MINUTES OF THE
SENATE Committee on Commerce and Labor
Seventieth Session
February 4, 1999
The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 7:30 a.m., on Thursday, February 4, 1999, in Room 2135 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau. This meeting was videoconferenced at the Grant Sawyer State Office Building, Room 4401, and 555 East Washington Street, Las Vegas, Nevada.
COMMITTEE MEMBERS PRESENT:
Senator Randolph J. Townsend, Chairman
Senator Ann O’Connell, Vice Chairman
Senator Mark Amodei
Senator Dean A. Rhoads
Senator Raymond C. Shaffer
Senator Michael A. (Mike) Schneider
Senator Maggie Carlton
STAFF MEMBERS PRESENT:
Scott Young, Committee Policy Analyst
Crystal Lesbo, Committee Policy Analyst
Beverly Willis, Committee Secretary
Ardyss Johns, Committee Secretary
Kathy Lawrence, Committee Secretary
OTHERS PRESENT:
Judy M. Sheldrew, Chairman, Public Utilities Commission of Nevada (PUCN)
Fredrick Schmidt, Consumer’s Advocate, Chief Deputy Attorney General, Bureau of Consumer Protection, Office of the Attorney General
Michael A. Pitlock, Executive Director, Department of Taxation
Chairman Townsend opened the meeting by explaining that today’s meeting would address public utilities in Nevada and introduced Judy M. Sheldrew, Chairman, Public Utilities Commission of Nevada (PUCN).
Ms. Sheldrew presented a letter to Lorne Malkiewich, Director of the Legislative Counsel Bureau (Exhibit C) presenting thoughts of the commission (PUCN) as to whether or not the date named in statute for alternative sellers to begin to provide potentially competitive services should be delayed. She began her presentation with a review of Exhibit C, pointing out items of accomplishment and those items yet to be addressed by the PUCN, in order to meet the legislative directive of providing an effective competitive market for electric services.
Ms. Sheldrew continued, observing her presentation would be offered in two major areas with the second part being an overview of the budget request. Ms. Sheldrew stated her belief that effectively opening the market to competition on the specified date would not be in the public interest.
Referring to Exhibit C, Ms. Sheldrew spoke about Retail Aggregation Tariff (RAT) and the Independent System Operator (ISO). Ms. Sheldrew reviewed the position played by an ISO as it pertains to California noting this system is very expensive, suggesting a lighter version for Nevada called Independent Systems Administrator (ISA). She claimed the ISA would have scheduling authority to assure there is nondiscriminatory access to the transmission system and would be not manipulated by transmission operators or owners. Ms. Sheldrew expressed concerns pertaining to the opening of Nevada’s market in competition with other states.
The next item addressed by Ms. Sheldrew pertained to a start-up date by Arizona for retail competition. She noted the ISA concept originated with Arizona as a way not to incur significant expenditures, yet assure open access to the transmission system. Ms. Sheldrew discussed the possibility of alternative sellers needing to make a choice between Arizona and Nevada. She continued her discussion with concerns and comments on the year 2000, pointing out complications that might be generated by computer errors.
The next area covered by Ms. Sheldrew considered the issue of the Provider of Last Resort (PLR). The PLR would allow alternative sellers to come into the market place and potentially be an option mechanism for assignment of certain segments of the population. She stated, "I am personally convinced that is the most significant method by which residential customers will get to participate in the benefits of competition early on."
Senator Shaffer inquired about the part to be played by the Federal Energy Regulatory Commission (FERC) as it concerns the ISA. Ms. Sheldrew replied that FERC would have control over transmission, however not distribution, noting distribution is jurisdictional to the states. Ms. Sheldrew then expanded her thoughts on the place of the ISA for Senator Shaffer, noting the ISA was a market power-mitigation method to provide an authority to control the transmission operators’ activities, so the transmission operator does not manipulate the use of the transmission system for his own benefit.
Senator Amodei noted Ms. Sheldrew had indicated Nevada might be using a "lighter" version of an ISA as opposed to the type presently used in California and inquired what the cost might be to operate this version. Ms. Sheldrew asserted a preliminary estimate could be $500,000 to $1,000,000. Senator Amodei and Ms. Sheldrew continued their discussion with an assessment of PLR. Ms. Sheldrew explained the PLR had a legal obligation to provide service to a customer where competitors have decided they do not want that customer’s business. Senator O’Connell and Ms. Sheldrew discussed any punishment that could be meted out for anticompetitive conduct. Ms. Sheldrew noted the PUCN had extensive prosecutorial authority to deal with anticompetitive situations.
Senator Townsend asserted care was needed before adding any new measures that might be a financial burden to the utility companies and ultimately, to the ratepayer. He went on to note:
As we go to the competitive market . . . not all benefits of competition are lower price. . . . We have to weigh, as we move forward, the cost we put on utilities for the public interest. . . . We want to make sure that mill sales tax assessment is returning effectively something to the ratepayer, particularly that residential person.
Senator Townsend and Ms. Sheldrew continued their discussion, touching on the effect the merger of Sierra Pacific Power Company and Nevada Power Company might have on competition. Senator Townsend explored the possibility of FERC determining that Nevada might be included in a regional Independent System Operator (ISO) and resultant problems that could occur.
Ms. Sheldrew noted there was no regional ISO at this time, stating it could be possible FERC might indicate an ISA be established, with the possibility of working toward affiliation with a regional ISO. Ms. Sheldrew indicated FERC could require formation of regional transmission organizations with a requirement to join. Senator Townsend inquired about the divestiture process, with Ms. Sheldrew noting the PUCN was awaiting a filing. Ms. Sheldrew continued her dissertation with concerns regarding the growing issue of how to establish regional reliability standards.
Once again referring to Exhibit C, Ms. Sheldrew continued her remarks pertaining to different components of service anticipated in the future. She also commented on allocation of costs to these various services; i.e., generation, power delivery, metering services, along with a determination as to which of these services would be competitive. Ms. Sheldrew noted the Legislature had made the determination that generation and aggregation are potentially competitive and are already designated for service by alternative sellers when the market is open; asserting customer services, billing, and metering should be added to this list.
Ms. Sheldrew commented on the regulation for the provision of nondiscriminatory distribution service. This requires the distribution company to provide open access to its distribution system to all alternative sellers. Ms. Sheldrew asserted the requirement in this regulation directs the distribution company to provide the same level of service to all alternative sellers as it does to its own affiliate. She went on with her explanation of Exhibit C, touching on items pertaining to licensing regulations/requirements, consumer protection, PLR and affiliate relations.
Senator O’Connell requested information pertaining to Quality Facility (QF) contracts. Ms. Sheldrew deferred to Fredrick Schmidt, Consumer’s Advocate, Chief Deputy Attorney General, Bureau of Consumer Protection, Office of the Attorney General, to answer.
Mr. Schmidt stated:
Did you want to just talk about the contract that Nevada Power [Company] was involved in? Because there were very different circumstances with regard to the so-called QF contracts in the north and I think your characterization may fit those and those were done when I was the commissioner and they were the result of federal legislation called PURPA [The Public Utility Regulatory Policy Act of 1978], and the commission’s [Public Utility Commission of Nevada] determination that it was better for the utility to sign contracts with geothermal companies if they were as cheap, or cheaper, than building a large coal plant in northeastern Nevada.
The company chose to enter into geothermal contracts but the commission did direct the price and did approve those. These contracts were done in the mid-to-late 1980s.
In the early 1990s in southern Nevada, Nevada Power [Company] was faced with a circumstance where it was unable, by its own representation, due to the double digit growth that caught everyone somewhat off guard in 1989 – 1990 – 1991, in that time frame, was unable to both fund, on a capital basis, all the distribution transmission improvements which had become a huge expenditure on an annual basis and continue to be, but that was really a crisis time for them. And also construct new power-plant generation. The company went into a practice, at that point, of not constructing new base-load generation, instead, pursuing contracts with others who would develop the resource.
There were two types [of contracts]. The one that was more the crisis situation was done with another fellow utility in Southern California, an affiliate of Southern California Edison, that is called today the Sunpeak Project. Those are gas units on Sunrise Mountain in Las Vegas. They were done pretty much on a rush-job basis, based on a contract, just to make sure we had enough power to make it through the following summer. The commission approved those contracts, but those were initiated by Nevada Power [Company] with that partner and there was a lot of controversy over the price for some time. They were eventually renegotiated and approved.
Partly as a result of that, and as a result of desiring to apply the federal statute in southern Nevada, and the interest of some manufacturing firms, particularly in the Henderson area in building cogeneration, in other words, generation that would have two uses, which had been encouraged and stimulated by the federal law that was passed a little over a decade before, the cogeneration concept . . . will serve a dual purpose and thereby have additional efficiencies and economies for the area, if you have a manufacturer that has a significant steam need. Steam is a byproduct of the construction of the generating power plants. There were a number of manufacturers, particularly in the Henderson area, but also elsewhere in Las Vegas, who wanted to construct facilities that would qualify as these qualifying facilities under federal law and serve their manufacturing needs; sell the electricity to Nevada Power [Company] and use the byproduct steam for their manufacturing process. The commission, [at that point in time] I was then Consumer Advocate, I do not think it would be fair to say, required, or ordered the utility to do that as part of resource planning. In resource planning, they identified specifically an amount of need, but it was the utilities, in conjunction with our office and with these representatives of these manufacturing facilities that wanted to construct generation, that all met together and said ‘Look, under the federal law, at Nevada Power [Company], you should have an avoided cost the same as Sierra Pacific [Power Company] has had.’ Avoided cost meaning, if you constructed generation, what would it cost, and that is the cost you avoid if someone constructs for you and sells it to you.
Nevada Power [Company], at that time, had not what, I call, long-term avoided costs. In other words, a cost that would be definite over a period of time so that someone could go out and obtain financing for a project. They had a short-term avoided cost which was the year-by-year change or fluctuation in prices, but no one could build a project for that. So we sat down and it was the utility commission staff, primarily Frank McRae, who is now at the utility, myself with the Consumer Advocate’s Office; these numerous manufacturing entities represented by experts, and the utility. We sat down and tried to figure out what the utility, Nevada Power’s, avoided cost would be on a 20- to 30-year basis. We took our best estimate, recognizing the continued growth- required power plants to be built and identified that cost; then signed an agreement with the power company that said that for at least, and at that point, it was about 300 MW [megawatts] of need that we knew we were going to have over the subsequent couple of years, the company would be required to sign contracts at that price if someone would come in and build a cogeneration facility at that price. As a result, we had these facilities negotiate with and enter into contracts with Nevada Power [Company] located in Henderson. There’s also the tomato hothouse plant that is in North Las Vegas as well as the gypsum board or wallboard plant.
We ended up with over 300 MW of those plants. Those are the ones that are the QFs in Nevada Power’s system. Those contracts, although initially determined to be at what utilities cost was thought to be over the next 20 – 30 years, because of declining prices in generation, which has led to the press for the desire to have electric competition, particularly among large customers who buy power, the difference between that declining price and what the contract prices have continued to require, has created this issue of whether there is so-called stranded costs of some sort in Nevada Power’s system, meaning the difference between what those contracts continue to cost Nevada Power [Company] to supply electricity to serve the needs of Las Vegas and buying it from those facilities under those contracts, and the price if someone else is going to build a new plant, or if you’re going to buy it just on the open market in the interconnected western grid.
Pertaining to contracts, both north and south, Senator O’Connell inquired if the commission set the price of the contracts, or if it was the utility. She also wanted to know if there was any disagreement.
Mr. Schmidt replied:
In the case of the north, the avoided cost was set by the commission prior to any contracting and prior to entities coming forward to sign contracts. There was one pilot project that Sierra [Pacific Power Company] entered into, but with that one exception, the rate was set by the commission, I believe it was in 1986, and then contracts were signed by the utility in 1987 and later on. That led to both geothermal plants being built, the wood chip facility in Loyalton and some more hydro contracts.
In southern Nevada, the rate was negotiated and stipulated between the utilities and my office and the commission staff and these other entities who were interested in building cogeneration. When that was presented to the commission, the commission agreed to that, but the commission did not direct it.
Ms. Sheldrew, once again referring to Exhibit C, presented remarks pertaining to compliance plans. Ms. Sheldrew discussed the merger between Sierra Pacific Power Company and Nevada Power Company. She made special note of several requirements, especially noting the divestiture plan. Ms. Sheldrew then referred to Upcoming Electric Restructures Procedural Steps (Exhibit D) and various documents referring to the move into competition (Exhibit E). (The Original is on file in the Research Library.)
Concluding her remarks, Ms. Sheldrew commented, on why it was in the public interest to delay competition. She maintained at this time, the PUCN was not in a position to suggest a certain date.
Senator Amodei queried Ms. Sheldrew concerning the range of competition for residential customers. Ms. Sheldrew stated:
. . . It has been the intent, I think, of the Legislature and certainly of the commission, that competition start for all customer classes at the same time; that there not be a phase-in. I believe that phase-ins in other states have resulted in residential customers not participating at all.
Senator Amodei asked, "Is it your position today, that there should be no phase-in, that everybody ought to start at once?" Ms. Sheldrew replied, "That is my position."
Commenting further, Senator Amodei inquired about those who might commit to providing services, with Ms. Sheldrew claiming there had been discussion with several potential alternative sellers who had indicated an interest in filing an application. Ms. Sheldrew affirmed the PUCN would assign customers who have made no decision for services, when competition is made available.
Senator Schneider and Ms. Sheldrew reviewed the possibility of opening competition to residential customers before opening to large customers. She noted other states had introduced legislation to address this situation. Ms. Sheldrew claimed that it was her thought, "All customers have to have an opportunity to participate. Some customers should not be prohibited from benefiting from competition, while other customers are able to benefit." Further discussion was held concerning various types of penalties available for infractions.
Senator Townsend expressed concern over the possibility of default PLR for a distribution company. He maintained there should be an effort made to plan for this likelihood.
Ms. Sheldrew commented:
Nevada is a very small player in even the western marketplace. One of the reasons perceived for going forward with competition was the opportunity to do it on our terms, and do it right and the need to be a little bit ahead of the way in order to get alternative sellers to come to this state.
Ms. Sheldrew asserted previous legislation would give Nevada an opportunity to be in a position to have the residents benefit from competition on a much earlier basis than other states. She claimed Nevada might have one opportunity to entice alternative sellers. She declared present legislation contains the mechanism requiring the assignment of customers to an affiliate of the distribution company for PLR service. Ms. Sheldrew stated:
. . . You wanted us to be able to assign customers to a new provider, because their old provider won’t [will not] be in existence in its current form anymore. We have the mechanism whereby if nobody shows up as PLR everybody is going to be assured of receiving electric service, as they do now through default to the affiliate of the distribution company.
Senator Shaffer queried Ms. Sheldrew on action by the federal government if Nevada did not proceed in an orderly manner. Ms. Sheldrew replied there were a number of bills pending to impose a variety of mandates on the states. She indicated there was activity that might come through periodically instead of all at once.
Senator Rhoads inquired about the role the rural co-op would play in Nevada, as well as the status of the rural co-op in other states. Ms. Sheldrew noted at least one co-op, in Nevada, had determined they would like to become an alternative seller. She went on, noting that under present legislation co-ops have the option of deciding for themselves and feel they already have the option of making their own choices.
Senator O’Connell, Senator Rhoads, Senator Townsend, and Ms. Sheldrew reviewed an upcoming piece of legislation that would deal with haze control and what effect this might have on the price of electric generation. Ms. Sheldrew claimed she would check into this matter in the near future.
Michael A. Pitlock, Executive Director, Department of Taxation, after presenting Exhibit F, Report to the 70th Session of the Nevada Legislature on the Effect of Nevada’s Tax Policies on the Potential for Effective Competition in Providing Electric Service to Customers in Nevada, noted his report indicated the impact competition may have on tax revenue of state and local governments, and also pointed out whether Nevada’s tax policy might interfere with development of a competitive market. Mr. Pitlock claimed the utility industry, in most cases, was taxed in the same fashion as any other business. Mr. Pitlock asserted the utility industry was a significant contributor to tax revenue, especially for local government. He encouraged the committee to obtain input from local governments, as they would be impacted more than state government. Referring to Exhibit F, Mr. Pitlock continued with a review of sales and use taxes. He asserted the property tax could have the greatest potential for problems, indicating the utility industry had been singled out for different treatment as opposed to other industries.
Mr. Pitlock stated:
If you want to remove the impact of taxes on the development of the competitive market, the only way to do that is to make sure all competitors are treated equally. There will be some fiscal impact, if you want to move to that point where everybody is treated equally and all competitors be taxed equally.
Mr. Pitlock declared the task for the Legislature would be to determine how this would be accomplished. He continued:
If your goal is to have all competitors taxed the same, how do you deal with the potential shortfall that may come about because of that movement of having everyone taxed the same? It will be key to some legislation that you’ll [you will] see about exempting intangibles. If you remove that from the picture, what’s going to be the fiscal impact?
Mr. Pitlock asserted the Nevada Tax Commission had made changes in dealing with centrally assessed property that has reduced the effect of intangibles on Nevada’s tax base. Again, Mr. Pitlock referred to Exhibit F, pointing out the information pertaining to the level of value in various counties. According to Mr. Pitlock, the financial condition of many rural counties, cities and special districts is, "just deplorable, at this time." He stated these entities could be hurt by anything that would reduce their revenue, even a small amount, as they face such great problems. Mr. Pitlock then addressed property tax pertaining to power plants and whether they should continue to be centrally assessed. He maintained problems could arise when the generating plant providing energy in combination with the distribution and transmission company would be located outside the State of Nevada, causing the Nevada Tax Commission to go outside the State of Nevada. Senator Townsend, Senator Shaffer and Mr. Pitlock spoke on possible methods of collection on sales and use tax on fuel used in the generation of energy.
Mr. Pitlock then addressed franchise fees and the mill assessment. He asserted in order to preserve the same level of revenue, recognition will be needed in order to know which entity should be taxed.
Mr. Pitlock concluded by noting he did not feel Nevada had a significant problem as far as tax questions. He asserted that perhaps minor changes in property tax might be taken.
Once again, Mr. Schmidt came forward to speak on several issues dealing with electric restructure. He noted his staff was working very hard to see that competition did not result in any loss of public confidence in the electric utility system in Nevada. He commented on deadlines set forth for services to become competitive. He claimed distribution could take a number of years.
As coal is used to power some generation plants, Senator Townsend and Mr. Schmidt discussed the impact of a coal tax on Nevada’s consumers. Mr. Schmidt claimed that particular tax issue in comparison with the start date for competition was a particularly significant issue.
Mr. Schmidt continued:
. . . Opening up competition is still in front of you; you passed a law in 1997 to allow for it. The chairman [Ms. Sheldrew] has told you this morning, that it’s [it is] doubtful they can get started, or should start, as a question of wisdom on the date originally set in the statute. . . . The statute was passed with an option that you left solely with the commission [PUCN] to modify that date.
Mr. Schmidt maintained it was his understanding that anytime between December 1, 1999 and October 1, 2001, was the time frame given to the commission (PUCN) to deal with opening up the competition. He claimed he was doubtful if there would be any significant "player," or alternative seller, in the Nevada market by the end of 1999, or even by the year 2000, who will market to residential customers. He asserted this was because of rates currently being charged residential customers for electric service and emphasized the need for fair rates for residential customers, as well as a reliable provider.
At this time Senator Townsend presented several bill draft requests for introduction by the Committee.
BILL DRAFT REQUEST 54-408: Revises provisions relating to professional engineers and land surveyors. (Later introduced as Senate Bill 103.)
BILL DRAFT REQUEST 57-628: Revises circumstances under which certain public officers and employees, or persons acting on their behalf, may obtain or procure contract of insurance for public building or construction contract. (Later introduced as Senate Bill 102.)
BILL DRAFT REQUEST 54-414: Makes various changes to provisions governing pharmacy. (Later introduced as Senate Bill 101.)
BILL DRAFT REQUEST 54-740: Revises educational requirements for obtaining original real estate broker’s or broker-salesman’s license. (Later introduced as Senate Bill 99.)
SENATOR O’CONNELL MOVED FOR INTRODUCTION OF BDR 54-408, BDR 57-628, BDR 54-414 AND BDR 54-740.
SENATOR SCHNEIDER SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
* * * * *
There being no further business, the meeting was adjourned at 10:30 a.m.
RESPECTFULLY SUBMITTED:
Beverly Willis,
Committee Secretary
APPROVED BY:
Senator Randolph J. Townsend, Chairman
DATE: