The Select Committee on Senate Bill 438 was called to order at 5:05 p.m., on Tuesday, May 11, 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.

Simultaneous videoconferencing of the meeting was provided to Room 4412 of the Grant Sawyer Building, 555 East Washington Avenue, Las Vegas, Nevada

COMMITTEE MEMBERS PRESENT:

Mr. Douglas Bache, Chairman

Mr. Joseph E. Dini, Vice Chairman

Mr. Greg Brower

Mrs. Barbara E. Buckley

Mr. Lynn C. Hettrick

Ms. Sheila Leslie

Mr. P.M. "Roy" Neighbors

Mr. David Parks

COMMITTEE MEMBERS EXCUSED:

Ms. Sandra J. Tiffany

STAFF MEMBERS PRESENT:

OTHERS PRESENT:

Chairman Bache called the meeting to order at 5:05 p.m. and continued the

hearing on Senate Bill 438.

Chairman Bache: First I’d like to note for the committee. There’s a couple of letters. One from AARP (American Association of Retired Persons) in opposition. They testified in opposition last time we met and they have some statistics as far as how the charge per kilowatt-hour for various users in 1998 and 1997 throughout the United States (Exhibit C). Secondly, there’s a letter in opposition from a person, Mr. Robert Deihl, who owns an Elko Discount Satellite TV, and he’s attached an ad in here (Exhibit D) relating to Sierra Pacific’s Simple Choice. That’s why he’s opposed to it. That’s for your information.

Okay. We have some proposed amendments before the committee and then I’d like to hear some testimony on some particular sections of the bill. I don’t see Mr. McMullen in the room? He has presented – I assume it’s from him. A rather long amendment. Are you going to present that amendment? Sir?

Okay. I just assumed Mr. McMullen was going to present it, but please present the amendment to the committee. You need to turn your microphone on.

Chairman Bache: Do I have questions from members of the committee for Mr. Kaufman? I don’t see any, Mr. Kaufman.

Mr. Kaufman: Thank you, Mr. Chairman and members of the committee.

Chairman Bache: I have one quick question. You signed in opposition and presented your amendment. Is your preference that if we don’t amend the bill in some manner that you’d prefer to go back to the language of A.B. 366?

Mr. Kaufman: Mr. Chairman, a number of the provisions in the Senate bill cause significant concern, just in the confusion that’s been developed around the language. As to the bill’s intent, we think there’s a number of policy decisions that this committee and this legislature has to make and we’d really prefer not to take a position on these policy decisions at this point. But to answer your question more directly, we’re very comfortable with the direction that A.B. 366 took, and the direction the commission has taken in its rule-makings.

Chairman Bache: I guess the second thing, has the language in the bill provided confusion as to when the start date for competition is?

Mr. Kaufman: I think that a number of parties have suggested that – I believe it’s section – if I might have a moment – either 13.1 or 13.2 creates some confusion about the start date. Candidly, we have not read that confusion into the bill, but we would, in any event, like other parties not to be confused. A major concern with that lack of clarity is that at some point we’ll get into an argument about the start date, and if it’s possible to avoid that argument, we’d certainly like to do so.

Chairman Bache: Would the language in this bill discourage you from wanting to come to Nevada as an alternative seller?

Mr. Kaufman: Mr. Chairman, it is very important to companies like ours that the circumstances of competition be very clear. Let me give you an example where that lack of clarity caused some problems. In California, the market was supposed to open on January 1 – I can’t remember the date. But whatever the date was, that was identified by the commission initially, was the date that our company planned on having the market open and we invested substantial amounts of money in advertising and other market development activities to enter that market on that date. Shortly before the date was to come about, the commission was forced to delay the onset of competition by, I believe, 3 months. That type of confusion gives our company pause. I think if it’s not entirely clear in this bill – in the legislation – when competition is to start and the circumstances of competition aren’t entirely clear, our company and other companies would have to evaluate very carefully when they start to expend funds to try and market the customers.

Chairman Bache: Thank you. Are there any other questions from members of the committee? Thank you, Mr. Kaufman.

Mr. Kaufman: Thank you, Chairman, thank you, members of the committee.

(An enlarged view of page 2 of Exhibit D was displayed on the easel.)

Chairman Bache: Questions from members of the committee?

Assemblywoman Leslie: I just want to say I throw the propaganda in my bills away too without reading them. I think most of us do. I don’t know why they keep putting them in there. I cannot read this. Can you read for me the line you think is the disclaimer, because if I squint I can read part of it, and –

Mr. Kaufman: I do have the original, so let me. "Sierra Pacific Simple Choice is not the same company as Sierra Pacific Power Company and is not regulated by the California or Nevada Public Utility Commission. You do not have to buy Sierra Pacific Simple Choice products in order to continue to receive quality regulated services from Sierra Pacific Power Company." Copyright so on and so forth. You’re welcome.

Chairman Bache: Do I have other questions from members of the committee? I don’t see any. I thank you. Let me ask the secretary. Do we have the sign-in list from Las Vegas yet? Would you – Okay, while the secretary’s checking on that, is there anyone else here in Carson City that wishes to testify before I go to Las Vegas?

Ernest K. Nielsen: My name is Ernest Nielsen and I am with the Washoe County Senior Law Project. I’m wishing to propose another amendment to section 13 which would account for the potential in the compliance filings that are compiled by the two utilities, that the rates generated by those compliance filings for the residential class might be lower than those rates which be otherwise frozen by subsection 1 of that section (see Exhibit F).

My proposed amendment would be – and I don’t have this written down – in subsection 1, at line 2, I start the sentence that begins, " . . . the rates," with "Except as described in subsection 6, the rates may not vary from the rates for each class . . ." Then, I suggest a new subsection 6, which would read, "If the residential rates based on the compliance filings – or different words from that – are lower than those described in subsection 1, such rates shall remain in effect until March 1, 2003." Then there’s one other modest amendment which would be to subsection 4, and that is to add the word "and 6" to line 20, after the word "subsection 1." With that, what I think we do is perhaps clean up the language so that the residential customers in Washoe County would be able to enjoy any lower rates that might be generated from Sierra Pacific’s compliance filing.

(Secretary’s note: The witness did not have the exhibit available at the time of the hearing. It was provided to the committee on Thursday, May 13. The witness requested it be entered into the record of the proceedings of May 11, and was so entered as Exhibit F.)

Chairman Bache: Will you get that to us in writing, Mr. Nielsen?

Mr. Nielsen: Yes, I will.

Chairman Bache: Questions from members of the committee for Mr. Nielsen? Is there anybody else from Carson City at this time?

C. Edwin Fend: Mr. Chairman and member of the committee. I promise I will not call you Mr. President when I depart because my hearing is a lot better and I’m feeling better. I did provide the committee with a letter. All members have received it. (See Exhibit C.) It pretty much explains our position –

Chairman Bache: Mr. Fend, could you state your name for the record?

Mr. Fend: Oh, I’m sorry. Yes I can. Ed Fend, AARP (American Association of Retired Persons), Capital City Task Force Coordinator. I’ll start again. I hope you all got the letter. Those pretty much delineate our position as to where we’re at.

I have also asked the secretary to provide you with a copy of the rates that are presently being paid throughout the 50 states in the United States (see attachment to Exhibit C). This particular thing delineates residential rates, commercial rates, industrial rates and others. It goes down through all the states that you’re aware of. It also lists the rate for 1997 and 1998. It’s fairly interesting when you go through the list to find where the companies are the lowest – Washington state – not surprising, is it? Why isn’t Nevada in that position, because we have the biggest dam and generator just outside of Las Vegas? All our electricity passes over us into California. Our rates are not bad. Our position is as stated in the letter, which I just wanted to remind everyone. I think it’s very appropriate for you to look at these rates because if we did nothing our rates are still significantly lower than a lot of areas in the United States that are providing things.

The other real concern I have is, as stated in the letter, and I’ll tell you, it’s written more like a lawyer because I had a lawyer on my committee write that letter for me. My concern still is if we do not have the ability to transfer some costs from the commercial and industrial providers to the residential ratepayer to keep it within the ballpark. This is particularly true probably more so in some of our areas – but expanding areas like Las Vegas, which are suffering from stranded costs. When those stranded costs are tried to be recovered, for all the new people that have moved in and the new lines that have been placed in to service these people, these costs are going to go up. They probably will go up anyway. I really want you to think about that and look at that. There’s been a lot of conversation. Is this the best we can get? God, I hope not. But if it’s all we can get, what are we going to do? Revert back to [A.B.] 366. Thank you. Any questions I can answer on the letter?

Chairman Bache: Questions? I don’t see any, Mr. Fend. I thank you.

I still don’t have the sign-in list from Las Vegas, but I’ve been told that there’s a Larry Smith who wishes to testify from Las Vegas? And a Harry Hernandez? Sherry Hernandez. Excuse me. So I’ll have you both come up there and I’ll turn off my microphone and then each of you can provide your testimony one at a time.

Larry Smith: Good evening, my name is Larry Smith. I’m a licensed C-21 contractor in Las Vegas. Have been for 19 years now. First off, I’d like to thank you for putting on the teleconferencing and allowing us to take part in this, because it’s logistically and financially impossible for all of us to come up there and be there as this is going on. We filled this room tonight just to show that there’s a lot of interest and support for Mr. Scott Meier and Jeff Stewart who have been up here before you.

For the past 2-1/2 years I’ve been involved with this. I testified before the PUC when the deregulation issue first came up. We have a major concern with the name and logo on this bill. And Scott and Jeff have given you all kinds of information and reasons why this should not be allowed. It’s not like I intend to go over it with you again. Mainly we’re just here to show you that they do have the support. We’re very interested. And very concerned that our livelihoods don’t become casualties of deregulation like the satellite industry. Thank you.

Chairman Bache: Questions from members of the committee? I don’t see any. Mr. Hernandez?

From somewhere in the Las Vegas audience: No, I’m going to speak.

Richard Kerzetski: My name is Richard Kerzetski. I live here in southern Nevada. I represent the Plumbing and Mechanical Contractors’ Association of Nevada. We are an association of small business owners located right here in southern Nevada. We have over 500 small business owners in our association. We oppose S.B. 438 without the amendment for logo and name recognition. We have just returned from Washington, D.C., from our national association office where we are opposing unfair utility competition on a national level. We don’t mind competition but we want fair competition. The problem is when the utilities abuse its market power to promote competitive products and services that it, or any other subsidiary company sells. Services are supposed to be financially separate from the regulated utility services. Utilities are essentially a government-sanctioned monopoly. We have supported the coalition against the unfair utility competition from the beginning and our association is continuing our support. Again, we don’t mind competition, but we want fair competition. Thank you.

Chairman Bache: Questions from members of the committee? I don’t see any questions. Thank you. Now is this Ms. Hernandez?

Sherry Hernandez: Yes it is, Mr. Chairman. Thank you for the opportunity. Mr. Chairman and members of the committee, my name is Sherry Hernandez and I am the Executive Director for the Plumbing and Mechanical Contractors Association of Nevada. As my co-spokesman stated, we were in Washington, D.C., recently and discussed similar issues with our national legislators on unfair utility competition. I was appalled at some of the horror stories that I heard expressed by member contractors from all over the United States in dealing with unfair utility competition. These big monopolies are going into the appliance sales business. Even some have gone into the real estate market. That’s appalling in my opinion. They are misusing their company and billions of dollars are at stake, and we’re putting the small business owner out of business. I think it’s a crime.

Pacific Gas & Electric, for example, was fined $1.68 million for violating California Public Utility Commission rules on affiliate transactions. I imagine that’s a drop in the bucket for them. However, the commission should have issued a statement to PG&E of California that any future violations would result in even higher fines. By using their logo and their name recognition, they’re allowed to do this and it really defeats the small business owner.

Our legislators indicated to us that they were going to take a little bit of a wait-and-see attitude because it was the responsibility of the individual states to regulate utilities.

I urge you to take that step. To use your vision. You have the opportunity and the responsibility to make sure that Big Brother does not put the small business owner out of business. I urge you to allow fair competition in the state of Nevada. Thank you.

Chairman Bache: Questions? I don’t see any. I thank you. Since I still haven’t received the sign-in list from Las Vegas, is there anyone else in Las Vegas wishing to testify? If it’s a matter of members in the audience just wanting to indicate their support, I’d appreciate if the camera could pan the audience and those of you who are in support of the position the three previous speakers have indicated, please raise your hand if you support those previous speakers.

Okay. We’ve got the picture here in Carson City. Is there anyone else wishing to testify from Las Vegas? Okay. You need to push the button for the microphone to turn it on and then state your name for the record.

Tom Lovato: Okay. My name is Tom Lovato. I’m with Quality Air Conditioning. I’ve been a part of that company for the last 5 years. I look at my position in the heating and air conditioning business as a career move. I’ve invested personal large sums of money in regard to training, through a heating, air conditioning, and refrigeration course some years ago. I think many of those in this room have also invested a lot of time in their career and now feel it’s at risk. I see the scenario of a Goliath and David situation here. You have the opportunity to make a difference in a lot of our lives by slinging that stone that will put the giant down and out. I appreciate the opportunity to speak to all of you, but I want to let you know that there are many families represented here. Many people and their careers represented here, that I think are not represented in this room itself, and so I pray that you might have a little compassion. Consider your own families, your own careers, and how they might also be at risk if someone larger than yourself was to come by and threaten it. I appreciate your hearing and hope you’ll do what’s best on behalf of us and your conscience. Thank you.

(Much applause from Las Vegas.)

Chairman Bache: Do I have questions from members of the committee? I don’t see any. I thank you, sir. Is there anybody else from Las Vegas wishing to testify? Okay, seeing nobody else coming to the microphone, I’m going to come back here to Carson City.

I have some specific questions on – and I think I’m going to need a representative of the utilities dealing with the name and logo issue. I’m sure they would like to provide some testimony on that. And also section 28, which deals with the merger. Okay I see Mr. Rigazio and Mr. Crowell and Mr. Ponn. Would you like to come up? I think maybe the first thing is to deal with section 28 first, which is the language – because I’m curious. It says, "If the pending merger between Sierra Pacific and Nevada Power is not completed, the act expires." Now I would think the legislation would be stand-alone and that it not depend on the merger, and I’d like you to address the issues of that.

Douglas Ponn: Doug Ponn, Sierra Pacific Power Company. In my mind the need for this provision is that our support for S.B. 438 is derived from what will be a merged company’s situation in both the regulated and competitive arenas. If we do not consummate our merger, many of the provisions in S.B. 438 could be detrimental to either company. The merger is what triggers the divestiture process. The divestiture was designed to jump start and enhance the potential for competition, but if we do not ultimately merge then neither company would willingly divest its generation assets, approximately one-third of the total value of each company. That is a "for instance". I think if you look at the rate freeze proposal, I would doubt that our partner to the south, Mr. Rigazio, would be willing to agree to a 3-year rate freeze. That is, current or redesigned rates absent the potential to achieve the economies in the merger. So I don’t know how many provisions we might go through but the essence is that both companies are basing their support and their ability to make the provisions of S.B. 438 work on the premise that we are a merged company and take that form rather than our current individual forms.

Mr. Rigazio may have some or a lot to add to that.

Steven Rigazio: For the record, Steve Rigazio, Nevada Power Company. Mr. Ponn gave me pretty much a lead into the area that is the most difficult for us. It is section 13. Without the merger it would be very difficult for us. We are under-recovering our deferred fuel. We’re under-earning – Nevada Power has not earned an authorized rate of return for over 10 years. Quite honestly, we think we’re substantially under-earning. The residential rates are low. As Fred Schmidt talked about last week, his concerns are on the rate design and subsidy of the residential rates. Fred and I will probably argue over what that number is. I think there is a number there.

With the tremendous growth in southern Nevada, the infrastructure requirements are substantial. One of the benefits of this merger, this situation, is we have a lot of growth potential for future earnings. We have not been able to get to the bottom line. Sierra Pacific has a very good situation relative to cash flow. I mentioned the last time we testified how much we’re borrowing and financing. The merger will help relieve some of that strain. It would be very difficult for us to go through a rate freeze when our earnings – not only are they low, they’re continuing to decrease as we see construction budgets go up. The merger savings – hopefully there will be some – will help offset some of that. They’ll issue a size. You’ve heard a lot of talk today about how we’re the "big guys." In the scheme of things we’re very small. When it comes to the utility industry these two companies are relatively small companies. Together, selling generation and putting our wires business together, we become a medium-size player in that business. As stand-alone companies, we’re relatively small. The financing pressure on a small utility building an infrastructure like we do is very difficult.

Chairman Bache: Do I have questions?

Assemblywoman Buckley: Thank you, Mr. Chairman. Turning to page – section 13, did you all, in the Senate or at some point during this process, do a financial estimate or a projection on these different paragraphs?

Mr. Ponn: We did do an analysis of the financial impacts of some of these paragraphs and the extensions thereof.

Assemblywoman Buckley: I guess my point of view in trying to grapple with this and figure it all out, if I can, Mr. Chairman, part of the benefit allegedly to section 13 is that the cap allows pass-through of deferred energy costs in southern Nevada. So to me, I kind of wanted to look at this objectively. I put the costs of what the deferred energy costs would be in southern Nevada versus -- As I understand it, paragraph 3 will basically say that the commission can’t look at the true value of – can’t compute a value to generation services or, in paragraph 4, you’re setting up different rates of customers. You’re not allowing netting by the commission to ascertain what the costs are. And that shortfall can, of course, then be recovered, allowing less money to be available to buy down stranded costs which means residential customers. All customers will pay. Then you can’t look at over-earnings. Perhaps that’s true only in the north. I’m not sure where the split -- 50 percent of the over-earnings – all is. So I guess, in my mind, I was thinking, "Well, maybe I should look at a ledger sheet. Maybe I should look at what are the benefits – not to you all as a company – but as a legislator – to customers. And to the citizens I represent. And that might be helpful. I don’t know. Any comments on that?

Assemblywoman Buckley: May I interrupt? Doesn’t paragraph 4 say you can set up your classes of customers and instead of looking overall at the net result of that, to ascertain whether or not there are losses, that you can just look at whether there’s a loss in that particular class, then go ahead and recover for that, thereby reducing the amount of funds available to buydown stranded costs, thereby potentially socking it to the ratepayers?

Mr. Ponn: The intent of [sub]section 4 – and I think the language could use some work – is that we filed a case with the Public Utilities Commission at the end of April as our unbundling case. One of the things that filing purports to show is what the costs should be for each class of customer. The intent of [sub]section 4 is to have that case go forward determine which customers are overpaying, therefore subsidizing other classes of customers, and fix their rates. If they should have a lesser rate then that rate would be put into place. But I think I can assure you that given that filing, especially in the south, the total filing would be much more than we’re going to be able to collect because we’re going to lower those rates for those customers who should have a lesser rate. We’re not going to be allowed to increase those rates to residential customers who should have a higher rate based on the showing in that filing and subject to a lot of testimony by a lot of economists. There is going to be, we think, a shortfall in what is collected from all of our customers going forward. Now it’s a matter of policy if you to decide how that shortfall should be paid for. If you want pure competition, you would let the rate design process work the way it’s always worked. If there’s a total amount of dollars that are the total cost to provide service to all of our customers in aggregate. The amount we’re collecting from one class drops. Mathematically the amount we would normally collect from other classes would increase. But we’ve put a constraint on this. We don’t want those residential customers to experience an increase at the beginning of competition. By agreeing to or putting the freeze language in S.B. 438 we were essentially shielding those residential customers from that increase, which is a costly proposition. To say that, well, if they go down, they go down. If they should have gone up but don’t, then shareholders eat that. What you’re doing is having shareholders pay for insulating residential customers from the true impact of competitive cost-based rates.

Assemblywoman Buckley: I guess I’ll kind of think over what you said, but I’m just concerned that this isn’t a freeze at all, but it’s a deferral more or less. Any shortfall will be gains, and then there will be less money available for stranded costs and otherwise, and in 5 years all hell is going to break loose in residential, and I’m still learning all this, so maybe I’m missing something. One last thing, if you could comment? In his testimony, the consumer advocate said that the freeze and the cap worked together. The freeze is not designed to supplant the cap. Could you tell me if that is your understanding as well, and how you would envision them working together?

Mr. Ponn: I agree with Mr. Schmidt’s characterization that the freeze and the cap do work in concert and that customers end up getting the benefit of both. Because you’re initiating choice, 3-1-2000, any customer can choose to go find an alternative provider of energy on that day. So you have frozen their rates at the current level, but going forward they still have the opportunity or option of choosing someone else. So their rates are effectively capped. We can’t charge them any more than we’re currently offering, but if anyone comes in and offers less, they can avail themselves to that option, and so they would be paying something under the frozen, i.e., the capped rate. I assume customers would not have the incentive to go to someone that offers them a higher rate than the freeze.

Assemblywoman Buckley: How would you reconcile the different dates? There’s a different date for the cap, with a different rate amount, and then there’s a different date in here with a rate amount for southern Nevada that’s 8.5 percent higher? I mean, how do you reconcile those two things?

Mr. Ponn: I’m sorry, Assemblywoman, I don’t understand the question.

Robert Crowell: Let me try and help. I don’t know how I’m going to help, but I can ask my partners here. What I think what she’s asking, Doug, is the cap says that the rates be frozen for 2 years after effective competition. That’s existing law. And how does that interplay and how do the companies believe that interplays with the freeze that’s good for 3 years. In other words, when does one start and when does it stop? How do the two relate? Maybe you could talk about it in those terms. Does that help?

Assemblywoman Buckley: Then on the cap, I believe, that was effective July 1, 1997, or sometime around there?

Mr. Crowell: Correct.

Assemblywoman Buckley: So now we’d have –

Mr. Crowell: The rates are effective.

Assemblywoman Buckley: The 10-1-99 date. How do you reconcile those?

Mr. Ponn: If the rates are frozen until 2003 under S.B. 438. I think that ends up being coincident with the date more or less in A.B. 366. Because A.B. 366 said, if my memory serves me, that rates for those components of service that become potentially competitive and then later the commission repeals the regulations, those rates will be capped for 2 years after that point in time? But there’s another provision in A.B. 366 that says that if something is deemed potentially competitive, as of October 1, 2001, then it becomes competitive. I think that’s when the 2-year provision of A.B. 366 starts and you end up in 2003 with both mechanisms working. That’s my interpretation.

Chairman Bache: I have a different interpretation of that from A.B. 366 because – first of all, I want to thank Mr. Crowell for interpreting the question – I believe that the commission’s position is that it’s 2 years from the determination of effective competition. I believe that was the term that’s used for different classes of customers. Maybe for large users on March 1, 2000, they can have effective competition very shortly, whereas for other classes of customers, it may be much longer before it hits effective competition.

Mr. Crowell: I think in order to clarify and follow up on what Mr. Ponn said to Assemblywoman Buckley, I think the next peg that follows logically in that argument is when things are deemed competitive. In other words, the statute says if you’ve been operating on things that are potentially competitive, they are deemed competitive at 2001. Once they’re deemed competitive, you have effective competition because that is competition. So that’s what they’re saying. That’s the triggering mechanism.

Chairman Bache: And I guess I interpret that differently because saying that you have competition is different than effective competition, and that’s where I’m at as far as that particular citation. Mrs. Buckley, do you have other questions?

Assemblywoman Buckley: I guess my last point I was trying to make is that I believe our rates in the south are like 8.5 percent higher than they were July 1, 1997, and then there’s another deferred rate case which arguably could make them 5 percent higher and why would it be in my constituents’ best interests to freeze the rates at a higher level than they were when they were frozen on July 1, 1997, which I think was the date. You know, just trying to balance all of these items in this section. I mean, I need to make sure their interests are being looked at. How would this be better in their interests than what the mechanism we set up in A.B. 366? I think Fred’s answer was, "We get rid of deferred energy." That’s what’s going to continue to sock it to my constituents, these deferred rate cases. So that’s why it’s better. So I’m just trying to piece all this together and – why would we want to freeze it at a lot higher rate than we agreed to do last session?

Mr. Crowell: Could I follow up and maybe take – argue why – if I were on your side, I would think this is a great deal for consumers and not a good deal for utilities. As a matter of fact I told Doug and Steve that, that this is not a very good deal for utilities. And why not? You look at the traditional utilities. Fifty percent of their costs are fuel and purchased power. Theoretically under deferred energy, you’re entitled to recover those costs dollar for dollar under deferred energy accounting. That means that you effectively have managed 50 percent of the risk of your company. It’s a good deal. Stockholders don’t make money, they don’t lose money on it. Fred would argue differently, but in general that’s the theory of what it’s doing. Place that into the context of A.B. 366, you have a cap. But that cap has a hole in it. The cap says if you need money to finance your infrastructure, you can do it. Basically what that says, Assemblywoman Buckley, is that I can file a rate application. If I’m not making enough money, I can file a rate application. Cap or no cap. You take, then, what’s in this bill, S.B. 438, and that says there’s a hard cap. I have no ability to file a rate case. If I can’t make my infrastructure costs, I can’t do it. I’m stuck for 3 years. That’s one big problem. And the third is I lose the ability to manage the use of deferred energy tools to manage my fuel and purchased power as a risk avoidance mechanism. I lose out on this. That’s compounded by the fact that I‘m going to be giving up my plants. Therefore I’m not going to be able to use my own internal generation to kind of massage my costs. Now I’m completely at the whim of the market. And so that’s why it’s not a good deal for them. It’s a good deal for customers because their rates are solidly capped for 3 years, period. You can’t go in and ask for a rate increase. You can’t do it. Right now, under A.B. 366, I don’t think anybody argues that. If the utility can show that it’s required to meet their infrastructure requirements, they can ask for a rate increase and the commission has to give it to them. To me, that’s why it’s a good deal for customers. As a matter of fact, I think it’s so much of a good deal it borders on the unconstitutional. I’m not going to argue that.

Mr. Rigazio: One more comment. Bob, there is a balance. It’s ultimately a balance and somebody said, "Well, after hearing Bob, why would the utilities want to do this?" It’s a balance and one of the reasons we would do this is because of the merger. As I mentioned before, the merger can bring some opportunities and benefits with it; without the merger we probably would be filing for a rate increase under A.B. 366, as Bob described when we filed our April 1 filing. We decided not to because we thought of S.B. 438 and the merger. But the merger, we think in the long-run, and everybody’s focused so much on the short-run, in the long-run we think it will make a good medium-sized wires company that can probably do a better job of the financing less externally and more internally, and balance the two growths of the two systems out. That is one of the main reasons we’re able to do this, particularly for Nevada Power Company.

Chairman Bache: Before I go to other ones – and I guess this is following up on what Mrs. Buckley had asked you – because we’re eliminating deferred energy, but sort of section 4 it looks like it’s deferred energy under a different name. And if that’s the case, why change deferred energy? I mean, because you’re recovering under a different name for energy costs, yet you’re eliminating the name of deferred energy. Just curious on that.

Mr. Crowell: I’ll give that a shot. Here’s how I read section 4. Section 4 says this: There is an inequity in the amount that we’re charging class cost to customers right now. In other words, Chairman Bache, you’re paying a rate that’s too low. If Assemblywoman Buckley owns a business, she’s paying a rate that’s too high. That’s built into the rates. Just assume that for a moment. What S.B. 438 says is this: If we fix that transaction right there between the rates you pay and the rates that Assemblywoman Buckley pays in her business, we’ve fixed it. Your rates, Chairman Bache, are frozen. We can’t raise them during this 3-year period of time. What we’re going to do is recover that through the proceeds of the sale of plants. Okay? And Assemblywoman Buckley is exactly correct. That does indeed reduce the amount of money that you have otherwise for stranded costs. But look at it from this standpoint. Stranded costs are an obligation, so we have to pay one way or the other. And too, so are the costs that were incurred to serve both of you two. Both of you. And if you say that we’re not allowed to recover that, then somebody has to pick it up. And that somebody is the only one left in this food chain, the stockholders. So what this is designed to say is, "Look, when we rectify the class cost to service issue, and show we’re having a rate freeze, what we’re going to do is we’re going to satisfy any inequity the shareholders may have had taken out of that balance by the sale of plants." Not going to mean a rate increase to you. You’re going to have less money for stranded costs, but it’s not going to be a rate increase to you.

Chairman Bache: Follow up and let – because you mentioned the sale of the facility which leads me into subsection 3 of section 13, and it says, "If a utility repurchases services to meet its obligation pursuant to this section from a generation unit that the utility has divested, the commission in determining reasonable cause pursuant to NRS 704.983 shall not impute a value to the generation unit other than the sale price of the unit." What that leads me to believe is let’s say you sell a generation unit for less than the market price, you enter into an agreement to repurchase that energy and then the commission cannot – and you get a good deal on that repurchasing because you sold the generation unit for less than the market value. I see some possibility for mischief there and the commission cannot look at it.

Mr. Ponn: The intent of this section, because, if you look in the other provisions of the bill, we would become the provider of last resort, we would not have a deferred energy mechanism as a way to hedge or recover fuel costs. We would not have, after divestiture, our generation portfolio as a way to manage some of those costs. Going forward, we’re still going to provide this all-inclusive utility service to some customers. The prudent way, if you have none of those mechanisms available to you to try to stabilize that, is to take a contract back for some of the output of those generators that we have sold. I think there’s a risk to the utility in the stranded costs proceeding that someone would say, "Had you not taken this contract for the output of that generator, then you might have been able to get some other dollar amount for it." That’s all this provision is intended to do, and that is to say that the sale price of that generator, with or without a buy-back contract to cover that PLR obligation, is the price that will be used for stranded cost calculations.

Chairman Bache: Okay, but I don’t think that particularly addresses the situation I was describing where you get a special rate because you sold the generation units for less than their market value. Say, you can get a special rate and you sold them for 75 percent of market value.

Mr. Ponn: Well, the market value for those generators is going to be whatever it is. There will be willing buyers and willing sellers. There may be some effect upon the price that’s ultimately paid for those generating units because we may ask that we be allowed to buy back the output. But the cost of the output is already in rates. No one’s talking about here buying back the output at something less than cost. I don’t see the potential for much mischief there.

Mr. Crowell: One other thing, Chairman Bache, if this is negotiated between you and me I might be able to follow that argument. This is an auction where they’re putting out to bid -- these plants are going to be put out to bid – and the only way you could do what you’re suggesting there is for them to put out the bid and say, "We’re going to sell these plants and, for those who give us a sweet enough deal, we’re going to give you a good buy-back deal." I don’t think they could legitimately put it into a bid.

Assemblyman Hettrick: I want to go back to section 4 or subsection 4. You’re establishing rates for classes of customers. Did I understand awhile ago in listening to this that some classes of customers may actually have a rate go down after that’s been established, and they would have the potential to go down? Okay. And so as I read this section, it says you can establish a rate pursuant to subsection 1 for any class of customers. That does not reflect the costs incurred by the utility to provide the services. So I’m sitting here thinking, okay, we have two opportunities. One I think Mrs. Buckley addressed. That would be that you’re going to have a shortfall because potentially what you have, you’re not charging a high enough rate to residential and you may have to lower the rate to your industrial. You’re clearly going to generate a shortfall. It doesn’t say you have to accumulate any profit that you might generate – and this would be back to a rate filing, more or less – but it says "by class". So you might have three or four classes that make a lot of money, one class that loses money, and you would still get to accumulate the loss and take it out of the sale, the way I read it. Even if you had a profit from the other classes. So that would be the first part of my question. The second part of my question would be, does this mean you could compete with somebody for a rate for the industrial customer and actually sell at a rate below your cost and recover that, too, to compete? Because that’s the way I read that as well. Does that make sense the way I said the question? In other words, if you buy power for 5.9 [cents] and you’ve got somebody who bid at 5.8, and you decided you wanted to keep him, could you sell at 5.8 and accumulate that loss as well? Because I don’t see anything that prohibits that in that section.

Mr. Rigazio: I don’t believe that’s the intent. I think in this section what you’re doing is you’re – in our case in particular at Nevada Power – the residential we feel is the one that’s below cost. If you go through this and the other classes get a reduction, the residential stays flat, you’re paying for that out of shareholder assets from the sale of these powerplants. That’s why – if you don’t go through it – there’s no other way to do it. To keep the residential rates flat. There’s no other way other than sell your powerplants. That’s the only way. So it’s being paid by shareholder assets. Otherwise it comes out of shareholder return and retain earnings and just wipe out the retain earnings. But you have an asset and an opportunity to sell the powerplants, hopefully, for whatever the market bears, as Doug said. We had some discussions before about market value. Actually the key here is the book value. And then you want to make sure you sell as much above that as possible and then you can make up that shortfall. It does say in there – I would guess if you don’t sell the plants for enough, you can’t make up that shortfall through shareholder assets, the assets they have aren’t sold, we’d have to eat it. There’s no other way to do it.

Mr. Ponn: If I could add to that. You know, the proceeds above the book value from the sale of those generating plants have accumulated a lot of claims on them. There’s stranded costs, there’s merger transaction and transition costs, and now there’s the financing of this rate freeze. So the companies are bearing, ultimately, a relatively large risk that there may not be enough money to cover all those things. That’s dependent upon the outcome of some proceedings at the PUC and the rules surrounding stranded costs and the provisions of the ultimate piece of legislation that comes from this session. But there’s no guarantee that because something is supposed to be paid for out of those proceeds that there will (1) be enough proceeds to pay all those things and (2) that we’ll be allowed ultimately to do that.

Assemblyman Hettrick: And I think what you’ve both said is exactly my point. I understand fully. You’ve got to have a way to recover costs. You can’t sit here and be totally bound by something that says, "You may lose money and that’s too bad, and by the way, stranded costs go down the drain too." There has to be some recovery mechanism. The issue here is, I guess, in my mind, it appears there might be a recovery below cost – which I’m not sure would be one we’d want to allow – because that would guarantee that we’d probably run down very rapidly any asset’s ability to cover stranded costs. So that bothers me a little bit, that we might be able to sell power – and I’m not saying this does that or you would choose to compete on that basis – but you might. And I don’t see anything here that says you couldn’t and therefore I think that puts those stranded costs at higher risk again. I guess – and I’m backing Mrs. Buckley’s point – it appears to me, the more I see of this and the more we talk about this – while it may be wonderful for residential customers for 3 years or 4 years – I believe at the end of the 4 years, the more I hear of this, it’s absolutely going to hit the fan big time 4 years from now. And there is no way residential customers are going to benefit from this. It doesn't appear to me that can happen. The farther we go down this road it looks to me like we’re just virtually guaranteeing that 4 years from now we’re going to see some whopping increases in residential rates.

Mr. Ponn: Thank you, Assemblyman. Two things. One on the first point about making contracts at below cost and then somehow accumulating those amounts for recovery out of the proceeds from generation. I think section 4 says that you’ll establish rates for classes of customers. Therefore those rates would be filed tariffs, et cetera, so I don’t see the accumulation of contracts – rates under a contract versus rates for a class of customer falling into this category. With regard to your second assertion that somewhere down the road there’s hell to pay, I think that restructuring in general, this bill in particular, is a wager that through the efficiencies that come out of competition being introduced into the market and through the efficiencies we may be able to garner in our merger, that we’ll be able to offset some of those future increases that you’re concerned about.

Assemblyman Hettrick: Ballpark figure, if you had to guess right now. What would you say a residential customer in Las Vegas is underpaying percentage wise. 20 percent? 10 percent?

Mr. Rigazio: The cost study that we filed on April 30 – and it’s a required filing and we showed on the broken out rates for what we called marginal costs versus an embedded cost that shows about 25 percent. Now if you’re going to compare marginal to marginal and embedded to embedded, it would probably be less than that, but it could be as high as 24.7 percent for residential rates. I think the study we filed with the PUC are current residential rates, including the fuel component for deferred energy that comes to about 6.8 cents – without, it’s about 6.2 [cents]. I believe the cost study shows something north of 8 cents per kilowatt-hour.

Assemblyman Hettrick: And given that you’re under-earning – and again Nevada Power – your regulated potential, I don’t think you set out to under-earn potential. I’m sure you’re operating as efficiently as you possibly can, and so what that says to us is, "How are we going to make up enough efficiencies out of divesting and all the rest to cover a 25 percent potential increase to the retail customer? The residential customer? That’s what it says to us. That does not seem to me to be a very high likelihood. I realize that Sierra Pacific is over-earning and if you get to mesh those things maybe there’s some benefit. But I’ve got to tell you. I don’t believe there’s a 25 percent residential rate benefit on any efficiencies you can do based on what I see here. I don’t see how the small guy comes out on this and I don’t see how the small guy in a rural community comes out on this at all. I think he gets burned big time. I’ll bet you if you did that same study, Steve, for me on a rural customer, it would be 50 or 60 percent. I don’t see how we make this fly. I just don’t.

Chairman Bache: Other questions from members of the committee?

Assemblywoman Leslie: A very easy question. Back to name and logo. I looked up Nevada Power’s website because I guess I assumed that when you merge you would be using the name Nevada Power. But I see on the website it says you’re going to be using Sierra Pacific Resources? So if you could comment on that and also are you then reserving you trademark name Sierra Pacific and Nevada Power for the affiliates in each area?

Mr. Rigazio: I’ll comment on the first one, Assemblywoman Leslie, and that is that the corporate name will be Sierra Pacific Resources. We’ll operate under that holding company as the corporate name and when we exchange the stock of the company, that will not be stock in Nevada Power Company. It won’t exist any more. There will be Sierra Pacific Resources. However, we felt it was important that the northern Nevada customers on a day-to-day basis who have dealt with Sierra Pacific forever, will continue to deal with Sierra Pacific Power Company, and in southern Nevada they will deal with Nevada Power Company. So it will be called Nevada Power Company in southern Nevada and that’s the name we’ll use down in Las Vegas. So when a residential customer – you’ll see the trucks go down the street – they’ll still say Nevada Power Company on them and in northern Nevada they’ll say Sierra Pacific Power Company.

And I think there’s a second question, and I probably forgot what it was, but I’ll let my pro answer it.

Mr. Crowell: I’m supposed to be here on name and logo stuff. I’ve been talking about everything else. When you get to the name and logo, I’ll be happy to give you that one too.

Chairman Bache: Are there any other questions dealing with the non-name and logo issues?

Assemblyman Brower: Just so I understand you response to the concerns expressed by the minority leader [Assemblyman Hettrick] and Mrs. Buckley, are you telling us that – are you conceding that the benefit to the consumer in the long run really is a gamble, as it always is, in this type of restructuring, but that gamble won’t pay off for the consumer only if the classic free market competition principles don’t kick in, which you fully expect will not happen? In other words, do you expect those classic free market principles will kick in and that the gamble as a result will pay off in accordance with the history of restructuring as we’ve seen it around the country? Is that basically how you respond to that?

Mr. Ponn: Assemblyman, I think what S.B. 438 does is it creates a transition mechanism between where we are today with regulated utilities and regulated rates, some of which are subsidized, particularly residential customers in the Las Vegas area. It creates a transition to get from there to competition and allows those residential customers to have the benefit of a safety net or protection of getting PLR service at frozen rates for that 3-year transition period so they don’t go into the market immediately or don’t have to go into the market immediately. They can do that at their choice, but don’t have to. As you said, what we’re assuming or thinking or supposing will happen, is that by the end of that 3-year period, you will have developed enough competition that those benefits will kick in and that, candidly, the combined companies will have achieved enough efficiencies that there will be other benefits. You hope that offsets things like the minority leader’s concerns.

Chairman Bache: Other questions here dealing with the non-logo issues? I have one, because we went through all the subsections of [section] 13 except subsection 5. The way I read that is that the commission can’t really even examine your books at all during this period of time of the rate freeze. They would not even have any knowledge of what either your earnings or losses are.

Mr. Ponn: I think the whole section 13 is designed in some ways to try to copy what has been a very successful experience for Sierra Pacific Power Company, its customers, its regulators, in that we froze our rates starting in the mid-90’s. They remain frozen today until the year 2000. During that time our customers appear to be satisfied with those rates and our shareholders, through efficiencies that we achieved, were able to earn not only our authorized rate of return but something more, and share that in the form of refunds to our customers. $11 million last year, another $11 million this year. And some more probably for 1999. So this section 13 is in some ways replicating that process going forward. I don’t want to apologize for the success of that. I think it’s been very successful and we’ve all benefited from it. I wouldn’t want to detract from section 13 because it’s trying to achieve that sort of benefits for the whole state instead of just the north.

Mr. Rigazio: Mr. Chairman, I’d like to add just a little to what Doug said. Another benefit of that section. The commission can’t look at our earnings, and in our case probably under-earnings. I’ve probably spent more time in a hearing room than anybody in the State of Nevada getting beat up. Since 1983. But we’ve had eight rate changes in deferred fuel since 1994. I wish I would have frozen my rates in 1994. At the end of the day they’re actually slightly lower. People were saying about our last three rate increases. Actually the rates were lower. I’ve spent so much time in a hearing room on these things. In the next 3 years we have so many things in front of us here to try to get through -- the rule-making, implement the merger, get through the commission proceedings on this stuff – the divestiture. The rate freeze will probably keep (unintelligible) for 3 years in deferred fuel and these examinations and these cases. That’s not an easy process. I’m not critical of the commission, it’s a lot of work. I have more work for them than anybody. It takes a lot of time, and like I said in hindsight, I wish I had done Doug’s experiment. Under this, we’ll do it. I wish I was doing it when the trends were going the other way rather than up, but with the merger we have a opportunity, hopefully, to learn from them and get some synergies for the next 3 years. Maybe we can stay out of that arena and address some rate designs here early on and concentrate on other things.

Chairman Bache: I guess your answer really doesn’t respond to what my question is, that – and maybe I’m reading it differently than you are – where it addresses that the commission cannot have any review of earnings. Now if you’re looking at that as adjusting the rates, I understand what you’re saying there, but, to me it means that the commission cannot even have this information as to what your earnings are. Maybe that’s the difference in our interpretation of what that language means. Because the way I’m interpreting is the commission cannot even get information on what you have – the way it reads.

Mr. Rigazio: Mr. Chairman, we provide to the commission, by rule and order of the commission, monthly financial statements. They’re called the "Blue Books". We provide annual reports, 10-Qs, 10-Ks, to the FERC (Federal Energy Regulatory Commission), the OCA (Office of the Consumer Advocate), the PUC – there are so many different entities. But we provide that information to the commission. We continue to provide that information. We’ll always provide that information on a monthly basis. And you can go right through the financial statements every month and look at what our earnings are, quarterly. They’re published. That information is provided to the commission and will continue to be. And you know, the other thing is the OCA and the staff of the commission can send us data requests or requests for information at any time regarding financings, financial information, reviews, calculations of earnings. And we provide those. So the information will still be provided. They’ll still see what we’re earning whether it’s over- or under-earning. They can make an assessment in their mind today you can calculate by the numbers what our earned return – say it’s 9.5 percent. They can calculate in their mind whether that’s too high or too low. That’s up to them to decide. But the information always has been provided and will continue to be provided to them.

Mr. Ponn: I think section 5 is designed to give us the other side of this bargain. We freeze rates, we do that for 3 years, and if we are able, in spite of the minority leader’s concerns to overcome the pressures on costs and the pressures in the energy market, and if we end up being profitable because of that, that’s our incentive to do our best. Our very best. Hopefully shareholders will get some benefit from that. It’s a compensation for – I think – some very significant risks taken by the shareholders.

Mr. Rigazio: Mr. Chairman, one last thing. On the financial end. It’s not just the rate of return that we provide to the commission. It’s significant financial data. It breaks down your plant investment by type, by depreciation, line items of all your expenses, the purchase power contracts I mentioned. That’s all shown in your financial statements and blue books we provide the commission. And we provide monthly fuel data separate from that to the commission also.

Chairman Bache: I guess that’s because I’m interpreting sub [section] 5 different than you’re interpreting. Maybe some of my committee members – if you have a different interpretation than I do, please point it out to me. To me, the way I read it, is that you don’t have to provide any information to the commission, and that’s where a great deal of concern is upon me.

Mr. Ponn: The only intent of subsection 5, Mr. Chairman, was there would be no over-earnings investigations and reductions in rates, not that any information transfer would be stymied or changed.

Assemblywoman Buckley: I think I read it similarly. That gets back to my balancing question. You have a freeze for 3 years. Then you can recover shortfall at the end of it and in the meantime, during the freeze, the commission can’t review any over-earnings. So it’s part of the equation you’re balancing out to see if it’s a good deal. I think they can look at all the documents, but they couldn’t do a darn thing about it if you-re over-earning.

Mr. Rigazio: We couldn’t file if we’re under-earning. I think it goes both ways.

Assemblywoman Buckley: Except that if you under-earn and create a shortfall, and any particular class, not through netting, then you can get it from the sale of generation units. You can recover those costs and any other costs under paragraph 4.

Mr. Ponn: I think we may be mixing two concepts. Earnings and profit on the one hand, versus rates on the other. The rate we charge to a particular customer or a particular class of customer does not necessarily indicate whether or not we will over- or under-earn. Or whether or not we will be a profitable company. That is an aggregate calculation which is the sum of pluses and minuses of all of our revenues and expenses for the whole business going forward.

Chairman Bache: Any other questions in relationship to this area? Mr. Crowell, would you present on name and logo. I’m sure you have comments on the amendment I proposed on name and logo.

Chairman Bache: I guess I have one first before I go to other committee members. Would you prefer we delete all mention of name and logo and – because I have a problem with doing legislation to avoid lawsuits. I would prefer to delete that section as opposed – and let you fight it out in court and if you win you win. If you lose you lose. And the proposed amendment I have can go away.

Mr. Crowell: The answer to that would be – you folks are the votes and so – and I’m not here to tell you what you should or shouldn’t do. But what I can tell you is that A.B. 366 is silent right now on name and logo. Silent. Nothing in there. And I would ask you to search your hearts when you passed A.B. 366 that you believed that we would be precluded. When you passed A.B. 366 did you know in your heart and your mind that we would be precluded by regulation of the commission from using our name and logo? If you did, well, I’d suggest that’s one thing. But I would be willing to bet the majority of people who voted did not know that and that’s what says – and then you say, shall we make it be silent? Well, sure. What silence meant to someone was – you can’t use it. You can’t use that name and logo. So we can all say, "Let the courts work it out." That makes money for myself and my colleagues. That’s fine. But what we’re asking you to do is we think we have a dead-bang winner case. What we’re asking you to do is just let’s put this stuff to bed. It’s just like stranded costs. If we’re going to solve these issues, let’s solve them and go on about getting to the competition rather than making attorneys rich over litigating it.

Mr. Ponn: There’s one other element. If we let the courts decide the name and logo issue, and if the legislature passes the opportunity to clarify its intent in what it wants, that court case is probably going to take some time. And it could occasion delays and who knows what processes related to restructuring. It’s a way to avoid potential delay.

Chairman Bache: Questions from members of the committee? I guess, then, one of the other questions is, how do you see you using your name and logo and competing with other businesses that you aren’t currently in, like the one from Elko where it’s Sierra Pacific Simple Choice, or entering the air conditioning and heating repair business that these witnesses have brought up? How do you see using your name and logo in those areas that you have not traditionally been involved in?

Mr. Ponn: One of the fallouts from restructuring, deregulation, whatever, is that the utilities in the mid-term or the long-term, are not going to be providing some of those services that they historically provide. We’re going to get out of the generation business, for instance. If you preclude us from going into other lines of business that are unrelated to the – or different from the current provision of the bundled utility service – you’ve closed one of the ways that we can become a successful participant in the competitive market. I think we have as much right as anyone else to use our name and logo in those business going forward.

Chairman Bache: Questions? I don’t see any. Thank you. Is there anyone else wishing to provide further testimony before the committee at this time? In Las Vegas? Okay. Before we adjourn, we’re scheduled for a meeting Thursday and I have scheduled one for Friday – there’s a possibility Thursday could be our last meeting. And the Friday one is upon adjournment of Assembly Commerce and Labor.

I was wondering of you had any comments about the state system, since that was brought up in testimony, Mrs. Buckley?

Assemblywoman Buckley: (Off microphone) No comment.

Chairman Bache: Okay. Any further business? This meeting’s adjourned.

Chairman Bache adjourned the meeting at 7 p.m.

RESPECTFULLY SUBMITTED:

Charlotte Tucker,

Committee Secretary

APPROVED BY:

Assemblyman Douglas Bache, Chairman

Assembly Select Committee on S.B. 438

DATE: