MINUTES OF THE meeting

of the

ASSEMBLY sELECT Committee on Energy

 

Seventy-First Session

May 3, 2001

 

 

The Select Committee on Energy was called to order at 1:50 p.m., on Thursday, May 3, 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

Mr.                     David Parks

Mrs.                     Debbie Smith

Ms.                     Kathy Von Tobel

Mr.                     Lynn Hettrick

Mr.                     David Humke

Ms.                     Sandra Tiffany

 

STAFF MEMBERS PRESENT:

 

Kevin C. Powers, Committee Counsel

David S. Ziegler, Committee Policy Analyst

Cheryl Meyers, Committee Secretary

 

OTHERS PRESENT:

 

Walter Higgins, CEO, Sierra Pacific Resources, Las Vegas, Nevada

Russell A. Fields, President, Nevada Mining Association, Reno, Nevada

Rose McKinney-James, Representative, Clark County School District, Las Vegas, Nevada

Dr. Joseph Crowley, President, University of Nevada and the Community College System of Nevada, Reno, Nevada

Cindy Ortega, Chief Financial Officer, MGM/Mirage, Las Vegas, Nevada

Lawrence Semenza, Representative, Dynergy, Inc., and NRG Energy, Houston, Texas

Timothy Hay, Chief Deputy Attorney General and Consumer Advocate, Bureau of Consumer Protection, Attorney General’s Office, Carson City, Nevada

Thomas E. Wilson, President, Nevada Utility Reform Alliance, Reno, Nevada

Jon L. Sasser, Representative, Washoe Legal Services, Nevada Legal Services, Washoe County Senior Law Project, Reno, Nevada

Steven Boss, President, Nevada Energy Buyers Network, Reno, Nevada 

 

Assembly Bill 661:  Revises and repeals various provisions concerning utilities and energy. (BDR 58-1128)

 

Chairman Bache remarked there were a number of concerns in regard to A.B. 369 and how it would affect the large power users.  The major users suggested that there be some alternative method of obtaining electrical power and had asked the Chairman if they could propose amendments to A.B. 661.  The Chairman had asked a number of people from mining, gaming, and the utility company to meet and present a concept on how the large users could exit the system.  He wanted to know if the major users could positively affect the rates for the residential and small business customers and bring new resources to the state.  He informed the committee that Mr. Walter Higgins, the CEO of Sierra Pacific Resources, would be arriving shortly to testify before the committee.

 

Walter Higgins, CEO and Chairman of Sierra Pacific Resources, the parent company of Sierra Pacific Power and Nevada Power (“the company”), testified “the company” was dealing with a credit crisis and he apologized to the committee for being late.  The rating agencies were looking at “the company’s” credit worthiness.  Because of the result of actions taken by the Legislature there had been restored confidence in “the company’s” ability to supply power to Nevada as well as to the banks that would loan money or those that would sell power to them.  The situation had considerably improved as a result of the passage of A.B. 369.  “The company” had purchased a portfolio of fuel and power to deal with the needs to run the power plants and purchase the power required to keep their customers in power through expected very hot weather and the growth continuing in Nevada.  They had purchased additional power to make sure if conditions got worse than expected there would be enough power for their customers.  If the additional power was not needed “the company” had purchased the power at prices, generally speaking, that could be sold back into the market and would lower the costs to their customers.  The situation for the summer should be good in terms of knowing what the customer prices would be and good for “the company” knowing what its supplies of power and fuel would be. 

 

Mr. Higgins stated as “the company” looked to the future they faced the question of what to do.  It was the current wisdom of the Governor and the Legislature that the market not be open for general retail access.  The question was raised now of whether it might be a good idea to let certain sophisticated customers who have desired to have direct access to buy their own supplies leave the utility and purchase their power from the market.

 

He acknowledged there were questions to be answered by the proposed action.  Could the major users leave the utility with the guarantee the customers left in the system would not be hurt?  Could the major users leave and keep Nevada intact as an electrical entity so that everything still worked?  Mr. Higgins’ answer was affirmative and he stated he supported the idea.  He indicated customers of a certain size have the sophistication and it would be good for the rest of Nevada to allow them to have the option of purchasing their own electricity.  “The company” supported allowing them to make the choice to leave and if they chose to leave he urged the Legislature to build safeguards into the system to be sure that in exercising the choice those customers would not be shifting costs to other customers remaining with the system.

 

Mr. Higgins informed the committee this was a model that had been widely used in the natural gas industry for a very long time.  Large gas customers for years had been able to buy their own gas commodity product and use the utility’s transportation and storage systems in order to supply the delivery service.  He stated the model for gas and electric were similar enough to be able to make it work. 

