The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 7:10 a.m., on Tuesday, April 6, 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

Kathryn Lawrence, Committee Secretary

OTHERS PRESENT:

Chairman Townsend opened the work session on Senate Bill (S.B.) 438. He noted the handout titled, "Proposed Amendment in Skeleton Form Draft Version Only" dated April 6, 1999 (Exhibit C).

Chris King, Lobbyist, Chief Executive Officer, Utility.com and CellNet Data Systems Inc., remarked Utility.com is an energy service provider in California registered to provide service to small commercial and residential customers. He said the other company he represents, CellNet Data Systems Inc., is a metering service provider operating throughout the United States and serving approximately 2 million large, small, and medium commercial and residential customers. Mr. King stated there are a number of companies interested in coming to Nevada and filing applications for licenses to become alternative sellers. He advised those companies, such as his two, are interested in serving the small commercial and residential markets in the competitive electric market. Mr. King expressed his support for the process taking place in Nevada, given the direction of the amendments contained in Exhibit C. He commended Nevada for the law it has put together for deregulation of the electric industry and extending the benefits of competition to consumers.

Chairman Townsend advised that the April 6, 1999 proposed amendment (Exhibit C) purports to clean up the March 29, 1999 draft amendment (Exhibit D. Original is on file in the Research Library.). He reviewed Exhibit C, noting the proposed changes. Chairman Townsend first mentioned that March 1, 2000 is the date certain. He stated there would be no auction before March 1, 2001. Continuing Chairman Townsend remarked deferred energy will be repealed October 1, 1999. He said he was uncertain of the applicable section numbers, but there is a statutory requirement for tax mitigation regarding the sale of any asset and a procedure for handling the sale. Finally, Chairman Townsend stated the amendment changes the administrative law judge (ALJ) language, that was in the original amendment, to be permissive. He also mentioned that what is not in the April 6, 1999 amendment (Exhibit C) is in essence in Assembly Bill (A.B.) 366 of the Sixty-ninth Session, which means the Public Utilities Commission of Nevada (PUCN) will continue with its dockets. Chairman Townsend advised the compliance filing is in, and there will be revenue-requirement issues with which to be dealt. Additionally, he remarked they would go forward in looking at a capped rate for residential customers over the next 2 to 3 years, and ensuring the rules that apply to licensing remain in place.

Judy M. Sheldrew, Chairman, Public Utilities Commission of Nevada, remarked Commissioner Michael Pitlock was with her. She said they had had a chance to briefly review Exhibit C and would offer their individual opinions regarding the proposed changes. Ms. Sheldrew advised that section 3, on hiring of administrative law judges, in that it is permissive, probably addresses what could have been a fiscal note issue if it were mandatory. She noted they do not currently use administrative law judges, contrary to the practice of utilities’ commissions in many other states. Ms. Sheldrew asserted the permissive language would allow the PUCN, when in an overload situation, to utilize administrative law judges to expedite processing of the more routine litigated cases. She remarked she personally prefers to participate in the hearings, but conceded this would be helpful in managing the increasing workload during the utility restructuring.

Michael A. Pitlock, Commissioner, Public Utilities Commission of Nevada, noted he has taken to heart the discussion last week regarding the sections that were deleted relative to the staff of the PUCN. He stated, as a commissioner, he intends to make it clear to his staff what their appropriate role should be. Further, in Mr. Pitlock’s opinion, the statutes already provide significant guidance to the PUCN as to what the PUCN’s role should be, and that guidance should be passed down from the PUCN to the staff to ensure they carry out the appropriate role.

Harvey Whittemore, Lobbyist, Nevada Resort Association, recommended, with respect to section 4, subsection 2, the following proposed additional language, "The cost of administrative hearings shall not be assessed against intervenors." He explained that would make it clear the existing practice of not subjecting intervenors to the cost of administrative law judge hearings would be continued.

Frederick Schmidt, Chief Deputy Attorney General, Consumer’s Advocate, Office of Advocate for Customers of Public Utilities, Office of the Attorney General, testified he is comfortable with sections 3 and 4 of Exhibit C. However, he stated he has the same concern as that of Mr. Whittemore. Mr. Schmidt referred to Nevada Revised Statutes (NRS) 703.330, on page 3 of Exhibit C, and remarked there is an existing statute that contains the sentence, "Costs of recording and transcribing testimony at a hearing must be paid by the applicant." Therefore, he noted if the proposed language in section 4, subsection 2 of Exhibit C is adopted, it would create a conflict in the statute regarding the ability of an ALJ to apportion costs. In Mr. Schmidt’s opinion, section 4, subsection 2 is unnecessary. Ms. Sheldrew concurred.

Mr. Whittemore advised, with respect to the section 4, subsection 2 language, the intent was to clarify that the apportionment issue was going to be left to the ALJ, but it would be imposed against the major participants in those hearings. He stated he does not have a problem with removing subsection 2, because then the existing law, with respect to apportionment, would be satisfactory.

Ms. Sheldrew remarked the next sections appear to simply insert provisions for the ALJ to have the same authorities as those of a commissioner. She said the next substantial section of Exhibit C, section 25, clarifies and codifies the PUCN’s current authority, which is to review and approve the procedures for divestiture, if any divestiture takes place after December 1, 1998. Chairman Townsend inquired what the PUCN would consider, besides a market power mitigation plan, when it reviews a divested situation. Ms. Sheldrew gave an example from a recent merger. She remarked the PUCN requested a divestiture plan be presented to the PUCN so it could be assured the divestiture of the generation bundles, for example, did not in and of itself, create additional market power problems. Additionally, Ms. Sheldrew advised they asked for a filing of the retail aggregation tariff before the PUCN so they could see that the pricing for that divested generation was such that it would encourage development of effective competition. Further, she mentioned the PUCN requested a filing from the parties on the independent scheduling administrator they had given the parties’ principals by whom the PUCN is of the opinion the independent system administrator should be developed. Ms. Sheldrew asserted, in her opinion, all of the things mentioned are well within the PUCN’s authority, particularly the divestiture of generation.

Mr. Schmidt added that it was not disputed among any of the parties in the merger case that were the power companies to sell their power plants in one lump sum, there would be a tremendous increase in rates to the market power opportunity provided to the transferred new owner. Therefore, the companies proposed dividing all their units into seven different bundles. Mr. Schmidt remarked the PUCN had an expert perform a market power analysis of that division and found it could still cause some pressure on the rates in the range of 10 percent, but beyond that there would not be a market power problem. He pointed out that is the type of analysis that needs to be done. Mr. Schmidt stated it has probably already been done, at this point, for the bundles. However, the PUCN needs clear authority to deny selling of the power plants the PUCN initially permitted and built for the citizens of Nevada if they are going to be sold in something less than the seven bundles. He asserted section 25 makes that policy clear, and it is beneficial to the ratepayers. Mr. Schmidt commented he hoped it is not an authority that would be used to micromanage power plant sales. He advised that the PUCN has taken the position that once the bundles have been determined, there is quite a bit of flexibility for the company to determine the timing and approach to use in the market to sell the units.

Mr. Schmidt further testified there is a double-edged sword. He explained although the company may have an interest in maximizing the sale price for a unit it plans to sell, and the PUCN may have a residual benefit if it offsets any other "stranded costs," the double-edged sword is that the more the plants are sold for, the higher the rates the new investor will have to charge to recover that investment cost. Therefore, Mr. Schmidt surmised it is not immediately obvious there should be unfettered discretion to sell the plants at the maximum price. Continuing, he stated if the Legislature does not ensure the PUCN exercises its authority to ensure price maximization is not the only factor considered, there would be tremendous pressure on the price of electricity in Nevada to escalate. Chairman Townsend disagreed, stating investors of that magnitude would buy at the level at which they could turn around and sell the commodity at a profitable price.

Ms. Sheldrew indicated this has been an ongoing debate, because the companies have wanted to maximize the sale value, and the state has an interest in maximizing the sale value. She pointed out, secondarily, after the units are divested, the state will lose jurisdiction over the price at which generation from those divested units will be allowed. Ms. Sheldrew continued, saying if a sale of a bundle creates another market power problem, a potential purchaser may pay a lot of money for that in the belief they could extract some monopoly rents from a market-power-constrained market. She maintained that is a situation the committee needs to consider because the state will not have control over the prices charged by the new investors, and if they overcharge to cover their investment, the PUCN will have to fight to protect the ratepayers in Nevada. Ms. Sheldrew remarked the ideal would be to reach a balance between sale price and some assurance a new market power problem is not being created. She noted the PUCN has clear legislative authority to review the transfer of any assets at the end of the sale. According to Ms. Sheldrew, the reason they wanted to look at it prospectively was to give certainty to the buyers of the divested generation of what the terms and conditions would be under which they would be able to sell into the retail market within Nevada.

Mr. Pitlock stated Ms. Sheldrew made a point of ensuring the review and approval occurred prior to implementation of the procedures for divestiture. He suggested it would be helpful for that language to actually be put into section 25 of Exhibit C. Mr. Pitlock recommended removing the period after the word "commission," and adding, "prior to the implementation of such procedures." He maintained that would make it clear to all the parties that this is before review and approval.

Douglas R. Ponn, Lobbyist, Vice President, Governmental & Regulatory Affairs, Sierra Pacific Power Company, stated with him was Steven Rigazio of Nevada Power Company, Sierra Pacific Power Company’s (SPPC) partner in the current merger. Mr. Ponn commented, in his reading of section 25 of Exhibit C, it appears the committee was attempting to add some level of jurisdiction the commission may not have had before the merger was filed and subsequently disposed of and approved with conditions by the PUCN. He said he assumed the word "occurs" on or after December 1, 1998, meant consummation of the merger. Mr. Ponn indicated if that is the case, he agrees with the chairman that they do have ongoing disputes regarding the level of approval and jurisdiction the PUCN has over the divestiture process. He remarked it is SPPC’s position that a lot of that jurisdiction belongs to the Federal Energy Regulatory Commission (FERC). Mr. Ponn further stated when they filed the merger application, there was not an attempt on SPPC’s part to totally maximize the value resulting from the sale of the plants. He maintained they tried to balance, in the application, the value that would be derived from the sale of those plants with market power concerns. He asserted that is why SPPC’s application tried to create the bundling process rather than sell the plants in one lump to a particular buyer which may have brought a higher value for those plants.

Continuing, Mr. Ponn commented as SPPC proceeded through the merger process and the restructuring process at the PUCN there did develop a disagreement about the jurisdiction between FERC and Nevada. He told of filing a generation aggregation tariff at FERC specifying the price buyers of that plant output would pay. Mr. Ponn expressed his opinion that adding the language of section 25 of Exhibit C now might create, in an ex post facto fashion, a level of review and approval that was not there when SPPC filed and received an order from the PUCN on its merger procedure. He remarked they have worked extensively through the hearing process on the merger, restructuring, and consensus-building attempts with the parties to resolve the two issues of the generation aggregation tariff and the independent system administrator. It is Mr. Ponn’s opinion the jurisdiction disagreements can be resolved within the current statutory framework without adding the language of section 25.

Steven Rigazio, Lobbyist, Vice President, Finance and Planning, Treasurer and Chief Financial Officer, Nevada Power Company (NPC), concurred with Mr. Ponn’s statements. He noted that Mr. Ponn’s point about maximization of value was accurate in that if the plants had been sold in one lump, the value could have been maximized, so it was a balance.

Chairman Townsend remarked, in his opinion, once the market power issue was mitigated, then the power companies should maximize the sale. He pointed out if the front end is making sure the bundles are correct, he wanted to clarify the new merger will sell below market value once they have established what the market power constraints are.

Ms. Sheldrew remarked that is the point; the merger partners have not shown the PUCN the market power analysis that says these bundles are indeed mitigating market power. She said there was particular concern about that, but unfortunately, in the merger proceeding, the applicants did not show the PUCN their plan. Ms. Sheldrew asserted that is what the PUCN asked for in a compliance order attached to the merger itself, but have yet to receive that plan. She stated without the information, it is impossible for the PUCN to assure they have mitigated market value and then tried to maximize power.

Mr. Whittemore testified that section 25 of Exhibit C was in the original draft version simply in response to a position taken by the utilities with respect to filings at FERC. He emphasized section 25 is only in response to the jurisdictional issue which was raised as a result of filings. Mr. Whittemore advised from his client’s perspective, there must be a provision making it clear the commission has jurisdiction over this procedure in advance of the divestiture. He said he is in agreement with the utilities that they do not want the ultimate process micromanaged. Therefore, he concluded section 25 is a codification of existing law, designed to resolve a problem resulting from an adverse position taken by the utilities at FERC.

Senator Amodei requested an explanation of the divestiture procedures mentioned in section 25 of Exhibit C. Ms. Sheldrew answered the applicants have proposed a two-part bidding process wherein offering statements are sent to prospective buyers. Responses are received, and negotiations take place. She advised what the commission wished to do was, first of all, determine whether the market bundles being offered were sufficiently broken up to ensure no one buyer could exert market power that was a monopoly in any particular area. Ms. Sheldrew further explained the PUCN was not necessarily disagreeing with the bundles presented in the merger, but has had no opportunity to analyze that. Furthermore the PUCN would like to see things such as the offering statement, the terms and conditions, and what the utilities are telling the potential buyers about the market into which they are buying. Additionally, Ms. Sheldrew stated there are a couple of other issues, one of which is the generation aggregation tariff. She said that is the price at which that divested generation would be resold into the marketplace. Ms. Sheldrew mentioned there are two different proposals, one of which the commission has suggested in the merger order is their preferred method by which that pricing take place. Continuing, she stated the utilities have filed something entirely different at FERC. Ms. Sheldrew commented those types of arguments PUCN had hoped via this submission could be resolved so PUCN could go forward in a consensus manner and resolve them very quickly through the FERC process.

Senator Amodei requested clarification that part of what the PUCN would look at to ensure the bundles were the correct size, would be the price at which the purchaser would sell electricity. Ms. Sheldrew answered negatively and said what the PUCN wants to review are the terms and conditions under which the divested generating unit would have to operate within the State of Nevada. Senator Amodei inquired whether that would involve price. Ms. Sheldrew replied she was talking about reviewing conditions before the purchaser addressed price. She stated the price would be determined after the purchaser had knowledge about factors that affect price, such as no price constraints, for example. Ms. Sheldrew asserted what is unfair is for somebody to pay quite a bit of money thinking the terms and conditions of their operation within the state are going to be one thing, and then when they get to the actual transfer, the PUCN putting restrictions on them. She maintained they merely want to know the terms up front in order to be a partner to the deal. Senator Amodei suggested perhaps procedures could be specified so that everyone would be clear about what is necessary. Ms. Sheldrew offered to submit more precise language to the committee to replace the word "procedures."

Mr. Whittemore remarked Senator Amodei’s comment addresses the fact the procedures outlined in section 25 of Exhibit C could be delineated with greater specificity. For example, he stated phrases could be added such as "terms, conditions, procedures" for the divestiture and get to the point suggested by Senator Amodei, while limiting inherently inappropriate controls over the exercise of business judgment by the utilities. Mr. Whittemore offered to draft additional language with respect to that issue. Ms. Sheldrew remarked there were examples as to what the divestiture plan should encompass in the merger order.

Mr. Ponn stated, again, there is a disagreement between the utilities, the chairman of the PUCN, and the PUCN regarding jurisdiction. He raised one additional point, that the applicants, while seeking merger approval, had to get approval not only in Nevada and California, at the state level, but also at the FERC. Mr. Ponn remarked in SPPC’s judgment, they tried to make filings in the best interest of the State of Nevada and that would have a good chance of being approved at the FERC. He added some of the disputes have arisen out of the parties’ decision as to what the FERC would want to see by way of the divestiture. In Mr. Ponn’s opinion, the avenues for resolution are open at this point without additional legislation to change the rules after the fact.

Ms. Sheldrew next addressed section 27 of Exhibit C. She said it appears to eliminate deferred energy proceedings wherein the utility applies to recover its fuel or purchase power costs outside of the general rate case. Ms. Sheldrew noted this provision was enacted when fuel costs were rising rapidly during the last "energy crisis." She stated SPPC has not used deferred energy since it entered into a stipulation in 1997, so this currently applies to NPC only. Ms. Sheldrew indicated the question is whether or not deferred energy is still appropriate in a competitive world. It essentially gives all of the risk to ratepayers and none of the risk to the utility for appropriately managing its fuel and purchase power costs. Mr. Rigazio remarked any legitimate business in a competitive world should have the ability to recover its legitimately incurred costs. He advised that the energy prices are probably more volatile than they have ever been, both up and down. Mr. Rigazio disagreed with Ms. Sheldrew’s statement that all the risks are to ratepayers. He said NPC has prudent reviews in every deferred fuel case, and in every general rate case, a prudency review is performed to ensure the company has taken prudent measures in acquiring its power.

Mr. Schmidt commented, as he understands the revised bill, there is no 5-year rate freeze. Therefore, the flexibility that Mr. Rigazio has requested was put into law in A.B. 366 of the Sixty-ninth Session. Mr. Schmidt stated it is in the statutes currently, and has a specific provision to reduce rates for a company that is exposed to undue market pressure on purchase power prices, if subjected to fluctuations over a period of time the company cannot control. He continued, saying this section does not, however, allow an automatic dollar-for-dollar recovery with interest of all purchase power costs. Mr. Schmidt advised that is what Mr. Rigazio would obtain if that section of the law were not repealed when the utilities go forward with competition. That would create an unlevel playing field, in Mr. Schmidt’s opinion, and would defeat the concept of competition the Legislature is attempting to develop. Mr. Ponn stated, in his opinion, a problem might arise when and if the present electric utility becomes the provider of last resort (PLR) for a number of customers without any mechanism for fuel protection. He said that is the downside risk that is of concern to the utilities. Chairman Townsend suggested they continue going through the draft amendment and return to this topic, because it speaks to the rate issue.

Ms. Sheldrew remarked the major change in section 33 of Exhibit C is that it establishes a new date for potentially competitive services of March 1, 2000, yet still preserves the commission’s flexibility to determine a different date, if necessary. She asserted the PUCN could meet the March 1, 2000 date if they go before FERC with a good deal of consensus and cooperation, speaking with one voice from the State of Nevada, as opposed to different voices. Mr. Whittemore agreed that March 1, 2000, is a good compromise date. Mr. Rigazio commented his company had proposed, in some of its filings, a phased-in approach, but does not want to delay this date, particularly for large customers. He said NPC would meet whatever date is provided in the bill.

Chairman Townsend mentioned section 38 of Exhibit C has something in it that should be italicized, the last sentence of subsection 2, "Such method may not be implemented before March 1, 2001." He clarified that is promoting the public interest of putting residential customers out to bid. Ms. Sheldrew confirmed that was correct. She further explained the addition here is to indicate the Legislature prefers the PUCN not do the option process until a year has elapsed, assuming competition starts on March 1, 2000. Ms. Sheldrew stated then the PLR function would be assigned to the affiliate of the electric distribution utilities of that interim period. She also mentioned a proposal whereby the PUCN would ballot the non-choosing customers to choose between transitional service and universal service. Ms. Sheldrew explained the universal service is what will be provided by the affiliate of the existing utility. The transitional service would be the 2-year PLR to provide by an option, if any.

Mr. Ponn remarked he sees section 38 as delaying the situation but not necessarily addressing concerns that some people have about being able to choose their own provider. Chairman Townsend expressed his hope that all of the options that are attempting to meet concerns would be brought to the commission so the committee may have a dialog next session. Mr. Schmidt advised he has never operated under the presumption that when going into a competitive marketplace, the incumbent utility that the customers never had a choice of selecting in the first place is one to whom they would automatically prefer to be defaulted. In his opinion, what makes sense about this section, first of all, is that it is tied to the date that competition begins. In Mr. Schmidt’s opinion, it is not essential to go forward in a competitive marketplace to have an auction. Secondly, Mr. Schmidt pointed out the date has been pushed into the next legislative session. Therefore, if the commission does not get feedback and more broad-based support for any type of concept on whether one is necessary and how it would be implemented, there is an opportunity for the Legislature to step in early in the next session and specify it does not want an auction. Therefore, Mr. Schmidt supports this section and in his opinion, the law passed in A.B. 366 of the Sixty-ninth Session, which made clear there might be needs for mechanisms to go forward in the competitive market, should be repealed.

Ms. Sheldrew reiterated in hearing the committee’s concerns about so-called "slamming," the PUCN has put into regulation that before going to an auction, the PUCN will attempt to poll the non-choosing customers and find out whether they want transitional or universal service. Those wanting transitional service would comprise the pool for the auction. She asserted they would only be auctioned off if they chose that option. Ms. Sheldrew stated they would also notify non-choosing customers that if they did not respond, it would be assumed from those that did respond the answers would be roughly in the same proportion and they would be assigned accordingly. She asked the committee to remember an auction is not a foregone conclusion; the PUCN does not know whether they will find a company that is interested. If not, the PLR, as the affiliate of the existing electric distribution utility, would continue.

Senator Amodei proposed, in section 38, subsection 1, putting brackets around "or who fail to select an alternative seller." Additionally, he proposed bracketing "the direct assignment," in subsection 2 of section 38. Senator Amodei explained the reason for bracketing that information is because during the Sixty-ninth Legislative Session, as a member of the Assembly Committee on Commerce and Labor, he observed they did not discuss, nor did he vote for, assigning customers. He stated his right to choose who he wants to provide his electric service does not belong to the commission, to this committee, or to the Legislature. Senator Amodei informed the committee he would offer his proposed bracketing amendments before voting on S.B. 438.

Mr. Whittemore remarked, in his opinion, the issue with respect to assignment and/or retaining the ability of the incumbent utility to continue to provide service during a transition phase was well presented in the prior version of these amendments. He stated there was significant debate over when and if an auction should ever take place. From Mr. Whittemore’s perspective, in light of the discussions with the consumer advocate attempting to retain choice for the smaller businesses and residents, they still need to achieve some balance in this process. He suggested if there is additional language other than saying, "Such method may not be implemented before March 1, 2001," leaving open the additional question, he would be happy to listen to any relevant proposal.

Ms. Sheldrew expressed uncertainty as to what would be accomplished by the brackets suggested by Senator Amodei. She explained when they go forward into a competitive marketplace, they will not know whether people that did not choose did not choose because they were not approached, or they wished to stay where they were. Practically and structurally speaking, Ms. Sheldrew stated the problem is that existing customers cannot stay where they are today because the vertically integrated electric utility will no longer exist. Chairman Townsend commented the commission made a compelling argument 2 years ago about jump-starting competition at the residential level. He said it is the opinion of commissioners there should be a way to get competitors into the market.

Samuel P. McMullen, Lobbyist, Las Vegas Chamber of Commerce, indicated he had questions to determine what the parameters of Senator Amodei’s amendment would be. He stated the chamber represents 5,800 businesses, 85 percent of which are small businesses with 25 or fewer employees. Mr. McMullen asked if Senator Amodei’s amendment in any way restricts a survey mechanism described by Ms. Sheldrew wherein people could indicate an interest in advance of an auction. Senator Amodei replied his amendment would be intended to prohibit customers who do not respond from being reassigned to a provider with whom they have not been prior to this action. He suggested if somebody wants to participate in an auction, they should be allowed to participate. However, if they do not return the card inviting them to participate in the auction, they should not be assigned to a different provider. Mr. McMullen remarked if the chamber can provide an opportunity for competition, which is the chamber’s goal, then it is just a question of the mechanism to ensure it is fair, balanced, and provides competitive opportunities.

Senator O’Connell agreed with Senator Amodei on this issue. She said she would rather not have anything in statute, and if next session the committee determines there needs to be such language, that would be the time to implement it and make it effective immediately. Senator O’Connell further stated it is incumbent upon the people interested in this issue to educate and bring the public aboard.

Ms. Sheldrew stated the process this envisions does exactly what Senator Amodei and Senator O’Connell are concerned about. She remarked it says now, if a person has not chosen, for whatever reason, an electric provider, the person will be assigned to the affiliate of the electric distribution utility, the existing companies as they exist, for 1 year. Then Ms. Sheldrew reported, the PUCN will send out a postcard, asking the non-choosers if they would be interested in the transitional service, which would be the option service, or if they wished to keep the universal service. Unfortunately, as Ms. Sheldrew pointed out, they will not get a 100 percent response, and for the non-choosers assumptions will have to be made that their response would be similar to the responses they do receive. She stated the non-choosers would be notified of that. Ms. Sheldrew reiterated her opinion that this process takes into consideration exactly the concerns expressed.

Mr. Pitlock stated, along with what Senator O’Connell was talking about, if the language is left in, the committee would have the benefit of that additional information in 2 years. In his opinion that information will be helpful in guiding the Legislature to the next step. Senator O’Connell remarked she did not know why that information could not be obtained without being in the law. Ms. Sheldrew answered there would be no point in balloting to see if individuals want a competitive PLR if the Legislature does not put the balloting opportunity into statute. Mr. Pitlock stated the statutory basis for the regulations that establish the balloting is the language the committee is proposing to eliminate. He said, in his opinion, all this language does is allow the PUCN to go forward with the regulations and gather information critical to deciding the next step. Mr. Pitlock continued, saying it would indicate to the PUCN whether or not an option is viable.

Senator Amodei pointed out his proposed change does not prohibit an auction, it just restricts the auction to people who affirmatively indicate they want to be part of the auction. Mr. Whittemore remarked this is more a question of language choice rather than concept. Chairman Townsend stated he was not concerned about language at this point, but hoped everyone was together on concept. He addressed Mr. McMullen, who represents small business owners, a group unique from large businesses or residential customers. Chairman Townsend inquired whether Mr. McMullen was of the opinion his customers could leave in March 1, 2000, along with large customers. Mr. McMullen replied, in his reading of the amendment, it was his understanding that nobody is restricted from leaving by choice, the day competition begins, if there is an available provider.

Chairman Townsend asked whether everyone agreed that on March 1, 2000, whether a large user, small business commercial, light industrial, or residential customer, under this proposal, if there is an alternative seller, licensed in this state, they could leave their current energy supplier and choose the alternative seller. Mr. Schmidt, Mr. McMullen, Mr. Whittemore, Ms. Sheldrew, Mr. Pitlock, Mr. Ponn, Mr. Rigazio, Joyce A. Newman, Lobbyist, Utility Shareholders Association of Nevada, and Terry K. Graves, Lobbyist, Nevada Independent Energy Coalition, all agreed with Chairman Townsend’s statement. Ms. Sheldrew pointed out that if a non-choosing customer receives a postcard, does not respond, and is assigned to someone, that customer may also leave. She emphasized there is always an opportunity to exit; that is how the competitive marketplace works.

Chairman Townsend assured the committee the only thing new in this amendment (Exhibit C) is the March 1, 2001 date. The only reason that date was chosen, according to Chairman Townsend, is that it is 12 months after the effective date of competition. He remarked if the committee wishes to move it to July 1, 2001, that could be done and they could still debate what to do with non-choosing customers.

Mr. Pitlock referred to the additional information he mentioned earlier that would be available once the balloting is completed. He maintained that additional information could dramatically change the interested parties’ view of this issue. For example, Mr. Pitlock said if they get a response of only 10 percent, and 90 percent of the customers are in the "no-choose" category, that may point interested parties in one direction. On the other hand, if a 75 percent response is received with only 25 percent of customers in the "no-choose" category, that may move the interested parties in another direction. Mr. Pitlock suggested if the committee goes forward with the language as it is currently, keeps the regulations in place, and goes through the balloting process, that critical information would be available in time to make a decision before anything happens to anybody who did not make that choice.

Chairman Townsend requested Mr. Whittemore’s and Mr. McMullen’s opinions of moving the March 1, 2001 date to July 1, 2001. Mr. Whittemore answered, in his opinion, the July 1, 2001 date would allow enough time to see if the process was working, and if not, to correct it. He also offered to work on language after receiving input from the PUCN chairman and other interested parties. Mr. McMullen also offered to work on language that would address this issue.

Chairman Townsend remarked the only remaining section to discuss in Exhibit C was section 39, subsection 3, which reads, "The commission shall require the utility to minimize the income tax consequences associated with the divestiture of any assets or obligations associated with potentially competitive services." Ms. Sheldrew confirmed that was the last substantive change, and it simply adds another category and directive when looking at stranded costs. She indicated that on the preceding page, section 39, subsection 1, paragraph (e), already gives a general category relative to tax considerations for assets and obligations. Ms. Sheldrew advised the next day, April 7, 1999, the PUCN would be discussing another rewrite of its proposed recoverable-costs regulation which would include language similar to this section.

Mr. Ponn remarked SPPC agrees in concept with the language in section 39, subsection 3, but has concerns regarding the way it is drafted. He pointed out, taken literally, the language would require SPPC to sell assets at a loss in order to minimize the tax consequences. He suggested alternative language is necessary to indicate the utility would minimize taxes within the parameters of reality. Mr. Ponn recommended saying, "require the utility to give consideration to the income tax consequences." Mr. Whittemore suggested perhaps the committee should revisit the reason for this provision. He advised it is because the generation proceeds would be sold during a particular tax period. Chairman Townsend remarked the provision replaces the language in the previous amendment about which many people had concern. He stated the previous provision said the utility could take the money it was making money on and the money it was losing money on and offset them. Chairman Townsend acknowledged Mr. Ponn’s concern.

Chairman Townsend returned to the beginning of Exhibit C, section 4 regarding ALJs in subsection 2. He clarified the committee agreed to delete the ALJ and is of the opinion the commission has authority to apportion costs of administrative hearings. Senator O’Connell inquired whether there was a reason for rejecting Ray Bacon’s suggestion of the judge being hired by the Governor. Ms. Sheldrew remarked she did not know why that would be a good suggestion. She explained the commission has 88 positions that all respond to the commission, which is appointed by the Governor. Ms. Sheldrew pointed out the way this provision is written the ALJs would simply be employees of the commission as are the other unclassified positions the Governor does not appoint. She said she was unsure of what the justification would be to have a two-layer gubernatorial appointment. Senator O’Connell called upon Mr. Bacon to clarify his suggestion.

Ray E. Bacon, Lobbyist, Nevada Manufacturers Association, explained in his understanding of the way the provision is written, the ALJ has similar powers to the commissioner. He stated it would be a simple way to ensure the level of permission was vested in the Governor. Mr. Whittemore advised there were substantive changes to the authorities in these provisions. He reiterated the ALJ would merely provide procedural assistance. Mr. Whittemore continued the ultimate authority would still be with the commission, and therefore, there was no sense there would be a need for the Governor to appoint the ALJ. Senator O’Connell noted when she heard the suggestion; she thought more of it as being an independent voice in the proceeding as compared to somebody who was working for the commission.

Ms. Sheldrew explained the way she reads this provision; the commission may hire, but does not necessarily have to have a position. She advised they might contract for the ALJ, to provide the procedural decision. The ultimate decision-making authority still rests with the commissioners, which are appointed by the Governor. Ms. Sheldrew continued, saying making it permissive removes a fiscal note problem, because otherwise at least one ALJ would have to be added to the commission’s budget. Senator Amodei expressed his opinion that for the appearance of objectivity, even though the commission would ultimately rule on the decisions, hiring an ALJ may be a good idea. Additionally, with the Governor’s heightened concern about the budget, it may be beneficial to have the Governor make the budgetary decision. Chairman Townsend pointed out the first proposal was to create an independent appointment, and there was no intention of adding anything to the budget. He said the commission was going to replace an existing employee with an ALJ appointed by the Governor, but due to the commission’s concern, the proposal was changed to this approach.

Chairman Townsend next addressed section 25 of Exhibit C. He mentioned Mr. Pitlock’s suggestion to add language to the effect, "all of this must happen prior to the sale or divestiture," so the review is before the fact. Mr. Pitlock affirmed that was correct. Chairman Townsend also mentioned concern of Mr. Ponn and Mr. Rigazio that the proposed additional language was not necessary. Mr. Ponn stated the summary of Mr. Rigazio’s and his testimony was that they filed under existing law, had an order, and there were some disputes about that; but they would resolve those in their minds under the existing law in the proper form. Senator Amodei recalled there was no objection to defining more specifically what procedures are in section 25. Ms. Sheldrew offered to provide clarifying language for that section.

The next section addressed by Chairman Townsend was deletion of subsection 5 of section 27, which removes deferred energy. He stated, additionally, section 49 triggers that occurring on October 1, 1999, so there can be one final case, and he noted the repealed section is on page 21 of Exhibit C. Chairman Townsend requested Mr. Ponn address these final changes. Mr. Ponn stated SPPC’s bottom-line concern with this language and elimination of the deferred-energy mechanism is that when looking at the interplay between section 45 of A.B. 366 of the Sixty-ninth Session and repeal of the deferred-energy statute, there is a potential to put the utilities in a position of PLR. As such, the utilities would be providing the same services as provided presently but without the possibility of a fuel protection "kicking in" if there is a significant rise in energy prices.

Chairman Townsend stated SPPC is currently without deferred energy, with a capped rate and a sharing mechanism over and above allowable. Mr. Ponn affirmed that was correct. Chairman Townsend asked why that mechanism could not be used for the next 2 years, for example. Mr. Ponn answered the creation of the PLR "animal," along with the divestiture of the power plants and energy resources by the utilities is going to create a different kind of utility from what they are currently. He maintained SPPC is able to manage its fuel and purchase power risks through the portfolio of assets under its control, and it can dampen any swings in energy prices by doing that. Mr. Ponn continued, if at the end of this process, they are the PLR providing energy to customers without control of SPPC’s assets, rather than choosing the customers for whom they might compete, they will have a number of customers they are obligated to serve without nearly as much control over the associated costs. Chairman Townsend asked if Mr. Ponn was saying he could not live with repeal of deferred energy even if allowed to maintain the current arrangement until SPPC caught up on October 1, 1999. Mr. Ponn replied what he was saying is there needs to be some sort of fail-safe mechanism for a PLR provider who does not have sufficient assets nor energy portfolios. He asserted it does not have to be the current deferred-energy mechanism, it could be another, more immediate mechanism such as that used at FERC. An example is a monthly adjustment in prices so that it effectively mirrors the market price of energy.

Mr. Schmidt noted Mr. Ponn made a point about needing the opportunity to recover a significant change in cost. He said that is still in the statute. Mr. Schmidt remarked in section 38, under NRS 704.982, the commission still has a mechanism to determine the utility’s ability to recover cost pursuant to NRS 704.701 through NRS 704.751. He stated if the reader goes back to the sections surrounding the repealed section, Mr. Ponn still has general rate-making opportunities to go in and ask for increased rates, and the provision remains that says an application may not be filed more often than every 30 days. Mr. Ponn commented he did not dispute Mr. Schmidt’s interpretation of what is remaining in the statute. However, in his opinion, it is a different mechanism, one more difficult to implement, and the current mechanism left in place provides a better net, especially for a PLR who is exposed to significant risks.

Debra Jacobson, Lobbyist, Senior Manager, State Regulatory Affairs, Southwest Gas Corporation (SGC), remarked she has heard this is just meant to apply to the electric deferred energy. She stated SGC is concerned because even though they have a deferred-energy mechanism, it is based on this statute. Ms. Jacobson explained SGC would like the record to reflect this is not meant to affect SGC’s deferred-energy mechanism at the commission. Mr. Schmidt advised this section was not the statutory basis for how the gas company handles its issues; that is in another section of the statute. He declared it only applies to electric utilities, and was only ever intended to apply to electric utilities when it was adopted. Mr. Schmidt added there are commission decisions on record from the early- to mid-1980s that make that clear.

Responding to a question from Chairman Townsend, Mr. Schmidt remarked the type of mechanism currently in place at FERC would be allowed under subsection 6 of NRS 704.110, if the utility convinced the commission that was something for which it should adopt a regulation. Mr. Schmidt stated, statutorily, a utility could also make the filings and argue for the mechanism.

Chairman Townsend referred to the concern voiced earlier by Mr. Ponn regarding the language in subsection 3 of section 39. He inquired if it was still a concern to Mr. Ponn; and, if so, if there were a word change that would eliminate that concern. Mr. Ponn answered the current language is still a concern. He suggested changing the word "minimize" to "give consideration to." Mr. Ponn explained the word "minimize" can have unintended consequences and might create a burden of being perfect in hindsight. Mr. Whittemore remarked he would be happy to work on language, but the entire intent was to replace this subsection 3 with the earlier sections in the draft, which simply said, "You’re [You are] rolling your gains against your losses so that there would be no obligation to pay the taxes to the IRS." Mr. Ponn stated he understands Mr. Whittemore’s concern, and is committed to exploring Mr. Whittemore’s theory. Chairman Townsend pointed out the goal is to say SPPC will make a good-faith effort to offset the losses. Mr. Ponn agreed to make that good-faith effort. Chairman Townsend told Mr. Ponn he had a couple of hours to either become comfortable with the current language or to come up with language agreeable to both sides.

Revisiting section 3, subsection 1, Chairman Townsend mentioned that Senator O’Connell had a concern about appointment of the ALJ. Senator O’Connell remarked perhaps her concern is because the function of the ALJ is not clear to her. She stated in the original discussion of the ALJ, it was her understanding the ALJ would be offering an independent view of the process. However, Senator O’Connell remarked if the individual was hired and worked for the commission, she was not certain how the person could remain independent. Senator O’Connell requested Mr. Schmidt explain how he sees the role of the ALJ.

Mr. Schmidt stated he views an ALJ as essentially operating the procedural hearings and particularly complicated or complex, contested cases. He advised in those types of hearings there are many legal motions and issues, both in the discovery process and at the hearing, that are very distracting to commissioners in terms of dealing with those types of issues. Mr. Schmidt commented it is a system used in all large states and an increasing number of smaller states in the country for utility rate-making processes. It is used by FERC as well, according to Mr. Schmidt. Senator O’Connell inquired whether the ALJs would then advise the commission. Mr. Schmidt explained the way the system works in most states is the ALJ drafts a proposed decision, submits that to the commission and the parties, and the parties would then have the opportunity to either write briefs or make oral argument at one time in front of the full commission. The commission would make the final decision, and it would not necessarily agree with the recommendation of the ALJ. Mr. Schmidt was of the opinion in most states that have ALJ systems, the commissions designate or appoint the ALJ; he was unaware of any state wherein the Governor appoints the ALJ. Chairman Townsend inquired whether the ALJ would make decisions regarding regulations as well. Mr. Schmidt replied it is his understanding ALJs are not utilized to make regulations, but to oversee contested cases. He said the power that would be vested in the ALJ would be similar to that of a trial judge in running the process. Mr. Schmidt reiterated the ultimate decision would remain with the commission.

Chairman Townsend queried whether Mr. McMullen, Mr. Reeder, Mr. Whittemore, Mr. Ponn, or Mr. Rigazio had any input regarding an ALJ versus the current structure. Mr. McMullen replied his theory is an ALJ would be an adjunct and addition to the commission in the sense it would help it handle its caseload. He added, in his opinion, it would not need a specific appointing mechanism.

F. R. (Bob) Reeder, Lobbyist, Barrick Goldstrike Mines Inc., agreed with Mr. McMullen’s comments. Mr. Whittemore commented the language that has been drafted fairly addresses the concerns raised, which were to provide additional help to the commission while going through the deregulation and restructuring process. Mr. Ponn mentioned SPPC operates both in California and Nevada, on a state level. He advised the two states have two different systems. Mr. Ponn said in Nevada the commission hears SPPC’s cases; however, in California ALJs hear their cases. In Mr. Ponn’s mind, both systems work well. Senator Amodei remarked he had dealt with this in the State Industrial Insurance System (SIIS) context. He is supportive of having an ALJ assist the commission, and, in his opinion, it is a good idea for the Governor to hire the person to put a little distance between the ALJ and his or her employer to provide objectivity to his or her decisions.

Chairman Townsend inquired where ALJs are currently being used in the government process. Mr. Whittemore answered they are used by the Department of Administration with respect to personnel disputes. He remarked, as far as he knows, the Department of Administration hires ALJs directly. Mr. Whittemore responded to a question by Chairman Townsend by stating the Department of Administration hires individuals with expertise in the appropriate field for which he or she is being hired. Mr. Pitlock advised there are also situations in state government in which hearing officers are simply employees. He gave an example of the Department of Taxation, in which the two deputy executive directors act as hearing officers in all of the contested cases that come before the department.

Ms. Sheldrew restated the PUCN, under this permissive legislation, would contract for an ALJ, if necessary, to handle specific cases on a case-by-case basis. She said, personally, she prefers to be in the hearing room and understanding the issues. Ms. Sheldrew maintained when another layer is built in, removing the commission from the issues and the parties, there is a certain disconnect.

Chairman Townsend asked the committee if they wished to leave the word "may" in section 3, subsection 1 of Exhibit C, or change it to "must." The consensus was to leave it as "may." Regarding appointment of the ALJ, Chairman Townsend inquired whether Senator Amodei wanted to replace "commission" with "Governor" in section 3, subsection 1 of Exhibit C.

*****

Chairman Townsend advised that the committee would remove subsection 2 of section 4, as had been agreed upon. He next addressed the issue of deferred energy, stating section 27, subsection 5 had been stricken, and text of the repealed section had been moved to page 21 of Exhibit C. Additionally, the date certain in section 49 is October 1, 1999. Chairman Townsend mentioned the only group immediately affected by that is NPC, which currently has money remaining in that account. Mr. Rigazio informed the chairman NPC would be allowed to file one more case to clear that account. Mr. Schmidt advised that if NPC filed prior to October 1, 1999, and the clearing time frame was established, it could go beyond October 1, 1999. Mr. Rigazio concurred with Mr. Schmidt’s remarks regarding the requirement to file prior to October 1, 1999, and the actual clearing time frame extending beyond that.

Joyce A. Newman, Lobbyist, Executive Director, Utility Shareholders Association of Nevada Inc., expressed concern that deferred energy or a mechanism like it would not be available to the PLR going forward. She distributed a copy of her testimony (Exhibit E). In Ms. Newman’s opinion, there needs to be some kind of mechanism in the law for the PLR to recover its increase in fuel costs. She pointed out it would permit rates to go down, as well, if energy prices decline. Chairman Townsend informed Ms. Newman that mechanism has not been decided. He said the commission has the authority to determine that mechanism, and they may stipulate to a rate for 2 years, or 3 years, for the protection of residential customers in a transitional period. Chairman Townsend mentioned that Mr. Schmidt read the statute that allows utilities to file with the PUCN once every 30 days to make their case with regard to their revenue needs.

Ms. Sheldrew concurred with Chairman Townsend’s remarks and added that Mr. Schmidt also pointed out that provision of PLR service is covered under NRS 704.001 through NRS 704.051, which is the basic rate-making provision. Therefore, the costs would be recovered for the affiliate of the electric distribution utility just as they are currently through rate cases with the additional 30-day allowance. Mr. Pitlock added one of the major differences between what would be allowed under the 30-day filing and deferred energy is the balancing account. He remarked more frequent changes are being traded for the balancing account. Mr. Pitlock continued the balancing account mechanism allows the utility to change rates only once every 6 months and still be made whole. By doing away with the balancing account, the trade off is that the utility can change rates every 30 days, if necessary. Responding to a question by Chairman Townsend, Mr. Rigazio commented the FERC method is similar to the balancing account mechanism described by Mr. Pitlock.

Ms. Newman restated her concern that shareholders receive no return on any of the dollars related to fuel and purchase power. She said those are intended to be dollar-for-dollar pass-throughs. However, if shareholders are not allowed to recover those returns with some mechanism, according to Ms. Newman, then shareholders do take the risk for that non-recovery. Chairman Townsend pointed out that when SPPC stipulated its agreement to eliminate deferred energy and share the savings over 12 percent, that was the trade off. He suggested that if Ms. Newman asked any of her association members who own SPPC stock, they would probably agree that was a good trade. Chairman Townsend noted things have changed; the SPPC shareholders took a risk and received a huge reward. Ms. Newman concurred that arrangement worked well for the shareholders last time. However, there are now different circumstances going into an unregulated environment. Chairman Townsend surmised that is the way the stock market works, and risks must be taken. Mr. Schmidt added SPPC has, for the last couple of years, given its shareholders rewards for accepting risk. He is in favor of that idea. Mr. Schmidt explained if the shareholders will not accept risk, they must go in and rely on the regulatory process for recovery.

Chairman Townsend mentioned the date with which both Senator Amodei and Senator O’Connell expressed concern, in section 38, subsection 2, of March 1, 2001. The two senators agreed to the date of July 1, 2001, to allow a full session to debate the mechanism, if any that will occur.

*****

Chairman Townsend addressed section 25 of Exhibit C, saying there was substantial concern regarding jurisdiction on this issue. He stated it was the commission’s position that they already have that authority, and believe their intervention prior to the act is important. Chairman Townsend recalled testimony that the problem was there is FERC jurisdiction only, and the people who intervene up front, perform a review only. Chairman Townsend requested Mr. Schmidt explain his interpretation of the divestiture issue with regard to who has and does not have jurisdiction, and how clearly that is defined. Mr. Schmidt stated, in his opinion, the commission currently has statutory jurisdiction. He remarked there is also jurisdiction being asserted through approval of the merger, which has been made conditional. Mr. Schmidt expressed his opinion the benefit of this section is that it removes doubt if other parties take the position the commission does not have jurisdiction. He clarified the commissioners are of the opinion the commission does not need to be involved in substantial detail in the divestiture process. Mr. Schmidt asserted, however, it is critical that the number of bundles into which the generation is divided at the time the sale goes forward is adequate to avoid a market power problem.

Chairman Townsend inquired whether the committee was correct in understanding that FERC jurisdiction, with regard to market power, is only in regard to having no harm from the current market power issue. Mr. Schmidt replied that is one standard, but FERC has additional standards that would also apply. He remarked FERC has concurrent jurisdiction with the PUCN. Mr. Schmidt explained that FERC has the right to determine the wholesale price of power from sale of the generation plants, and authority to determine whether the proposed merger that has divestiture as a component, is in the public interest from FERC’s standpoint. He reported that FERC has not yet made a determination on the merger. Mr. Schmidt opined that FERC probably would require some form of divestiture in order to approve the merger resulting in only one utility in the State of Nevada. Chairman Townsend clarified that FERC’s minimum standard is that there be no worse market power problem than currently exists in the state with regard to either a merger or a divestiture. Mr. Schmidt expressed doubt that the standard is that simple, because there is the possibility of a slightly worse situation occurring. He stated, in his opinion, neither FERC nor the commission could make a determination that there would be any opportunity for market power through the sale of the units. Mr. Schmidt continued, saying there is market power associated with the fact that there are only a certain number of units in certain geographic areas serving the state currently, and some of that could continue.

Responding to a question by Chairman Townsend regarding Mr. Pitlock’s view of the jurisdiction issue, Mr. Schmidt stated the commission has had a chance to review the bundles of seven proposed by the company. He remarked, in his understanding, that is all the company wanted to show, and it now wants flexibility in going forward with the sale, both on the timing and in the manner in which it would conduct the transactions. Further, Mr. Schmidt commented the commission is more nervous about that, because they have not heard a lot of testimony on market power. He told of the commission presenting a witness in the case that they hired from New England who had been involved in a number of other divestitures, but all the other parties in the merger case did not offer much evidence about market power, the right number of bundles, and how to protect against market monopoly. Mr. Schmidt said at the same time the commission has had the pending issue of what tariff the companies would file for selling from those power plants. That tariff is called the general aggregation tariff or "GAT."

Mr. Schmidt surmised that is the dispute between the commission, who would like more information, and the companies, who are of the opinion they have supplied enough information and will do the rest at FERC. He commented he is not completely comfortable relying on FERC to protect this state’s customers. Mr. Schmidt asserted if the committee passes this section of the law, the commission can ensure Nevada is overseeing protection of its consumers and companies at the same time and not relying on a federal agency for that oversight. Ms. Sheldrew made an additional point that the case law coming out of FERC clearly says the divestiture of generation itself is not FERC jurisdictional; it belongs to the states.

Chairman Townsend clarified that Mr. Ponn and Mr. Rigazio were of the opinion section 25 of Exhibit C is unnecessary. Mr. Rigazio replied, in his opinion, there was a presumption that the merger parties would not meet a compliance filing. He asserted there is a compliance filing in the merger to file a divestiture plan, and the parties intend to file the plan with the commission.

Senator O’Connell asked if there was still a problem with the litigation regarding stranded costs. Chairman Townsend answered there is nothing in Exhibit C that had not been dealt with in A.B. 366 of the Sixty-ninth Session. He advised the only change regards the tax implication. Mr. Whittemore stated the parties agreed to disagree with respect to what the existing language required, and the parties are going to continue to negotiate those terms before the commission and any agency that might have jurisdiction with respect to that issue. Senator O’Connell requested clarification of section 39 of Exhibit C. Ms. Sheldrew informed the senator that section 39 is simply a restatement of what the current law is, as it relates to stranded costs.

Senator Amodei referred to section 35, which was deleted from the previous draft, in which subsection 3 discussed name and logo, and inquired what the basis was for omission of that section. Mr. Whittemore answered the reason for deletion of section 35 was because litigation had been filed the week of April 4, 1999 with respect to that very issue. He said the sense was not to become involved in discussions with the utilities. Senator Amodei asked if there was any sense from the committee regarding whether or not it still wanted to make a statement in that area. Mr. Whittemore replied his client did not suggest one way or the other whether it was appropriate or not to make such a statement. He continued, in discussions with the utilities, it was the utilities’ opinion that in light of all the other discussions that took place, it was not necessary to include name and logo. Mr. Ponn advised that SPPC had never requested to delete protection on name and logo. He said they did file a court action, which perhaps will resolve it, but SPPC never intended to limit the committee’s or Legislature’s inclinations to express what they want. Senator Amodei told Vice Chairman O’Connell that he wished to make a motion when the chairman returned to the meeting. Chairman Townsend returned to the meeting, and Senator Amodei explained to the chairman what was discussed in his absence.

Mr. Whittemore clarified for the record there was a suggestion that his client attempted to preclude the committee’s desire to address the issues in subsection 3 of section 35 of the previously proposed amendment (Exhibit D). Additionally, Mr. Whittemore stated there have been substantive discussions between all the parties at the table, and there are a lot of issues that, in his opinion, were appropriate in presenting. Chairman Townsend advised he had taken that section out of the amendment because the parties were in litigation. Senator Amodei remarked he understood that, but if the law changes, litigation becomes moot.

*****

Terry K. Graves, Lobbyist, Nevada Independent Energy Coalition (NIEC), referred to the proposed amendment, dated March 29, 1999 (Exhibit D), and stated section 20 of that amendment contained contract-sanctity language that has been deleted from Exhibit C. He remarked the qualifying facilities (QF) are interested in retaining that language. Chairman Townsend pointed out there was concern that the term "liberally" was too vague, so the committee deleted it. Mr. Graves stated his point was the entire section 20 has been deleted in the most recent amendment (Exhibit C), and his association would like it back in as it was amended in the March 30, 1999 meeting of the Senate Committee on Commerce and Labor. Chairman Townsend recalled that it was on the record that the issue of contracts is one that has become moot. He continued, saying the commission and the office of Consumer’s Advocate (OCA) have said, "A contract is a contract and will be honored." If there are mitigation clauses that are in those contracts, good-faith effort must be maintained. Chairman Townsend asked anyone with a different interpretation to speak up. Mr. Graves claimed it was similar to the issue just discussed on name and logo. He said it is one thing to sit in the hearing room and talk about it; but in fact, in practice there had been aggressive measures to attack NIEC’s contracts. Chairman Townsend inquired in what form the attack had taken place and by whom. Mr. Graves answered the commission attacked NIEC’s contracts during PUCN hearings on deregulation and the merger.

Ms. Sheldrew requested Mr. Graves point out the language where contracts were being attacked. Mr. Schmidt remarked that Mr. Graves was correct in stating there had been some attack on the contracts. He advised that the counsel who made the attack is no longer at the commission. Mr. Schmidt stated, in his opinion, nobody other than that counsel has raised the argument nor has the argument been raised since in other hearings where it could have been raised.

Norman Ty Hilbrecht, Lobbyist, Las Vegas Cogeneration LP, stated he last testified before the committee in support of the language of section 20 of Exhibit D, suggesting it be made clear that the parties, rather than the regulators, ought to become involved, because these are private contracts. He offered to explain Mr. Graves’ concern and noted it was also his concern at the last committee meeting at which Mr. Hilbrecht testified. Mr. Hilbrecht remarked it was not just attacks, but comments by Mr. Schmidt at the same proceeding where they were discussing whether or not enactment of A.B. 366 of the Sixty-ninth Session did indeed offer the opportunity to take the position these contracts were no longer enforceable. He recalled Mr. Schmidt saying something to the effect:

Mr. Hilbrecht remarked that was the testimony, in part, to which Mr. Graves and he addressed themselves. He said the point is with respect to the QF contracts, Mr. Graves and he are of the opinion they should be honored, and they can be honored in a manner that would not adversely affect competition in Nevada. Mr. Hilbrecht asserted what they are trying to avoid is a successor to the attorney who was referred to earlier taking a fresh look at the contracts and suggesting that other "draconian" provisions be required of utilities in order to recover recoverable costs alleged to arise out of these contracts. He stated the only point he is obliged to make before this committee is he would not like to see the finances and resources of the State of Nevada, the commission, and the contracting parties, which have expressed between themselves the intent to honor these contracts fully, costly litigation which places in question the application of S.B. 438. Mr. Hilbrecht surmised section 20 is a method of avoiding the doubt raised by Mr. Schmidt.

Chairman Townsend stated, in his opinion, this Legislature, any Legislature, or the U.S. Congress, may not interfere with any contract. He maintained it is not the issue of the contract not being honored by the utility, but of what will be allowed by the commission to be recovered. Chairman Townsend asked why the discussion continues regarding a contract issue, when it is not a contract issue. Mr. Hilbrecht replied that question is answered in the case law on this subject, Freehold Cogeneration Associates, L.P. v. Board of Regulatory Commissioners of the State of New Jersey; Jersey Central Power and Light Company, which not only said that federal preemption does not permit the state regulators to modify those contracts, it also said they may not deny the passage of those rates to the consumers of the utilities for which those contracts were entered into. That is the issue this committee may not have addressed in the past, according to Mr. Hilbrecht. Chairman Townsend asked if Mr. Hilbrecht was saying the utilities could not pass along any of the contract costs to the consumers of the State of Nevada. Mr. Hilbrecht stated the court said the utilities were required to pass on to the consumers the costs of those contracts. Chairman Townsend queried, if the court has just held that, and the law prohibits interference with the right to contract, what was Mr. Hilbrecht’s concern. Mr. Hilbrecht answered the concern is in the statement that the contract costs or portions of them would be required to be absorbed by the utility stockholders. Chairman Townsend asked where that was said. Mr. Hilbrecht replied in hearings before the PUCN respecting the issue of merger, and the issue of the methodology of recovering recoverable costs under NRS 704.983.

In response to a question by Chairman Townsend, Mr. Hilbrecht remarked the commission modified, in part, a former proposed regulation addressing NRS 704.983 by adding a provision that would require utilities seeking recoverable costs arising out of power purchase agreements to show that they had examined all provisions of the contract to demonstrate there had been adequate mitigation. Chairman Townsend stated that represented a good-faith effort by the utility; they get 100-percent recovery because they made a good-faith effort. Mr. Hilbrecht claimed if that were the only reasonable reading of that regulation, Mr. Graves and he would not be at the meeting requesting clarification in the form of former section 20 of Exhibit D be considered again by the committee. Chairman Townsend suggested if the commission or the utilities have a different interpretation of what he had just articulated, then Mr. Hilbrecht would have an obligation to go to the commission with regard to the recoverable-costs issue. Chairman Townsend said if Mr. Hilbrecht has made a good-faith effort, he would get it all. If there was a mitigation clause, he should pick up the telephone. Chairman Townsend asked if he correctly understood what Mr. Hilbrecht is required to do.

Mr. Ponn stated he understood what Chairman Townsend was proposing if the commission agrees that telephone call is what would be required to mitigate that "potentially stranded cost." Ms. Sheldrew commented the regulation simply states that if there is a clause that can help mitigate the cost of the contract, the parties need to look at that clause in the contract. She asserted that is all it says. Mr. Graves pointed out it is uncertain who will be chairing the PUCN 6 months or 2 years from now; most other jurisdictions have adopted this language, and in his opinion, it would be prudent for the committee to do so. Senator Schneider remarked the saying that applies to this situation is "If it is worth saying, it is worth putting in writing." He maintained since there is a conflict in interpretation, it should be put into writing to prevent future conflict. Mr. Graves affirmed the language of section 20 of Exhibit D is acceptable to NIEC. Chairman Townsend indicated if Senator Schneider wanted to make a motion to put section 20 of Exhibit D into writing he would recommend the language is drafted exactly as it is in the commission regulation.

*****

Chairman Townsend requested Ms. Sheldrew’s assistance in understanding a contract issue. He explained it was regarding a contract the southern Nevada utility attempted to enter into with one of the large users. Chairman Townsend further explained it was supposed to be a different rate than that of other customers in that class and it was not supposed to impact any other rate class. He added the commission has jurisdiction over that because Nevada was not at the competitive level. Chairman Townsend inquired whether that scenario was indicative of the jurisdictional issue. Ms. Sheldrew answered there was a contract proposed between NPC and a large user in southern Nevada that did come before the commission. She said the commission essentially dismissed the application for a number of technical reasons, but it was jurisdictional to the PUCN.

Chairman Townsend asked, if no ratepayer, no matter what class the ratepayer is in, is going to subsidize a contract with a current user, because the utility is either asking the shareholders to pick up that reduced rate, or extended rate, or they are going to somehow mitigate it internally with their own abilities, is there a reason to review that contract? Ms. Sheldrew answered affirmatively and stated, in her opinion, there is a problem with allowing contracts of that nature to not be assured of meeting some minimum requirements such as non-subsidization, for example. She continued the way the electric system is interconnected, and the way the current rate structure is established, everything is codependent. Ms. Sheldrew mentioned there is flexibility the PUCN has given to many large customers, however, through a tariff to establish some contracts. She further stated, on a going-forward basis, those kinds of contracts are the type that would be between alternative sellers and large buyers. However, they would still be under some sort of modified regulation from the commission.

Chairman Townsend next addressed the issue of moving the date in section 38, subsection 2, of Exhibit C to July 1, 2001. He indicated it was the committee’s understanding there is a compliance filing in front of the commission. There will be revenues needed under the current statute, and the change in date to March 1, 2000, is for everything that is generation the PUCN requires be put into an affiliate of the two incumbent utilities. Anyone who wants to provide generation must be licensed as an alternative seller. Chairman Townsend asked if that was the way Mr. Pitlock understood it. Mr. Pitlock answered affirmatively. Chairman Townsend stated between now and March 1, 2000, the commission would operate under the current rules and rates until the commission rules otherwise. He inquired where the commission is with regard to rates during the 15 months following March 1, 2000. Chairman Townsend further asked if there would be an effort to deal with these rates until that auction date occurs and a capped rate from now until then, or if the PUCN would continue with a normal course of events regarding a vertically integrated utility.

Ms. Sheldrew advised she had not had a chance to review the compliance filings, but was told they include rate requests as well. She stated essentially the compliance filings currently unbundle all of the services and allocate the expenses to those services. Ms. Sheldrew continued they are essentially establishing revenue requirements for those unbundled services. She remarked the unbundled services have been identified since November 1997, and everyone is aware of what consists of them. Ms. Sheldrew said in the second portion of the filing that is due the end of April 1999, there will be a cost-of-service portion assigned to each of those, so if they need to go beyond the date on which SPPC’s rate expires, they will have the rate to cover it until such time as the market is opened. Once the market is opened, the information will be used to determine the bundled rate for the PLR. Ms. Sheldrew reported for all the competitive services, the unbundled rates will be re-bundled by the aggregators and put together using a mixture of noncompetitive distribution transmission tariff rates as well as whatever the other competitive services are, to an end-use price per customer.

Ms. Sheldrew told of receiving surprising information a couple of weeks prior that the utilities would not be divested until July 2000. The intent was to have the divestiture completed by the end of 1999, so that the divested units would be selling into the marketplace at about the same time the market opened up. Ms. Sheldrew asserted they would have to make allowances for whatever the final divestiture date is, and whether or not the utilities will be putting those generation units into some kind of affiliate will be one of the options. She stated, in the fall of 1999 they had planned to establish an alternative plan of regulation for potentially competitive services. Ms. Sheldrew remarked if some of those services, for example, an affiliate formed by the utilities to do metering, reaches a bottleneck, the PUCN may have to put a rate cap on that to ensure customers are not taken advantage of by a utility having all the meters in the State of Nevada. She said their choice would be not to cap the retail aggregator services, because that is where they want to have a free flow of competition at those bundled rates after they get the capped generation rates and they have the distribution tariffs and the flexibility to figure out what pricing they want to charge their customers without dealing with price caps.

Mr. Ponn clarified that SPPC filed revenue-requirements cases on April 1, 1999, not rate-increase applications. Mr. Schmidt stated both utilities have filed revenue-requirements documents in their unbundled cases that they filed on April 1, 1999. He remarked the PUCN has not fully reviewed those, but they have reviewed them enough to know that NPC purported to show an earning of less than 11.9 percent, a figure NPC indicated they would have projected in calculating the revenue requirement. Mr. Schmidt said SPPC showed a level rate based on a lower return on equity of approximately 11 percent. He remarked those cases can and will be used by parties to determine the appropriate rate for the PLR, because if the rates are frozen or kept at current levels, it would be beneficial to both the utilities going forward. Mr. Schmidt continued, saying they have a problem with SPPC in that the PUCN had a rate freeze that went until the end of 1999, and they do not have a rate that would take effect from that point forward. Therefore, Mr. Schmidt indicated it is necessary for the PUCN to reestablish SPPC’s rate, especially if the competition date is moved to March 1, 2000.

Chairman Townsend inquired how long it would take before the committee knows, based on their revenue filings, the status of the rates that will carry to the competitive date of, if not March 1, 2000, then July 1, 2001. Ms. Sheldrew remarked the PUCN had hoped to finish those proceedings in mid-fall of 1999. She indicated they would be extensive, and it depends on the adequacy of the filings and the degree to which they have to establish various rates that contain rate design. Chairman Townsend asked Mr. Schmidt, since the committee must move S.B. 438 by Friday, April 9, 1999, how long it would take the utilities and he to negotiate a rate the committee would understand before the end of the day on April 9, 1999. Mr. Schmidt replied he had been involved in nearly all of the negotiations in which they agreed to a rate freeze, rate cap, or sharing mechanism. He recalled they had not completed any of those in a 4-day time frame. Mr. Schmidt reiterated the PUCN has not had adequate time to review the filing. He continued NPC purports to be under-earning, and the PUCN has performed a quick analysis of their return on equity as something closer to approximately 10.5 percent, which is still higher than what they have been earning. Chairman Townsend inquired how long it would take to make a professional determination. Mr. Schmidt said he could attempt to determine SPPC’s rate, but anything involving SPPC, given their current level of earnings, should involve a rate reduction. Chairman Townsend pointed out he was not asking if the rate should go up or down, he was asking if Mr. Schmidt could negotiate a rate with both utilities to get the state through the transitory period. Mr. Schmidt answered that can be done in 1 to 2 months.

Chairman Townsend remarked in the previous proposal there was a rate freeze that the commission would determine based on the current proceedings, and then it would be capped for a 5-year period. At the end of 2 years, if competition opened up, somebody could come in and bid with a substantially better rate. Mr. Schmidt stated that was a tremendous protection for all the committees’ constituents and the people Mr. Schmidt represents. He said that has been removed from S.B. 438, but he is confident that with a filing on the table they can go forward. Mr. Schmidt continued, saying there is a mechanism in the bill from A.B. 366 of the Sixty-ninth Session to provide protection at that capped rate for at least 2 years going into competition. Chairman Townsend indicated the committee would decide on April 9, 1999, if it needs to add something to S.B. 438 regarding rates for the next 2 years. Additionally, on that date, Chairman Townsend stated the committee would have a draft of what the committee has acted on so far, including the language Senator Schneider recommended obtaining from the commission. He added the last thing the committee would decide is whether it wants to mandate a cap the commission would determine in its next filing.

Ernest K. Nielsen, Lobbyist, Washoe County Senior Law Project, testified with respect to the rates and so forth, one of the issues the committee should look at, in his opinion, is the issue of energy efficiency, or demand-side management (DSM). He stated energy services will potentially be a competitive service for most customer groups. Mr. Nielsen noted there are certain customers, however, due to one market barrier or another, who cannot access certain energy services. Specifically, Mr. Nielsen was talking about senior citizens with fixed incomes, low-income individuals who might otherwise purchase weatherization. He maintained throughout the last 2 years the implementation of A.B. 366 of the Sixty-ninth Session and the language presented regarding S.B. 438, there has not been any discussion regarding the issues of energy efficiency and how Nevada would wish to promote it. Mr. Nielsen suggested if the committee wished to deal with this issue outside the context of restructuring, that would be fine as long as the committee acknowledges that is what it is doing and suggests other means to foster good energy-efficiency policy. Chairman Townsend remarked that as Mr. Nielsen and he had discussed, it is the chairman’s opinion the committee should write a preamble that talks about the importance of DSM. He informed Mr. Nielsen he would like the committee to work with him to draft a good, solid policy statement about DSM. Chairman Townsend mentioned with the continuing growth of the state and restrictions in nearby states, such as California, on building new plants, it is crucial to develop a feasible DSM plan.

C. Joseph Guild, Lobbyist, Southwest Gas Corporation (SCG), referred to the action the committee just took regarding section 35 of Exhibit C, adding back into the amendment the logo protection for electric utilities, and reminded the committee he has been involved in similar actions for protection for the gas company. He said the appropriate place to add the same protection for a gas utility logo and name is in NRS 704.997. Chairman Townsend inquired which name Mr. Guild wanted to protect; the one they are currently using or another they might gain in a few days. Mr. Guild replied the current name, Southwest Gas Corporation. He advised that Scott Young, Committee Policy Analyst, Research Division, Legislative Counsel Bureau, had been provided with a copy of where the appropriate logo protection language would be. Mr. Guild requested the committee provide that protection for SGC, also. Chairman Townsend asked Senator Amodei if he would amend his motion to include SGC. Senator Amodei stated, as the maker of the motion, he has no objection to amend it to include appropriate language in NRS 704.997. The other members of the committee that voted for the motion also agreed to the amendment.

Ernest E. Adler, ex-Senator, Lobbyist, Idaho Power Company, mentioned previously there was an amendment to section 47, and there is no longer a section 47. He remarked it was NRS 704.975, and was the definition of vertically integrated utility. Mr. Adler stated A.B. 366 of the Sixty-ninth Session currently defines vertically integrated utility as a company with greater than $250 million in sales, and he would like to add the words "in Nevada."

*****

Senator Carlton noted there were a couple of gentlemen at the meeting that had questions regarding the name and logo issue. She told the gentlemen their concerns were being addressed through an amendment being drafted by Senator Amodei.

Chairman Townsend closed the discussion on S.B. 438 and opened discussion on S.B. 218.

Chairman Townsend advised that Senator Schneider requested S.B. 218 on behalf of the Marriage and Family Therapists. He remarked the committee had amended and passed this bill, but the proponents have expressed a concern about the fee in section 3 for examination of an applicant for a license that was increased by $50. Another concern is the addition of subsection 8 of section 4, requiring the licensee to pay the costs incurred by the board to conduct a disciplinary hearing.

Joanna L. Brooks, Lobbyist, Marriage and Family Therapists, testified that as much as they are of the opinion the board needs the increase in fees, they are more concerned with the language changes and are willing to amend out the increase in fee for the amendments to go through and be passed.

Senator O’Connell inquired whether the increased fees would go into the General Fund. Ms. Brooks deferred to Senator Carlton. Senator Carlton stated, in her understanding, the money would go straight to the board, but she was uncertain. She advised that the Marriage and Family Therapists would rather have the legislation than possibly lose it, because the decision on the fees is not currently clear to everyone. Senator O’Connell explained if the money goes to a self-supporting board, then there is no problem. However, if the money reverts back to the General Fund, S.B. 218 would be vetoed.

Chairman Townsend remarked the Governor has issued a statement to that effect that was distributed to the committee members. He said if the Marriage and Family Therapists were comfortable deleting the fees, that would be their choice. Chairman Townsend is of the opinion that it is a fee increase at a board that the board requested, and the Governor will probably not veto the bill based on a letter. Senator Carlton stated, in her opinion, the legislation is important enough without the fees. She recommended deleting the fees and passing the bill without them.

Chairman Townsend recommended retaining subsection 8 of section 4, because it is a disciplinary action. He explained the board might discipline the holder of the license who defaults, and may be heard by the board and be found guilty of any of a number of methods. Subsection 8 of section 4 is one of the disciplinary methods. Ms. Brooks agreed, and said she only wanted to revert back to $200 from $250 in section 3 of S.B. 218.

The motion was amended as follows:

There being no further business to come before the committee, Chairman Townsend adjourned the meeting at 11:40 a.m.

RESPECTFULLY SUBMITTED:

Jo Greenslate,

Committee Secretary

APPROVED BY:

Senator Randolph J. Townsend, Chairman

DATE: