Rates would be reduced immediately, and members would enjoy a period of rate stability that is forecasted to be 10 years, barring any unforeseen changes. For example, the 9.9 percent rate increase, which went into effect on July 1, 2016, would go away. Next, some of the costs that drive rate increases, like debt payments and depreciation, would be lower because that debt would be lower. As part of the sales agreement, the new owners will contract with VEA to operate, maintain, and manage the system for them.
That produces another revenue stream, which also keeps rates down, much like our contracts with Creech AFB and NNSS (DOE), which might also mean hiring additional VEA personnel. Finally, although VEA would no longer own the system, the new owner would be subject to regulatory approvals set forth by the Federal Energy Regulatory Commission. FERC exists to protect ratepayers from dramatic rate adjustments.
We believe this sale provides enough cash premium and opportunity to stave off a rate increase for a considerable time. In the future, we will only pay for what we use. We won’t have to bear the risk of the ownership cost for the entire system as we do now.
We built that first 230 kV line to serve our load and provide reliability through redundancy. That is our mission. Pahrump was growing fast, and VEA did not have enough transmission capability to serve the load reliably. We built one 230 kV line from Las Vegas to Pahrump. As we continued to grow, we had to put in another 230 kV line to meet our demand and to provide even more reliability.
At that time, there were no partners who were willing to share the cost and the risk of building those lines. Now there are a number of companies that are not only willing to buy the entire system, but they are willing to pay more than twice what it cost VEA to build.
The sale of those lines does not mean that our mission changes. That mission was accomplished in 2013 when the second of the two lines was energized, and it is not going away. Whether we own that system or not, those lines will always be there to serve Valley Electric’s load and to give us reliability.
We believe the new owners of those lines can take the mission of those lines even further than Valley Electric can. What is that larger mission? Economic development and continued reliability and redundancy for Southern Nevada.
The value of the system increased dramatically when VEA joined the California Independent System Operator network in 2013. At that time, our lines became a crucial part of the regional electric grid. The system generates revenue that has a utility-based rate of return, which is approved by the Federal Energy Regulatory Commission and paid for by the CAISO. That return typically is between 8 to 10 percent paid by a monopolistic system with ratepayers.
It is a high rate of return, but it is based on a lengthy depreciation schedule, 40 to 50 years. Valley Electric has taken on a lot of debt in order to have electric service that meets our needs of demand and reliability. However, our debt is disproportionate to the number of member-owners. Our service area is very large (6,800 square miles) and sparsely populated. The sale would enable VEA to maintain reliable power, reduce debt, and provide another hedge against rate increases.
Additionally, the premium earned on a sale would be so substantial that it far exceeds the rate of return we currently are earning.
First, all debt associated with the 230 kV transmission system ($82 million) would be retired. Next, The Board has made known its intentions to set aside $17.2 million after the sale closes for distribution to active and former members who have paid into the ownership of the system. After that, the Board has a suite of options, but the bottom line is that members can be assured that those options would include the retirement of capital credits, reduced electric rates, paying down of additional debt, and future capital expenditures.
Obviously, there is a multitude of options that the Board will consider, and all will be positive to the members.
One other thing: $5 million of the premium will be donated to the Valley Electric Charitable Foundation designated for a community rec center on property adjacent to the VEA headquarters. The value of the land is an additional $5 million.
It will be conducted by an independent third party, using the same company we use for the election of our Board of Directors each year. The voting process will take place over approximately four weeks, from September 14 through mid-October. Member-owners could vote at designated areas, by mail, Online, or by proxy, very similar to the manner in which district elections are conducted.