 

Mr. Higgins acknowledged this was something the large users had wanted for a long time.  The major users believed they might be able, through commitments that were particular to their own businesses and structure, to make better deals for power than continuing to purchase from the utility.  He was pleased to be able to support their idea for leaving.  Mr. Higgins indicated the proposal made sense in the current cost environment and presented charts outlining the facts to the committee (Exhibit C).

 

The first chart showed a merit order for generation for power supply for the Nevada Power Company in a typical summer such as the current one.  The charts showed general data and not precise exact data.  Each of the bars on the histogram represented a particular resource “the company” had available to them to use to serve their customer’s power needs.  The chart represented the Navajo, Mohave, Reid Gardner, Hoover, Qualifying Facilities, Clark, Sunrise, Harry Allen, Valmy and Sunpeak plants.  The bar representing purchased power was included and the current on-peak market was last.  Relative merit order prices of the different resources were used to make up a portfolio of power to serve their customers and they tried to get the prices represented by the bars to be as low as possible.  “The company” first served out of the lowest possible prices and if they could they would never buy anything in the current power spot-market that was 2.5 times higher than their purchase power contracts.  If they could they would always run the Navajo plant, the cheapest resource, before the Sunrise or Sunpeak plants that ran on natural gas and were the most expensive to operate.  The coal-fire plants were the cheapest power they could produce and they tried to produce as much from those as possible and not use anything to the further right on the chart.

 

Mr. Higgins stated the average of all of the resources, and each contributed a certain amount of energy, was represented by the farthest bar on the right at $78 per megawatt-hour.  The Navajo, Mohave and Reid Gardner plants averaged between $11 and $13 per megawatt-hour.  In order to make the total portfolio for Nevada Power for this summer, they planned to run all of the cheaper plants, including the qualifying facilities or the power plants they owned, Sunrise and Sunpeak.  When those plants were no longer sufficient, and they were not when the load was at peak, then they would begin to use their purchase power contracts.  “The company” had been fortunate in that they began buying the purchase power contracts for Nevada Power last summer when the power prices were beginning to escalate but before they reached the current very high level.  Their total purchase power portfolio for southern Nevada was approximately $138 on an average.  Their portfolio of power would never be expected to use any of the current on-peak market power.  They would only use their purchased power portfolio plus the power plants they owned plus the qualifying facilities contracts.  If they had something fail and went outside the bounds of the conservatively purchased power portfolio, they would have to go to the power market and purchase some of that very high priced power.  If the weather was to get very hot, hotter than normal, and if there was a power plant that was not running for some unexpected reason that day, they might have to buy a small amount of power from the spot-market.  The committee could note if “the company” had to depend very much on the spot-market it would raise the price of power significantly.  Mr. Higgins stated the average number, $78 dollars, was very important.  The average number represented the average cost in the entire system for all of the power they expected to produce this year to serve all the expected needs of the customers.

 

Mr. Higgins stated this was a time in the history of the power industry when an unusual effect was occurring.  If they did not have a big customer take power from them in their system, they would not buy some of the more expensive power they would have had to purchase.  They would be farther away from a situation that would require “the company” to have to purchase power from the spot-market entailing huge expense.  They would have more reserve in the portfolio they had already bought if, for example, a large casino on the Las Vegas Strip decided to exercise a right to leave and was no longer going to buy 30 megawatts from “the company.”  That would be 30 megawatts they would have already purchased for this year they would not have to purchase in the market next year.  Everything they bought was at a higher price and if they did not have to exercise the purchased power contracts the average cost of power would be reduced by losing some of the customers able to leave the system.  Mr. Higgins indicated the model did not work if every single customer chose to leave.  This model only worked if it was limited to the large customers, the sophisticated customers that were able to buy on their own and if it was a condition that in allowing them to leave the system, they left leaving no cost unpaid and no transfer of cost.  The customers leaving of course could not compete with “the company” for their same resource.  Certain provisions discussed included the fact that the power had to come from a new resource.  “The company” could demonstrate for an increment of their total system, several hundred to a thousand megawatts, that in losing those large customers, provided it was done with no damage to remaining customers and no competition with “the company”, the cost to the customer remaining on the system would go down.  “The company” in that scenario would buy less expensive power and use more of their own resources to meet their customers’ needs which should reduce the average cost and in turn reduce the cost to all remaining customers.  It was for that reason and under those circumstances and with those controls he was pleased to recommend the committee give serious consideration to allowing large customers to be able to leave the system.

