A special interview with Walt Higgins, chairman of the board, president and chief executive officer, Sierra Pacific Resources
One might expect the guy in charge of keeping the flamboyant, pulsating lights of Las Vegas and Reno burning 24/7 to be a pretty slick fellow. You’d think he’d be a guy that wows you with big talk of the big things he’s going to do and all the big money everyone’s going to make. He would be a guy you may not trust, what with all his big plans and that somewhat wild glint that would most certainly be in his eyes.
Nothing could be further from the truth when you talk to the real man in charge. Walter “Walt” M. Higgins III, chairman, president and CEO of Sierra Pacific Resources, displays a balanced mix of confidence and caution when he talks about the future of his company and the future of the utility industry. He gives it to you straight and has no time for the industry folks who go all-in on risky and unproven investments. Sierra Pacific Resources is a holding company, with Nevada Power Company and Sierra Pacific Power Company as its two major utility subsidiaries, and Higgins knows his primary responsibility is providing his customers with a reliable and stable product. No betting the house for the big pot.
As focused as his goal is, Higgins has quite a hand to manage. The dealer’s given him one of the fastest growing service territories in the nation, 50,000-plus new customers a year, and a 3,000 MW deficit that keeps growing. But he’s got plans to improve his hand, among them constructing some new power plants and building a new $300 million 250- mile transmission line between Ely, Nevada, and Las Vegas.
If all goes right, Sierra Pacific Resources will be in good shape when everyone shows their cards.
EL&P: Air conditioning and swimming pools in the desert: serving the state of Nevada is a unique challenge. What concerns you most as you plan for the next five years?
Walt Higgins, chairman, president and CEO, Sierra Pacific Resources Click here to enlarge image
Higgins: The combination of getting the facilities built to serve the customers so that the 50,000 new electric customers that we’ll have in Nevada every year are hooked up with proper infrastructure to support them and power plants to meet their needs, and getting the capital to build that infrastructure. Call it something we are confident about executing on, but concerned as to how important it is. Without the money, you can’t build it and we need to build.
Just to put it in perspective, this year we’ve brought on-line, through construction or purchase, 1,600 new MW. So that puts us at a grand total in Nevada of about 4,600 MW of capacity. Our non-coincident peak is in the vicinity of 7,500 MW, so we’re 3,000 MW short. And every year that deficit grows by another 300 MW. Fifty-seven thousand new customers a year is about the same as what the Southern Company hooks up in the entirety of the Southern system. We have a formidable challenge just to hook them up and provide the infrastructure. If you’re going to provide the infrastructure, you have to have the capital to do it. A lot of things have to work well. And, even with the announced plants, and executing now on a plan to build 2,500 MW of new coal-fired generation in eastern Nevada, it will still be a challenge.
With the new plants we have planned to come on-line by 2015, our load will have grown 2,700 MW or more between now and 2015. We’ll still be in exactly the same situation nine years from now as we are today, in terms of our total ability to meet load relative to owned or controlled generation. In other words, I’m still 3,000 MW short, so the totality of what I need to do isn’t just the already-announced plans. We’ve got other peaking plants that we need to build. We have one plan to build 12 side-by-side 50 MW combustion turbines in Las Vegas to help meet peak summer load. That’s 600 more MW. But even that’s just taking a whack away at the 3,000 MW deficit. Those things keep one thinking about what you’re going to do to meet your customer’s needs.
EL&P: You just mentioned the need for capital for infrastructure and the new coal-fired plant you have in the works. We’ve heard a lot about the skyrocketing costs of rail transportation for coal. Does that worry you at all or is it something that will work itself out?
Higgins: There are a couple of factors affecting rail transportation cost, one of which is just raw fuel cost. Engines cost many times more to run now than they used to. Other things are going up: the cost of money’s getting higher, the cost of wages, etc. However, most of the problems of coal are eastern shipments from the low sulfur coal basins of the west, particularly Powder River. We’ve experienced occasional rail service problems coming west-our coal right now comes from Utah-but we’ve worked constructively with railroads. And while the cost of transportation is, in an absolute sense, going up, we have not yet experienced and don’t see a clear path to experiencing the kind of shortage of availability problems that seem to exist for coal going to the east because of long overdue rail maintenance. It doesn’t mean it won’t change but we do think, for a whole variety of reasons, coal needs to be a more important part of our portfolio in the future to protect our customers and provide reliability.
EL&P: When the 514-MW Tracy natural gas combined cycle plant comes on line, it will help Sierra Pacific Power reduce power purchases from other suppliers. Are you steering the company back to the regulated model, away from reliance on IPPs?
Higgins: Sierra Pacific and its two utility subsidiaries, Nevada Power and Sierra Pacific Power, were at the precipice of deregulation in 2000. Nevada had a law that was not terribly unlike California’s. We were about to begin the process when the governor stopped it, as he had the right to do, and then the legislature rescinded the move to competition. So Nevada never went away from the vertically integrated utility model. We have always been the regulated vertically integrated model even though we came close to changing before the California disaster.
We have been, as a matter of state policy for many years, dependant on the power market. And while there were some IPPs in that mix, a lot of the power that we bought was power being produced by some combination of other utilities, the United States government, and a few IPPs, over the decades leading up to the late ’90s. We just found, as a state, the usually plentiful existence of hydro from the Pacific Northwest, just at the time when southern Nevada needed it, made it possible for Nevada to plan on using the power markets as a source of power. We never had long term commitments other than under PURPA-type things, but using the power markets where you’d make seasonal, daily purchases was a model that worked for Nevada. It was approved by the regulator, and lasted for a long time very successfully. It only fell apart when the California energy crisis occurred and the combination of short hydro, bad market model, and market manipulation by the Enrons and others, caused the prices to get out of control; it became clear that Nevada’s dependence on the power markets was a bad idea. So instead of being, in the future, more dependant on the power market, which would be the case if you didn’t build power plants in this fast growing environment, the state made a choice to become less dependant on the power markets. But we never really changed away from the vertically integrated regulated model. We’re there and we’ve always been there. It’s just that now we’re building power plants so we’re less dependant on the power market.
EL&P: As efficient as it is, the Tracy plant still uses natural gas, high-priced and volatile, but you’re not in favor of long term contracts. Can you tell us what your strategy is?
Higgins: There’s a real challenge with natural gas contracts. If you told me that I could lock in a natural gas contract at $2, I’d say, “ËœOf course I would.’ If you asked me if I’d lock in at $8, I’d say, “ËœI don’t think so.’ If you asked me if I’d lock in at $3, I’d say, “ËœMaybe, probably.’ You ask me about $7. I’d say, “ËœMaybe not, but more likely.’
What I’m saying is that nobody really knows what the future price of natural gas is and locking in long term at some prices has a very high potential to cause pain for somebody. The way that pain could manifest itself is in higher prices for our customers than they need to pay, say, if we locked in at $5 and the market went to $4. But similarly, if you lock in at $5 and the market goes to $4, the suppliers are going to want to make a margin call. They’re going to be afraid that you’ll try to dump their contracts, so they’ll be asking you for a mark-to-market payment on the difference. Options to buy gas for the long term don’t come free either. So you really have to balance, and that’s what we try to do, and we do it with the permission of the public utilities commission. We have to balance the risk of having the commodity, so we do sign physical contracts, with the risk of what the commodity’s going to cost, so we employ a variety of hedging strategies with public utility commission approval that help to protect our customers from too much volatility. And we avoid the long term commitments to a price. By avoiding the long term commitment to a price, we don’t take any more risk of either the counterparty going broke or hurting our customers. In other words, it doesn’t really look like it’s a good bet with prices as volatile as they are and nobody really knowing what they’re going to be in the future to make a long term gas bet.
Now, if you told me again that the price is $2, well of course I’d do that, because I know the lifting cost for much of the new gas is $6 or $7. But those aren’t contracts you could get. And talk is cheap about signing up for a long term contract. Not very many people think about what the true cost of signing up is, in terms of a commitment fee and then the potential for margin calls. And of course it works in reverse for us too. We’d be very concerned if we had signed a contract for $3 and the price of gas went to $10 whether our counterparty would stick with us or find a way to get out of the contract.
EL&P: Sierra has plans to build a 2,500 MW coal-fired plant at Ely. Do you plan on coal playing a larger role in your generation mix?
Higgins: We do think coal needs to be a more important part of our mix, in part to protect us from the volatility you’ve mentioned about natural gas, in part to give us other ways of making the product. Suppose for example-I’m making this up-somebody suddenly finds that there’s something in natural gas that’s poisoning the environment and all natural gas-fired plants have to be shut down for a year while we put some environmental control on to deal with that poison. I made that up, there is no such thing. But that’s happened in the nuclear business before. We can’t afford to have all of our eggs in one basket, such that if something goes wrong with one particular commodity, we’re suddenly unable to achieve some degree of reliability for our customers.
So, any rational person faced with the totality of the power situation and all the choices would want some of each: some renewables, some coal, some natural gas, some hydro if you could have it, and nuclear if you could have it. Diversifying your portfolio allows you to ride through the vagaries of different things that might happen to different generating technologies, provide less surprises, provide fewer volatile events, and provide more predictability and stability for our customers. That, of course, is one of our important goals.
EL&P: How soon do you think the new clean coal technologies will come on line?
Higgins: I’m really happy that American Electric Power and Cinergy are talking about going ahead as fast as they can and taking all the steps to try to prove up the IGCC technology so that us smaller companies that don’t have the appetite to take the development risk can then, as it’s proven commercially, adopt it and build it. Somebody’s got to be first and it’s better for the bigger companies usually to be first on something like that. We’re very supportive of the idea but we cannot afford to take the development risk.
You may recall we had a coal gasification plant called Piàƒ±on Pine that used a technology that did not work and that cost us a lot of money. We can’t afford that kind of a problem again. So we choose to be one of the early adopters but not one of the bleeding edge on IGCC development. I’m guessing by 2010 or 2011, when it’s time for us to be starting the IGCC plants at Ely, the technology will be far enough along that we’ll have a good idea whether it works or not and what refinements might be needed.
EL&P: A large coalition of politicians, environmentalists and industry leaders has recently announced a challenge to have 25 percent of the nation’s energy mix provided by renewable sources by the year 2025. Is this 25X25 plan, as it’s called, too ambitious, or is it too conservative in this time of rising costs and climate concerns?
Higgins: I would repeat my belief in needing to diversify the portfolios of the United States and the power industry. Renewables need to be a part of the solution to this problem. There are good renewables available that can help to serve as a hedge against out-of-control natural gas prices or whatever the next vagary might be.
In Nevada, we have had a renewable portfolio standard since 2001 and that standard requires that by 2015, 20 percent of our energy must come from renewable resources. Of that 20 percent, one quarter of it may come from actual energy savings achieved through utility-sponsored energy savings programs. So, no less than 15 percent of our energy will come from renewable resources and as much as 20 percent from the combination of actual kilowatt hours saved and renewable resources. That is a standard we find very comfortable. There are certainly challenges in meeting it. Getting the solar component of it at some price that people are willing to tolerate is formidable. We are lucky to have solar, wind and geothermal resources in Nevada. Not all states have that benefit, but we’re lucky to have them all. We’re ahead of schedule in total on meeting the standard, thanks to renewable geothermal resources coming largely from northern Nevada. Wind has had its trouble getting permits and there have been some fits and starts by some wind developers. Solar is just flat-out expensive and developers have had trouble getting financing. But it seems to be moving along now.
“Yucca Mountain’s only 100 miles from Las Vegas and we’re very worried that if anything goes wrong, even if it’s harmless, the publicity would badly hurt our state’s major economic engine. We can’t afford that.” Click here to enlarge image
I would say the goal is not overly ambitious. It is, if people don’t get on it and start working. Twenty years to get to 25 percent means a lot of people have to work hard. We have really put a massive effort on this in our company. We have one executive whose whole job in life is getting renewables built by others and by us to help meet the standards. We have a large staff, in comparison, to what any utility was doing a few years ago. It’s full time work trying to get this done. This is not apples falling off trees. You have to get out there, find credible people, find the resources, and find the financing. These projects don’t just happen; they really take a lot of work. People have to get going now to make such a target.
EL&P: Would you like to comment on Yucca Mountain?
Higgins: Only to say that Nevada is not a state that welcomes the Yucca Mountain project. If one were around Nevada for a while one would realize that our state’s economy is highly tourist-based. Yucca Mountain’s only 100 miles from Las Vegas and we’re very worried that if anything goes wrong, even if it’s harmless, the publicity would badly hurt our state’s major economic engine. We can’t afford that. Until that problem is completely resolved for Nevadans, it’s going to be very hard for Nevada to accept that [Yucca Mountain] ought to be built. It doesn’t comport with an economy where everybody gets to decide everyday whether they’re coming here to spend their money.
We think a lot about that. It’s not a popular idea. A lot of Nevadans work there but we can’t afford to have our major engine disabled because of something that may have no substance but has a lot of political and media run.
EL&P: A $300 million transmission line could link Sierra Pacific and Nevada Power for the first time. What’s the benefit of this project to your customers?
Higgins: The line is about 250 miles of double circuit 500kV. It runs from just north of Ely down to the north end of Las Vegas. It interconnects in northern Nevada with a 345 line that runs into our system in the north and it intersects in Southern Nevada with our 500kV system that’s already under construction. That line is needed for one important reason: to bring the power from the coal plant to northern Nevada and southern Nevada.
It has several additional benefits that make other things work well. For example, it’s going to run through what is considered to be the heart of the wind availability area in the eastern Nevada mountains. Wind projects that probably could not have made it economically can now access a transmission line much closer than would have been the case before. They can get their wind energy out on the grid to help meet our renewable portfolio standard and come to market with their product in a much more facilitated way. So we’re building some capacity into the line to allow wind to get out of those mountains. It also allows solar energy from southern Nevada to go north to serve the solar needs of our northern utility. It also allows any geothermal energy that’s in excess in the north to go south to serve more renewable needs in southern Nevada. So there’s a big renewable component of the line helping us, in both of our utilities, to meet the renewable portfolio standard.
Finally, and this is a less obvious effect, one of the advantages of a bigger electric system is that reliability is easier to accomplish. Think of it this way: if you were a fly and you were hit with a boxing glove, you would be a squashed fly. If you were a child hit with a boxing glove, it would hurt you and it might knock you down. If you’re Sugar Ray Leonard hit with a boxing glove, it glances off you and usually doesn’t hurt you too much. And if you’re the heavy weight champion of the world one boxing glove doesn’t hurt you at all. So, the same exact instrument applied to a smaller thing has more effect on the smaller thing. The same thing is true of an electrical system for reliability. You have to plan around the loss of certain things, transmission lines and power plants in your system. If you have one larger system, and that’s the effect of building the transmission line, you will have more ability to withstand the loss of something as you plan for reliability.
So, we’ll actually help our customers not only with getting the coal and renewable power out, but also by increasing the reliability of the system. Put differently, decreasing the cost of achieving reliability by having one interconnected system. That’s good for the customers in several different ways.
EL&P: What kind of grade would you give to deregulation?
Higgins: I think I would give the grade of, “ËœIt depends.’ It’s probably a “ËœC’ if you take everything into account. There are places where deregulation seems to work. For example, my former company,AGL Resources Inc., in Atlanta, Georgia, the holding company for Atlanta Gas Light, where I was the CEO when we went through gas deregulation-gas deregulation seems to work in Georgia. There are a number of viable marketers. Some studies have shown that the prices are no worse and maybe a little bit better. There’ve been no reliability problems that I’m aware of. Deregulation seems to be working there.
I would say that there’s some evidence that electric deregulation is working to some extent in places where it’s available. I would also say that there are places where it’s not working. Like, if nobody ever leaves the utility, that’s some indication. Whether it’s because the model is flawed, there’s a regulatory interference going on, or there are no resources available that can beat the utilities resources. I also think that interfering with the open market and trying to call it deregulation is an unfair way to evaluate deregulation. For example, if you put a rate freeze on after you start deregulation and then you’re shocked when the prices go up after a six- or seven-year price freeze, you never had deregulation in the first place. I think that shows that monkeying-around with or trying to manipulate a transition to deregulation to suit a particular set of political agendas leads to a disaster. In every place in the United States where people monkeyed-around with deregulation and started doing things like freezing prices or imposing a certain price that would be this or that for this period of time, we’re seeing terrible problems now as those freezes end.
I think “ËœC’ overall. Maybe “ËœC-‘ would be more accurate as I think it’s tending away from being viewed as successful even if there are a few places that have been reasonably successful. I went to Georgia to work there because I thought the challenge of deregulating and trying it was a good idea. It was certainly not one that went easily, but we got there and they’re still doing it today. Do people like it? I don’t know. They haven’t asked their legislature to rescind it.
On the other hand, I think in Maryland where prices are getting ready to go up 72 percent or whatever is going to happen, you have to ask yourself, “ËœIs that really working?’ And if they were going to have to go up 72 percent, wouldn’t it have been better to go up over time instead of in one lump? Customers hate volatility. They hate it. They don’t like rapid price increases. You really have to find a way to let the customers be able to deal with a changing market. What was the big mistake in California besides a flawed model and market manipulation? It was that even when the market started going up at wholesale, it never went through to retail so the customers didn’t change anything in the way they behaved. That wasn’t really deregulation. That was badly managed semi-regulation. If there were pure deregulation and there were real incentives for people to build power plants, maybe deregulation would work.
I’m not entirely sure that deregulation works if you’re not ever willing to let the customer see the true price of a product. And it only works if customers see the price of the product and can then make consumption decisions based on that. One of the troubles of electricity is the use in the short term is relatively inelastic.
EL&P: In the mega-merger scheme of things, do you think Sierra is the big fish or a little takeover-target fish?
Higgins: On the scale of utility companies in the U.S., I don’t think we’re quite in the top 25 yet. I think we’re in the next 10 or 15 after that. We will be in the top 25 with our growth rate within the next few years. Having said that, if you assume some of these big mergers go on through, like Exelon, MidAmerican, Duke (I’m not sure Baltimore/Florida is going to happen but that would have created another one) if those big things continue to happen, we’re relatively small compared to those players. We’re certainly not big enough to take out our neighbors to the west or our neighbors to the south or our neighbors to the east. They’re all bigger than we are and the Pacific Northwest hasn’t shown much inclination to merge up in the electric business. So we probably sit more on the side of target than we do predator, although the market in the West seems relatively stable.
EL&P: You’re optimistic that an investment grade bond rating is on the horizon for the company. What will that mean to Sierra?
Higgins: There are two great advantages to being investment grade. The greatest advantage is it makes our cost of doing business lower, and our customers see it reflected as a lower price. For the same exact product, presumably, and the same reliability, they get the price lower because we pay less for money. Investment grade has that effect.
Sometimes the difference is larger when the credit curves get to be real steep. Sometimes the difference isn’t very much when you pay as much for a non-investment grade credit instrument as you do for an investment grade credit instrument. But on average it saves money and that’s good for customers.
The other thing is that our industry is really organized around the principle of the players all being investment grade. So the standard contracts and the terms of doing business, they all assume both parties are investment grade. It’s a lot easier for us to do business if we are investment grade in the daily doing of business like the buying and selling of goods and services, the buying and selling of power, the buying and selling of fuel, and entering into construction contracts. They are all easier. They are easier to execute. They cost less; there are fewer terms required and fewer collateral requirements when you are investment grade. So business happens more efficiently as well as the cost of money being lower.
EL&P: What kind of leadership do we need in the electric industry now?
Higgins: I don’t know that it has really changed much through the years. The industry needs people who can look beyond the flaps of today to anticipate what the various things that might be coming are, plan for and be prepared for the various outcomes that might occur, whether it’s outcomes that involve higher prices for power, environmental changes, restrictions on the use of fuel, on land use, or on siting. The people who will lead this industry well are those that sense where things are going or what the possibilities are, plan for it, prepare for each of those, and then execute such that regardless of how the world turns out, you’re prepared. I think that’s always been what the industry needed.
Sometimes somebody bets on one course and they get lucky and they look really smart. But when people bet on one course that isn’t the outcome, they hurt their customers, their employees, and sometimes their companies. I won’t use any names, but people who made big telecom bets eight or nine years ago are gone. People who made big trading bets five and six years ago are in the tank. There are so many examples of making big bets in one direction that might be right, but if they’re wrong, you bet the company and it’s lost.
The interesting thing about utilities that serve electricity and gas to customers is the customers don’t ask us to make these incredible bets that maybe pay off big for them if they get lucky, but pay off horribly if they get unlucky. They ask us to provide reliability, safe service, predictability, protection from volatility, and fair prices. And if we do that, we’re more likely to be successful than the guy or gal that makes the big bet and one time out of five they’re right, and four times out of five they’re wrong. Their customers end up paying for the four out of five forever or the company’s gone.
EL&P: Any final thoughts or comments?
Higgins: I would just re-emphasize how committed we are to diversity in our portfolio. Renewables are a very important part of our future. Without renewables, you do the math: What if oil costs $120 a barrel in 10 years? It will drag coal up. It will certainly drive natural gas higher. What if natural gas drilling doesn’t get freed up, such that our supply of natural gas, even with all the LNG you can do, is diminishing? Without renewables, we got a problem in this country. We all need to do more and we are committed to doing more with renewables, as an important part of our diversification strategy for our customers.