The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 7:30 a.m., on Tuesday, February 5, 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.

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

Beverly Willis, Committee Secretary

Ardyss Johns, Committee Secretary

Kathryn Lawrence, Committee Secretary

OTHERS PRESENT:

Chairman Townsend opened the meeting by presenting several bill draft requests (BDRs) for committee introduction.

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Chairman Townsend stated information pertaining to electric restructure would be made available soon as possible. He pointed out material for today’s meeting, prepared by Scott Young, Committee Policy Analyst, Research Division, Legislative Counsel Bureau, "Present Status of Electric Restructuring in Arizona and Oregon" (Exhibit C).

Michael R. Niggli, President and Chief Operation Officer, Nevada Power Company introduced Malyn K. Malquist, Chairman, President and Chief Executive, Sierra Pacific Power Company. Mr. Niggli and Mr. Malquist presented Exhibit D, "Creating a Competitive Company and a Competitive Marketplace." This information presents an outlook on the pending merger between Sierra Pacific Power Company and Nevada Power Company, to be called Sierra Pacific Resources.

Mr. Niggli addressed the merger update and probable merger timeline as noted on pages 2 and 3 of Exhibit D, maintaining a prime objective for the merger would be to keep low costs for Nevada. Mr. Niggli claimed there was no wish to raise base rates and felt a merger would help control costs, and make certain the best practices are put together by both companies.

Mr. Malquist gave background on the merger process, noting the Public Utilities Commission of Nevada (PUCN) needed to make sure the interest of all concerned was protected. He claimed there was a 98 percent of the shareholder vote for the merger. Mr. Malquist asserted a major milestone in the merger would be approval by The Federal Energy Regulatory Commission (FERC). He observed, as this would be a fairly small merger without competitive issues that might be found in other states, a hearing at the federal level would not be anticipated. Mr. Malquist claimed both entities had offered to divest their power plants as part of the merger removing competitive issues that normally might concern FERC. Mr. Niggli and Mr. Malquist gave further examples of efforts to move forward with the merger; i.e., filing the divestiture plan, filing a rate case concerning the unbundling of their rates, in order for customers to understand the billing process. Mr. Malquist maintained that the target date for completion of the merger was June 1999.

Referring to page 4, of Exhibit D, Mr. Malquist started his explanation of reasons for this merger. He claimed since both companies were among the smallest utility companies in the west, the merger would bring needed size and scope in order to operate in the most efficient manner and in order to be competitive in the new marketplace. Mr. Malquist asserted the company would be downsized in order to become more efficient and stabilize prices. Mr. Niggli claimed the merger would make a stronger company and help eliminate the possibility of a takeover by a larger company. He maintained, with the merger, the newly formed company would be about the 35^th largest utility in the United States.

Page 5, of Exhibit D next addressed by Mr. Niggli and Mr. Malquist illustrated two mandatory items for compliance filing. Mr. Niggli pointed out the need to file a Generation Aggregation Tariff (GAT) as well as the need to file for an Independent Scheduling Administrator (ISA) with FERC. These two items are necessary to allow competition to begin and to allow nondiscriminatory access to the transmission system. Mr. Niggli declared generation divestiture and customer choice process, associated with the proper establishment of the ISA, would help obtain most benefits. Mr. Malquist asserted it was felt by divesting the power plants and creating competition in the generation side of the business, the greatest savings would be accomplished. Mr. Malquist stated, "Therefore, I would urge you to focus on that, as really the step we need to get done as we deregulate ourselves."

Pointing out information on page 6 of Exhibit D, Mr. Niggli maintained Nevadans were fortunate to have relatively low rates with high customer satisfaction. However, he feels choice is an important option to be moved into the marketplace, with appropriate speed. Mr. Niggli stated, "We will be ready, the first part of next year, to make customer choice happen. You have our commitment to assist in that process." He indicated during the process of deregulation, FERC might become the jurisdictional entity for the ISA and GAT. Mr. Malquist emphasized the purpose of Sierra Pacific Resources, as shown on page 6 of Exhibit D, would be to become a "premier" transmission and distribution company.

Mr. Niggli concluded:

Senator O’Connell questioned the gentlemen regarding the status of an ISA and/or an Independent System Operator (ISO). Mr. Niggli asserted because of scheduling constrictions it would be impossible to form an ISO, and could be accomplished only by joining a California ISO. He declared neither he nor Mr. Malquist considered this an option, maintaining the establishment of an interim ISA was favored. Mr. Niggli asserted cost was a major problem with creating an ISO. In general, Mr. Niggli and Mr. Malquist favored an ISA as opposed to an ISO.

Mr. Niggli gave a brief summary of the ISA, observing the ISA had three functions, the first function being nondiscriminatory access. The second issue is one of settlement; i.e., matching energy scheduled to energy received. Finally, auditing the transmission company to see their job is being handled correctly. He indicated an ISA would oversee Sierra Pacific Resources to make sure operations were carried out in a nondiscriminatory manner. Mr. Niggli emphasized although an ISA functions within the state; it would be governed by FERC. Senator O’Connell inquired about the mill cost with Mr. Niggli claiming it was too early to ascertain. He maintained the question of cost could be determined by the functions of the ISA. Mr. Niggli commented:

Senator O’Connell inquired about the possibility of a federal threat insofar as having to act immediately on deregulation. Mr. Malquist indicated it was his opinion there would not be any federal legislation for the next 2 or 3 years. Mr. Niggli concurred with comments made by Mr. Malquist.

Senator Amodei posed questions relating to the timing of implementation. Mr. Niggli asserted that with approval the time frame would be early to mid-2000. He claimed implementation of systems for the mass market would be the most difficult, as well as most costly. Mr. Malquist supplemented Mr. Niggli’s remarks by asserting timing could depend on the form of deregulation. He stated, "If we are talking about customer choice for the generation component only, I think we can be ready sooner than if we need to do other pieces; i.e., metering, or billing, some of those things that are very system intensive." Mr. Niggli noted there is a stakeholder group comprised of generators, marketers, aggregators, and consumer segments, as well as the offering utilities, all in agreement, yet all of who are subject to federal timing.

Senator Amodei asked about the status of stranded costs. Mr. Malquist asserted an assessment is needed as to what qualified as a stranded cost. He indicated, perhaps tighter legislation would help. Mr. Niggli noted a clear agreement is needed as to what stranded costs might entail, with clear legislative intent. Senator Amodei inquired, "Is it accurate to say that your position is we ought to have the stranded cost issue settled before we implement?" Mr. Niggli replied, "Absolutely."

Senator Amodei requested an opinion on the use of trademarks and names, along with information as to assignment of customers. Mr. Niggli asserted the utilities should be allowed to use their name and logo in a competitive marketplace.

Senator Schneider, Mr. Niggli and Mr. Malquist discussed the possibility of having a large power company in the east and one in the west. Mr. Niggli and Mr. Malquist agreed this was a possibility, however there could be consolidation in the future. Senator Schneider directed his remarks to the problem of large customers obtaining all the service, versus the small customers not being able to obtain service as readily. Mr. Niggli and Mr. Malquist responded by noting large customers would certainly have an easier time of acquiring service. Senator Schneider brought forth the possibility of a number of smaller customers banding together to become a larger entity, thus being able to procure better service, with Mr. Niggli and Mr. Malquist concurring. Mr. Niggli pointed out that if the decision was made to opt for customer choice, his feeling was to, "Let the marketplace work."

Senator O’Connell questioned Mr. Niggli how Qualifying Facility (QF) contracts were arrived at in southern Nevada. Mr. Niggli replied:

Mr. Niggli continued:

Chairman Townsend, referring to page 3 of Exhibit D, had questions pertaining to jurisdictional matters affecting the merger. He continued:

Mr. Malquist agreed. He noted the PUCN had filed as an intervener with FERC.

Senator Townsend posed questions regarding transmission/distribution issues and whether or not transmission issues, in particular, were FERC jurisdictional. Mr. Niggli stated, "Yes," and maintained transmission issues, as they pertain to restructuring, were clearly defined as FERC issues. Mr. Niggli noted FERC had jurisdiction over the operational aspects of transmission.

Chairman Townsend then posed questions concerning generation. He continued with matters pertaining to filing a merger document with FERC, stating, ". . . When you file your document with FERC it says our goal is to sell our generation."

Mr. Malquist replied:

Mr. Niggli pointed out the merger document requires a divestiture plan be filed.

Senator Townsend posed this question:

Mr. Niggli maintained if you think about it from a buyer’s perspective, the buyers do not want uncertainty. He asserted buyers would pay maximum price if they were dealing with one person. Mr. Niggli stated:

Mr. Niggli indicated he thought this would be the most straightforward process. He stated, "One seller has full authority to sell into the marketplace; full authority to deal with the buyers without a lot of interaction going back and forth."

Senator Townsend clarified, ". . . I’m talking about the merger of this company and the sale of the assets." He continued, asserting it was his understanding if a buyer, or multiple buyers come in to look at various generation assets, at that time, after the company is merged, one company person can make that determination. Mr. Niggli replied, "Yes, Senator, it is." Senator Townsend maintained one of the committee goals would be to streamline the merger process, while assuring this process is functional for all ratepayers in Nevada.

Mr. Niggli asserted, ". . . The key is streamlining the process." He indicated every process needs to be streamlined, or participants will not participate, or will be very confused in the process. Mr. Niggli maintained this would apply to affiliate rules and transactions, power plant divestiture, as well as the way the marketplace is entered.

Senator Townsend brought forth the ISA/ISO issue relative to the merger. He outlined his thoughts by stating:

Mr. Niggli replied in the affirmative.

Senator Townsend continued:

Mr. Malquist confirmed Senator Townsend’s statement. Mr. Niggli and Mr. Malquist continued their discussion regarding the place of FERC in the formation of an ISA/ISO. Mr. Malquist stated his view that a big structure would not be needed in order to operate.

Senator Townsend commented on committee action stating, " . . . We have made a conscious decision to understand we are adding cost to the ratepayer, in exchange for saving dollars in the bigger picture." Senator Townsend continued, ". . . I think all of us are uncomfortable with just taking a concept and applying a dollar [figure] and letting it happen without a full investigation of what is the right way to go; what is the minimum cost, with the greatest protection."

Senator Townsend posed the question, "In this merged effort, are you working with the stakeholders to come up with a simplified, understandable ISA/ISO/ISS [Independent System Scheduler] group we can take a look at, so we can be comfortable, as you go to FERC with this presentation?"

Mr. Niggli replied in the affirmative. He continued with an overview.

Mr. Niggli declared these groups were all participants in the marketplace, with we believe, a very close alliance for how it ought to look; i.e., streamlined and less costly. Mr. Niggli asserted there were concerns that utilities might have a vested interest and would pose problems for deregulation. He went on:

Mr. Niggli claimed the ISA working group is composed of people looking only at Nevada.

Senator Townsend referred to items concerning recoverable costs, as they would pertain to setting rates, noting recoverable costs are not well defined. Senator Townsend questioned whether or not clarification might be needed on this issue regarding contracts, costs.

Mr. Malquist alleged the issue was defining recoverable. Mr. Niggli asserted a process with integrity enabling all to acquire customer choice as quickly as possible, in a fair manner for all the stakeholders was necessary.

When queried by Senator Townsend, Mr. Steven W. Rigazio, Vice President Finance & Planning, Treasurer & Chief Financial Officer, Nevada Power Company, offered an opinion of the recent explanation on the QF contract as presented by Mr. Schmidt. Mr. Rigazio asserted Mr. Schmidt did, "a very thorough and accurate job describing the history of the QF contracts."

Chairman Townsend emphasized the importance of clarifying all issues and rules for those entities coming from out of state to link with this deregulation process

Senator O’Connell requested information stating, ". . . investigate the area of whether or not we should, if other states have, and their record, guarantee a customer base. . . ." She maintained it was her impression this would be a necessity. Mr. Niggli noted he would be glad to investigate this matter.

Referring to Exhibit D, Senator Townsend posed questions concerning the PUCN Compliance Filings, as it would pertain to the merger timeline.

Mr. Niggli indicated there were four items that would need to be considered for filing. He stated the divestiture plan, the unbundling rate case, the GAT tariff with FERC and the ISA filing with FERC. Mr. Malquist pointed out these four items were ordered as part of the PUCN merger order.

Mr. Niggli addressed concerns expressed by Senator Shaffer whether there might be items not yet covered. Mr. Niggli asserted the ISA/ISO was a very complex issue. He maintained:

Mr. Niggli asserted some of the biggest concerns are fair play in the marketplace. He claimed, of prime importance would be to allow those things that will allow the entry into the marketplace in an efficient manner and be a competitor.

Senator Townsend requested information on the sale of assets. Mr. Niggli replied that information should be available shortly. Mr. Niggli asserted, ". . . You are changing more certainty and control at the state level for freedom of choice at the marketplace." Mr. Niggli went on to note the marketplace does not always mean lower cost and could sometimes mean higher cost.

Senator O’Connell inquired regarding the role coal plants might play in the future. Mr. Malquist and Mr. Niggli concurred on their belief coal plants could still operate efficiently, as well as being a major asset.

Senator Townsend presented one more BDR for committee introduction.

RESPECTFULLY SUBMITTED:

Beverly Willis,

Committee Secretary

APPROVED BY:

Senator Randolph J. Townsend, Chairman

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