MINUTES OF THE meeting
of the
ASSEMBLY sELECT Committee on Energy
Seventy-First Session
April 12, 2001
The Select Committee on Energy was called to order at 1:51 p.m., on Thursday, April 12, 2001. Chairman Douglas Bache presided in Room 4100 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Mr. Douglas Bache, Chairman
Ms. Barbara Buckley, Vice Chairman
Mr. Joseph Dini, Jr.
Ms. Sheila Leslie
Mr. Roy Neighbors
Ms. Kathy Von Tobel
Mr. Lynn Hettrick
Mr. David Humke
Ms. Sandra Tiffany
COMMITTEE MEMBERS EXCUSED:
Mr. David Parks
Mrs. Debbie Smith
GUEST LEGISLATORS PRESENT:
David E. Goldwater, Assembly, District No. 10, Clark County
STAFF MEMBERS PRESENT:
Kevin C. Powers, Committee Counsel
David S. Ziegler, Committee Policy Analyst
Cheryl Meyers, Committee Secretary
OTHERS PRESENT:
Terry Graves, Graves Communications, Nevada Independent Electric Coalition, Las Vegas, Nevada
Michael Pitlock, Representative, Shell Energy Services, Carson City, Nevada
Ernie Adler, Representative, Nevada Housing Coalition, Carson City, Nevada
Ernest Nielsen, Washoe County Senior Law Project, Washoe County Senior Services, Reno, Nevada
Thomas W. Kinnane, Attorney, Howes & Kinnane, P.C., Annapolis, Maryland
Judy Stokey, Government Affairs Executive II, Nevada Power and Sierra Pacific Power, Las Vegas, Nevada
Kathleen M. Drakulich, Associate General Counsel, Sierra Pacific Power and Nevada Power, Reno, Nevada
Sharon Thomas, Director of Regulatory and Public Policy, Advanced TelCom Group, Inc., Reno, Nevada
Assembly Bill 661: Revises and repeals various provisions concerning utilities and energy. (BDR 58-1128)
Chairman Bache asked Ms. Buckley if A.B. 661 had received the waiver to continue the discussions and hear testimony on the bill. Ms. Buckley replied she believed the waiver was approved the previous day. She would confirm. Kevin Powers, Committee Counsel, informed the committee that A.B. 661 did have a waiver from the requirement for passage out of committee and had to be passed out of the final committee in the Assembly by April 23.
Terry Graves, Graves Communication, Nevada Independent Electric Coalition, represented a group of qualified facilities (QFs) that were co-generation plants. They provided approximately 300 megawatts of co-generation power to Nevada Power Company that encompassed approximately 5 to 15 percent of their load depending on the season. His testimony was informational and he wanted to bring to the committee’s attention that in some jurisdictions, including the federal level, there were discussions in regard to including QF type facilities in renewable portfolios. If it would please the committee he would pursue obtaining some language or more information on that matter. The reason co-generation units were being considered for renewable portfolios was because of their superior energy-efficiency even though they did burn fossil fuels. Because of their association with thermal users they were able to use that fuel in a more efficient manner than most conventional utilities.
Mr. Graves discussed the issue of prudency. The co-generation contracts and the QF contracts had been under a lot of attack. During this legislative session they were receiving accolades. With regard to prudency the contracts were approved by the Public Service Commission in the late 1980s. In the past, the debate had been if the contracts were prudent. The decisions were made at the time with prudency as a state of mind and under the conditions that existed. He cautioned the committee in the reflection of prudency standards and to be aware of hasty decisions. The committee should base their prudency upon using the best information available at the time.
Assemblywoman Buckley divulged the committee members had spent so much time in the previous session discussing the QF contracts and how they were dinosaurs. She was curious about the current costs of the QF contracts and their relationship to the spot market. Mr. Graves testified the QF contracts were definitely below market today. If the spot market price for any given day was $200 a megawatt-hour the contracts would be a third of that. He felt that the QF contracts should be designated long-term contracts rather than segregating them as QF contracts. The contracts covered 20 to 30 years, with locked-in gas and fuel prices. The reason the contracts were locked in for a long time was at the time the Public Service Commission was very concerned about reliability. Everyone at the time had thought natural gas prices would continue to climb; however, right after they had signed the contracts the prices went down and continued to stay down. A very prudent decision at the time seemed to look far worse a year later. Now the contracts were in good graces again. Ms. Buckley stated there were some good lessons.
Michael Pitlock, representative, Shell Energy Services, introduced Thomas Kinnane, counsel for Shell Oil Company. They wanted to discuss what they believed was a very logical process to help deal with the energy markets currently in existence. The energy markets were a very scary place right now and the last thing the state wanted to do was to put the customers of the utilities at risk because of the volatility of the market. He believed, however, that customers should have a choice in energy providers. If there was a way to accomplish that goal in a way that was controlled, protected customers from volatile rates and in a way that stabilized supply for Nevada, he believed the state should take advantage of the practice of being able to choose.
The process he was proposing to amend into A.B. 661 would be in two steps. The first step would be to allow large customers or groups of customers that used in excess of one-megawatt hour to secure an energy supply on their own. There would be a contractual relationship between a supply and that customer or group of customers. Control would be maintained over the process by the approval of contracts by the Public Utilities Commission (PUC). He felt two criteria would have to be met in order for the process to be of benefit to the state. The first criteria would be at least 50 percent of the energy involved in the contracts would come from a source that did not currently exist, a new supply for the state. The new supply could come from new power plants constructed within the state or new sources of supply brought into the state from another state that was not currently being used by the utility to provide service to their customers. By including this requirement, the state would be contributing to improving the supply situation as it related to the state and hopefully stabilizing the supply into the future.
The other criteria that would be very important would be to make sure that allowing these customers to leave the utility did no harm to either the utility or those customers left behind. He referred to the amendments (Exhibit C) as the “better deal” amendments. When he mentioned a “better deal” he was not talking about a single customer getting a better deal at the expense of some other customer. He envisioned a process that would allow for the opportunity for everyone to be better off. There had been similar language proposed by Sierra Pacific Power that would have only allowed large customers to take advantage of the opportunity. He believed that if the policy was good for a large customer it should work for an aggregated group of customers. He thought it was important to understand what types of entities would then be included by allowing groups of customers to aggregate. A single grocery store or a single 7-11 would not be a customer that had a load over one megawatt-hour. If 10 grocery stores or 100 7-11 stores aggregated together there would be a customer-group that had the level of one megawatt. They should be allowed to receive the same benefits. From a governmental perspective there could be a single school in a district that did not have a load of one megawatt-hour; however, if all the schools in a district aggregated together, such as Clark County, they would surpass the requirement. The same could be said of municipal services in a particular city. He believed these types of groups should be given an opportunity to see if there was a better deal in the marketplace. If they could find a better deal they should be allowed the opportunity to bring the proposal to the PUC to be evaluated under the standards that had been mentioned.
Mr. Pitlock stated there had been many discussions about the low-income citizens of the state. The same language mentioned could provide a mechanism to aggregate low-income people together and shop for a better utility deal for them. Mr. Pitlock said there were no limits whatsoever on who could aggregate and would be considered individual customers. The only criteria would be they would be in excess of one megawatt and bring a benefit to the state. He believed it was a process that had no risk. There were controls built into the process. By allowing the PUC to make the approvals, the state maintained controls over who could leave and under what terms. There would be a certain amount of control over the supply that was being brought into the state.
Mr. Pitlock determined the second step in the process would be a mechanism where the PUC would issue a request for proposals (RFP) to ascertain what kind of deals could be in the marketplace on a larger scale. He viewed this mechanism as a good way of testing the marketplace. There was much speculation about what could happen to the energy markets two or three years from now, but until the state actually put out a request for proposals and companies made proposals on what they could do for the state, all there would be was speculation. Mr. Pitlock proposed language that would call for an annual RFP process to be administered by the PUC. If the proposals they received in any year were not deemed acceptable, the information would be used as information and no customers would be awarded to that group. In a worst-case scenario they would have the information on what the market would be at that time. If the state did not find any acceptable proposals they could wait a year and repeat the process. At some point in time the energy market would stabilize so there would be acceptable proposals made to the state. There should be flexibility to take advantage of that situation. He stated the proposal he presented was a very conservative approach to dealing with the volatile markets currently. One of the things he had learned was that things change very rapidly. One of the decisions the legislative body would have to make was whether or not in the coming two years nothing should be done or they could at least put in some mechanisms that would allow the Legislature to react and the state to react in the event things moved in a more favorable direction in the next two years. He felt the proposals he was outlining would give the state the opportunity with no risks to the ratepayers of Nevada.
Assemblywoman Tiffany asked if large customers or aggregated groups pulled out of the utility, why that did not harm everyone else that was left.
Mr. Pitlock stated as the incumbent utility put together their portfolio of energy to buy their total load some of the energy would be very expensive and some very reasonably priced. As the utility lost load and cuts back on the amount of energy they were securing, and if the incremental amount they no longer needed to buy in the future was of a higher price than what the customers that were leaving were able to secure, the customer that left received a better deal, the average overall cost of the portfolio that the utility had to serve their remaining load also would decrease. This would be the type of evidence that would have to be demonstrated to the PUC before they would propose allowing that customer group or customer to leave. The other item that would have to be done in order to insure the remaining customers were not harmed was if the state went back to a deferred energy accounting environment there would be costs that would be recorded on the books of the utilities that were really related to prior service, funded by future customers. If a customer left after they had contributed to that deferred balance, they must also be required to compensate the utility so the deferred amount would not be placed as a burden on the remaining customers. That item would also have to be presented to the PUC in order to make the showing of no harm.
Chairman Bache stated he was glad Mr. Pitlock made the last statement because in his presentation Mr. Bache’s thoughts had strayed to workmen’s compensation issues in the early 1990s when companies left the system and became self-insured. There was a similar concept with deferred energy accounting.
Ms. Tiffany asked if the amendment mentioned the PUC would ask for the deferred energy amount to be refunded to the utility. Mr. Pitlock stated there was language in the proposed amendment; however, it did not necessarily refer to deferred energy by name. The amendment did state any charges associated with the departure must be paid to the utility.
Chairman Bache stated the committee would hold more testimony on A.B. 661 until other issues were discussed.
Assembly Bill 349: Establishes universal energy charge to fund low-income energy assistance and conservation. (BDR 58-1264)
Assemblyman David Goldwater, District 10, Clark County stated A.B. 349 was the bill to provide low-income energy assistance. He indicated there were a few amendments to the bill. There was some technical language to submit to the committee (Exhibit D). Additionally he wanted to change the imposition of the surcharge imposed on each kilowatt-hour of electricity generated in Nevada by an entity, as defined by the latest proposed amendment to the bill, whether for use in Nevada or out of state. The surcharge would also be imposed on each kilowatt of electricity not generated in Nevada that was purchased by an entity for resale in Nevada or generated out of state by an entity for resale in Nevada. Each therm of natural gas that was consumed in Nevada would have the surcharge imposed. This part of the amendment would broaden the base and lower the rate to help the large customers that would have been paying an inordinate amount of the surcharge.
The PUC would be given statutory authority to impose the surcharges and set up appropriate entities to collect the surcharges. The surcharge must be imposed in a manner that avoided “double” taxation and at a rate that was equal with respect to electricity that was generated and consumed in Nevada and electricity that was generated in Nevada and consumed out of state. The surcharge could be indicated as a separate entry on the utility bill of retail customers of gas and electric service in Nevada. Assemblyman Goldwater stated this was a challenging issue to address because they wanted to make sure they were able to collect and provide assistance this summer to low-income people. The PUC would have to determine what the right level was to charge and if there should be a cap on the assessment. The main concern was the state would not be able to address the impending need of the summer if the PUC was allowed to use regulation to determine the levels. He suggested the committee would probably have to make the decision based on the Governor’s budget or the regulations of the PUC. The amount of the surcharge would be established on an annual basis by the PUC at the level necessary to provide the $14 million for the fund for energy assistance and energy conservation or to fund a designated budget, for example the Welfare Division’s budget for energy assistance.
Ernie Adler, Representative, Nevada Housing Coalition, stated there were some changes to the amendments, based on Mr. Nielsen’s calculations, to page 2, Section 12. The amount of the universal service charge was 39 mills per kilowatt-hour for electricity and 3.3 mills per therm of natural gas. In addressing the concerns of Mr. Goldwater and out of fairness the committee did have to come up with a definite number for the coming summer and make the bill effective upon passage and approval, otherwise there would not be enough time to collect revenues to subsidize some of the power rates this summer. Even with the Governor’s proposed $5 million contribution to energy assistance he believed the state would be very short in terms of being able to provide energy assistance this summer. In reviewing a bill that was in amendment form in the Senate there would be an increase in fuel rates this summer. There needed to be a number in the bill, he indicated, that would be in effect immediately.
Ernest Nielsen, Washoe County Senior Law Project, Washoe County Senior Services, wanted to make sure as the bill went forward the Welfare Division had the ability to move the money as quickly as possible and he was aware there may need to be additional technical language added to make that happen. He wanted to alert the committee to that fact depending on what direction the committee wanted to proceed. The suggestions he had with respect to the amendment would be the change in the mill rate.
Ms. Von Tobel stated there was some confusion on the part of the committee because they had not received all of Mr. Goldwater’s proposed amendments. Kevin Powers, Committee Counsel, stated the documents would be available in a short time.
Assemblyman Goldwater wanted to discuss what the best mechanism was for determining the rate of the surcharge and whether the committee wanted the PUC to determine the rate necessary to raise a discreet amount or if the committee wanted the rate to be set in statute.
Assemblyman Hettrick stated he understood the intent and direction of that question and felt it would be very difficult for the Legislature to allow the PUC to set the rate. The state of Nevada would have to pay the rate as well and there would be no way to budget. Since the state had to budget there needed to be a rate that would send the bill to Ways and Means to determine if the state could pay the rate. Assemblyman Goldwater said that was a good point.
The Chairman indicated the committee had received the proposed amendment and testimony could continue.
Mr. Goldwater stated there were only two additions to A.B. 349 conceptually. The first change was the deletion of unnecessary and administratively burdensome eligibility requirements and making it appropriately related to counting benefit levels in Section 14. The bill needed to make sure the Welfare Division was able to administer the program appropriately by making sure the transition period before implementation of the benefit levels was more closely tied to the relative energy burden.
Mr. Nielsen, with respect to the administratively burdensome eligibility language, asked the committee to look at Section 14 on page 6, lines 9 through 11, to note the language designed more for benefit level targeted as opposed to eligibility. He asked for the deletion of lines 9 through 11. The other language that needed to be changed was in Section 15, subsection 2(a). He suggested the inclusion of “on or after July 1, 2002” to the beginning of the line and the addition of a subsection (c) stating, “until July 1, 2002 shall provide assistance based on the existing funding formulas described in the state plan.” In that way the Welfare Division could receive the funds and release them without much complication.
Mr. Adler stated he believed these additions and changes would work well. He understood the Welfare Division had many applications pending and they would be able to utilize the funds immediately to start to consider the applications and assist the people in need of energy assistance. Mr. Nielsen wanted to make sure the mill assessment numbers were noted by the committee with the adjustment to .39 mills on each kilowatt-hour of electricity contained in Section 12, subsection 1, and in Section 12, subsection 2, the number would be changed to 3.3 mills on each therm of natural gas. Those numbers would raise approximately $14 million each year.
Assemblywoman Buckley asked Mr. Goldwater if the bill would be passed to the Assembly Ways and Means Committee. Mr. Goldwater stated he did not think the bill was an exempt bill unless made so by motion of the committee. Mr. Bache stated with the rate included there was no fiscal impact in the state; however, there would be a different fiscal impact on the state because the state would have to pay the surcharge. Mr. Goldwater stated he did not know if the bill met the criteria for exemption. All large users of electricity, such as the state, would be impacted by the bill; however, given the size of the state budget, the impact would be negligible. If the bill was amended and rereferred to Ways and Means there would be a very tight timeline unless they could ask the Fiscal Division to declare it exempt.
Mr. Hettrick stated the original print of the bill showed that it did have a fiscal impact with a note attached on the state. It appeared to him it would proceed to Ways and Means and would be exempt. There was no exemption in the amendment that indicated the state of Nevada did not have to pay the mill rate or the therm mill rate, therefore there had to be an impact on state budgets. He believed the bill would be referred to Ways and Means and it was exempt.
Ms. Buckley suggested the committee could ask the Fiscal Division to mark it exempt so there would be no delay and complete a rereferral on the Assembly floor. The committee did not want to jeopardize the bill. She asked if the Chairman would entertain a motion. Chairman Bache stated he would.
ASSEMBLYWOMAN BUCKLEY MOTIONED TO AMEND AND DO PASS A.B. 349.
ASSEMBLYWOMAN LESLIE SECONDED THE MOTION.
Chairman Bache stated it had been moved to amend and do pass A.B. 349 with the proposed amendments and the editorial changes verbalized to the committee. Mr. Bache asked Mr. Powers if he was clear on the verbal changes and Mr. Powers stated he was confident he was clear.
Assemblywoman Buckley stated in this time of energy crisis there needed to be a multi-faceted approach. The committee supported the multi-faceted approach that included stopping the sale of the power plants, deferred energy and other items yet to be considered. She believed A.B. 349 was one of the most important issues the committee would address, as many citizens on fixed incomes would not be able to afford power in another year. There was nothing the committee could do to stop the energy crisis, except for perhaps stopping utility bills from increasing.
Mr. Powers wanted to clarify for the record there was a proposed amendment drafted by the Legislative Counsel Bureau (LCB), the comments made by Mr. Nielsen and the document presented on behalf of Mr. Goldwater (Exhibit D) to be included in the amendment. Mr. Bache asked Ms. Buckley if that was her intent included in the motion to amend and do pass. She stated that was correct.
Assemblywoman Tiffany stated she was voting in favor of the bill with the option of examining it in Ways and Means where she may want to change her vote. She was very involved with welfare recipients and besides stabilizing those citizens with housing and daycare issues, electricity was always a top priority.
MOTION CARRIED UNANIMOUSLY TO AMEND AND DO PASS.
Assembly Bill 418: Revises provisions concerning conservation of energy and use of renewable energy. (BDR 58-1198)
Chairman Bache opened the hearing on A.B. 418 and noted Mrs. de Braga was in Fallon and not present to explain the proposed amendments. He asked if anyone that worked with Mrs. de Braga on the bill was present. Mr. Bache stated there was one amendment in color and the other pages were submitted suggestions (Exhibit E). He stated the committee was having a difficult time processing the information that had been received. He wondered if the committee would like to set a time when Mrs. de Braga could explain the amendments before taking action on the bill.
Ms. Buckley stated she would be ready to schedule a meeting on Friday or Monday so the amendments could be explained. She supported increasing the state’s reliance on renewable energy; however, she was not sure what the percentage and the timelines should be. She was not sure if there needed to be an addition to the amendment that stated if renewables were not available the utility did not have to purchase them. She would like to have more discussion on the amendment before she would feel comfortable voting on the bill.
Assemblyman Hettrick agreed with Ms. Buckley and would have proposed an amendment in language similar to what Ms. Buckley was stating. He would like to see the percentages of renewables eliminated and adopt language that stated the PUC should determine if the renewable source was equal to or cheaper than the existing source and then the utility would buy all they could possibly buy of the renewable source. If the renewable source was not cheaper why would the state want to put it into the mix and raise the rates, he asked. He questioned why the state would want a mandated rate of a renewable source if it was not cheaper. The state would see some development in the cheaper sources of renewable energy if the Legislature passed the bill without a percentage.
Mr. Hettrick pointed out there was language in Section 6 of the amendment that asked for state buildings to identify potential savings in sources of alternative energy. The language still existed, however, that stated, “for each measure that is identified and estimate of time required.” The problem with the language, he indicated, was the first measure could be 100 percent of what it was estimated to save; however, when one conservation measure was applied the next measure applied was not as effective as if it was applied by itself. The language left the state not measuring the conservation measures in total and made every measure seem to be a cost savings when, in fact, when added together they would not be an equal cost savings. He indicated the state had to be careful not to build state buildings where the measures were measured individually, but rather they should be measured cumulatively. There needed to be some clarity on the amendments before the committee moved forward and he suggested the committee wait until Monday.
Assemblywoman Buckley noted she and Mr. Hettrick felt there needed to be more time to discuss the issues. She believed from the testimony renewable energy would cost more and the question would be if the Legislature supported the idea of varied resource planning. There was the issue of purchasing on long-term contracts and depending on the time of purchase it could cost more or less. For example the QFs were a bad idea five years ago and today they were a great idea. She believed the same concept was true with renewables. It could be the renewables would cost more today; however, if the market was established and the state was using wind or solar they would never have to depend on the instability of fossil fuels. In the larger scheme of things the idea that it would cost more today should not be the end of the conversation; however, it made it very important for the committee to be careful about how much more they were willing to pay and for how much.
Mr. Hettrick agreed and believed two of the renewable resources were actually cheaper. He did not think it would be a restriction. He did not want to mandate a percentage and therefore have someone put in a source of alternative energy that might be more expensive and turn to the state law that dictated the utility had to purchase. He believed the state could help the ratepayer and start renewables at the same time.
Chairman Bache stated because of the complexities of the amendment, he would suggest holding any action on the bill until Monday. Mr. Bache stated he shared Ms. Buckley’s concern. If the state was looking strictly at price, the second cheapest form of power now was nuclear power. He did not believe the state would at all be interested in nuclear power even though it was cheap. He did not want the state to be in conflict by using nuclear power and then oppose dumping nuclear waste in Nevada. Mr. Hettrick indicated his understanding was geothermal and wind would be cheaper than natural gas.
Mr. Dini indicated co-generation was sanctioned in the amendment. He had been a proponent of co-generation for at least 15 years in the construction of all of Nevada’s large prisons. The proponents of co-generation had never been successful in their attempts because of the expense. It would have cost $7 million in the last prison built to put in co-generation. He said if the state had used co-generation in the last group of buildings the state built, the state would have been in a position to produce their own power at a low cost. Co-generation would have paid for itself. The Legislature needed far-reaching ideas for the future, he indicated, because he did not believe the generation of power would get easier for anyone. Co-generation, he reiterated, was something the state should take seriously and perhaps before the legislative session was over the committee could suggest a study on co-generation so that when the state built multi-million dollar prisons the money could be added to apply co-generation.
Chairman Bache closed the discussion on A.B. 418 and reopened the hearing on A.B. 661. He recalled Michael Pitlock and Thomas Kinnane to the witness table.
Michael Pitlock, Representative, Shell Energy, and Thomas Kinnane, Attorney for Shell Energy, stated their proposal did not put “all of the state’s eggs in one basket.” Ms. Buckley had commented in a past meeting that she wanted to avoid putting the state and the ratepayers in the position mentioned where they would be unprotected and were subject to risks. Their approach gave the committee the multi-faceted approach they believed was necessary to address the energy crisis the state had currently. Nevada did not have to be California. California had gone out of their way to make their current crisis happen. Mr. Pitlock believed with creative approaches and the participation of other energy providers other than the utilities, customers could have opportunities to seek better deals that would help them through in their own individual way to the end of the energy crisis and a point in time where perhaps a competitive market could provide the benefits that everyone thought it would provide in 1997 and 1999.
Mr. Kinnane stated their proposal took away any disparate treatment based on the size of the customers. If large customers could leave and save money, then why could not a group of smaller customers be permitted to do so as well? There could be more books for classrooms and groceries for consumers if they were part of large aggregated buying groups and saved money. At the very worst they would stay with the utility, be served by the utility and as the market matured and stabilized they would have the opportunity to leave when they wanted. The system was completely voluntary. He stated it was a new regulated service, the suppliers would have to be licensed, the PUC must approve any contract and it was a firm obligation to serve. This would be a reliable service just as if the customers had remained with the utility. There would be a contract rate for a specified period of time from which the private supplier companies could not deviate. If the companies guessed wrong and bought poorly, their errors would not be rolled over into a deferred energy account. They could not come back for a fuel and purchase power (F&PP) rider. They would take the loss and find new buyers. The errors would not be passed on to the customer. The obligation for his company to serve was less risky for those served than the ratepayers that remained with the utility.
Assemblywoman Leslie stated she was conservative and had not decided if she wanted the state to move toward wholesale purchasing even though she did agree it was very important for all of the small customers to have every opportunity the large customers did. She asked if it made sense to try a pilot program perhaps in the northeastern area of the state where the mines were located and there was more potential for the customers to aggregate and benefit in that area. Mr. Pitlock responded that he believed the proposal was an extremely conservative approach. The proposal had all of the appropriate safeguards to make sure consumers were protected with less risky deals. If she did feel there was an element of risk associated with the proposal, and if a pilot program was considered, he suggested there be two pilot programs, one in the north and the south of the state. The two markets within the state were so distinct from one another that the experience in one of the markets could not be a clear indication of what would happen with the same approach in the other market. He did not, however, believe it was necessary to scale the proposal back to a pilot program, but reiterated he would suggest at least two programs with a size sufficient enough to show a real test of the process.
Ms. Leslie stated one reason she was not convinced it was a conservative movement was the dependence on the PUC for assurance of good prudent judgment. She queried how, even in a pilot program, could the state make sure the small users had an opportunity or the know-how to aggregate and what was the incentive for someone to help them aggregate. She feared the large customers would take advantage of the program and the small customers would not know how or would not have a mechanism to join the program.
Mr. Pitlock responded to Ms. Leslie’s comments in regard to the PUC and stated he had served as a commissioner for eight years on the PUC. During that period of time he had served with many individuals, including five different chairmen. He indicated while the Legislature could disagree with the individual chairman or the individual decision that a commissioner could make, what was critical was the process. If the process was correct and fair, then it did not really matter who the individuals were that were making the decisions. If the process was right, there should be confidence in the ultimate outcome. When he stated “the process,” he referred to the entire process including judicial review of decisions.
Mr. Pitlock believed there were entities, such as Shell Energy, that if language was adopted would be willing to come into the state, receive a license from the commission and assist the small customers in aggregating. He also thought there were municipalities, cities or counties that would be willing to enter into a public/private partnership with entities such as Shell to accomplish the same goal. He realized individual small residential customers might not have the sophistication to aggregate on their own and felt there would be entities and organizations, such as the American Association of Retired Persons (AARP), that could sponsor aggregation.
Mr. Kinnane stated in each of the areas where these types of programs had been initialized, government agencies, departments of energy, community groups and private consulting firms had been ready to gather together the groups necessary to meet whatever load requirements were necessary and to insure the RFPs were sufficient to be responded to by alternative sellers. The opportunity to aggregate by itself stimulated a new business entity that helped work out the program.
Assemblywoman Buckley thanked the gentlemen for submitting their proposal. She felt very strongly that the Legislature should be open to proposals such as theirs that might enable power prices to decrease for everyone. She stated the proposal indicated the option was only available to a group of customers that demonstrated at least 50 percent of their electric capacity would be provided from a generation resource not operating on a certain date. She asked why that would matter. She was thinking there would be four new power plants that would bring power into the grid. The grid had a certain amount of power going to everyone, whether it was generated in the state or brought in on transmission lines. Why did it matter, she queried, if a customer could show they were using a new resource or not because that power was available to all people that lived in Nevada.
Mr. Pitlock indicated the wholesale market was not controlled in terms of where the energy went once it was generated. The fact power plants were being built in Nevada did not assure the state the energy from the plants would benefit the residents of Nevada. In examining the current mix of fuel supply there was about 50 percent of the native load serviced by purchased power and 50 percent served by generation within the state. In order to assist with the shortage of supply, recognized as one of the problems in the West currently, and if the option was offered to customers, the customer should do something to help with the supply. If the state was only repackaging the existing resources, in the long run the supply situation would not be benefited. He stated their proposal was not offered to just repackage the existing resources, but rather to contribute to stimulation of the market for new generation facilities in the West. There had been discussions in regard to energy issues over the past months concerning constitutional problems in the restriction of where power could flow. They did not want to propose anything that would involve mandating in-state resources as opposed to trying to stimulate the supply for the whole region.
Ms. Buckley stated the Governor had indicated in some preliminary discussions with the new power plant builders that through the Southern Nevada Water Authority with the water permitting process and/or zone permitting process, he was able to guarantee 25 percent of the energy for Nevadans. She asked if that 25 percent was promised for the grid and there was access to the remaining 75 percent for the right price, how was his proposal bringing any new energy to the grid.
Mr. Pitlock reiterated he did not feel the state should limit its options to only those plants within the state. Ms. Buckley had mentioned the price and that was a very important issue. If an alternative seller could find a new resource that was outside of the state and had a better price than the resource within the state, he asked if the state should not allow at least consideration of that option. Rather than the state limiting itself to resources in the state and considering the volatile market of natural gas, he said, it would be risky not to consider all options that might deserve consideration.
Ms. Buckley stated if the supply was out of state, of course the state would want those resources as well; however, there was the issue of transmission lines. If the lines were available there was already access to that supply or source. If there were no lines the state could not take advantage of the source. Mr. Kinnane stated that was correct; however, Shell Energy had an affiliate named Entergyn. The company built generating plants. Entergyn would complete 235 megawatts of new generation by the end of 2001 in California. That plant would be fueled by Shell natural gas delivered through a Shell natural gas pipeline to the Shell generator. That Shell generator would prefer to sell to a Shell retailer in the state of Nevada because they knew they would get paid. If there was a market and a buyer they could bring that generation from other places and help improve the supply situation.
Assemblywoman Tiffany asked for clarification on an example of the Mirage Hotel in Las Vegas leaving the utility and aggregating. In that case Mr. Pitlock had indicated there would be more power available in the portfolio and make the power more reliable and more stable. Mr. Pitlock stated when the utility put together its portfolio of energy it would be ranked relative to their price. At some point the cheapest would be at the bottom of the stack and the most expensive at the top of the stack. They all totaled up to the amount of energy that was needed to serve the load they had an obligation to serve. As part of a load left, the incumbent utility and the obligation to serve was reduced, assuming they made prudent decisions, the utility started to reduce the portfolio of energy they had secured to serve the load. Obviously they would cut off the most expensive first if they were able and if not able, perhaps by contract obligation, they would have the ability to resell that energy in the markets to someone else and recover costs. Mr. Pitlock went on to explain as the utility’s total obligation to serve was reduced, their total need for power was reduced and they should be able to incrementally reduce the average cost that was passed on to the residential customer.
Ms. Tiffany asked if there were a certain amount of users that left the system what would happen to the stock value of the utility, which was the liquidity for bonding that built the transmission lines. Mr. Pitlock stated there should be a positive impact to the utility. The most volatile part of their business, the part of the business that was causing problems with the price of the utility’s stock, was the energy market. The utility had to buy the energy and there had in the past been limitations on their ability to pass those costs onto ratepayers. In allowing other companies to provide that part of the business, the risk was shared with other entities that were able to manage the risk. The utility would be fully compensated for the service it was still providing. The utility would still have to provide the transmission lines, the wires and the level of service to its customers. The only relief was the energy piece and the utility would still be fully compensated for the other costs. In his opinion, it would reduce the overall risk of that utility business and in the long run would have a positive impact on their stock price.
Mr. Kinnane indicated Shell’s proposal did not replace the utility, but rather joined the utility in providing electric service to customers and in doing so alleviated the risky part of their business. It was absolutely necessary to Shell’s business that the electricity they provided to a customer was efficiently delivered by the utility. They needed the utility to be in good financial shape in order to invest, retool and maintain the efficiency of its distribution and transmission system.
Mr. Hettrick commented on the proposal. He stated the committee should take into account paragraph 5 of the proposed amendment, indicating aggregated groups would pay any charges associated with their departure and the customers remaining could not be negatively impacted. If the language was written carefully in the law it should address some of the concerns about what might happen to the people left behind. If for every megawatt that left the aggregated groups had to bring in a half of megawatt of new power, it would free up a half of megawatt in the state’s marketplace.
The law of supply and demand said if a half a megawatt was brought into the marketplace it would do two things for the state. Mr. Hettrick indicated the half of a megawatt provided reliability that was a benefit to the small customer. The state would run the risk of reliability lost if Shell’s plant was finished by the end of 2001 and there was no other generation completed in the state until 2003 and 2004. That was one reason why he felt it was important. Shell brought in half new power to this marketplace. If supply were added, by the law of supply and demand the price would decrease. The state could mandate Shell to bring in half of the power if they wanted to have customers. The price should either stabilize or decrease. Mr. Hettrick proposed if the utility could stabilize the price that would help the small residential customer. There was nothing in the proposal prohibiting the small customers from aggregating. If they could aggregate and buy better they could increase reliability and increase supply, forcing prices down again. Mr. Hettrick explained if the state forced a major user who wanted to buy from the existing grid the user would have the power of size to negotiate for a better price within the same supply. The major user would receive a lower kilowatt-hour price than the small consumer who could not negotiate for the same price. The proposal made clear sense to Mr. Hettrick. Shell or some other company would bring in part of the supply, increase reliability and, ultimately, lower price. There was no risk to the state because they would not be using deferred energy, imprudent purchases that had to be offset by a rate filing and increase. There was no downside to the proposal and he proposed the state should allow them the option with the PUC overseeing the program to prove they could meet the obligations they had proposed.
Ms. Buckley was not clear how the companies would be bringing in new power to Nevada. There was a certain amount that was either built here or that the state had the transmission lines to receive. Unless they were building a new co-generation she could not see how it would bring in new supply.
Mr. Kinnane stated Nevada only had half of what they needed for power at any time currently. The state had to import half of its power and that meant it had to buy, within its own capabilities of purchasing, a relatively large amount of power to meet peak load obligations. Shell Energy and its many competitors had a vast array of resources, not necessarily electricity, perhaps natural gas, various fuels, and a wealth of financial resources and contacts. They were able and better positioned than the utilities. The utilities were large in the state, however, not in the region, and in the nation as a whole they were smaller than the national energy companies. Shell was better positioned to leverage their resources to purchase cheaper fuel in order to obtain savings and obtain large amounts of power to be used in Nevada or elsewhere.
Ms. Buckley created a scenario wherein she assumed it to be true Shell could get a better price. She asked if Shell bought 40 percent of the energy needed with 60 percent left for Sierra Pacific Power to buy, did Sierra Pacific pay higher prices because Shell got a better price.
Mr. Kinnane stated Sierra Pacific already had half of what they needed and if Shell was taking 40 percent then they had reduced nearly by half what Sierra Pacific would have to buy. Sierra Pacific’s purchase requirements that exceeded their generating ability was far reduced. Mr. Pitlock stated one of the concerns he had heard expressed in the Assembly and in the Senate was the state could lose control over the existing resources the utilities owned today. This language, he stated, preserved the capacity that the utilities already owned for their remaining customers. If customers exercised choice and were allowed to leave the utility and the overall load responsibility for the utility decreased, instead of buying 50 percent of their power in the markets today, 60 percent next year, and 70 percent the following year, based on the fact the utilities were not building new plants, the utility would be able to self-generate a greater percentage of their load requirements. The concern in regard to maintaining control over the utility’s assets for the benefit of the current customers of the utility could be alleviated. Shell was bringing something new to the market and not just repackaging.
Ms. Von Tobel recognized Nevada had prided itself on being pro business and she believed much of the deregulation language would be preserved. With a pro-business attitude towards the energy situation, Nevada would be different than California in their excessive regulation. She responded very favorably to the Shell proposal. She had in the past proposed many hard questions to the Shell proposals; however, this one made sense. As a customer she would choose a product at a lower price with the service she needed. She indicated Shell was not going to enter into the market unless they were going to be competitive. Shell would still need to be approved by the PUC. She did not understand why some legislators did not feel pro business when it came to power supply. She believed the proposal was a win-win for the state, much the same as renewables, with a little adjustment. She did not think the state should require a certain percentage of renewables be purchased by the utility when there was no idea if the renewables would be available or less expensive. Shell was going to bring a product to the state that was affordable and available and would offer it to the customers for purchase. Ms. Von Tobel stated giving the customers a choice and most likely lowering the rates for everyone was a positive action.
Ms. Buckley indicated the state would not be very pro business if it did not watch its power prices and caused businesses to fail.
Judy Stokey, Government Affairs Executive II, Nevada Power and Sierra Pacific Power, introduced Kathleen M. Drakulich, Associate General Counsel for Sierra Pacific Power and Nevada Power (“the company”), for the reaction of the utilities to the Shell proposal. They were not present to support or oppose the proposal, but rather to communicate some of the concerns the utility had with respect to the proposals. Ms. Drakulich indicated she would speak to the aggregation of customers or the ability of customers over one megawatt or aggregated to be over one megawatt, leaving the utility. The idea looked familiar to the idea of opening the market with the exception of metering and billing. There were some concerns with respect to the uncertainty for the utility. How long would they serve their customers? How did the utility predict the amount of supply they would need to commit for and for what length of time? Ms. Drakulich stated there was concern on that issue. “The company” was apprehensive in regard to metering and billing. The rules would need to be in place in regard to the sharing of responsibility of metering the customers that would leave. How did “the company” bill those customers when the energy component was coming from a source other than the utility? She commented directly on the question of disparity and the equality of all customers with respect to the proposal. She believed that might not be true for certain customer classes and those would be smaller commercial and residential. As Assemblyman Hettrick had pointed out, when the aggregated customers left they did take the cost of leaving with them? She wondered if those smaller commercial enterprises and residential customers could afford to take that cost with them. For a large residential group of customers the amount could be sizable. The issue could become whether or not they would be able to go based on prohibitive upfront costs.
Ms. Drakulich stated the other question was who would take this group of customers. She had been participating at the PUC in the last three years in the deregulation environment. While there had been a large number of providers applying to do business in the Nevada power market there had not been one that would have been interested in serving large groups of residential customers. The industry called those types of customers “low-margin” customers. They were expensive to serve and the profit margin was low. “The company” was anxious in regard to the proposal from Shell addressing opportunity equally for all customers.
Ms. Drakulich stated the alternative provider part of the proposal was similar to the existing statute, NRS 704.9829, which allowed alternative providers to enter into the state to bid for a segment of the customers. In the language there was an opportunity for the PUC and the Governor to rule on the application of an alternative provider and therefore what was the utility’s risk and how did “the company” mitigate the risk? The application could be filed ten months after the current legislative session and that was the certainty period for the utility in terms of numbers of customers. Beyond that time an alternative provider could file an application with the PUC and the utility would be in an uncertain position with respect to when did they make the decision for customers that were represented in the alternative providers application. In the proposal the alternative provider could back out of their proposal prior to providing service to customers as late as the Governor’s attachment of conditions and modifications to that application/proposal to provide service to customers. She asked when the utility should commit or stop committing, when the proposal was made or when the alternative provider accepted the Governor’s attachments and conditions to that proposal.
Ms. Drakulich stated having been involved in deregulation she was made aware of situations in other states across the nation. She had heard Mr. Pitlock state the energy providers would have contracts with their customers in the aggregation proposal; however, she did not hear the alternative provider would have the obligation to take a piece of the utility’s portfolio with them and relieve the utility of that obligation when they left. In a number of other states, and in Nevada, the margin of profit on those residential customers did not work any longer for the alternative providers. The alternative providers in other states had served notice to those types of customers they would no longer serve them. One of the benefits of the proposal admittedly, she stated, was the provider did not pass on costs they did not anticipate if it was a fixed rate. If the provider decided, for instance, Nevada was not the right state and they were not making enough money, they were not regulated and could leave. The obligation, as in other states, was on the utility to pick up those customers. If the group had a large amount of customers, the utility would have to buy short-term and of course that short-term would be the most expensive.
Ms. Buckley stated Ms. Drakulich’s pointed concerns were just another reason why the committee had to continue to examine all of the alternatives.
Chairman Bache stated there was one more presentation on A.B. 661 in regard to the election of the PUC.
Mr. Bache presented the sections of the bill that contained provisions for elections of the PUC and clarification of the duties of the PUC to act in the public interest. In recent years it had not always been apparent the PUC was functioning in the best interest of Nevada. There had been vacancies on the Commission and turnovers of Commissioners and staff that had hindered the efficient operation of the Commission. Litigation settlements and rate cases had been approved that contradicted the spirit and the letter of legislation passed by the Legislature and agreed to by all affected parties. Section 1 of A.B. 661 was written to make the Commission more responsive to the public interest as well as directly accountable to the voters, and provided the Commissioners of the PUC be elected, not appointed.
Mr. Bache indicated nine other states had elected PUC Commissions: Alabama, Louisiana, Georgia, Mississippi, Montana, New Mexico, North Dakota, Oklahoma and South Dakota. In A.B. 661 the three Commissioners must be elected from the three congressional districts; the third of which would be created before the next general election at which the Commissioners could be elected in November 2002.
Section 46 of the bill required candidates for the office of Commissioner to specify in the declaration of candidacy which of the three seats on the PUC they would be running for. Section 47 established the office of Commissioner was a nonpartisan office. Section 101 repealed existing language allowing the Governor to remove Commissioners because removal of elected Commissioners would be handled by existing provisions for impeachment of public officers. Chairman Bache indicated Section 106 staggered the initial terms of elected Commissioners so that one of the three Commissioners elected at the first general election served an initial term of two years instead of four years. The section also outlined the duties of the PUC to act in the public interest. The last two provisions of A.B. 661 mentioned involved the consideration of the public interest during the deliberations of the PUC. Section 28 required the PUC, while in the process of approving the construction of new electric generating plants, must consider whether the plant would benefit the residents of the state by increasing the amount of electricity that would be available for purchase in the state. This addressed the problem of electric generation plants built in Nevada only to export power out of the state and yet did not forbid the exportation of electricity or the fact that a plant would export electricity to another state an automatic criterion for disapproval. The latter would bring up questions related to the Commerce Clause.
Mr. Bache stated Section 29 of the bill required if a public utility purchased electricity for resale pursuant to multiple contracts or purchase power agreements, one of the duties would be to ensure the terms of such contracts and agreements were varied so the utility had a mix of short-term and long-term agreements. This would help provide a situation in which the utility customers were less subjected to fluctuation in wholesale price electricity. Section 29 also required the PUC to consider whether a utility’s purchase of electricity for resale was desirable in the public interest, considering whether the utility had been complying with the requirement to vary the terms of the purchase power contracts.
Mr. Bache additionally remarked he had been very disappointed in the PUC in the last year or so. There was some proposed language he had requested in regard to the commission’s staff. He was very disturbed by the fact that Mr. Soderberg had fired three people, one a 25-year unclassified employee with no appeal rights, when he became the Commissioner of the PUC. There had been a large exodus of Commission staff over the last two years. His opinion was that Commissioners would come and go; however, the staff of the PUC should be one of a base of knowledge and historical perspective. An average Commissioner could be made to look good by the Commission staff and a good Commissioner could look excellent. He believed there were various questionable changes in the Commission over the last two years that were distressing. One employee had been told his/her position was being eliminated and was released. A very similar position was opened and another employee was hired to fill the new position a week later. These items were of great concern to Mr. Bache. He had hoped the bill would mention unclassified personnel working for the PUC would have a “just cause” provision as far as dismissal. In previous sessions Assemblyman Price had introduced bills in regard to eliminating “at will” firing. He believed the problem currently was at the PUC with staff turnover and it should be addressed.
Sharon Thomas, Director of Regulatory and Public Policy, Advanced TelCom Group, Inc., appeared as a private citizen in support of the portions of A.B. 661 that dealt with the restructuring of the PUC. Although appearing as a private citizen she believed her background gave her some insights into the workings of the PUC. She had been employed by the Public Service Commission and then the PUC of Nevada from March 1992 until July 1999. She started her employment as manager of the telecommunications division and ended as the director of the regulatory operations staff. Prior to being hired by the Commission staff she had worked for 13 years for an economic consulting firm in Florida that specialized in PUC regulation. In that capacity she had gained exposure to many regulatory commissions across the country. She left the PUC in July 1999 and was currently employed by Advanced TelCom Group, a competitive local telephone company in competition with Nevada Bell in northern Nevada. In her current position she had appeared before the PUC in a number of telecommunication proceedings and had extensive interaction with the Commission staff.
Ms. Thomas related her concerns about the structure of the PUC. She indicated the structure affected the ability of the PUC staff to provide a useful service to the Commission as an institution. The staff should assist the Commission in carrying out statutory obligations to insure just and reasonable utility rates, safe and reliable utility services and the encouragement of effective competition in those areas where a competitive market structure could best insure reasonable rates, high quality service and the availability of choice to Nevada consumers. Regretfully, she did not believe the staff was now in a position to provide that kind of service to the Commission. She did not make this statement because she was no longer director of the staff, but rather because of what she observed as almost a complete disintegration of the separation that historically had existed between the Commission and the regulatory operation staff. Historically that separation gave the staff the ability to conduct independent objective analyses that it presented to the Commission in regulatory proceedings as a separate party on equal footing with other parties. In her experience, that separateness served the public interest very well. Unlike other parties with a particular constituency to represent or a particular monetary stake in the outcome of a proceeding, the staff was in a position to examine issues from a truly neutral perspective. The staff presented analyses and recommendations to the Commission not intended to benefit a particular party or a group of consumers, but rather to promote the broad public interest.
Ms. Thomas stated in the 1997 Legislative Session a law was enacted that substantially increased the authority given to the chairman of the PUC including the ability to hire and fire Commission staff members “at will” without the need for the vote by the full body of the Commission. While this change was probably well intended she believed it had unintended negative consequences. The current law gave the sitting chairman the ability to build a staff that he/she believed would be loyal to the chair and similarly to decimate a staff that might be perceived as disloyal or perhaps too loyal to a previous chair. This would be appropriate for the President of the United States in the selection of his cabinet; however, even in that case the appointees were subject to an approval process. Even the President did not have the ability to decimate the ranks of long-term federal employees that provided the continuity, stability and institutional knowledge that allowed the federal government to transition smoothly from one administration to another. Unfortunately, the absolute and unchecked authority that had been given to the chairman of the PUC prevented the same continuity from providing stability and institutional memory in the PUC as the chairmanship changed over time.
Ms. Thomas indicated a second and related problem stemming from the authority given to the chairman was the inability of staff to act independently without fear of employment reprisal if they presented analyses or recommendations that conflicted with the desires of the chairman. She believed that fact substantially reduced the value of the expertise that was available from the Commission staff and in turn reduced the quality of the Commission’s decisions on regulatory issues that were of great importance to the citizens of Nevada. When the Commission chair had direct access to staff and could influence or control the analyses and recommendations presented by staff, the regulatory process itself became tainted. Staff believed it was a separate party in regulatory proceedings, subject to the same rules and restrictions on communication with the Commissioners as any other party. That separateness was now a façade and the fact was staff was not acting as a separate party at all, but rather received instructions directly from the Commission chair on issues before the Commission. Because of the chair’s ability to hire and fire “at will” staff was inclined to do the chair’s bidding. Since staff was now essentially an expanded group of policy advisors to the Commission, the façade of independence should be torn down, she stated, so that all parties and the public were aware of staff’s true role in the regulatory process. To continue under the current guise of independence, she evaluated, gave staff a greater legal position in the regulatory process than it deserved to the detriment of other legitimate parties that came before the Commission. This fact was particularly damaging when the direction that staff received from the chair was to support the position of a particular party to a proceeding or to present only minor modifications to that party’s position to the detriment of other parties. She testified in this way the deck was stacked in favor of the parties supported by staff and from a legal perspective the Commission’s decision could appear more reasonable when it was supported by the favored party and a supposedly neutral staff.
Ms. Thomas spoke about the circumstances surrounding her departure from the Commission. She was one of the three mentioned by Chairman Bache. Two days after the new chairman was appointed she was asked to leave the Commission. The day before that the Commission secretary, the 25-year employee, was also asked to leave. Within a week or two a key manager of a division at the Commission intimately involved in the electric utility restructuring was asked to leave and following several more employees were asked to leave or left on their own accord because of the circumstances at the commission. From her personal perspective being asked to leave was not harmful and she was able to find a comparable position within a week. Her concern was not a personal one but rather about the ramifications of the chairman’s actions on the regulatory process. In essence, all of the conceptual concerns she had discussed she contended had been realized. She supported legislation that would restructure the commission and she believed A.B. 661 was a good starting point. She also felt it could be further improved by revising the current statute that gave the chair of the commission chief executive authority.
Chairman Bache seeing no further witnesses or questions adjourned the meeting at 3:56 p.m.
RESPECTFULLY SUBMITTED:
Cheryl Meyers
Committee Secretary
APPROVED BY:
Assemblyman Douglas Bache, Chairman
DATE: