On Friday, February 1, Sierra Pacific began the second step in what is a six- month process that will lead to a detailed and public review of the company's expenses, finances and fuel and power purchases. The filing was in response to a new Nevada law, Assembly Bill 369, that takes a two-phased approach to setting electric rates that will result in changes to customer rates next June. On February 1, Sierra Pacific filed a Deferred Energy Accounting Adjustment with the Public Utilities Commission of Nevada (PUCN) that requests reimbursement for costs paid by the company for fuel and power purchased by the company on behalf of its customers from March through November 2001. The filing will also set a new electric rate to match the on-going cost of providing electricity to our customers. The first step was taken on November 30, when Sierra Pacific filed a General Rate Case with the PUCN, its first since 1994. Over the next several months, the PUCN will closely examine the company's operating expenses, its finances and nearly $240 million in capital expenditures that the company has made on new facilities to serve customers. After reviewing both cases, the PUCN will make a decision on these cases on or before June 1, 2002.

Why has Sierra Pacific filed this Deferred Energy case?
In this case, the company is requesting reimbursement for costs we paid to purchase fuel and power on behalf of our customers during the recent energy crisis. As wholesale costs spiraled out of control, Sierra kept the lights on in northern Nevada. However, at times we were paying significantly more for fuel and power than we were allowed to charge customers. In other words, we used our "credit card" to make these purchases for customers and held the charges in an account from March through November 2001. This deferred filing will also set a new electric rate to hopefully avoid the build up of another "credit card" balance. There is no profit to the company from recovering these deferred costs. As we have always done, all wholesale fuel and purchased power costs are being passed to customers, dollar-for-dollar, with no mark up.

When will my bills go up and by how much?
The Public Utilities Commission of Nevada (PUCN) will undertake a detailed and public review of both the General and Deferred Energy cases that will take approximately six months. The exact amount of the increase will not be final until after the PUCN completes its review. In the Deferred Energy filing, Sierra Pacific proposes an overall average increase of 9.9%. but that amount varies by customer class. For residential customers, the proposed increase is 7.7%. That amount is offset by an earlier proposal by Sierra to decrease residential rates by 2.5%. Therefore, the average increase for residential customers of the combined cases ranges from 5.2% to 7.8.

I thought my electric rates were frozen?
They are frozen until the Public Utilities Commission of Nevada completes its detailed and public review. A new Nevada law froze Sierra's rates from April 1, 2001 until June 1, 2002 and prompted the company to file these General Rate and Deferred Energy filings.

What is the difference between a General Rate and a Deferred Energy filing?
Each results in a very detailed and public review during presentation of the company's case before the PUCN, like presenting a law case before a judge. The General Rate Case examines expenses that the utility directly controls, such as wires, poles and trucks, the costs is pays to borrow money to operate and the profit it pays to the owners of the company. The Deferred Energy case reviews costs the company has limited control over, namely the cost of the fuel to generate electricity and power purchased by the company on behalf of its customers. It results in no profit to the company. Both cases examine current customer rates and the PUCN makes a decision on whether these rates need to be increases, decreased, or remain the same in the future.

What will happen if Sierra Pacific Power is not allowed to recover the costs incurred during the energy crisis (the "deferred balance")?
If we are unable to recover the money that we prudently spent to keep the lights on during the energy crisis, the consequences would be extreme. You can look at California as an example of what could follow. Californians suffered rolling blackouts, impacting their quality of life and economy. Yes, their lights are back on now, but Californians have been forced to redirect billions of tax dollars away from police, fire, schools, roads, and parks to pay the state's wholesale power bills. Plus, they have additional billions of dollars in unrecovered costs still outstanding. And, still, their rates went up considerably and could continue to rise. Fortunately, our state's lawmakers protected Nevada from a similar situation and passed a law that prevented all of these things from happening. However, the plan established by that law needs to be carried out. If it is not, in all likelihood, we too would suffer rolling blackouts. Can you imagine how that would impact our community's economy as a whole? The economic ripple effects would touch us all. In addition, if the company were no longer able to supply you with power, somebody would still have to pay to do so. In California, it was, and will continue for many years to be, the state and the taxpayers. We know this may sound alarming, but our deepest concern is the impact this will have on all of us in our community. Ultimately, this issue isn't about doing something to help Sierra Pacific, it is about protecting Nevada, its economy and the people who live here.

How has Nevada been affected by the energy crisis compared to other states in the West?
Nevada certainly is not alone. The impact of the energy crisis is being felt throughout the West. Beyond California's multi-billion dollar crisis, Washington, Oregon, Utah, Idaho, Montana, and Wyoming are all facing rate increase issues similar to Nevada's. For example, customers in parts of Washington have experienced multiple increases, first 33%, now an additional 18%; some in Oregon face a 26% increase for residential customers and 47% for industrial customers; those in Idaho face increases from 14% to 64%; and some customers in Wyoming have already experienced a 40% increase, with an additional 13- 14% increase pending. We know none of these figures directly impacts you, but it certainly shows that the events of the past two years in the energy markets have had dramatic effects throughout the West.

How did power costs get so out of control?
Ultimately, it was a result of a convergence of events:
1. A public policy environment and a set of rules and regulations across the West that had discouraged or prohibited the production of new generation and transmission facilities for at least a decade.
2. Mother Nature-last year's extended hot weather, low rain, and low snowfall resulted in extremely poor hydro-electric production in the Northwest.
3. Strong economic growth across the West led to rapidly increasing demand.
4. Low supply + high demand = skyrocketing wholesale fuel and power prices-- and in some cases, no supply at all.
Some of California's rolling blackouts were examples of what happens when utilities can't buy power at any price. (California uses as much power as the other 11 Western states combined. And because Nevada is part of the Western power grid-problems in other western states will affect us.)

Aren't you just blaming these other factors for what was really poor planning on your part?
Don't forget that prior to last year's unusual events, one-half to two-thirds of the states were pursuing some form of deregulation in their electric utility industry. And here in Nevada, a particularly aggressive path toward deregulation was being followed. The rules under which we do business were clear: under deregulation, our company would no longer be in the business of generating power or buying fuel and power to supply our customers. We were to concentrate on being a Transmission and Distribution company. To have been building generating plants and entering into long-term fuel purchase contracts while approaching deregulation would have been acts of defiance, as well as extremely poor planning on our part. When Nevada's Governor put a halt to deregulation in this state earlier this year, our company was locked into the plans we had been required to make when everyone believed deregulation would take place. Therefore, when the convergence of factors came together that resulted in the energy crisis in the West (extremely high prices for fuel and power, excessive demand from California, low supply from the Northwest), we had to do what it took to continue to serve our customers. When the crisis hit, our obligation was as it has always been: to keep the lights - and we did.

You keep talking about keeping the lights on. Why did you do that? Wouldn't it have been better if you hadn't?
Any alternative to what was done would have been worse. If we hadn't kept the power flowing last summer, here are some likely scenarios: 1. The lights (and traffic signals, and business operations, and hospital equipment, etc., would have gone out, repeatedly.) 2. There would have been severe damage to our local, tourism-dependent economy--who would take a trip to northern Nevada if they heard their hotel was experiencing power outages? 3. Somebody would have had to pay for fuel and purchased power to get the lights back on--quite possibly the State, like in California. In California, billions of dollars in tax money were diverted from things like police, fire, schools, roads, etc., to cover these costs.

I don't remember being consulted about this. Why didn't you OK this with me first?
Indirectly, we did. You see, we work under the authority of the state government. And the government, your legislators, and the Public Utilities Commission of Nevada act as your voice. Given the extreme crisis situation at the time, we believe these people did the right, and possibly the only, thing to ensure that your lights would stay on and that Nevada would continue to have a safe and reliable supply of power throughout the crisis.

Why should we even have to pay these increases? If the price goes up, that should be the utility company's problem, right?
You have always paid the cost of wholesale power that we purchase for you, but it was never an issue because our rates were enough to cover these costs when wholesale power prices were stable. All electric utility customers throughout the West are facing the same problem - the cost for power skyrocketed well beyond current rates. As it is, our company already shouldered millions of dollars of losses before the legislature stepped in to ensure the stability of our state's energy supply. It is painful for us as well to see so many of our customers frustrated and even angry about these increases, but the alternative was worse. California, for example, was forced to redirect billions of dollars of tax money away from police, fire, schools, roads and parks to pay wholesale power bills that were not covered in rates. The increases we are facing are less, but it is a price we all have to pay to work ourselves out of an unprecedented collapse of the wholesale power markets that everyone in Nevada and the West depends upon to keep the lights on.

Is the company just raising rates to make more money?
No. Our recent increase request is to cover the cost of wholesale power we bought to keep the lights on during the energy crisis. This crisis cost northern Nevadans over $200 million dollars, and southern Nevadans nearly a billion dollars. In fact, our shareholders suffered a loss of hundreds of millions of dollars that will never be recovered. As wholesale prices continued to spiral out of control and California began facing rolling blackouts due to their inability to buy power, our state passed a law that allowed us to explore every available financial resource to keep the lights on in Nevada, with the promise these costs could be recovered later. In line with our state's prudent action in passing this law, it is now time to fulfill that law's promise to those people who put their money at risk to keep the lights on in Nevada. We are providing tremendous amounts of information to the Public Utilities Commission of Nevada - details on every single purchase we made and why - so they can determine whether Nevadans got the best deal possible.

Why do we even have to buy power from other places? Let's just generate all our own power - it would be a lot cheaper wouldn't it?
Usually not. If a factory was idle for several months of the year, the products from that factory would cost more than a factory that is always running around the clock. If we built enough power plants to meet the greatest demand we could face during the summer or winter, it means that plant would also stand idle many months of the year, and that would result in higher costs for you for many years. When things are normal you are always better off for us to purchase outside power for peak needs, and in turn sometimes we will sell unneeded power to other utilities and use that money to reduce your costs. The only problem this year is that nothing was normal.

Why don't the executives and employees of your company take a $1 billion pay cut instead of trying to get the money out of us?
In some ways, the company has already done some of this. Our shareholders, the owners of the company, have lost 25% of their stock's value due to this situation. In addition, we've written-off more than $300 million of this debt-a sum which we will never recover. With regard to salaries, Sierra Pacific Power and Nevada Power combined spend approximately $300 million per year on operating expenses, only a portion of which goes to salaries and wages for our 3,000 employees. As a result, no pay cut would significantly impact the deferred balance in any significant way.

Could anything else have been done to avoid or reduce these increases?
Basically, no. As you know, power prices throughout the West skyrocketed out of control during the recent energy crisis. If we had not purchased power as we did, it is likely that your lights would have gone out repeatedly, seriously impacting the way you live and work in northern Nevada. It is frustrating for us to see this occurring during these difficult times, but the alternative could have been worse. California, for example, was forced to redirect billions of dollars in tax money away from police, fire, schools, roads and parks to pay its wholesale power bills.

What is Sierra Pacific doing to reduce costs for the future? Do you think prices will go down?
Yes, we believe prices will eventually go down. But only if the plan implemented by the State of Nevada is followed. At that point, you should see a return to lower rates. We are currently doing everything possible to reduce costs for the future and restore rates that accurately reflect power costs. But we will only be able to take advantage of lower prices for the future if the people who put their money at risk to keep the lights on during the energy crisis are repaid. They need to have confidence that Nevada will keep its promise and we can then move forward to buy less expensive power in the future.

Fuel prices are going down. Why are my power rates going up?
What you are seeing is essentially a postponed response to the problem all western states felt earlier this year. Our company and the legislature and governor agreed earlier this year that we should hold off on the needed rate increases until customers got through the summer with the rates already in effect. There are similar rate increases going into effect or being considered in most other western states to cover these costs, so Nevada is no exception. One hopeful sign for the future is that the energy crisis has captured everyone's attention - consumers are conserving more, power generators are building new plants, local communities are more supportive of new transmission networks being built and policy-makers are understanding what can happen when prices charged to consumers do not match the costs being paid. As a result, prices for wholesale power and natural gas are dropping throughout the West. If the trend holds, once Nevada's wholesale power bills are paid off, we are more hopeful that rates will drop and the whole market will return to normal. In fact, already we are securing new, long-term contracts at these lower prices so our customers can have lower-cost power available to them in the years ahead.

Will price increases ever end?
We know that increasing rates are a hardship on our customers, particularly during these tough times. Wholesale costs for power have dropped significantly. And, if that trend continues, so should your rates. We are currently implementing plans to take advantage of these lower costs as we prepare for the future. That is why we are building infrastructure and instituting conservation programs that will help stabilize Nevada's power needs and rates for the long term. Barring another energy crisis, rates should stabilize, and hopefully, begin to level off and even decrease over the next few years.

What can I do?
There are several things you can do to take control of your power bills. You can take advantage of our Equal Pay program to avoid higher seasonal bills (based on eligibility). Remember, conservation is key to keeping your bill as low as possible. Take advantage of our Take Control conservation programs.

Some news stories and consumer advocates have claimed that the company "bet wrong" by buying power contracts when prices were high and should have just bought power each day or week as prices were dropping.
That's simply wrong, and it ignores our most important promise to you - a reliable supply of electricity at all times. It would have violated our oath to you to wait each week or day to purchase the power you might need at a time when power was often not available at any price. That's the way California did it last year and we were determined not to repeat that mistake here. Not only that, if you look at the cost of spot power - sold at the last minute each day - heading into this past summer, it would have cost our customers much more than it has with our longer-term contracts. We do not set prices, so our job is to secure reliable sources of supply at the best price we can find at the time. Some of the same people criticizing us for purchasing long-term contracts were the same people who were insisting a year ago that we should be buying long-term power to protect consumers from rapidly escalating prices, which shows you just how hard it is for anyone to predict with certainty whether prices are rising or falling. In fact, if we had followed that advice, we most certainly would have had numerous rolling blackouts this summer.