Indy Explains: How Nevadans’ Southwest Gas bills got so expensive

Exceptionally high natural gas bills this winter have led many customers to accuse Southwest Gas, the largest natural gas provider in the state, of price gouging.

Customers across the state who haven’t changed their usage are seeing their bills run two or three times as much as they did the year prior, with some bills tallying hundreds of dollars more per month — all while natural gas benchmark prices have reached a three-decade low.

But the increased bills reflect the costs the utility itself is paying for natural gas, according to the Public Utilities Commission of Nevada and the utility itself. Those costs fluctuate with national and global events such as a 2021 winter storm that ground natural gas production in Texas to a halt and last year’s extremely cold winter in the West.

It’s because Nevada uses a process designed to consistently monitor and adjust the costs utilities are paying for fuel, meaning customers do not pay for the cost of fuel in real time. Fuel costs reflected on customers’ bills reflect the cost of fuel the utility purchased 12 months ago. Nevada law requires utilities to adjust those rates quarterly to account for rising and declining fuel prices, with state regulators ensuring that the cost adjustments are appropriate — making it a lagging indicator of current natural gas prices.

The state’s Bureau of Consumer Protection participates in utility rate proceedings to ensure ratepayers receive reliable service at a fair cost. Ernest Figueroa, the Nevada state consumer advocate and head of the agency, said there is “some real concern” as well as “misunderstanding” around the high bills.

“We had increased inflation … you couple that with utility rates and a colder winter, and it’s a perfect storm for people to complain,” he said. “There’s quite a lag in how we pay for our rates here in Nevada.”

As Southwest Gas experienced a 75 percent increase in fuel costs over a two-year period, with prices peaking in August 2022, customers’ bills were largely unaffected. But based on the state’s rate structure, those high costs are now resulting in higher bills.

“The challenge we have and the situation we are now in is when gas prices stabilize at a lower level, but you’re still paying off the prior year’s purchases, it confuses people,” Southwest Gas President Justin Brown said in a February interview with The Nevada Independent.

The utility does not make a profit on the higher price of natural gas. But there are other costs the utility does profit from.

Southwest Gas is petitioning state utility regulators to approve up to $74 million in higher rates to cover cost increases related to things such as maintenance, infrastructure and operations, a request organizations such as CHISPA urged state regulators to deny to “protect ratepayers” and the Southwest Energy Efficiency Project (SWEEP) said “would have benefited from more oversight.”

But that request has no bearing on the skyrocketing gas bills that have left customers flabbergasted. Multiple Southwest Gas customers wrote to The Nevada Independent after reporting bill increases of around 85 percent, sharing copies of their statements. One reader called his bill “a ripoff.” Another called it “gas gouging.”

Southwest Gas officials who spoke to The Nevada Independent say they took copious measures to let customers know about the projected price increases, including putting mailers in print bills and information on social media and the utility’s website. The utility’s messaging mirrored that put out by the U.S. Energy Information Association in the fall forecasting that natural gas bills would increase nationwide.

Not all customers noticed.

“We were all caught completely unaware,” said Marjorie Bleam, a Las Vegas resident who reached out to The Nevada Independent with her frustration after her bill doubled to around $300. “We’re not well informed as consumers. I admit that. I don’t understand the whole process … but this is over the top.”

Read More: As Southwest Gas seeks another rate hike, some consumers and advocacy groups cry foul

Nevada doesn’t produce its own natural gas. But it relies heavily on the resource

Nevada has no significant natural gas reserves and only limited natural gas production — factors that can help cushion costs during periods of high demand. But the state still relies on natural gas to generate nearly 57 percent of its electricity — 1.5 times more than the state generates through renewable sources.

In 2022, electricity power generation used 65 percent of all natural gas delivered to Nevada.

Residential customers used just 12 percent of natural gas delivered to the state, and the remaining natural gas import was distributed among the industrial, commercial and transportation sectors.

As a state that relies on importing nearly all its natural gas, Nevada has some of the highest residential natural gas prices in the nation.

Natural gas is piped to Southern Nevada from the Rockies and west Texas, and delivered to Northern Nevada from the Rockies and Canada.

Once the fuel makes it into Nevada, the state then sets its own policies and practices around gas purchasing and how those prices are reflected in customers’ bills.

“Perhaps there might be an appetite for the Nevada Legislature next session to utilize experience to see if there are any amendments that could be made to generate greater rate stability,” Figueroa said.

Fuel costs behind big changes on bills

Southwest Gas bills include listed fees for fuel delivery, a basic service charge and a universal energy charge. But most of the increased costs are coming in the section titled “gas cost,” featuring two subsections — BTER and DEAA.

BTER refers to the base tariff energy charge — the amount the utility collects from customers to cover the estimated cost of fuel.

DEAA is short for deferred energy accounting adjustment — an adjustment between the amount the utility expected to pay and what it did pay. If the base tariff energy charge was set too high, customers receive a credit. If the base tariff charge was too low, Southwest Gas collects the difference.

The utility directly passes those fuel costs on to customers without making a profit. As a regulated utility, Southwest Gas instead earns a profit on the delivery charge at a rate set by state utility regulators.

“When fuel prices spike considerably as they did the past few years, the deferred energy accounting adjustment process can take several quarters or more for the higher fuel prices to noticeably cycle through current customer rates,” according to Peter Kostes, communications director for the Public Utilities Commission of Nevada.

Under Nevada law, both rates are updated quarterly to reflect the average costs over the previous 12 months. When the company adjusted its rates Jan. 1, it was to recoup costs the utility spent to purchase natural gas between October 2022 and September 2023.

High fuel costs a ‘Western United States phenomenon’

As a state that relies heavily on natural gas but produces nearly none, Nevada relies on the volatile national market.

Between October 2022 and October 2023, natural gas prices hit record highs due to a series of weather and man-made events. In 2021, Winter Storm Uri struck Texas, the nation’s leading natural gas producer, resulting in subfreezing temperatures, a blanket of snow and the state’s costliest natural disaster.

Although the storm only lasted a few days, it had devastating impacts on natural gas production and prices spiked to record-setting levels, according to the American Public Power Association, with utilities facing “no choice but to purchase historically high-priced natural gas fuel.”

The massively inflated prices that companies paid for natural gas during the storm were spread out over a longer period to lessen impact on customers — for example, customers in Texas, where the disaster occurred, will pay about $4 more per month over the next 16 years due to the spike in costs.

“The costs were so extreme that a lot of state public utility commissions spread the recovery out over a really long time,” said Justin Brant, utility program director for SWEEP. “Winter Storm Uri spooked the market … Part of the run up in costs last winter — even though Winter Storm Uri was two years ago — was markets saw the impacts of Winter Storm Uri and priced in the risk.”

The following year, a major west Texas pipeline that supplied gas to the Western United States went out of service, which also affected supply, according to Brown. That was exacerbated when forecasters predicted a warmer than normal winter last year — and then one of the wettest, coldest winters struck the West.

“The culmination of those three things pinched the West,” Brown said. “This was a Western United States phenomenon.”

At one point, Brown said Southwest Gas saw a 1,000 percent increase in the price it was paying for fuel. That spike was brief, but it’s those kinds of extreme fluctuations that have customer base rates so high this year.

“Customers last year did not see a 1,000 percent increase in their bill,” Brown said.

Presumably prices rose slower in Nevada and therefore will take longer to decrease, SWEEP’s Brant said, whereas costs rose quicker and decreased faster in other states.

“Nevada’s different than other Western states in that it uses this 12 month rolling average rather than more recent absolute costs,” he said. “The goal is to minimize the average over a long time, but you’re seeing the bad result now — costs have gone down, but what customers are paying hasn’t gone down.”

Equal payment plan aims to balance costs out over a year

Equal payment plans are offered by Southwest Gas and are designed to even out the cost fluctuations customers see between summer and winter bills. In winter, when customers use more natural gas, bills are higher.

The equal payment plan accounts for a customer’s billing history and attempts to spread costs equally across the months. But when gas costs increase, customer bills will increase — even if they are on the equal payment plan.

“That’s not going to make you immune,” according to Brown. “If you weren’t on the [payment plan], then your winter bills would be even higher.”

Costs on their way down

Counterintuitively, prices have already started dropping.

Natural gas prices nationwide peaked in the summer of 2022, reaching their highest point since 2008, according to the U.S. Energy Information Administration. Many customers didn’t notice because they use substantially less natural gas during the summer months.

Costs then decreased by a combined 8 percent during the utility’s October and January quarterly adjustments, and the utility estimates another 8 percent reduction in April, the start of its next quarterly rate adjustment.

Based on current fuel costs, the utility is projecting base rates will continue to drop for its customers.

Company wants price hikes unrelated to field costs

In September, Southwest Gas filed a general rate case application with state regulators to change the rates charged to customers to cover costs such as capital improvements, increased operating expenses, maintenance and inflation.

If fully approved, the $74 million request by Southwest Gas would result in Southern Nevada residential customers paying roughly $8.14 more per month — about a 10.2 percent increase — while Northern Nevada customers would pay $5.80 more per month, about a 4.3 percent increase.

“We all experienced tremendous inflation in 2022, 2023,” Brown told The Nevada Independent. “We’re not immune to that.”

State regulators began hearing arguments on the matter Feb. 26. If approved, the new rates would go into effect in April.

These increases are not related to the quarterly rate adjustments that cover the costs of fuel, and state regulators can either approve the rates as proposed or decrease or increase them as the commission sees fit to ensure they are reasonable.

The current rate case application marks the fourth sought in five years by Southwest Gas, and the largest.

“We are not allowed to adjust our revenues to cover our costs absent going through the rate case process. We can’t do that without supplying the justification for that rate change. And we have to conform our business to those revenue structures,” Brown said. “We’re living on a budget, no different than anyone else.”

Nevada’s utility regulators almost never approve a utility’s full request.

In 2020, SW Gas requested a $38.5 million rate increase. State utility regulators approved an increase of just $25.1 million, 35 percent less than the initial request. In 2021, the utility requested an increase of $30.5 million, and regulators approved an increase of just over $14 million — a decrease of 54 percent.

Gas company expanding into new territory

How are the utility’s Mesquite and Spring Creek expansions affecting statewide customer costs?

Spring Creek is not, according to Southwest Gas, while Mesquite is impacting Southern Nevada customers.

In December 2019, state regulators authorized the utility to expand its service to the Spring Creek area near Elko. The expansion, which served 1,500 people as of Feb. 16, has mechanisms in place so that only people in that region are paying for the expansion, Brown said.

The year before, the utility regulators authorized Southwest Gas’ expansion into Mesquite, including 47 miles of pipeline, totaling $28 million.

Under SB151, passed in 2015, Southwest Gas can recover 98.5 percent of the costs related to the expansion from Southern Nevada customers and 1.5 percent from Mesquite customers.

The cost for the Mesquite expansion is built into Southern Nevada customer rates, Brown said.

Appeasing shareholders

The utility’s request for $74 million is based on a proposed 10 percent return on equity, up from its current 9.4 percent. The Bureau of Consumer Protection is recommending a 9.3 percent return on equity.

The company is also seeking a 10 percent return on investment — a way of showing profitability by comparing amounts paid to amounts earned — up from its current rate of 9.4 percent. In its filing with state regulators, Southwest Gas said that its existing charges do not provide reasonable return on its investment.

Brown argues those numbers are fair, despite protests from groups ranging from the AARP to the Nevada Conservation League, and that 10 percent is less than what the market is demanding. On behalf of Southwest Gas, consultant Dylan D’Ascendis said the company should be seeking a rate of return between 10.29 and 12.12 percent.

In written testimony, Daniel Lawton, an economist representing the Bureau of Consumer Protection, argued for a substantially lower number.

“The company’s proposed 10 percent return for equity shareholders is not supported by any financial model and is an overstatement of the required return on equity to hold and attract equity capital,” he said in the filing.

— This story is used with permission of The Nevada Independent. Go here for updates to this and other Nevada Independent stories.