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By GREGORY DL MORRIS, a New York-based business journalist who has covered the global energy and chemical sector for more than 20 years

NV Energy, based in Las Vegas, has just established a new captive insurance company, an unusual and difficult accomplishment in the highly regulated utility industry. Kirk Cresto, director of risk control for NVE, told Risk & Insurance® that the licensing had been completed by the end of last year and that all the contracts signed by the middle of February. He added that three initial policies, excess workers' compensation, general liability and auto will take effect June 1. Broker Beecher Carlson worked with NVE for three years to plan and execute the captive, he noted.

He explained that, to a large degree, few utilities have tried it because few utilities have tried it.. Because of the real and perceived regulatory hurdles, few risk managers in the sector have even bothered exploring the idea.

"We have a huge regulatory burden and lots of constituents to bring on board," he said. "I had to convince people who were not risk managers how this was good for the company and for the ratepayers."

Cresto described his firm as a typical utility. NVE's electric service area covers the southern tip of Nevada and most of the western third of the state, extending a bit into California around Lake Tahoe and totaling 54,500 square miles. Gas service is confined to Reno. Operating as Nevada Power Co. and Sierra Pacific Power Co. NVE has 2.4 million residential customers and counts 10 times that many tourists in its service area.

THE ADVANTAGES

"The captive concept is not as widely used in energy as it is in other sectors of the Fortune 500," said Mark Ouimette, managing director in the captive group at Beecher Carlson. "There are other similar approaches, including segregated cells and rentable captives. But only a true captive becomes an integral component of the company's management. NV wanted to manage risk most efficiently, whether that was retaining or transferring it. With the captive, it can write coverage directly or through a fronting company, buy down deductible or buy reinsurance."

Cresto expanded on the advantage of a captive for his utility. "Sure, access to the reinsurance markets is important. We also wanted to smooth claims and premiums over time, lower our overhead as compared to the commercial market, and be able to write coverage not commercially available. The captive will become a very powerful tool for efficiency and lowering our overall cost of risk."

THE CHALLENGE

The challenge for Cresto was convincing the rest of his management. He did a two-phase, internal study in conjunction with Beecher, that took NVE up to the point of implementation

But then they hit a "snag," recalled Cresto.

"My regulatory and legal staff did not understand a captive. I got a lot of tough questions internally, and I had to go back to Beecher," he said.

Erin Lynch, vice president in Beecher's energy group, had spearheaded the initial effort with NVE. She was deeply involved in every phase of the project, and with its successful completion earned recognition this year as a Power Broker^TM in the utilities category.

"Kirk quickly found that he had to overcome some internal doubts, as well as pressure from the Public Utilities Commission (PUC), to prove that a captive would specifically benefit rate-payers to the utility," she said.

Cresto asked her to conduct a national research project to find compelling evidence that PUCs in other states had supported the creation of captives at regional, investor-owned utilities, according to Lynch.

"We went to great lengths to find case studies, court documents and PUC public filings that would support the licensure and use of captives at investor-owned utilities," Lynch added.

They found that there were only five single-jurisdictional, investor-owned utilities in the country that had operating captives. Of those, they provided testimony and filings related to two of them. The regulatory record demonstrated that every state either explicitly or implicitly favored allowing the use of a captive, in recognition of the potential benefit accruing to ratepayers.

"Their report was 50 to 60 pages," Cresto recalled. "Once I had presented it to management, the proposal for the captive was resoundingly approved. We got the final green light from the board of directors on April 30, 2009."

After that the pace quickened.

"There were no particular regulatory roadblocks," Cresto said. "The state process was fast and efficient--really exemplary. The burden was all on the front end, because the regulatory process is all on the back end--did you do the right thing? With all the leg work in advance, we did not hit any barriers."

Ouimette noted that, while some of the particulars are unique to NVE, "the process would be very easy to replicate, and we would certainly like to try."

Prior to joining NVE, Cresto was with Citigroup, UPS and the U.S. Army.

"I have always run a very lean, flat organization," he said. "I demand a lot from my staff and my vendors, and I have to have the right tools. In my previous renewals, I found that I did not have one important tool. Now I have it."

March 1, 2010

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