MINUTES OF THE

MINUTES OF THE

ASSEMBLY SELECT COMMITTEE ON SENATE BILL NO. 438

Seventieth Session

May 4, 1999

The Select Committee on Senate Bill No. 438 was called to order at 4:10 p.m., on Tuesday, May 4, 1999. Chairman Douglas Bache presided in Room 4100 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All Exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

COMMITTEE MEMBERS PRESENT:

Mr. Douglas Bache, Chairman

Mr. Greg Brower

Mrs. Barbara E. Buckley

Ms. Sheila Leslie

Mr. P.M. "Roy" Neighbors

Mr. David Parks

Ms. Sandra J. Tiffany

COMMITTEE MEMBERS EXCUSED:

Mr. Joseph E. Dini, Vice Chairman

Mr. Lynn C. Hettrick

STAFF MEMBERS PRESENT:

Eileen O’Grady, Committee Counsel

David Ziegler, Committee Policy Analyst

Charlotte Tucker, Committee Secretary

OTHERS PRESENT:

Judy Sheldrew, Chairman, Public Utilities Commission

Michael Pitlock, Commissioner, Public Utilities Commission

Chairman Bache called the meeting to order at 4:10 p.m. and continued the hearings on Senate Bill 438.

Senate Bill 438: Makes various changes related to electric restructuring. (BDR 58-861)

THE FOLLOWING IS A VERBATIM TRANSCRIPTION OF THE MINUTES.

Chairman Bache: Let’s get started. We’re going to have to only go to 5 o’clock today. We’ll have a limited amount of time. One because of the ever-popular basketball game tonight and if those of you in the audience haven’t bought your ticket yet, Ways and Means is selling them for $10 for a good charity.

We’ll call this meeting to order as a subcommittee on S.B. 438 since we don’t quite have a quorum yet. Would the secretary just mark members present as they arrive?

I’d like to start off today -- Commissioner Sheldrew, since you did not do a presentation at our last meeting would you like to present what you think of the bill or how it contrasts with current law? I see we have the trifecta here today from the PUC. This is a first. All three of you in the same place at one time except when you were voting on issues.

Judy Sheldrew: Mr. Chairman, we try to avoid any impression that we may be having some kind of discussion, but sometimes it’s just impossible to avoid.

Thank you very much. For the record, Judy Sheldrew, Chairman of the Public Utilities Commission.

Michael Pitlock: I’m Michael Pitlock, a member of the Public Utilities Commission.

Judy Sheldrew said:

What we’d like to do, per your request today, Mr. Chairman and members of the committee, is essentially walk you through some of the history of A.B. 366, what A.B. 366 has in its provisions, and then contrast that against what S.B. 438 does. We’ll be prepared to answer any questions you may have. Of course, we are offering these comments as individuals. The commission has not taken a position on S.B. 438. I hope you have before you a little summary we tried to put together simply to use as a comparison piece as we go through. It’s stapled on the wrong end (see Exhibit C). I apologize for that.

If you turn to the first page, one of the things that A.B. 366 required of the PUC was that the commission take such action as necessary to encourage and enhance (1) the development of a competitive market for the provision of utility services in Nevada, and (2) the reliability and safety of the provision of those services within that competitive market. Now with that rather dynamic change of direction to the PUC, we at the commission embarked upon an entirely new effort as directed by the legislature. That is to focus our efforts on the efforts to see to it that a competitive market would develop. Prior to that, of course, we had the responsibility of being sure the rates are just and reasonable, and that the services are reliable and safe, as well as balancing the needs of shareholders and ratepayers. While those remain, this additional directive from the legislature certainly has impacted the work that we have done during the interim to implement the regulations with A.B. 366. I think as we go forward it’s rather important for the legislature to remember that is the directive that was issued in 1997 for us. So just as a preface, we’ve pointed that out.

The next couple of pages are an attempt to walk you through what A.B. 366 has done, and I will talk to you briefly about what the commission did to implement the regulations for A.B. 366. We’ve attempted to contrast, as we understand S.B. 438, with the provisions of A.B. 366. My apologies to those of you on the Government Affairs Committee that may have heard some of the explanation of A.B. 366 and certainly, to you, Mr. Chairman, I know you’ve had a long history with A.B. 366. However I think it’s sort of important for us to have the background to understand what it is that we’re talking about and how it relates to A.B. 366 in the bill that is before this body today.

A.B. 366, perhaps most importantly, directed the Public Utilities Commission to unbundle electric service. By that we mean we took the component of electric service as you know it today, one unit on your bill, at a price per that unit, and identified all of the various segments of electricity that is delivered to customers today. We essentially identified, of course, distribution, transmission services, and generation, both capacity and energy. We identified aggregation services, or those services by which you bring together customers with a supply, and deliver services as you see them today. We identified metering, billing, and customer services. We identified such things as public goods type services, for example, demand side management, and those kinds of things. That effort was undertaken immediately upon passage of A.B. 366 in the formation of an investigation to be conducted by the Public Utilities Commission. It’s important that you remember that the directive in A.B. 366 was to break apart all the various components of service with the hope that we could then identify the costs that are attributable to those various services, some of which will be regulated and some of which will not be regulated in the going-forward market, to correctly send the price signals that are necessary for competitive market to function efficiently.

Now, I think it’s probably best if I contrast what S.B. 438 does as I go forward, unless, Mr. Chairman, you’d like me to go down A.B. 366 and then come back with S.B. 438. I don’t know how you’d like to proceed on that.

Chairman Bache: I believe contrasting the two – A.B. 366, which is current law -- with S.B. 438 probably would be the best way.

Judy Sheldrew said:

Okay. S.B.438, as we read it, directs the Public Utilities Commission to establish an unbundled rate for each of class of customers effective on passage and approval of S.B. 438, which would be, of course, some time, we presume, between now and the end of May, with that rate to be frozen over 3 years. So essentially, the unbundling process that we started under A.B. 366 is, I guess, held harmless at some point as we go forward, because we’re going to establish a new bundled rate for all classes of customers so each class of customer would continue to have the single rate for all of their services on going forward. So you can see right there that there is a fairly significant difference between the direction of both of these measures.

A.B. 366 then sets up a process to identify which services can be offered by alternative sellers. Now the legislature in 1997 specifically said that generation and aggregation – and aggregation again is putting all of the various services together to deliver an end product that is bundled – so it would include generation, distribution, transmission services, billing, metering, and customer services. Those were identified as being potentially competitive. If you recall, we’re moving from a provision of monopoly services – a regime – to one which we’re going to try and rely on competition. The in-between area is, in our parlance, called potentially competitive. That means there’s going to be some form of regulation over those services, but each one of those services, either in total or in whole, can be offered by alternative sellers. Through a process that we conducted during the interim, the commission also identified three other services that should be identified as potentially competitive. Those services are, of course, metering – and I think in your first meeting, Mr. Chairman, you heard a lot from a number of providers of metering services. It was clear from the record it’s hard to call those services monopoly services when you have so many companies providing and able to provide metering services. Not only meters themselves but meter-reading services. We also identified customer services and billing services as potentially competitive. So what that means is transmission and distribution, or the wire service of the business, remains regulated. Again, with the unbundling process and now the determination of which services should be continued to be regulated, or deemed to be non-competitive in the going-forward market as well as those services that were identified as being likely candidates for being offered for services, offered for sale by various alternative sellers, you then have the differences between the types of services.

Now S.B. 438 prohibits alternative sellers – the way I read it now, and it may be unintentional – prohibits alternative sellers from selling any of these potentially competitive services until July 1, 2001. So all the effort that we’ve gone to, to unbundle services would essentially be kept on hold unless – and I don’t know whether that was the intention of the drafters or not – thereby rendering the efforts to bring alternative sellers to sell these various services to at least be put on the back burner for some period of time.

A.B. 366 outlines the requirements for licensing alternative sellers. As you recall, there was a good deal of conversation in 1997 about not wanting to repeat the California experience. We wanted to have good quality alternative sellers. We wanted to be sure they were financially capable of providing the services, had some experience, and were willing to meet the requirements of providing customer services in the State of Nevada, and we have indeed completed those licensing requirements. They were effective the end of 1998 and I think we have received at least one application for an alternative seller license at this point in time. S.B. 438 does not address the licensing requirements for alternative sellers.

A.B. 366 prohibits the provision of competitive services by providers of non-competitive services. Now what this means is the providers of the regulated service, either wire service, could not provide competitive services through that particular entity. The reason for that is when you have provision of regulated services versus competitive services, there is a tendency, I think, to subsidize your competitive efforts by overcharging the regulated ratepayers, who, indeed, are still captive ratepayers and cannot go forward. So the provision was very clear that the provider of non-competitive service could not provide competitive service unless – and if you drop down to the next listing on the left-hand side of the first page here – unless it’s offered through an affiliate. Now the affiliate is allowed to provide those services, but only on a showing that the non-discriminatory access would be provided to all the non-competitive services. Essentially, that means that all of the alternative sellers, as well as the affiliate, can get to the distribution lines and the transmission lines in order to get to customers. The competitive affiliate will have an arms-length relationship with the distribution company, again to show us they are properly separate, and to be sure there is no cross-subsidization of regulated rates with the competitive endeavors. [It means] the business relationship between the affiliate and the distribution company does not interfere with the development of effective competition and the risk of anti-competitive conduct is minimal and the regulatory expense to prevent that anti-competitive conduct or behavior is also minimal.

So essentially there were four statutory requirements that the provider of the noncompetitive service had to meet in order to be able to form an affiliate. Both utilities have made filings before us, with a request to have the authority to form affiliates, and we are in the process of hearing those particular applications. On the other hand, what S.B. 438 does, is it allows the distribution company to provide potentially competitive services. For example, in section 12 of the bill, it allows the distribution company to have some ownership of qualified facility contracts. It thereby begins to blur the line that was established fairly clearly in A.B. 366, between the provider of regulated services and the nonregulated or competitive services. Also, it allows the distribution utility, pursuant to section 13, to own generation facilities. Essentially, S.B. 438 recreates the vertically integrated utility that A.B. 366 tried to disaggregate.

In addition, the distribution company is allowed to provide both noncompetitive and competitive services. This again makes it quite difficult to assure that the costs for wire services are indeed [those costs] and not either a subsidy for some other effort that is being run in that same vertically integrated utility, or that there is not some sort of cross-subsidization to some competitive effort ongoing by the utility. It also prohibits the commission from reviewing the earnings of the distribution company or the vertically integrated utility during this 3-year freeze period that was established pursuant to section 13. We’ll talk a little bit more about that as we go forward.

On the next page on the top, A.B. 366 directed the commission to assure that customers that are unable to obtain or fail to select an alternative seller, will still receive electric service. This was at the request of the 1997 legislature to be sure that those customers who may not either be aware or may not be approached by an alternative seller, would continue to have electric service in the market going forward. There’s been a good deal of debate about who should be assigned as the provider of last resort, and whether alternative sellers should have an opportunity to provide that obligation to serve that last resort service in the new world. The regulation that the commission adopted, or is under consideration – it’s in about its fourth or fifth hearing at this point – does allow the affiliate of the existing utility to provide last resort services. And also, if there is sufficient interest from alternative sellers, and they are prequalified, and the nonchoosing customers respond that they want to have this service provided by transitional service providers, we could have an auction to auction off, not customers, but really pieces of the service franchise territory that’s currently being served by the entity. Again, this is an option only. We don’t know whether anybody’s going to respond to it or not, but it was an idea to essentially fast-track residential customers into receiving or getting the benefits of competition much more quickly than they might otherwise, simply because of the inertia that we’ve seen in other states.

I might add that A.B. 366, of course, caps the residential rates. It only addresses residential rates for provider of last resort customers. As of July 1, 1997, the rate cap is set for 2 years past the date when it’s determined there is effective competition. Potentially, it would be in effect for the entirely potentially competitive period, and 2 years after there were many buyers and sellers in the market trying to provide this last resort service. Now it does have some exceptions in it. The utilities can make a request to increase their rates. But these are for certain issues that we would deem to be unnecessary for them to continue to provide their service at just and reasonable rates.

Now S.B. 438 on the other hand appears to set up a structure where all customers must choose last resort services that are offered through the distribution company, or now the provider of last resort, until at least July 1, 2001, and thereafter appears in section 14, to create some kind of double bid process for alternative sellers to try and compete to get a piece of the franchise service territory. It also appears to contemplate the utilities have some sort of right of first refusal. I’m not sure I understand that entirely and what the process is, but it looks to us, the way we read the bill as currently drafted – and again we may misunderstand or there may be some drafting errors – that all the customers would have to take this last resort service for some period of time until at least July 1, 2001, at which point alternative sellers could come in and offer potentially competitive services. Perhaps you might get some bidding through this double bidding process.

A.B. 366 requires the Public Utilities Commission to determine recoverable costs for assets and obligations for competitive services by taking into consideration several issues. As you recall the legislature had a good deal of debate about what those issues might be. In A.B. 366 they included such things as whether the utilities had attempted to mitigate the costs of either the contracts or the assets, whether they had attempted to increase the market value, whether or not shareholders had already been compensated for the risk. There’s a laundry list of about seven or eight things that the Public Utilities Commission was required to take into consideration in determining what the correct level of stranded costs were. Upon that determination, shareholders were to get 100 percent of those amounts determined to be recoverable, assessed from some nonbypassable, nondiscriminatory type charge to both the alternative sellers and the utility customers.

S.B. 438 appears to limit the scope of the Public Utilities Commission’s recoverable cost determination by authorizing utilities to use generation sale proceeds to cover the costs of the excess revenues during the 3-year rate freeze period. Essentially, the rate freeze was established at existing rates. Three years hence, if the utilities have not recovered all their costs by customer rate class, then they apparently can recover those costs and take them out of the gains from the sale of the generation units. As the amount of gains available to offset stranded costs decrease, of course, the amount of stranded costs that the ratepayers will eventually have to pay will also increase. Likewise, it [S.B. 438] prohibits the commission from evaluating the value of contracts associated with the purchasers of the divested generation units in addition to sale price. What that means is if the existing utilities were to negotiate a contract with one of the purchasers of the divested generating units, and thereby reduce their sale price, we could not take that contract into consideration in determining that as part of the sale price of the generation units, once again, thereby, reducing funds that would be available to reduce stranded costs.

Finally it [S.B. 438] directs the utilities to minimize federal taxes resulting from the divestiture of the generating units. This is an item is included in our current regulations and certainly was anticipated by the 1997 legislature in outlining the issues we were to look at to determine recoverable costs.

A.B. 366 directs the Public Utilities Commission to assure that certain consumer protections are in place prior to competition. S.B. 438 does not really address consumer protections.

