Ed Fend, representing AARP (American Association of Retired Persons). I would like to say a few words about our utility deregulation. I had the unique distinction of being sent back to Washington, D.C., to learn – and I put that in quotations – about utilities and utility systems in the United States. We went through a 3-day course back there, which is very comprehensive stuff, by some very good people. I think the most important thing that I heard back there was, "You know, Nevada passed a bill in their last session, No. 366, that is probably one of the best utility bills that has been passed out in dealing with deregulation."

I bring that up simply because I still feel a lot of [A.B.] 366 [of the 69^th Legislative Session] is very applicable to where we want to go and where we should be going. I am also very much concerned over the bills we’re working on now – and I have been privy to a couple of the amendments that will be coming up – and I want to indicate for the most part I support the amendments that are coming through.

However, even with the amended program, I feel very strongly and I’m very concerned that we are not taking care of senior citizens and low-income citizens in Nevada. We established a rate freeze and that’s wonderful, I guess. But why didn’t we establish a rate cap? If we had established a rate cap, then we could expect, if deregulation works, to get lower rates. All we’re doing is saying, "That’s as high as you can go, but we haven’t said you can’t go lower. If you’re making too much money, if you’re making more than the 12 percent we think is adequate, you can give us some money back." I think it’s absolutely essential to have that provision put in there. We still have the same thing, it’s just a matter of terminology to make sure that we can benefit from deregulation if it goes through and happens and runs smoothly.

One of the other things that concerns me is that, in the last reading I did, and the last drafting, it said the PUC (Public Utilities Commission) would have no authority to go in and inspect or look at the books of the companies that are supplying us power. I cannot see how that can be conducive to any system, most particularly insuring that we get low-priced electricity. If we don’t know how much money these people are making, how can the PUC or anybody else indicate to us that it’s a fair amount or it’s not a fair amount?

As a member of AARP, it puts us in a very peculiar position. We’re very anxious to get low rates. Very anxious. Because all of us on fixed incomes in this arena – the senior citizens – are concerned about that. On the other hand, I must say there are also a lot more of us as well who have been brought up to believe if you want to have a good, secure, safe retirement program, buy utilities. Because they’ll give you a reasonable return on your money ad infinitum, and they’re safe.

We have a lot of people in this state that do own utility stocks that are senior citizens, depending on that. So I’m not saying, "Don’t let these people make money." Let them make money. But are they making too much money? The freeze rate that we looked at was in 1997. I understand. I’m not an expert on it, but I understand there were overruns in how much money they made in 1997, where they were supposed to get 12 percent. They probably made 14 percent or more than that, because it was like $14 million or $15 million over what the estimate was. I don’t recall seeing any of that money coming back to me. I was a ratepayer here in Washoe County.

These are the types of things that we must have. We must look at the books of these companies so we can tell where we’re going and what we’re doing. Yes, give them a fair rate of profit. Yes, let them recover some of their stranded costs, but don’t let them change their ability to purchase fuel on a 30-day average. That isn’t going to work. It’s going to go up and down so rapidly and across the board that at the end of the year you won’t know where you were.

(Unintelligible) 6 months or a yearly program. There’s none of these companies that should go broke because suddenly the price of coal, oil, or gas goes up by so much money that they couldn’t recover in 30 days.

So that’s where I’m coming from. At this point in time, having gone through all these things, looked at all the amendments, looked at all the things we have done, I’m just about convinced – just about convinced – that we ought to establish an interim committee to study utility deregulation. And I hate interim committee studies. But I don’t know where else to go. We’ve got – what? 25 days to jam this one out? Maybe we can do it. I hope so. But I just specifically wanted to express my concern for the senior citizens in this state who are on fixed income, who I think are not going to benefit from the security deregulation, particularly with the rate freeze and not cap, and a few of the other things.

[A.B.] 366 started down the road properly. Is it adequately covered? I don’t think so. These people are going to be totally confused. As we move down the road, particularly with telephone service – and I’m glad you brought that up, even though it’s not with this committee – everybody is offering people so much on their telephone bill. These seniors are getting crammed and slammed and they don’t even know what’s happened to them. This is all part of the deregulation process. All of a sudden AT&T is coming in and they’re going to offer them services for their computer? Come on. All this is going to do is confuse people. I don’t know what we need to do to clear that up except run continuous programs for our people in areas like yours where you do have a high population rate. We have had several programs at the senior center over there where we tried to explain this to them, where we have demonstrated – actually demonstrated – the process used for this telephone fraud thing. It’s frightening. The results. Because we can tell them one thing, go through the procedures, step back for 30 minutes, and go through the procedures again, and they will buy the same thing they bought before with just a few different terminologies. It is frightening. It is very frightening.

Now that’s on the telephone side. They’re going to be just as confused when they get to the power side. These people are the people we’re really concerned about. And we’re also concerned about the rural areas. I had a gentleman from Ione Valley call me in January in an absolute panic. He said, "I’ve been getting power from this sawmill off the road from the guy that sold me this lot where I built my house. He’s going out of business. What do I do?" I said, "Gee, what do you do? I guess you buy a generator. Buy your own power if he’s shutting his down." He said, "I can’t afford that. There are six houses out here that fall into that category. The man sold them the property, and told them he’d supply the power. Now he went out of business and there is no power." Fortunately, the Indian reservation just the north of him had power brought down to them by – I think it was Idaho Power that brought the power into the reservation – and I told him to go out to the power company and they’ll bring the power to your property line and you’ll pay the rest. But apparently he got power because I haven’t heard another word from him.

This is the type of thing that we’re up against in the rural areas. This one plant out there supplying power to people in rural areas is not an exception. There are many of them out there. Mining companies that have leftover things that are pumping generated power to some of these people, who, but for the Grace of God are gone tomorrow.

Tom Parker, representing EnergySource. (He distributed Exhibit C.) EnergySource is an energy consulting firm located in Reno, Nevada. The five EnergySource partners have over 150 years of utility related experience. In that venue, that includes law, finance, financing, operations, design, planning, construction, customer service, and marketing.

I am here today to comment on Senate Bill 438. An aside, if you’re looking at my handout, I think the month is wrong. It’s just been one of those months. I believe it’s May.

I’m here today to comment on S.B. 438. My comments are general; however I would entertain any questions.

Overview and observations: The competitive flame sparked by A.B. 366 could be extinguished by S.B. 438. A. B. 366 passed, passed by the legislature in 1997, is innovative and progressive. This law is recognized both regionally and nationally as a beacon for energy restructuring.

Moreover, the existing law and regulations secure the interests of residential and small commercial customers through the transition to competition. The Public Utilities Commission was instructed and obligated, under A.B. 366, to promulgate rules necessary to facilitate the transition. What has occurred to date, competitors are allowed a fair opportunity to compete for customers, utilities are allowed the opportunity to operate the regulated monopoly "wires" companies, and to compete in those markets in which they wish to enter.

Senate Bill 438 is a legislative compromise that suboptimizes the transition to a competitive market. The residential and small commercial customers’ interests are less protected during the transition to competition for the following reasons. Although I state these in an absolute or they look absolute, there is a lot of interpretation left in S.B. 438. I will speak to where I draw conclusions.

The customers would be exposed to price increases as a result of eliminating the price cap period from 1997 to the date of effective competition, and replacing it with a 3-year price freeze. If you refer to section 13, item 5, I think it indicates no review on earnings. It causes a big concern. A cap and a freeze are not equivalent.

The price freeze would essentially be paid for by the customers at the end of the freeze period. Albeit, it might be interpreted differently or regulation might rule on that difference, but what is allowed for in this law is a method of balancing the undercollected generation costs and then collecting them at the end of the 3-year period from the generation divestiture assets, which would have otherwise been applied to stranded investment.

Competitors would be delayed access to critical, potentially competitive markets. This goes to the provider of last resort (PLR) issue. Potentially competitive services such as metering, billing, and customer service would be delayed by at least 2 years, practically. The reason for that is in order to enter into those markets, you have to have enough mass to reduce the cost of entry, and with the PLR centered with, in effect, the vertically integrated utility, that makes it very difficult to enter the market.

The intended divestiture of generation assets by the utilities should assist in creating a competitive generation market; however, for some period the predominant buyer would be the provider of last resort. This would result in the inadvertent consequence of creating market power by the PLR. By that, it means if you divest that generation you have one singular PLR, at least for a period. They are going to have to serve those customers under the PLR by contract with that generation, and in fact, then, they will be the predominant holder of the generation assets. Whether it be by contract or ownership, the net effect is the same.

Recommendations:

You should be commended on your actions in the 1997 legislature, and thank you for the opportunity to comment.

[I would] be happy to do that. First of all, in the opening paragraph, following up what we believe was the intent of the Senate committee and in the Senate passing this language out of the Senate, is that the contracts are to be honored. They are not to be reinterpreted or modified by rulings from the regulatory body. That language is represented in the underlined section of the first paragraph, where it says, "Contracts shall not be modified or reinterpreted except by agreement of the contracting parties . . ." I think that’s part of the problem that Mr. Hettrick had, that these contracts could only be renegotiated by the parties. Secondly, it clarifies that the contracts’ cost should be recoverable by the utility.

Going into subsections 1 through 4, in subsection 1, again it just clarifies these contracts can only be renegotiated by the parties to the contract. We revised the verbiage under paragraph 1(a) that the regulatory agency can " . . . evaluate the contracts’ costs and benefits and analyze reasonable options under the existing contract provisions that may reduce costs or increase benefits." I would remind the committee again that none of this language prevents a buyout or buydown of these contracts. That is a separate issue.

Again, paragraph 1, subsection b, "Reports upon the good faith attempts initiated by the utility with the provider of the purchased power to seek an increase in value or reduction in cost under the existing contract terms." That’s just to clarify the language. We thought it expressed the intent a little better.

Subparagraph (c), under subsection 1, we’ve deleted entirely, because in our view any action taken by the power provider or the QF contractee is really not subject to the regulatory review. Deleting that paragraph, subparagraph (d) becomes (c). We had concerns about the former wording which said, "Exercising all existing contract terms." We felt that was too intrusive, so we’ve rewritten that to say, "show that the utility or its assign has exercised existing contract terms relating to the obligation to mitigate the cost of the contracts or the assessed value of retaining the contracts." And that’s to point out there could well be a benefit to these contracts as well as an above-market cost. And both sides of the ledger should be evaluated and considered.

Subsection 2, "Provides a citation to any commission order approving the contract; or, if such order is not available, provide all information, including actions and statements by the commission, if any, demonstrating any state or federal agency or other authority supporting the utility’s commitment to the contract." That again is just validation that the contracts were in fact executed under, in our case, federal law as well as review by the PUC at the time these contracts were enacted.

We moved to strike subparagraph 3. Again, we felt this language was awfully intrusive and arbitrary in terms of what could be required, in this case, of the utility.

Subparagraph 4 now becomes subparagraph 3, and "Provides all the information indicating the extent to which the rates previously established by the commission have compensated shareholders for the risk of not recovering the costs of the obligations." That paragraph did not change much and goes to the stranded cost issue with the utilities.

With that, I’d be happy to answer questions from the committee.

I won’t be long. I’m sorry it took so long to get to the table. Either they’re making these chairs closer to the ground or I’m getting a lot older. Mr. Chairman and members of the committee, thank you. I had not planned on reappearing here. However, I was deeply disappointed to learn that some of the testimony you received on Tuesday, May 4 of this year requires clarification and, in some instances, corrections.

I realize that many of these areas will be addressed in future testimony before your committee by parties whose support for S.B. 438 and therefore I’ll not go into great detail here. However, it is important that the members of your committee realize and understand the areas where they may not have received accurate information.

Your committee had questions regarding the administrative law judge provisions, and I’m going to address that, but I have discussed this with the chairman. I think he has some language that he’s going to be proposing that seems to clarify many of the issues.

The purpose of authorizing the use of these law judges was to ease the workload of the three commissioners. Our committee believes the commissioners should devote their time to policy issues and developing regulations as well as involving themselves in regional and federal issues. It’s not an effective use of the commissioners’ time to preside over technical rate cases. Additionally, administrative law judges are familiar with rulings on motions and objections during a hearing. Such rulings frequently form the basis for appeals to the district court. An individual with legal training is more likely to make an appropriate ruling which will either avoid an appeal altogether or increase the likelihood the ruling will be upheld on appeal, and therefore the case will not be remanded for further proceedings before the commission. I believe your Chairman has language that clarifies those issues with regard to how and when and the mechanism to be used. I’ve glanced at that and it certainly appears to have substantial merit to clarify that issue and I appreciate the chairman’s efforts.

In testimony before our committee, the utilities commission indicated it would prefer to utilize contract services of an administrative law judge. This procedure is acceptable to my committee and is not inconsistent with what was originally proposed. Again, I think the Chairman has a very good grip on this issue and has clarifying language.

It was suggested to your committee that the process of unbundling, which the Public Utilities Commission has commenced, would be put on hold because the commission is required under section 13 of S.B. 438 to establish a total rate for basic electric service for each customer class. I cannot emphasize enough that S.B. 438 does not prohibit any customer from choosing a competitive provider after March 1, 2000. Unbundled rates are necessary to further competition, as was discussed at great length by the Chairman in this committee and some of the committee members who were sitting here under A.B. 366 [of the 69^th Legislative Session]. The rates the commission established pursuant to section 12 are only for those customers who either choose not to use an alternative seller or who are unable to find an alternative provider willing to service them. While our committee is aware that the competitive markets take time to develop, it is clear from experience in other states such as California and Pennsylvania that alternative sellers are willing to market to residential customers, particularly in the area of supplying "green power" even during the initial phases of competition. Unbundled rates are essential for these competitive services. Therefore there is no reason for the commission to suspend its work on unbundling of rates if this provision is enacted.

Additionally, it was intimated that customers would be required to use a provider of last resort services from the existing utilities until July 1, 2001. All customers of any class will be free to choose an alternative provider as of March 1, 2000. The July 1, 2001 date is the first date on which a competitive auction can be implemented by the commission to provide services for customers who did not choose to leave or choose to exercise services provided by the provider of last resort. The commission’s authority to implement such alternative methods of service at the time in no way restricts the ability of any customer to leave the utilities after March 1, 2000.

There’s another area in which the testimony created an inaccurate impression. S.B. 438 does not "recreate" – and that’s in quotes – vertically integrated electric utilities. After the passage of A.B. 366 Sierra Pacific and Nevada Power entered into a merger agreement which requires them to divest their generation assets. By definition, utilities that divest themselves of generation are no longer a vertically integrated utility. There is nothing in S.B. 438 which recreates or encourages the continued existence of vertically integrated utilities.

Testimony indicated S.B. 438 limits the commission’s ability to address stranded costs. This is absolutely incorrect. Section 46 of A.B. 366, now codified in Nevada Revised Statutes, lists the factors the commission must take into account in determining recoverable or stranded costs. Section 12 specifies the information regarding those factors which the utility must supply to the commission. Indeed, section 12 is an enhanced version of the commission’s own regulation on stranded costs.

A suggestion was made that S.B. 438 does not address consumer protection issues. S.B. 438 builds upon the fine work that was done by this house in A.B. 366. Consumer provision protections placed in A.B. 366 are no way diminished or abrogated by S.B. 438. Additional consumer protection provisions were not needed in S.B. 438. However, it should be noted that the rate freeze in section 13 in and of itself is a significant consumer protection. I’ll discuss that in just a moment.

Again it was indicated that A.B. 366 from last session gave the commission broad authority to prevent anti-competitive behavior and that the commission’s authority in this regard is reduced under this proposal. This senate bill in no way reduces the commission’s authority to prevent anti-competitive behavior. After lengthy discussions the Senate determined, as a matter of public policy, that allowing affiliates of the utility to use the name and logo of the utility does not constitute anti-competitive behavior. Nor does allowing a utility to supply provider of last resort services itself rather than through an affiliate diminish the commission’s authority to regulate anti-competitive behavior. The provision of last resort services remain under the authority of the commission. Ironically, some of the testimony indicates it was not necessary to eliminate deferred energy accounting as proposed in this bill. Instead, it was suggested that the deferred energy accounting mechanism, one of the most inefficient and anti-competitive provisions in these statutes, would just die on its own in face of competition. The use of deferred energy accounting is responsible for tens of millions of dollars being added to customers’ rates each time the mechanism is utilized. I really emphasize that for those of you from southern Nevada because you are still under deferred energy accounting.

Furthermore, deferred energy accounting removes any incentive the utilities have for improving their fuel efficiency or fuel procurement process. Without this bill deferred energy accounting will remain in the statutes and continue to cost customers millions of dollars every year. Nor was the testimony correct when it said that S.B. 438 creates deferred energy accounting for natural gas. It already exists in that industry, and it’s appropriate for it to continue at the present time.

Lastly, the discussion of the relative merits and impacts of the rate cap of A.B. 366 and the rate freeze in S.B. 438 did not provide your committee with an accurate basis for analysis. Initially it should be noted that the rate freeze does not replace the cap. The cap can, in fact, continue beyond the period when the rate freeze expires if the conditions specified in the creation of the cap in A.B. 366 continue.

Secondly, concern was expressed that Sierra Pacific Power is earning more than 12 percent on rate of return on capital and that a freeze would allow that situation to continue. That was addressed here in previous testimony. It is significant that Sierra Pacific has been operating for several years without deferred energy accounting, and with a rate cap coupled with a shearing [sharing?] mechanism for earning above 12 percent. Yet the rates in Sierra Pacific’s territory have not increased for years, unlike the rates in Nevada Power’s territory, which has no cap and which continues to utilize deferred energy accounting. Sierra Pacific’s earnings are irrelevant as long the rates customers pay are frozen and the customers receive the benefit of sharing the additional earnings that Sierra generates while those customers’ rates stay the same. This is an ideal situation for consumers as well as shareholders of the company. Both groups benefit without harm to either.

Of necessity I can only highlight certain areas regarding S.B. 438 to you today. I encourage your committee to carefully consider these points raised herein as additional testimony you’ll be receiving on these issues.

It’s highly significant that both utilities, Nevada businesses, and the recognized representative of all consumers, the advocate, of those particularly small commercial and residential customers, endorse this provision. When all these affected parties are in agreement that a program is beneficial to each one of them, policy makers like ourselves should carefully scrutinize the opposition from government regulators who are not yet comfortable with the increasing role of market mechanisms.

I will reemphasize one fact. Under this provision, all consumers will be allowed to leave on a date certain. Make no mistake about that. When people have an opportunity to drive the market, everyone in that market, particularly consumers, are best served.

I wanted to clear that for you, Mr. Chairman, because I believe the inaccuracies are an important part of your debate. I appreciate your committee’s indulgence again today. I will continue to monitor the testimony and I will continue to come up here and attempt to rebut any things that were problematic, such as people who did not testify in front of us and who are now over here [on the Assembly side] and perhaps not liking what they saw. I do not like it when it is done to me, and I do not like it when it is done to you on our side. We had a number of bills come to Senate Commerce and Labor, in which people came and gave these deep apologies for not coming to the Assembly first. To be honest with you, we did not accept the apologies. These houses are of equal value, and will be treated accordingly.

I’ll be glad to answer any questions. I appreciate your time.

Ernie Nielsen. I am with the Washoe County Senior Law Project. I am passing out three documents (Exhibits E, F, and G), two of which are proposed amendments that I would hope that you would consider (Exhibits E and F), and the third document (Exhibit G) which is some material that I have attached to assist you to understand some of the issues associated with those two proposed amendments.

Again, I don’t believe the two amendments I’m proposing to you unbalance the delicate balance that’s been established by the parties that have come forward in consensus on S.B. 438. I also need to say that I put forward both the issues that I’m proposing to you on the Senate side.

The first amendment deals with the customer disclosure issue (Exhibit E). What I’m requesting by this amendment is that you require the commission to establish a simple method by which the customer can compare pricing, fuel type and other conditions of service. I understand and have been somewhat involved with the consumer regulations that have been developed before the commission, and the pricing and some of the other conditions of service are being put into a format that would enable a customer to be able to compare between alternative sellers. However, the one issue that is, I think, very important to consumers that has not made it into the regulations as of today, is the ability to distinguish between alternative sellers with respect to the fuel type that is used in the generation to produce the power the customer is buying. In other words, coal plants, nuclear plants, green power and so on. I understand the commission might suggest one of the reasons they may be holding back on that type of disclosure is because of the limited transmission capacity coming into the state. That is something that doesn’t account for possibly intrinsic generation that develops in this state and I think there is some capacity to bring in nuclear from the south.

Anyway I think it’s really important from the consumer perspective that they be able to compare between the various alternative sellers what they’re buying. This is the first time they’ve had that opportunity and if it’s going to be a free market, hopefully it’s a free market for the consumers to choose between sellers.

The handout I’ve given you (Exhibit G) includes an example of the proposed rule of the Western Interconnection relating to consumer disclosure. In that proposed rule there are a number of items that deal with fuel types. I’m certainly not contemplating anything as sophisticated as this in a rule that the commission adopts, but it’s certainly something you might want to look at just to see what other entities are doing with respect to this kind of disclosure.

The second issue is one relating to energy efficiency (Exhibit F), particularly energy efficiency as it pertains to the vulnerable population here in Nevada. As I discussed a week ago, the demand side programs of yesteryear are no longer being engaged. Demand side programs are programs where the utilities provided programs to help customers reduce their use of energy. These programs were paid for via the rates and were justified based on the savings the utility and the customer base was going to experience because of the deferred need to produce new powerplants.

We’ve done nothing to replace these kinds of programs in this state, either in A.B. 366 or in S.B. 438. Some might argue that the marketplace will adequately address what the commission considers public goods, though there are certain customer segments that are just not going to be able to access that marketplace. The proposal that I’ve put forward to you here targets people below 106 percent of poverty. I think the program that I’ve suggested in the second page of that amendment is one which I’m hoping you agree with. It is a proactive program that will provide benefits not only to those customers but basically to assist the various state agencies involved with these sorts of things to coordinate their programs better.

I’ve attached to the handout ---

I’m currently discussing an amendment that entitled "Proposed Amendment regarding Energy Reduction and Efficiency Programs for certain residential customers" (Exhibit F). It’s a 2-page document. The second page of that document outlines the program that I’m proposing that the funds I’m suggesting would be applied to. The fatter document I handed out (Exhibit G) has an attachment to it that is from the National Consumer Law Center which has compiled the statutes from all the states that have restructuring laws. It then has outlined on separate pages how each of those statutes affects various elements of consumer service (see pages 19 through 28 of Exhibit G), including overall residential rates, affordability issues, targeted bill assistance programs, and energy efficiency programs.

I’m particularly here concerned about the energy efficiency aspects. The reason I handed this out to you is to hopefully show you that Nevada is fairly unique in all of the states that have restructuring statutes, in that we are not addressing those public goods going forward into the deregulated era. What I’ve proposed to you here is an opportunity for you to take a look at that and possibly do something about it.

On the amendment that deals with energy efficiency (Exhibit F) I’ve proposed two separate options with respect as to how to pay for these programs. The first one is an option which would allow the commission to select the source of funding, whether from the sale of generation assets or from savings from the merger, or any other. Basically they could take those funds and allocate them to a state agency that operated programs most similar to the program I’m proposing here.

The second option is one which is more similar to most of the other states. That is to assess a charge onto the distribution tariff which is paid for by all producers of energy or alternative users of energy. This funds a program called – the energy efficiency program I’m talking about would be funded by a systems benefit charge. The systems benefit charge is one – I’ve asked the governor’s office through Denice Miller to take a look at this. I haven’t heard anything back about how the governor would view such a charge, but I offer it to you simply because it’s something that’s fairly traditional in the other states. If you don’t believe that’s something that could be appropriate this session, I certainly think the first option is one that is potentially available to you. Again, I’m talking here about people who are the most vulnerable to excessive energy costs in the state, and am simply suggesting a program that would help them reduce their need for the use of energy and thereby reduce their costs.

Any questions?

Good afternoon, Mr. Chairman. For the record, my name is Harvey Whittemore. I am a partner with the law firm of Lionel, Sawyer & Collins. I am appearing today on behalf of the Nevada Resort Association and TCID (Truckee-Carson Irrigation District).

First of all, with respect to S.B. 438, there are a number of matters over the course of the past week that I think need to be addressed consistent with testimony with respect to the bill. With respect to section 13, I think it’s important that the committee understand that it is the parties’ contemplation that section 13 require that the commission – if you read A.B. 366 and S.B. 438 together – requires that the unbundling process, which is presently being undertaken, needs to be completed so that the operative provisions of section 13 coming up with a total rate and the rate protection afforded the residential customers can be effectuated. Without going through an unbundling process, the benefits of S.B. 438 are (unintelligible) to our clients, the Resort Association. We thought, and I think it is clear from all the parties, that when reading S.B. 438 in concert with A.B. 366, the portions which aren’t amended, that what was going to happen was the subsidy which presently exists between the large users and the residential customers, especially in Nevada Power’s service territory, would be removed. As a result of the removal of that subsidy, the residential ratepayers, especially in southern Nevada, were going to be faced with a very – or potentially – significant rate increase. During the negotiations between the various parties on S.B. 438, it became clear that the consumer advocates – the most important thing that Fred [Schmidt] negotiated for was the protection afforded the residential ratepayers in section 13. That mechanism, I think, needs further explanation so the committee understands the process by which we contemplate it. I believe the language makes clear, but if there needs to be additional work I’m sure that, through the efforts of this committee and the participants who were involved in presenting this bill to the Senate can come up with language to make sure our intent is effectuated.

In any event, section 13 requires a process where the subsidy is removed, and that the large industrial users would be entitled to a removal of that subsidy on a going forward basis so the transmission and distribution rates which would be, in effect, for purposes associated with combining those T&D (transmission and distribution) rates with the generation power that they acquire in the open market, would in effect receiving a fair, economic and quite frankly, a competitive rate. One which is set by competitive forces. There’s been a lot of concern expressed with respect to subsection 4 on page 6, lines 20 through 25, regarding how the mechanism is contemplated to work with respect to the costs which the utility would not be entitled to recover immediately against the ratepayers, and yet would be entitled to recover that through the divestiture process and any gain associated with the divestiture of those generation assets. Again, I think it’s clear that subsection 4 does that. I would like to make it clear that that process contemplates, to the extent that generation gains are incurred in any one particular year, and then any losses as a result of the removal of the subsidy, are in place, that those are offset during that particular year and again, as the gain is used up, assuming there is gain associated with that, it may or may not be available in years 2001, 2002, 2003. It’s a question of how much gain there is and how much loss there is. Clearly, it’s the parties’ contemplation that any loss associated with the removal of the subsidy, would in fact be taken out of that first bite of the proceeds associated with the divestiture of the generation assets.

Some of the other things that need to be taken into account are the question of whether or not there need to be adjustments with respect to language in the bill dealing with PLR (provider of last resort). I think a fair reading of the bill would suggest there is a possibility that confusion exists in that area, and we would stand ready to work with the committee in addressing any concerns that have been expressed that the PLR function is not adequately addressed in light of -- or the auction process isn’t adequately correlated to prior sections of A.B. 366. I think that is not a function that the language is bad, I think it may be a function of correctly identifying the sections in A.B. 366 that go to the auction process and the PLR function, and make sure those are cross-referenced in an appropriate fashion.

With respect to deferred energy and the notion that somehow deferred energy should be retained in this bill, one of the biggest mistakes that we made on behalf of our clients 2 years ago was not pushing as hard – we felt we pushed as hard as we could last session to get rid of deferred energy, and I guess rather than saying it’s a mistake that we didn’t push hard enough, I guess, from our perspective, it was a mistake we weren’t successful. Deferred energy created an environment where – and this is an area where there was significant disagreement between our clients and the utilities as to the appropriateness of continuing deferred energy for electric utilities. Obviously, one of the biggest advantages that all customers have in this bill is the fact that deferred energy is going away. Therefore, obviously, one of the biggest problems from the utilities’ perspective is that deferred energy is going away. And to somehow suggest that by retaining it for a gas utility is somehow inappropriate when it’s already in existence or that somehow the reflection of that language in this bill is giving the gas utility a benefit which they did not otherwise have, I think is inappropriate, as Senator Townsend suggested.

I guess the purpose of the testimony today with respect to the Resort Association is fairly straightforward. That is to say, yes, we would rather have had stranded costs capped. We’d rather have been able to say to the utilities who are presently providing us services that we were more successful in limiting our exposure in terms of stranded costs. Yes, there are other things we negotiated for and through the process of negotiation, were not successful. That’s reflected in the Senate’s work product. On the whole, S.B. 438 continues to be a bill which we can support in its efforts to balance the interests of both the residential ratepayers, the large industrial users, the utilities, the shareholders, and those individuals with whom the utilities contract – the QFs and other individuals such as that.

Can there be clarifying language with respect to section 13? The answer is yes. Do I believe that it accurately reflects the understanding of the parties with the explanations that we’ve given in the past? Yes. Again, if people are confused about the existing language and need to make it clear the unbundling process must go forward, and the rates rebundle and the rates which are reflected are those which are presently in existence but that our rate reduction can be in place, then yes. Let’s make that clear. I think that’s in the language. I think you can fairly read it into the language. If it’s not clear, and people are concerned about it, then we stand ready to work with the utilities and the consumer advocate and this committee on clarifying what I think was everyone’s intent in recommending this to you.

Mr. Chairman, with respect to the TCID [Truckee Carson Irrigation District] issue which was previously discussed in A.B. 426, I’ve had the opportunity to look at the proposed amendment which you so graciously agreed to work with me on. I would like to report that I think it’s premature to present that at this time in light of some discussions we’ve had, both with the utility and the TCID, and I would ask the committee’s indulgence to work with you again on Monday or Tuesday to try to come up with language in that regard.

Fred Schmidt, State Consumer Advocate, Attorney General’s Office: I just have a very brief statement to make. First, I want to support the notion that if there’s any confusion about whether section 13 and section 14 are only intended to amend the function of the provider of last resort, as is referred to in the first part of section 13 – it’s currently in Nevada Revised Statutes 704.982. That was the only intent of parties, including myself, who worked on this language to draft this language as a consumer protection provision, to allow for competition, but to protect consumers at the same time, not to diminish competition in any way. I want to say that, to me as a lawyer, it does not make any sense to read this section to limit competition in terms of choice when you’re actually setting a date to start choice as of March 1 in other places in the bill. So the fact that that confusion was created to the extent the language was not clear enough, I apologize, but to the extent that needs to be clarified I’m happy to help in doing that. It was never the intention of the bill to limit competition from starting as on the date certain next year.

In that regard, there is one other section of the bill where I believe an error discovered. That is in the auction section in section 14 under subsection 3, which is on page 7. The use of the word "affiliate" on line 13 was not appropriate, and should also be stricken. I believe it was an error in the bill drafting, but it is also inconsistent with the intent that’s created in the prior sections of the bill. That is the utilities would be allowed to, without establishing an affiliate, provide the provider of last resort function -- if they were going to do that or be required to do that -- through the existing company to eliminate confusion to customers and to eliminate costs to the utility in terms of establishing that separate entity.

The only other testimony I want to give you is really an update from things I have learned since I testified last week, which I think is very important, particularly to the southern Nevada members of the committee. You may recall that I testified last week that one of the major reasons that I, as consumer advocate, could assure you that this bill has more consumer protection in terms of rates than A.B. 366 already has, is for two reasons. (1) We’re not repealing any rate cap. (2) To the extent that any rate cap mechanism that’s currently in law has exceptions, those exceptions are being eliminated. Why are those exceptions important to be eliminated? Because we do have to go through an unbundling process. Well, since I testified last week, the unbundling cases have now been filed. They were required to be filed by April 30 by both Sierra Pacific and Nevada Power. I speculated last week when I testified to you that, in southern Nevada in particular, unbundling case would be filed, particularly because of the numerous recent rate hikes that were borne primarily by large commercial customers. These would show there was a rate shift that was required, regardless of whether there was any rate increase to Nevada Power in overall rates, and there would be a rate shift exposure to residential customers.

That filing has now been made. I have in front of me the summary page, although the filing is fairly thick, and my experts and staff have not gone through all of it. We have pulled out the page that shows what that number is. The number is potentially as high as $102 million, 25 percent higher than what residential customers are currently paying. I don’t support that number and I’m sure that when my experts go through the case, we’ll be able to point out that number is probably overstated. However, that number is now filed before the commission. It’s in a record.

That is the range of the potential number that your southern Nevada constituents are exposed to if we don’t put a freeze on the rates as opposed to a cap that has an exception for just and reasonable changes. It would be a just and reasonable change to rebalance the rates if the commission finds that and shift rates among customer classes when we do the unbundling. I am very, very concerned about that. That is one of the driving forces – why I entered into discussions and drafted language to try and further define the rate protection to which consumers are entitled. By doing that, the beauty of S.B. 438 is that you can give the large customers the rate reduction by giving them an accurate wires charge for their transmission and distribution rates that they deserve. They can then go out in the market and compete, or they can buy from someone else. You can give them that without having to place a burden and a rate shift on the residential customers that you represent.

The customers I represent don’t want that increase. I can tell you. We would like competition, too, and we want someone to come and compete for us – but not at the cost of us having to raise our rates substantially going in. I’m sure if we raise the rates high enough, we’ll actually get competition too. I know the people I represent don’t want the rates higher as a result of us passing a competition law and opening up the market.

So what I’m here today to tell you, based on my 20 years of experience – and I’ve done every rate design case in southern Nevada in the last 2 decades – that we have a lot of exposure here. If we just leave A.B. 366 in place, we have a lot of exposure in southern Nevada to a huge rate shift. We can eliminate that exposure by passing S.B. 438.

Now there are some trade-offs that I agreed to in the form of the name and logo, eliminating the auction, and things like that. They are well worth the cost of any major additional rate hike in southern Nevada, so I urge you to consider the rate freeze protection that's offered and the elimination of deferred energy after this summer, as something that is really beneficial to your constituents. I still believe that having heard all the testimony and the criticisms I’ve heard of the bill.

Finally, I would point out something to clarify the notion of trying to contrast a rate freeze and a rate cap. The rate freeze is a rate freeze as to rates for customers who do not want to choose. The rate freeze is also a cap. If there are choices – if someone’s going to come in, whether it’s the utility setting up an affiliate to offer green power or something different – or some other competitor who wants to come into the marketplace. Any competitor who wants to come into the marketplace can offer a lower price. If they do, those customers who are protected by the rate freeze may exit, buy their service from that alternative supplier, and get the lower rate. So the freeze works as a cap for that customer too in that if they want the benefits of lower costs and they’re willing to go and take service from a new supplier they can do that. The freeze is only a freeze in terms of setting or establishing that rate. If we made the freeze solely as A.B. 366 has it today, a cap – if you leave it as a cap in the bill and the vertically integrated utility can provide the service, then you have effectively eliminated almost any chance of competition from where we are today. The reason for that is the vertically integrated utility, even after it divests, as it tries to retain its revenue share and sales margin, it can offer all the discounts directly through the same company and the same service. The freeze forces it to go out and compete in the marketplace, if it’s going to discount rates or do something else to compete with others.

This is the mechanism that Pennsylvania has adopted. It’s the most successful mechanism in terms of the rate mechanism that’s worked in the country so far of all of the 12 states that have actually gone forward. That means that I did not develop this on my own, I borrowed it, in a sense, from my colleague in Pennsylvania who worked it out there. They’ve had choice and competition in Pennsylvania. Now maybe, particularly in southern Nevada, because our residential rates are low, we won’t have much competition for those customers with the exception of green power options. But to the extent those rates can be lower – that opportunity is there, and the rate freeze does not prevent customers from getting lower rates, even though the rate cap that is currently in the law in A.B. 366 does allow for rates to go up.

The final comment I want to make with regard to that is: The rate cap is a mechanism as a concept that affects not only overall rates but it affects components of rates. I left a hearing at the Public Utilities Commission where the PUC staff, much to the chagrin of my experts and our testimony that we’ve offered either in prior cases or intend to offer when the case goes before FERC (Federal Energy Regulatory Commission) in the next month, has suggested that the rate cap in northern Nevada should be based on a market tracking mechanism tracking the California PX price. Now I know when we all sat here and we went through before many of you the interim study committee hearings, one of the biggest fears that we all had was that our prices in Nevada were going to gravitate to California’s. That may occur. Some of us have warned that could occur. We want to do everything in our power to avoid that. Now we’re in the regulatory proceeding fighting whether we’re going to have an automatic mechanism for the generation component for our generation units once they’re sold, to track that as our cap. I’m not comfortable with that at all. That’s why I like S.B. 438. It gives the small guy certainty during the transition period of the next 3 years. Granted, it doesn’t offer much after that, and I concede, particularly to the northern Nevada members here, that it maybe sacrifices the opportunity for slight rate reductions that could be afforded through what Sierra’s been earning right now. But the danger to southern Nevada and to consumers as a whole over the next 3 years, is too great not to adopt S.B. 438 and its additional protections. Thank you for the opportunity to appear again, Mr. Chairman, and I’d be happy to answer any questions.

Mr. Chairman, I would agree with you that the way A.B. 366 was set up, we drew a line – although it was an artificial line – between affiliates of the company and the company that exists today. They would have to actually separate assets that were competitive, put them in another entity, but still under the same umbrella. The more significant cut or separation of vertically integrated utilities is to get them to get rid of their ownership control over the competitive assets, to the extent that the merger that has been proposed. Then you divest all those assets – and you may recall in the last session, one of the big arguments was whether we could actually put the "D" word in the bill. I argued very hard that we had to have that authority, because that’s the most efficient manner by which to separate the conflicting interest the utility would have in favoring its own affiliate. Affiliate rules were drafted by the commission. I think they’re very effective. We support them. We still support them. We think they’ll still be necessary. But the fact the utility has, as a part of this merger, divested all of its generation, is probably the most effective tool in segregating. That’s why – one of the reasons why – but a major reason why – I felt that it was not too much of a concession to the utilities to allow them to continue to provide the sales for the customers who were not going to be competed for, or who did not want to exercise choice. This could still be done through the traditional distribution utility and its name.

We had testimony on the Senate side on several bills that were offered there. These were about the customer confusion that’s created, when you force the customer to actually move somewhere else and not know whether he’s dealing with the utility he always wanted. I think I said last week, I was torn on that issue because, to some extent, I’m sympathetic to the customer who wants to know who his utility is, and whether he can choose and get [that utility] again. Frankly, the regulations prohibited that – even prohibited a phone call from the customer to the utility to find out who the affiliate of that utility was to do it. The regulations that have been developed today force that call to the commission. I think that type of over-regulation probably is not necessary, and as we testified during the regulation hearings, things like that probably don’t have to be done in order to start a competitive market.

This, I would grant you, S.B. 438 backtracks a little in terms of allowing the utility to keep what appears more vertically integrated operations on the provider of last resort function only. But with regard to everything else (unintelligible) competition, it tracks along exactly with the concepts and the policy that was in A.B. 366.

A number of people have also testified before you that our bill A.B. 366 was a beacon. I am, this year and next year, President of the National Association of Utility Consumer Advocates. I was elected by my peers. I can tell you I’ve had discussions in that capacity with my peers in all the other states that have gone to competition over the last 2 years since we did A.B. 366. I can tell you they think it’s a good bill. They like it. They’ve read it. Even my colleagues in states that are now looking at doing bills. There’s parts of it they’re not wild about or don’t like.

I can tell you also I’ve talked to at least four of them since we’ve worked on S.B. 438. They are all from states that are doing competition. They all think I’m doing the right thing in getting these additional protections. They’ve all assured me that the things I’ve indicated that we can backtrack on and do later, or delay in implementation – the auction, the name and logo – those things are things none of those other states have done as well. Even those states like Pennsylvania have very successfully been gaining competition into the marketplace. At last count, as of February 1, or March 1 – I forget which – Pennsylvania has over 400,000 customers that have switched. It’s the first state that really has it working. I think, listening to my colleagues in those states gave me comfort. I hope it will give you some comfort that what I’m suggesting in S.B. 438 is actually an improvement on A.B. 366, not a contradiction of the progress that was made in developing A.B. 366.

Okay, I guess I’d ask at this time. Members of the committee, there’s a stack of amendments that are paper-clipped together (Exhibits H, I, J, and K). We’re only going to deal with the top four. The fifth one was one Mr. Whittemore addressed. He’ll be revising it later. I had distributed them to members of the committee.

The first one (Exhibit H)– because I – in reading through S.B. 438 – I think the language was – and as I pointed out in previous hearings – [the language] on the administrative law judges was somewhat disjointed. In reading through the statutes, this one section deals with – [NRS] 703.130 deals with appointment by the commissioner, secretary, and appointing employees, adding in a new subsection there that allows them to appoint hearing officers. Anybody who’s interested in any of these, I’ll have copies available from my office. I don’t have additional ones right here beyond the committee’s right now for your review.

This one says, "Proceedings conducted under the general duties of the commission may be conducted by administrative hearing officers designated by the commission. Any such administrative hearing officer may be assigned to conduct a variety of proceedings for a specific period of time by the commission. The commission shall, by regulation, prescribe the process by which proceedings conducted before an administrative hearings officer will be disposed of by the commission." I think this short paragraph addresses the concern that you have administrative hearing officers, or administrative law judges, whichever the case may be. Yet it gives them flexibility that they can either hire them for specific cases or for a specific period of time. I’ve provided these to Senator Townsend, and in his testimony he indicated he thought this would take care of that concern. Any members of the committee have any comments at this time? If not, that’s fine, too. We can deal with it at a future meeting.

Any comments from members of the committee?

The second one I have here (Exhibit I) – I know I provided one copy to Mr. [Greg] Ferraro because he was particularly interested. I’ll have additional ones available. This is dealing with the name and logo. It’s something I’ve mentioned before to the committee.

It says, "In providing a potentially competitive service, an affiliate or an alternative seller may use the name or logo, or both, of the vertically integrated electric utility only if the right to use the name or logo, or both is purchased from the Nevada ratepayers. Such right may be purchased through an auction process defined by the Commission, which includes the right of the affiliate of the vertically integrated electric utility to match the highest bid of any alternative seller. Any auction proceeds shall be returned to Nevada ratepayers as specified by the Commission. An entity that wins the right to use the name or logo, or both, of the vertically integrated utility shall fully mitigate any customer confusion arising from such entity’s use of the name or logo, or both by an entity which is not the vertically integrated electric utility."

The purpose of this language is – and I’m sure it’s quite controversial – is that there’s a value to that name and logo, and even though, through their advertising, the utilities have, through the years, spent money there, through what the ratepayers have paid, I think there is a buy-in on that name and logo. I wanted the affiliate to be able to purchase that [name and logo] from the transmission and distribution company. I think this language allows it to reduce the stranded costs – and that’s the intent of this language -- to the ratepayers.

The third one I have here (Exhibit J) is a rewriting of section 14, to clarify, I think, the auction process and provider of last resort. It’s rather lengthy. I don’t want to read all of that into the record. I’d ask committee members to look at it and I will have additional copies available for anybody who wishes it.

It sets up a process where those people who are licensed by the commission or prequalified, as language I have in here, to provide alternative services, that the commission must do a balloting process. [The language] lays that out. It adds the requirement that the utility provide a customer list to send that ballot to them, so they can choose who their alternative seller will be.

Read through that and we’ll discuss this at another meeting. I’ll have additional copies available.

The last one I have here (Exhibit K) is amending NRS 704.984, "Adverse effects of competitive service on employees of vertically integrated electric utilities." An additional sentence [was added], "The vertically integrated electric utility shall be given a reasonable opportunity to recover the costs incurred under this section including without limitation the costs for severance pay, retraining, job placement, and early retirement for employees of the vertically integrated utility." So this language here I think provides additional safeguards for employees and allows the utility to recover those costs out of their stranded costs.

The last one you have in the packet we’re holding. Mr. Whittemore and the utilities are going to look at that one and provide additional language dealing with the TCID situation or any other irrigation district.