MINUTES OF THE
SENATE Committee on Commerce and Labor
Seventieth Session
March 17, 1999
The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 7:30 a.m. on Wednesday, March 17, 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
OTHERS PRESENT:
Kenneth Rose, Senior Institute Economist, The National Regulatory Research Institute – The Ohio State University
Robert Lane, Senior Policy Analyst, California Public Utilities Commission
John C. Hilke, Economist and Electricity Project Coordinator, Federal Trade Commission
Manoj Hastak, Independent Consultant, Associate Professor of Business, American University, Washington, D.C.
Chairman Townsend opened the meeting by presenting several bill draft requests (BDRs) for committee introduction.
BILL DRAFT REQUEST 54-1659: Revises provisions governing hotels, inns, motels and motor courts. (Later introduced as Senate Bill 461.)
Senator O’Connell disclosed she is the owner of a small hotel.
BILL DRAFT REQUEST 53-637: Expands definition of police officers who are eligible for workers’ compensation for occupational diseases. (Later introduced as Senate Bill 463.)
BILL DRAFT REQUEST 53-770: Restricts use of certain anticipated distributions from Federal Government. (Later introduced as Senate Bill 460.)
BILL DRAFT REQUEST 57-627: Authorizes department to lock and seal a business for failure to pay use tax debt.
BILL DRAFT REQUEST 53-769: Revises provisions in cases of delinquency in payment of employers’ assessments for unemployment compensation. (Later introduced as Senate Bill 464.)
BILL DRAFT REQUEST 55-1495: Makes various changes to provisions governing trust companies. (Later introduced as Senate Bill 465.)
SENATOR O’CONNELL MOVED FOR COMMITTEE INTRODUCTION OF BDR 54-1659, BDR 53-637, BDR 53-770, and BDR 57-627, 53-769, AND BDR 55-1495.
SENATOR SCHNEIDER SECONDED THE MOTION.
THE MOTION CARRIED. (SENATOR SHAFFER WAS ABSENT FOR THE VOTE.)
* * * * *
Senator Townsend stated today’s meeting would consist of a broad overview of issues pertaining to the deregulation of electricity. Senator Townsend introduced the first speaker, Kenneth Rose, Senior Institute Economist, The National Regulatory Research Institute – The Ohio State University. Mr. Rose explained sources of funding for his organization and noted his association with the Ohio Legislature. Mr. Rose gave an overview of the market power issue, and presented information on "Who Should Supply Non-Choosing Customers?" (Exhibit C). Proceeding with his comments, Mr. Rose gave an explanation of "market power," stating:
Market power exists when a supplier, or group of suppliers, are able to raise and maintain the price that is significantly above the competitive level. ‘Significantly,’ has to be an appreciable amount, it cannot be just a little bit.
Mr. Rose noted, in some cases it would not be worthwhile to require intervention from the federal government. He claimed in the electric market, it would be different, as the change will be from a monopoly and move toward a competitive market. Mr. Rose asserted it is critical the structure of this market is handled correctly, and will encourage competition to develop. He claimed competition needs to be developed so it will thrive over a period of time. Mr. Rose stated economists generally like competitive markets better than regulation. He explained reasoning behind intervention, noting things might go wrong with the market, or market failure. Mr. Rose continued:
Market power or monopoly power is a category of market failure that must be dealt with. If not dealt with, this can result in higher prices. The electric market states, including Nevada, have been doing various things in order to try to encourage the development of a competitive market. Codes-of-conduct rules, for example, are being developed. All the states, including Nevada, are working toward open-access distribution tariffs. The idea is to allow all suppliers to have their fair shot at the customers that are at the end of the line, so no discriminatory access is done by the owners, if the owners happen to own their own generation. If they could, they would like to favor their own generation and prevent other suppliers having fair access to those end-use customers.
The independent systems administrator, which is more of a transmission issue; in other states, the general term is Independent Systems Operator [ISO]; basically it is more at the wholesale level, to allow access to wholesale customers by other suppliers and prevent, again, discriminatory access. The Provider of Last Resort [PLR] is another example dealing with another kind of market power, or incumbent market power. Other mechanisms include divestiture. Some states have very aggressive divestiture, requiring the utilities to sell all of their generation.
Mr. Rose referred to unbundling as another tool to avoid discrimination as far as market power. He noted many issues in Nevada were similar to those in other states. Mr. Rose presented a slide program for the committee, in conjunction with Exhibit C. He referred in detail to Exhibit C, noting other states that have dealt with these various situations. He presented remarks on pages 2, 3, and page 4 of Exhibit C, in particular with a summarization of the process indicated therein. Senator O’Connell and Mr. Rose discussed reasoning behind the assignment of customers in a deregulated situation. Senator Townsend and Mr. Rose perused the difference between random assignment of customers, as opposed to an auction. Senator Amodei and Mr. Rose discussed options of residential customers, focusing on the subject of choosing a utility when the situation arises. Mr. Rose noted a number of the issues presented by Senator Amodei were covered in the "Public Utilities Fortnightly" (Exhibit D). He pointed out Exhibit D contained information on problems being addressed in Ohio. Senator Amodei and Mr. Rose conducted a detailed conversation on problems and possible solutions in Nevada and Ohio.
Mr. Rose summarized:
The states are trying to create an environment for retail competition to develop and thrive. This will occur if potential significant price distortions, from market power, are avoided. All customers and suppliers should be on an even footing; nobody should have any particular advantage from what is left over from the old monopoly days. I leave it to you; the auction is the way to solve that particular type of problem.
Senator Townsend introduced Robert Lane, Senior Policy Analyst, California Public Utilities Commission, with background on Mr. Lane’s experience. Mr. Lane presented "Retail Competition and Default Service" (Exhibit E). Referring to Exhibit E, Mr. Lane noted a standard disclaimer, "The views expressed here are my own and do not necessarily reflect the positions, opinions or views of the California Public Utilities Commission or any of the commissioners."
Referring to Exhibit E, Mr. Lane presented a summary of his expertise in his field and offered an overview of retail competition in California. He emphasized wholesale competition and retail competition, and stressed consumer-protection services. Mr. Lane claimed it was very important that reliability would not be affected by competition. He detailed pertinent information in Exhibit E, highlighting default service options. He concluded, of prime importance would be to focus on establishing a competitive retail marketplace.
John C. Hilke, Economist and Electricity Project Coordinator, Federal Trade Commission, offered a disclaimer, noting, "I am here expressing my own views that are not necessarily those of the Federal Trade Commission, or of any individual commissioner." Mr. Hilke presented "The Market Power of Incumbency" (Exhibit F). He accentuated two subjects; potential cross-subsidization and the use of the parent utility’s logo. Mr. Hilke then turned his attention to the item of potential deception. Mr. Hilke cited an example by pointing out page 5 of Exhibit F. He claimed the Federal Trade Commission has a direct interest in the area of consumer protection.
Senator Townsend introduced Manoj Hastak, Independent Consultant, Associate Professor of Business, American University, Washington, D.C., who enhanced his background and qualifications. He presented an energy company advertising study (Exhibit G), noting he would address concerns pertaining to potential consumer confusion between an affiliate and a parent electric company. Mr. Hastak addressed items noted on page 2 of Exhibit G, covering questions asked in conjunction with this study. He explained what sort of questions were asked and to what age groups. Mr. Hastek pointed out differences in the various presentations as shown in Exhibit G, noting the different combinations from which the respondents were given to choose. Once again, referring to Exhibit G, Mr. Hastek reviewed conclusions from this survey.
Senator Shaffer, Senator O’Connell and Mr. Hastek reviewed the familiarity factor of a logo along with a familiar name. Senator O’Connell inquired what the cost of this study had been. Mr. Hastek replied with everything included, he thought the total was about $15,000. Senator Carlton and Mr. Hastek discussed the method of qualification for those questioned in this survey; i.e., age group, and familiarity with electric company. Senator Carlton claimed she had a problem with the age groups picked for this survey. Senator Amodei questioned Mr. Hastek concerning who had requested this survey and whether or not the price of energy was more important than the name of the provider. Mr. Hastek stated the Public Utility Commission of Nevada (PUCN) had requested the survey and noted his information did not include any reference to the cost of energy.
Senator Townsend requested information from Mr. Lane on deregulation in California. He continued:
. . . you had three areas with which you had to deal. One, was give consumers choice; two, was addressing the stranded costs issue, and three, was rates. According to our understanding, you rolled rates back approximately 10 percent per residential customers and froze them for 5 years.
Mr. Lane replied in the affirmative. Senator Townsend went on, "You gave utilities 100 percent of the cost recovery and it had to be gathered over a certain period of time. At the end of that time, perhaps it is that 5-year time, they do not get a dime after that?"
Mr. Lane stated, "We gave them an opportunity to recover, up to 100 percent." Claiming this had to be accomplished without raising rates, Mr. Lane indicated the only way this could be completed would be:
. . . as rates go down to where we were still using traditional cost- of-service regulation, we allowed the utilities to keep the difference, between what their current would have been and what the frozen rate is. The term we use is ‘head room.’ This is the difference between what the rate would have been had we kept the traditional regulation and this frozen rate. One of our utilities is going to recover that early. They are the ones with the fewest assets; hence the lowest stranded costs. All of our utilities have divested themselves of all of their fossil-fuel plants.
Mr. Lane noted these fossil-fuel plants were sold at a very nice profit, thus enabling the utilities to offset the stranded costs.
Senator Townsend inquired:
Is it fair to say the three issues you dealt with and tried to address the concerns, were a residential rate; frozen rate, with a rollback with an opportunity to exit, if you so choose. The second thing was the utilities had an opportunity to recover their stranded costs, over a fixed period and after that date they were on their own. The third thing is the large users were able to leave.
Mr. Lane concurred with Senator Townsend. Senator Townsend claimed frozen rates were different from capped rates. Senator Townsend asserted the PUCN had negotiated some capped rates for certain periods of time. He noted he did believe in capped rates, as it was his belief the customer would benefit. Mr. Lane and Mr. Rose discussed market power issues pertaining to California. Mr. Lane touched on deregulation in other areas versus the program in California. Mr. Hilke joined the discussion noting Nevada should be able to benefit with its deregulation by noting mistakes made in other places. Senator Townsend observed one problem would be to define a stranded cost and discovering the means to recover these stranded costs. Mr. Lane commented that California had defined stranded assets as, "The difference between the cost that is recorded in the utility books; the book value of the asset and a market value for that asset." As this is a very complex issue, he declared, each state should be allowed to deal with this issue.
Senator Townsend and Mr. Lane perused the issue of divestiture with Mr. Lane noting, in California, this operation was under control and almost completed. The discussion then touched on the importance of name value in an instance when a completed divestiture has been initiated. Mr. Hastek noted the name/logo value in this instance would be moot. Senator Townsend then posed questions concerning the market value of a name/logo. Mr. Hastek, Senator Townsend, and Mr. Hilke examined the value of a name/logo, with all agreeing that familiarity was of prime importance.
Senator Amodei posed questions regarding the name-recognition possibilities presented if an unrelated business should decide to enter the electrical market; i.e., a bank, a gas company. Mr. Hilke indicated those unrelated businesses might need to reinvent themselves. Senator Amodei, Mr. Hastek, Mr. Lane and Mr. Hilke continued their discussion concerning the value of a familiar name/logo and possible solutions to assessing the market value.
Senator Townsend thanked the gentlemen for their knowledge and help.
As there was no further business, the meeting was adjourned at 10:25 a.m.
RESPECTFULLY SUBMITTED:
Beverly Willis,
Committee Secretary
APPROVED BY:
Senator Randolph J. Townsend, Chairman
DATE: