quarterly-report.com Political and Social Commentary by James R. Audet

May 23, 2000
139th anniversary of Virginia's vote to secede from the Union in 1861.

If you believe that Las Vegas, NV, is a typical desert environment, you are mistaken.  Although it shares the heat of the Arabian and Sahara Deserts, the Las Vegas Valley is a far cry from the sandy dunes of these lands.  Instead, the soil of Las Vegas is a composite of rock and hardpan called caliche.  To dig a hole for an average sized plant takes hours.  Nevertheless, this land is less hostile to humans than the politicians who seek to make it a vast wasteland of stupidity.

On the pretext of bringing savings to consumers, Nevada is embarked on the deregulation of the electric utility industry.  The Nevada legislature, seeking the same benefits that have accrued to consumers and business from the deregulation of telephony, has drastically changed the regulatory structure of power companies.

Although deregulation is touted as a means to reduce consumer electric bills, the promise is vacuous.  Naïve lawmakers, in response to large power users, have adopted the utterly inappropriate telecommunications model for an energy deregulatory structure.^1/  Telephone deregulation required companies to "unbundle" their enhanced service offerings such as cellular mobile radio from their legacy voice and data delivery network.  Electric deregulation seeks a similar result: the separation of generation from the network of transmission lines that deliver power.  In response to the new regulations, some energy companies have found a way to exploit the regulators' gullibility.  They have adopted strategic plans for their companies that ignore the need of consumers for price stability in the cost of power.  In addition, they have compromised the power network to such a degree that many jurisdictions can no longer rely on adequate and reliable service.

Regulatory failures and the frenzy into building non-standardized nuclear power plants in the 60s and 70s have left the United States with an energy crisis.  Driven by the blind folly of their egocentric CEOs, utilities plunged into nuclear power.  The industry was plagued with cost overruns and safety problems that strangled corporate balance sheets.  The amortization of these wretched assets -- paid by the utilities' ratepayers -- left the industry without adequate capital to expand capacity.  Consequently, there is today a lack of adequate generation capacity.

The threat of the world famous Las Vegas casinos to install their own cogeneration facilities caused the Nevada legislature to capitulate to the gamers' demands.  The legislature empowered the Nevada Public Utilities Commission (Nevada PUC) to establish new rules that have required the local Las Vegas utility, Nevada Power Company, and its counterpart in Northern Nevada, Sierra Pacific Power Company, to divest themselves of their generation systems.^2/

The response of these companies was to merge.  On July 28, 1999, the new entity, Sierra Pacific Resources (Sierra Pacific) aggregated both systems into a combined customer base of 843,000.  The merger was accounted for as a reverse purchase with Nevada Power the acquiring entity although Sierra Pacific survives and is the legal parent of Nevada Power.  "Mergers and Acquisitions: The Dealmaker's Journal," a publication of Securities Data Publishing, characterized the merger as the most creative financing deal of 1999.  What is "creative" to Wall Street is more often destructive to the interests of the common man.

Less than four months after the merger, Sierra Pacific announced that it would buy the Portland, OR electric utility, Portland General Electric (PGE) owned by the Enron Corporation and take over its 704,000 customers.^3/  Enron seeks to rid itself of its only electric utility after a turbulent history in Oregon.^4/

The Portland deal threatens Nevadans in two significant ways.  The first is the price that Sierra Pacific has agreed to pay for PGE and the source of the financing.   The second is environmental.  PGE is decommissioning its Trojan Nuclear Power Plant.  The nuclear fuel from this reactor now sits in an on-site repository in Portland.  Ultimately, PGE wants to transfer this nuclear material to a secure facility for high level nuclear waste.  The designated repository for such waste is being built by the U.S. Department of Energy at Yucca Mountain, Nevada.

The Financial Deal

Enron acquired PGE by merger on July 1, 1997.  Enron issued 50.515 million shares of treasury stock at a price of $36.88 for a total of $1.863 billion and assumed PGE's debt of approximately $1.1 billion for an overall purchase price of $2.963 billion.  Enron is amortizing $1 billion in goodwill over forty years.  The following table shows the breakdown of what Enron paid for the company.

On November 8, 1999, Sierra Pacific and Enron signed a Stock Purchase Agreement for the sale and purchase of PGE and a wholly owned subsidiary.  The proposed sales price is $2.1 billion in cash, reduced by Enron's approximately $80 million merger payment obligation from its previous transaction.  Sierra Pacific will assume $1.0 billion in PGE debt and preferred stock.  Sierra Pacific will amortize $1.12 billion (Sierra Pacific's Federal Energy Regulatory Commission (FERC) filing claims $1.071 billion) in goodwill over forty years.  The following table shows the breakdown of what Sierra Pacific will pay for the PGE.

It is noteworthy that net income for PGE has decreased over a three-year period, yet Sierra Pacific is willing to pay a higher multiple for it.  Apparently, the management of Sierra Pacific values revenues greater than income.  In a "Transaction Fact Sheet" to the Stock Purchase Agreement, Sierra Pacific claims that it "anticipates opportunities for savings from among other things, reduced administrative and overhead costs, greater efficiencies in operations and business processes, and increased purchasing efficiencies."  These goals are the same old refrain we hear whenever a merger or purchase of a company is made.  Since Enron sought to achieve these same objectives when it bought PGE, it is doubtful whether there is any fat left to cut.

In addition, the goodwill portion of the purchase price has increased 10 percent.   Goodwill is characterized as the premium a buyer pays for a company over and above the value of the assets.  Goodwill is listed on a company's balance sheet to conform the purchase price to the value of the assets that are being acquired.  In this case, goodwill is the value of PGE's operating licenses.  The $1.1 billion goodwill portion of this transaction comes directly from the pockets of Nevada ratepayers.

Sierra Pacific's 1999 Annual Report (10K) states that the transaction will be financed through a bank loan.  The 10K further states that, "Ultimately, the transaction is expected to be financed through approximately $750 million of the proceeds from the sale of the Nevada generation assets of Sierra Pacific's... subsidiaries, the issuance by Sierra Pacific of debt and equity securities, and internal cash flow."

Sierra Pacific needs to shelter the capital gains that will accrue from the sale of its generations stations because of the depreciation recapture provisions of the U.S. Tax Code.  Clearly, it does not object to paying a greater multiple of cash flow than customary because this deal facilitates its empire building objective.  Sierra Pacific has two alternatives to buying PGE: (1) Return the capital gains to Nevada ratepayers; or, (2) Invest in network capacity in accordance with the statements it has made to the Securities and Exchange Commission.  Of course, facilities construction takes time and such endeavors will not cause Wall Street to bestow some new honor on the management of Sierra Pacific for its deal making ability.

Of serious concern to Nevada residents is that proceeds from the sale of the generation stations -- power plants paid for by Nevadans -- are to be transferred out-of-state.  Sierra Pacific is paying cash for what Enron acquired with paper.  It makes one wonder if the president of Sierra Pacific, Michael Niggli, and the Board of Directors of this Nevada Corporation have any concern whatsoever that they are stealing from Nevadans to finance this deal.  Then, why should this board have any allegiance to, or interest in, the well being of the citizens of Nevada?  All they require from us is to pay our monthly utility bills and keep our mouths shut.

The Stock Purchase Agreement required Sierra Pacific to make a filing with the Nevada PUC within 75 days.  It has made its filing, but not for regulatory review.  Instead, in a request for a Declaratory Order, Sierra Pacific claimed that the Nevada PUC had no jurisdiction over the PGE purchase.  The PUC agreed that its enabling statutes from the Nevada legislature did not grant it authority to review the PGE acquisition.

Since the PGE deal is not subject to shareholder approval, Nevadans have no local input at all into this transaction.  The sole forum for a discussion of the merits of the case resides with Federal Energy Regulatory Commission which must approve Sierra Pacific's purchase.  FERC approval is a slam-dunk.

It is inconceivable that a public utility would have such unilateral power to decide the fortunes of the 843,000 subscribers it is committed to serve.  This is insanity.  Clearly, the Nevada legislature has not acted in the citizens' best interests despite the constant refrain we hear from the Nevada PUC that deregulation will bring choice and savings to consumers.  At the end of Nevada's regulatory experiment are blackouts, brownouts, and higher rates.

Nuclear Hypocrisy

There is a Washington type phenomenon taking place in the high Mojave desert.   One unrelated to alleged UFOs spotted near Groom Lake.  Nevada politicians are trying to burrow their heads in the ground, an impossibility given the fact that the soil of Nevada is rock.  Could it be they are trying to stuff more rocks in their heads?

Near the secret military installation known as Area 51, a "permanent" nuclear depository for high level radioactive waste is being carved out of Yucca Mountain in Nye County, NV, approximately 90 miles northwest of Las Vegas.  The area is known as the "Nevada Test Site."

As with the politics of energy deregulation, the forces behind the development of the Yucca Mountain Project (Yucca) are formidable.  Nuclear reactors across the country have incredible amounts of high level nuclear waste in on-site storage containers.  The nuclear power industry, which has Washington politicians in their cash-laden pockets, and local environmental activists want this deadly material out of their backyards -- the not in my backyard (NIMBY) syndrome.  They demand that Yucca be authorized.  The latest congressional bill to authorize Yucca was vetoed by Bill Clinton on April 25, 2000.  The veto was more symbolic than substantive.  Yucca development proceeds.  Through September 1998, three billion dollars have been spent to excavate a tunnel in the mountain.  Although Nevadans are temporarily safe, Senate Majority Leader Trent Lott (R) seeks another vote before Congress adjourns for the 2000 elections.  Regardless of whether George W. Bush or Al Gore is elected president, Nevada is likely to become, at a minimum, an "interim" storage site for the nation's nuclear fuels.

Ideally, the Department of Energy would select some eastern state for nuclear waste, as Nevadans do not want it here.  Aside from the geological concerns -- Yucca Mountain is located in a high-risk earthquake zone -- there is no method for transporting the waste to Yucca safely.  Nuclear material must use the highways that pass through Las Vegas to reach the Nevada Test Site for any compass point except northwest of the site.  There is no railroad line to Yucca Mountain.

Nevada has a sorry history of nuclear testing, a legacy of the cold war based on fear, stupidity, and incompetence.  Fortuitously, there are no commercial nuclear power plants in the state.  As the following map shows, the Yucca repository is being built for the waste of nuclear power plants that are located predominately east of the Mississippi River.  The map also demonstrates the political power base that is ramming the repository down Nevada's throat, a force that the Silver State with its two House representatives and four electoral votes has no chance of overcoming.

Sierra Pacific's purchase of PGE changes the dynamics of Nevada's opposition to the Yucca depository.  The Trojan Nuclear Plant was operated by PGE, which owns a 67.5 percent share of the facility.  PacifiCorp owns 2.5 percent, and the remaining 30 percent was assigned by the Eugene, OR Water and Electric Board to the Bonneville Power Administration.  The plant was shutdown in January 1993.  Oregon citizens forced this action after a series of problems at the plant, including cracked steam tubes and a faulty safety system that released radioactive gases into the environment.  The owners determined it was too expensive to make repairs and decided to decommission the plant.  Last year, in a well-covered media event, the Trojan reactor was loaded onto a barge and shipped up the Columbia River to a burial site for low level waste in south-central Washington State near the U.S. government's Hanford Nuclear Reservation.  The nearly 800, extremely dangerous, nuclear fuel rods remain at the Trojan site in storage casks until a permanent disposal site is ready.

If the PGE deal closes, Sierra Pacific will need Yucca for the fuel rods of its Portland reactor.  It is inconceivable that Oregon citizens will allow high level waste to remain in Portland.^5/  Consequently, Nevada loses any credibility to halt Yucca development since Sierra Pacific -- the state's prime energy provider -- will have a need for it.^6/  Do Nevada's politicians appreciate this hypocrisy?  If they have, they have said nothing to question the PGE acquisition.

Nevada politicians, in response to citizen concerns, trumpet their anti-Yucca views on television and in political ads.  When Bill Clinton comes to town, there is a staged media event.  Local and federal politicians all gather to profess their continued opposition to the dump.

Nevada politicians have staked all on their anti-dump positions.  For example, the state's congressional delegation of Senators Bryan (R) and Reid (D) and Congresspersons Gibbons (R) and Berkley (D) have done nothing to cause Congress to insure the safe transportation of nuclear material.  Of course, to propose such legislation would be an unambiguous conflict with their anti-dump positions.  Local Las Vegas and Clark County politicians claim they may block use of the highways.^7/  Ridiculous.  Their attempt will be an interesting media event, one designed to rescue them from their irresponsibility to insure the safety of their constituents, but one, nonetheless, that will ultimately end in the Nevada losing to the eminent domain of the U.S. government.

There is the frightening possibility that a nuclear accident will occur on a Nevada highway, perhaps adjacent to the casinos on the Las Vegas Strip or on the serpentine road across the Hoover Dam.  An accident on the dam could spill nuclear material into Lake Mead, and contaminate the water supply for the entire Southwest and Southern California.  Visitors will avoid Las Vegas because of the fear of radiation.  If an accident does occur, casino operators will realize that they have should have spent their lobbying funds on safety not energy deregulation.

The PGE purchase demands that Nevada make a full court press to secure a safe and reliable method for the interstate transportation of nuclear waste, one that avoids the Las Vegas metropolitan area.  Politicians who fail to act will bear the wrath of the voters for their pandering stupidity.  At the terrible cost of a nuclear accident, even the soil of Nevada will not win, though it will be able to reclaim the rocks that are lodged in the heads of Nevada's politicians.

Footnotes

1/  The telephone network relies on user content to generate traffic, thus, revenues for the network provider.  On the other hand, energy must be produced or converted from some source, such as coal, gas, oil, hydroelectric, geothermal, etc.   Regulators would have you believe that energy is analogous to voice and data.   Unlike voice and data traffic, for which there is no scarcity, the cost of finding, making, and/or converting energy continues to rise.  This is why the telecommunications deregulation model falls apart for power companies.

2/  38 percent of Nevada Power's sales are to residential customers.  Gaming, recreation, and restaurant sales are 19 percent.  Nevertheless, the gaming industry had the influence with the legislature to set Nevada on this disastrous course.

3/  Sierra Pacific claims its objective is to become a provider of network transmission services in Nevada, although it has applied with the Nevada PUC to form a separate subsidiary that would sell retail power.  Oregon regulators have prohibited PGE from selling its hydroelectric plants as hydroelectric is by far one of the cheapest sources of energy.  Consequently, PGE will remain both an energy provider and transmission company.

4/  Curiously, Enron has bought the 50 megawatt, gas-fired, Las Vegas Cogeneration project from a privately held holding firm headquartered in Bristol, VA.   Nevada Power Company has a contract with Las Vegas Cogeneration through 2024 to purchase 45 Megawatts of power.  Evidently, Enron sees Las Vegas as a profitable market.

5/  The nuclear storage system being used in Portland uses prototype casks that have already suffered from corrosion.  Concern has been raised about the structural stability of the casks if they are moved.

6/  Sierra Pacific claims that it will not move the Trojan nuclear fuel to Yucca.  Obviously, this representation is without foundation given Oregon's greater political weight, and the threat of a terrorist incident that nuclear plants risk with on-site storage facilities.

7/  Clark County, home to Las Vegas, is the only municipality in the country building an "urban bypass" commonly known as a "beltway" with local tax dollars.  Authorized by the Clark County Board of Supervisors, this 53 mile loop around the Las Vegas metropolitan area is estimated at 1.5 billion dollars.  How ironic that Clark County residents are paying for a road that will likely be a transport system for nuclear waste.  Although the intent of the Clark County Board of Supervisors was to avoid filing an Environmental Impact Statement with the Environmental Protection Administration (EPA) for qualification to use federal highway funds, the use of entirely local money for Beltway construction demonstrates the impotence of Nevada's congressional delegation.

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