A.B. 366 also directs the vertically integrated electrical utility to submit a compliance plan to the Public Utilities Commission, including information to set rates for unbundled electric services, allocate costs among customers for noncompetitive services, and adopt regulations – whatever form of regulation, whether rate cap or not -- for potentially competitive services. Those compliance filings have been made to the Public Utilities Commission. We just received the second part of those filings, which is the rate design that would apply to those various revenue requirement studies on last Friday, so the information has been received. But S.B. 438 essentially, I think probably moots our need to go forward with those compliance filings, because it directs the commission to establish a rate that’s frozen at the current rates for all rate classes, with one exception which is the addition of deferred energy filings that were going to be filed prior to October 1, 1999. At that time, the rates are to be effective through March 1, 2003, and at that time all unrecovered costs which were deferred through the 3-year rate freeze, apparently can be recovered from the gain of the sale on the generation assets. So the question here is whether or not there is a point in us going forward on the unbundling compliance filings to get the rates since it appears, at least as I understand the bill as it’s written, that the bundled rate that’s in existence today plus a little more would be the rate that would be frozen for the next 3 years.

Finally, on the last page, A.B. 366 granted the Public Utilities Commission broad authority to monitor the market to prevent anti-competitive behavior. We were given the authority to do such things as limiting ownership or operation in control of transmission facilities, conduct investigations to monitor whether the markets are functioning on all of the various bullet points that you see there. S.B. 438, however, reduces our ability to do that because it allows the integration of noncompetitive and potentially competitive services within the distribution utility; it enables the competitive affiliates of the distribution utility to represent themselves as the former vertically integrated utility through the use of name and logo; and allows the vertically integrated utility to negotiate directly with customers and without securing approval for affiliates or getting licensed. All of those, of course, make it difficult to monitor behavior in the market and assure there is no anticompetitive conduct that’s going forward. It has diluted the commission’s ability to address them.

In addition, there are a few miscellaneous items that are included in S.B. 438. It creates administrative law judges appointed by the governor and mandates that they be hearing officers for the Public Utility Commission proceedings. I’m not sure whether that’s intentional or not, but that’s the way it appears that the law is written currently. It eliminates the deferred energy process for electric utilities. I think at the first meeting Mr. Schmidt explained to you what deferred energy was. It’s the passthrough on a dollar-for-dollar basis of either the cost of purchase power contracts or fuel for generating utilities. It establishes deferred energy for natural gas utilities. It requires the act to expire if the merger between Sierra Pacific and Nevada Power is not completed, and then established March 2000 as the date on which alternative sellers can offer potentially competitive services. We believe this potentially conflicts with section 14, which appears to prohibit any alternative seller from bidding for the provision of a potentially competitive service until after July 1, 2001.

That’s a quick run-through of the comparisons. I don’t know whether you’d like me to stop and go over any questions as it relates the comparisons, or continue on with what we have done with market power mitigation under A.B. 366. This was, as I know, Mr. Chairman, you are aware, was probably one of the toughest tasks that we’ve undertaken and one that is, of course, one to be given considerable thought as you attempt to move from a monopoly marketplace to one that you’re relying on competition in. So whatever your desire is.

Chairman Bache: I think we’ll take questions from members of the committee right now. I’ll start it off here. Under the miscellaneous section, I read through the language on administrative law judges. I thought it was rather awkward and disjointed that you’d have the governor appointing some people and they’re doing hearings and it sounds like the commission would then be insulated and not be able to be familiar with the various cases that you would be sitting – I guess adjudicating – after they did whatever they were going to do, from that language. I thought if there was a need on your part for administrative law judges, I think there’s a much cleaner and simpler way of doing that through, by, let’s say, giving you permission to either on a case-by-case basis, if you have a certain case or docket that you wish to have an administrative law judge handle, or where you enter into a contract for a set period of time and that, instead of having the governor appoint somebody that you have no real control over, there is no control over. I mean they’re just sort of floating out there.

Michael Pitlock said:

If I could respond briefly to those comments. First of all, with respect to the administrative law judges, the testimony on the senate side was basically that this provision was in response to the heavy workload of the commission. It was felt there were times when the workload was such that the three of us needed assistance in presiding over hearings. Unfortunately, when you look at the language that’s actually included in the bill, it doesn’t really accomplish that. I tried to take a look at it from a practical standpoint on how we would actually implement this language if it was to pass, and tried to view it in the context of how we would respond if truly there was a need for assistance on the workload.

The first provision, where it has the governor basically appointing an administrative law judge, there’s no indication of how he would make that decision, particularly if it’s driven by workload. Are we to request that the governor provide us that assistance? Or does he have some other means of making that determination that the workload has reached the point where it’s required? It’s also unclear as to whether or not the appointments would be on a case-by-case basis, or whether we’re talking about a full-time employee of the commission.

There are two points in the language as written right now that would make you think that administrative law judges are required. It’s section 4, paragraph 3, says that if a request for a hearing is filed with the commission, that a notice will be sent out and that the matter will be assigned to an administrative law judge. It doesn’t say that if the commission can’t preside over that hearing, they appoint an administrative law judge. It says one will be assigned. There’s also a provision later on in section 10 where we’re talking about hearings for the revocation of a certificate. It indicates it must be a hearing by an administrative law judge. So it sets up that that particular category of hearing must be presided over by an administrative law judge.

From a practical standpoint, there are also concerns in here about the amount of time that it could add to the process. Many of the proceedings in front of the Public Utilities Commission have specific statutory deadlines. When you overlay the timelines that are given to the administrative law judge for the drafting of his opinion and then the consideration of that draft opinion by the commission, there’s no indication here as to whether that’s an addition to the statutory time limits that are already in place or must be encompassed within those limits.

On one hand, I can understand, to a certain extent, the concern that the workload of the commission might be alleviated by administrative law judges, because frankly, our workload has a lot of peaks and valleys to it. If truly that’s the intent of the drafters of this legislation, I don’t believe that intent was carried through in the language.

Chairman Bache: So then would you agree with me it would be much cleaner to give you the authority to enter into contracts for either specific cases or on a period of a time before the administrative law judge function, if you as a commission – meaning the entire body – saw necessary?

Mr. Pitlock: Yes, I believe if the true concern is the workload, I believe the easiest way to do it is to simply provide permissive language that would allow the commission, on a case-by-case basis, so that it’s clear this is not a full-time employee but only a contract, the commission be permitted, on a case-by-case basis when they deem it to be necessary, to appoint an administrative law judge.

Chairman Bache: I have one other question or remark. On the deferred energy. I’m looking at deferred energy and with the confusion on dates, I hadn’t really thought of that before how that language in section 14 mismatches with section 20. When we open it up to competition, wouldn’t sort of deferred energy, even if we did not touch it in the statutes, wouldn’t it sort of go away naturally as – hopefully – the affiliate of the electric distribution company? Even if they had deferred energy, they would have to meet the competition and that would sort of take care of itself?

Judy Sheldrew said:

Two answers to that. Deferred energy was created to address the needs by utilities to recover the pass-through costs of their fuel for their generating units or the increasing costs of their purchase power contracts in a time when there was high volatility in the marketplace. Clearly, through the years when we’ve had deferred energy, the rates gone up and the rates have gone down. We really are looking at a situation on a going forward basis where there probably is some degree of increased volatility on a going forward basis, until at least the marketplace settles out and until competition starts to take hold. I guess the first question is whether or not now is the time to be removing deferred energy. As far as large customers, I really think if they get the opportunity to access alternative sellers who will be meeting their needs, large sellers are going to be largely insulated from the effects of undeferred energy because they will probably choose an alternative seller who does not feel it necessary to increase those rates or ratchet them up for the passthrough. An alternative seller, for example, that has a significant enough portfolio to assume the risk itself of the change in rates that we normally see being passed through. Of course as you recognize this bill would not eliminate deferred energy for anyone, any class of customers, for this next coming period, since it allows for that deferral mechanism to be recovered through the final clearing periods. No one’s going to get away from that one.

As far as the end part of your question and small customers, if the affiliate of the existing vertically integrated or the distribution company on a going forward basis utility, is the provider of last resort. I would think they might take a little comfort in having the deferred energy, but as they went forward, if customers had the opportunity to leave them, to go to other customers [sellers], so that’s why the timing is critical, then I would think they would have to think very seriously about how much they wanted to increase their deferred energy rates. If they kept ratcheting those rates up and people had an opportunity to go to another seller, again with a larger portfolio who would not ratchet those rates up, to take into consideration deferred energy or deferred energy passthroughs, I think the process itself is just going to die. Competition is going to essentially erode the importance of deferred energy, probably in the medium term, as I see it, or possibly in the short term. Again, it’s important that alternatives be available to those customers that wish to leave. If you’re going to have it with captive customers and you’re not going to give them an opportunity to go to another alternative seller, you’ve got to think about that again.

Mr. Pitlock: If I could add a little to that response. A lot of time you’ll hear that deferred energy is not compatible with a competitive generation market. I don’t necessarily believe that’s true, or that it has to be true. The current deferred energy process, where you have a straight dollar-for-dollar recover of your fuel and purchase power costs, truly is incompatible with the competitive market, because it doesn’t provide the appropriate incentives to the utility to go out and take advantage of that competitive market. There are ways you can modify the deferred energy process to build in the incentives. To actually force the utilities to go out and take advantage of the competitive markets to get the best prices for fuel and purchase power for their customers. So if you modify deferred energy, as opposed to removing it altogether, I think you can actually use it as a tool to stimulate the markets for generation of electricity, as opposed to just saying, "Well, it’s incompatible with it and therefore the only answer is to do away with it."

I think there’s other alternatives to a simple repeal of it.

Assemblywoman Buckley: I’ve some questions. I’m very concerned what’s going to happen to residential consumers and customers, and so I’m still trying to figure out the pros and cons of the rate cap in A.B. 366 versus the rate freeze in S.B. 438. So if maybe I could ask a few questions to try to better understand it in my mind. First of all, there’s the timing issue of how long they last. Would you address what your opinion is about the length of time, 2 years after effective competition, when you think that will be, versus the time period in this bill.

Ms. Sheldrew: Ms. Buckley, I was here the other day when the consumer advocate [Fred Schmidt, AG’s Office] answered the question, and I must respectfully disagree with his analysis. It seems to me that the residential rate freeze established in A.B. 366 lasts the entire time that we are in the potentially competitive mode. We’re in a monopoly, we go to potentially competitive, and on that happy day, as I use the term that many who appear before me do, that we have effective competition. That is, many buyers and sellers in the market and many ease of entry and exit, et cetera. Then 2 years after that point in time is when I believe that the residential rate freeze that’s established in A.B. 366 would terminate. That doesn’t mean that it hasn’t granted the flexibility to the utilities to come in and ask for rate changes for issues that are important to them. I want to be clear about that. The thing is it’s direct legislative guidance as to what was your intent for the commission to watch over for residential ratepayers. My impression is that it lasts through the entire potentially competitive period. Mr. Schmidt, I think, pointed to the deeming services competitive by the year 2001 as called for in the bill. I think that’s a name change for potentially competitive that may or may not mean certain things, but it certainly doesn’t mean there’s effective competition. I think the legislature would get pretty unhappy with the commission if because of that particular provision we were to remove all regulation and there was no competition in the marketplace, leaving you with unregulated monopolies on a going forward basis. I don’t read it quite the way Mr. Schmidt did, and would suggest that my reading of A.B. 366 has the residential rate freeze lasting for far longer. I couldn't tell you how long because it really depends on the success to which we are able to attract competitive sellers, particularly in the marketplace.

Mr. Pitlock: If I could add to that. The existence of effective competition is an extremely high standard. If you compare what we’re doing in telecommunications, and we’ve been trying to stimulate effective competition in telecommunications for a long time – going on 15 years now – there are some that will argue that in certain areas of telecommunications, we still have not achieved effective competition. So you’ve got a very high standard in A.B. 366 for when that rate freeze will end, because I believe it’s going to take quite some time for there to be "effective competition" in many of these markets. That’s a high standard.

Assemblywoman Buckley: I think the consumer advocate makes the argument that the rate cap is not as effective as a rate freeze, because especially with regard to Nevada Power and Southern Nevada, they can go in and present deferred energy charges. If you look at these charges, rates have continued to go up significantly since A.B. 366, and that a freezing is a better protection for the residential customer than a cap. Would you address that?

Michael Pitlock said:

I’ll go first on that one. The problem with trying to decide whether I agree or disagree with the consumer advocate on that point, is that it’s difficult to put – First of all, you have to put the current rates in their proper context. The current rates, at least in the northern part of the state, are creating a situation where the incumbent utility is earning in excess of 12 percent, based on the sharing dockets, one of which we completed not too long ago, and another one that’s going to be in front of us shortly. That 12 percent they’re currently earning in excess of, according to their latest revenue requirements filing with the commission, is in excess of what they believe is a reasonable rate of return. They made a filing with the commission that said a reasonable rate of return for Sierra Pacific is 11 percent. So not only are we freezing that 100 basis points between 11 percent and 12 percent, we’re also freezing in the amount in excess of 12 percent that they’re currently earning.

The other thing that makes it difficult to evaluate those alternatives is this – I don’t know what else to call it – this giant balancing account that they get to look at the end of the 3 years to decide whether or not each individual class of customers has covered its costs. First of all, from a practical standpoint, I’m confused as to how I would implement the language that’s in the bill. It says that if they don’t recover their costs for a given customer class, they’re allowed to recoup that money from any gain from the sale of the generation. And then the next section says that the commission cannot do any earnings review. So it appears to me that there’s no opportunity for the commission to analyze whatever the utility says they did or did not do in terms of covering their costs.

We also don’t know what the standard is they’re going to use to decide whether a particular class of customer covered its cost. We haven’t done rate design for Sierra Pacific since, I believe, 1991. So we have no idea, and there’s no guidance in the bill as written, as to what rate design they’re going to use to judge whether or not they’ve recovered costs on a class by class basis. There’s also no language in here that tells us what to do when they over-recover from one class and under-recover from another class. So – and I wish I could give you an answer, but the problem is I have more questions when it comes to that particular section than I have answers – and so it’s difficult for me to evaluate those two alternatives.

It appears to me, at least from the viewpoint of a regulator, I would need a lot more information about how they’re going to calculate these class revenue requirements and whether or not the commission is going to have an opportunity to review that before I could respond any better.

Assemblywoman Buckley: Mr. Chair, I guess I’ll ask one more question and then pass it on to someone else. I believe in his testimony the consumer advocate also said that the freeze is intended to supplement and not take the place of the cap, and we’ll probably have an opportunity to explore that a little bit more. Can you make them compatible and what would you have? You’d have a freeze for a few years and then a cap after that, and then how would that affect the shortages between classes of customers? And then the – how does that all fit?

Ms. Sheldrew: I think you asked a question, again to which we have no answer. The problem with the freeze is that it doesn’t really appear to be a freeze because of the 3-year period. It appears that any costs – I presume that may include deferred costs – I’m not sure – that were not recovered by class of customer, so I suppose if you over-recover in one class of customer and under-recover in another, I don’t know whether there would be a netting going on there between the two or whether or not you just get to go after the under-recovered class. You take that from the gain on sale, but you’ve established those as costs for your rates. So if they’re up here and the rate freeze and down here, or vice versa, one way or the other, I don’t know if the two fit together. It seems to me once you’ve established a rate – and essentially the legislature is replacing the commission in determining that today’s rates are just and reasonable and are appropriate on the going forward basis – plus anything else that can be added on at the end of that rate freeze period, how you would get yourself back into any kind of rate freeze or rate cap that’s currently in the law -- I’m sort of at a loss to understand the mechanics of how that would work once you got yourself out to that third year period and had tacked on all of the other rates and had prohibited the commission from looking at any over-earnings during that entire period of time.

Assemblywoman Tiffany: Boy, this is complicated, isn’t it, Judy?

Ms. Sheldrew: Sure is.

Assemblywoman Tiffany: Every time you put the hammer on one, another one pops up. I would like to go back to what we were talking about earlier – Michael, when you were talking about the problem you had with the administrative law judges. My question was, what was the intent for this from the senate? It’s not unusual that we see sections in the law that are maybe confusing or contradictory when we pass them. So that would be number one, the intent. Number two, what would be appropriate for you to interpret or implement in regulations when it came to the administrative law judges?

Mr. Pitlock: Because I was not intimately involved with the drafters of this legislation, it may be difficult for me to tell you exactly what their intent was. But from sitting in the hearings on the senate side, at least one of the intents appeared to be that the average residential consumer should see as little disruption as possible. They were attempting, I believe, to make the transition from the monopoly markets to a competitive seem as seamless as possible to that residential customer.

Assemblywoman Tiffany: No, I’m just talking about the administrative law judges part of it ---

Mr. Pitlock: Oh –

Assemblywoman Tiffany: You’re getting a little broad here.

Mr. Pitlock: Okay, I apologize. On that issue, clearly the intent that was discussed at every committee hearing when this issue came up was that it was designed to address what was a perceived workload problem that the commission was facing. That’s why, when we testified on this particular portion on the senate side, it was my indication to the committee that, [why] I truly believed it was important for the commissioners to be in the hearing room. I personally believed that’s one of the best parts about this job, and is an essential part of doing the job well. You have to be there in the hearing room, look the witnesses in the eye, just like we’re doing right now, to judge their credibility in what they’re telling you. You lose some of that when you’re distanced from the hearing.

I did indicate our workload does come in peaks and valleys and that there are times when it may be difficult, particularly now with a 3-member commission as opposed to the 5-member commission that I’m used to from the past. There may be situations where the workload is such that that type of assistance would be necessary.

Assemblywoman Tiffany: So – we’ve got to get out of here, I know, at five. I’d like to go over and talk to Senator Townsend about the intent, too. It looks to me like the intent – like you said – was workload. If that’s the case, then when you have your questions about who makes the decision and who appoints it. Is it case by case? And all the other questions I wrote down that you had on this, why can’t that be interpreted? If the intent is the workload, why can’t the rest of it be done through regulation?

Mr. Pitlock: As I indicated, there were two particular points in the language where that intent does not come through because it mandates that we assign a case to an administrative law judge and it mandates that certain hearings be conducted by administrative law judges. So assuming that you fix those two – which I’m assuming are just drafting errors – and possibly add language that indicates that upon the request of the chairman, the governor may appoint. That way, we would have an opportunity to communicate to the governor’s office – we’re facing a workload situation – we need an ALJ (administrative law judge) so you need to appoint one.

Assemblywoman Tiffany: Assuming that’s the case, that it is workload, and some of the mandates need to be clarified, wouldn’t the rest be implemented by regulation?

Mr. Pitlock: We currently have regulations that set forth the procedures for appearing before the commission, and a lot of those details could be worked out in those kinds of regulations. The one other thing I would point out in terms of what would be helpful as to the intent of the legislation is how it fits into the statutory timeframe. Because it does set forth specific timeframes for the administrative law judge to take certain actions and other timeframes for the commission to review those proposed orders. We would need some guidance as to whether or not that needs to be worked out within the statutory timeframe, which frankly would be a little tough on the 180-day cases. The legislative guidance would be important, too, before we move to the regulation proceedings.

Assemblywoman Tiffany: Okay. If the Chairman indulges me, I would like to get clarification, I think, from the senate side on some of these questions, because that doesn’t come to us without a lot of thought. I just wasn’t stuck in at the last minute. I actually see some benefits to it --

Ms. Sheldrew (interrupting): Ms. Tiffany, if I could just add. One of the things that you need to keep in mind is our regulations can only go as far as the law. If the law, for example, in section 3 on the top of page 2, is as explicit as it is, we would have little room to develop the regulations. So if we’re talking about getting us a little less specific guidance so we can develop the regulations as you are suggesting, that would be helpful. This is pretty constraining language.

Assemblywoman Tiffany: Yes. Some of it is and some of it isn’t. Maybe that needs to be clarified. Also, do you have it in the budget to go ahead and contract with an administrative –

Ms. Sheldrew (interrupting): No. This was not our request.

Assemblywoman Tiffany: So you don’t have it in the budget?

Ms. Sheldrew: No.

Assemblywoman Tiffany: Do you think it would be a large budget item, or you don’t know because you don’t know exactly how it would implemented?

Ms. Sheldrew: We don’t know whether the thinking here is it would be a new position to be added to the budget, full-time. I think first that section 2 contemplates it as a position that serves at the wish of the governor – the pleasure of the governor. It’s not for a set term. We have no position in mind. If it was contract, we might have a little mote flexibility.

Assemblywoman Tiffany: I think this is worth some clarification to see where we’re going on it. I have more rate questions, but we don’t have time. We’ve got lots of time to talk about it I guess next Thursday. Thank you.

Assemblywoman Leslie: My question is on a totally different issue. One that really interests me. And thank you for forwarding that study on Ultima Energy. When I was reading the study, and I looked at the ads that they used to test the disclosures, I noticed that it always says -- ultimate energy was the example -- it is not the same corporation as Nevada Power, but when it was a Nevada Power affiliate, the first line of the ad said clearly it was an affiliate. So I looked up the word "affiliate," which means "adopt as a son." So I’m wondering why – obviously people are going to get confused with that word "affiliate" – the dictionary goes on to say it means "to bring or receive into close connection as a member of a branch, to associate as a member, to connect or associate oneself," so of course people are going to get confused with that kind of a disclosure. I’m sure you put a lot of thought into A.B. 366 choosing that word "affiliate" and I’m just wondering why that word?

Ms. Sheldrew: Ms. Leslie, the selection of the word "affiliate" was – I think exactly as you took it to mean "close connection with" – but not describe a certain corporate structure. The language of the law is broad enough to cover other subsidiary – those kinds of things. I’m just trying to say you could have a connected entity with you. Affiliate is a fairly routine phrase that’s used in the energy world to identify the various components of a corporate body that provides various divisions of service, so I don’t know there was a lot of discussion or thought about the word, mainly because all of us sort of understood what affiliate meant. I don’t know that we were thinking to the day we had to get to the point of trying to describe to customers that "this is an affiliate of the company." The reason the two disagree is because Ultima Energy has the tag line and the other one did not, so I hope the disclosures were relatively consistent with each other. Amazingly enough I believe that the study – we wanted to do a lot more on trying to determine how much the public understood the disclosure itself, but we were only able, due to time and money, to get kind of a brief review. Apparently the consuming public to which these ads were shown did understand "affiliate" to mean "a different company." So that actually communicates best, although it doesn’t, from the numbers, it isn’t a real home-run-hitter as far as communicating to folks what exactly the relationship is. That’s probably sort of a non-answer, but that’s kind of what happened.

Assemblywoman Leslie: Just a brief followup, and I’ll discuss it with you later personally. I actually came to a different conclusion when I was reading the results this afternoon, that it confused the public more.

Ms. Sheldrew: You know, that’s one of the concerns we had is whether or not if you put – for example, I know some people have suggested you just put this big long disclosure on them – our concern was that disclosure, if it’s as long as that one that was referenced the other day – the PG&E Energy Services disclosure – I think is more confusing than clarifying. That was what we were trying to weigh as we were trying to figure out how best to communicate in a going forward market, the differences between the two. I’d like to talk with you more about it.

Assemblywoman Leslie: Okay, thank you.

Chairman Bache said:

Are there other questions from members of the committee for either Commissioner Sheldrew or Commissioner Pitlock?

It has been noted there, timewise, some of us have to be elsewhere, and we’re going to have to wrap up this meeting today. The rest of your presentation you can finish first thing on Thursday. Mr. Graves, I thank you for the amendment (see Exhibit D) that you proposed. If anybody else has amendments to propose to the bill, I’d appreciate that you have them for Thursday. We’ve received some in the first meeting. One from Mr. Graves today. After Thursday’s meeting, we can look at the various amendments and try to process them as we see fit.

A closing comment here. The more I look at the bill I’m more of the opinion that if we don’t do anything, nothing bad happens as far as the current status of A.B. 366 from last session and this bill.

Any other business to come before the committee? Thursday, since Constitutional Amendments moved back later, we’ve moved up Thursday until 3:30. It is in this room. This meeting’s adjourned.

Fifty-nine letters in support of the SNARSCA amendment on the name and logo issue were entered into the record as Exhibit E.

Chairman Bache adjourned the meeting at 5:10 p.m.

RESPECTFULLY SUBMITTED:

Charlotte Tucker,

Committee Secretary

APPROVED BY:

Assemblyman Douglas Bache, Chairman

Assembly Select Committee on S.B. 438

DATE:

S.B.438 Makes various changes related to electric restructuring. (BDR 58-861)