 

Mr. Higgins referred to the other chart that showed Sierra Pacific Power’s power portfolio.  He indicated the shape of the graph was very similar although some of the numbers were different because the market was different.  The two companies bought from and operated in different markets and therefore had different power portfolios.  If a large customer left the system in northern Nevada the same situation would occur and everyone would save money.  There was one main difference between the two systems and that was the transmission system in northern Nevada was constrained.  It was not capable of importing 100 percent of what was needed to serve customers.  The southern Nevada transmission system did not have import transmission constraints.  Power could be brought into southern Nevada, however, not into northern Nevada.  As a result a large customer that chose to leave the system and bought from outside the system could not buy 100 percent because they would be literally stealing the transmission import capability for all other customers.  If a new plant were to be built inside the northern Nevada system, and the transmission import capability was not hindered, there would be a different calculation and an ability to use more of the power.  Mr. Higgins stated encouraging new resources to serve would be the ideal system.  He reaffirmed he believed it was a good idea for all Nevadans, and especially for those that remained in the system, to allow the large customers to have the choice to leave the utility system.

 

Assemblywoman Tiffany asked if “the company” did not want a large user to compete with the resources listed on the chart could the large user use renewables.  Mr. Higgins stated a new renewable, not one existing because that would be competition.  Ms. Tiffany asked if that would have to be developed.  Mr. Higgins replied a new resource would not compete and as she could see by the charts the qualified facilities contracts both in the north and south were very competitive today.  That was good news for Nevada because the geothermal and biomass energies were a good investment in the market that existed today.  The market might change, but if the resources were removed from current customers it would raise the price to other customers today.  A new resource would have no effect on current customers.  Ms. Tiffany clarified if it was a renewable it had to be a new renewable or a renewable from outside of the grid.  Mr. Higgins replied in southern Nevada’s case any renewable outside the grid would be good and in northern Nevada a renewable could only be imported to the extent it was within the share of transmission import that customer enjoyed. 

 

Ms. Tiffany stated another option was purchasing power on the spot-market or buying a power contract as long as it was not in competition on the grid.  Mr. Higgins stated with power contracts there was little question that everyone went to the same markets and it would be substituting one for another.  He was confident “the company’s” ability to buy power would be sufficient to protect “the company” and its remaining customers even if a large customer would go out and try to buy power.  Mr. Higgins reiterated in northern Nevada a power contract from outside northern Nevada would be subject to a transmission constraint.

 

Ms. Tiffany asked if Mr. Higgins foresaw any other source from another grid that did not exist today.  Mr. Higgins indicated conservation should remain a source that everyone thought about in the current troubled times.  “The company” had an aggressive program called “Take Control” and anything that anyone did to conserve and save power in Nevada had the same effect he had described previously; if a customer once used it and “the company” planned for the customer to use it and then they did not, each customer could “free up” some of the high-priced power.  The high-priced power could be sold or not purchased on a future basis.  If customers aggressively conserved it would have the same effect and would be welcomed.  Ms. Tiffany stated when she examined all of the combinations for a large user to leave the system she realized it probably would not happen until there was something new and at the minimum she felt would take two years.  Mr. Higgins stated there were power plants coming on-line in northern Nevada that were not necessarily economically attractive to a company that would want long-term firm power.  It was possible, however, for a company to buy power from a plant that would be activated this summer.  It did not mean they would and by next summer, he indicated, there were commitments for more power plants.  Again, he did not think it would be the kind of power that most large users would want to leave the system for; however, they might.  Mr. Higgins stated he could not predict because a company did not sign a contract for ten years that stayed the same.  The contract might be back-end loaded with a provision for delivery of power at a low price out of the new higher cost plant if the company would sign a ten-year contract.  Power contracts could be created so that someone could leave the system even though a power plant might not yet be on-line. 

 

Ms. Tiffany indicated the conditions were fairly restrictive and asked when he expected the first large customers to be able to leave.  Mr. Higgins responded there needed to be some rules made by the PUC and there needed to be a deliberation of how the customers that remained were protected.  He believed those issues would take a few months and he thought customers could leave the system in an orderly fashion by sometime next spring.  The large customers in southern Nevada were talking about being prepared to take power in the summer of next year.  If someone were to aggressively go to the market and look for power and assuming the market produced power at the cost they were willing to pay, under terms and conditions they were willing to have, he would not be surprised to see those customers leave next summer.

 

Ms. Tiffany asked what else would a large company need to do to make sure “the company” and the consumers were left in a good situation.  Mr. Higgins stated it would be a combination of things.  If there were any public benefit programs they had been asked to participate in, the large users would have to agree to take a share of that program on an ongoing or residual or cash-out basis.  Issues would have to be resolved if there were long-term contracts, rate subsidies built into the rates, or any deferred energy balances remaining.  The details would have to be worked out.  The Legislature must not allow departure from the system as a way to escape public policy or legitimate activities that had been undertaken in their behalf in the past.  Some notice was required to “the company” and the sooner the better because planning for a customer’s load was an activity that needed to be undertaken carefully.  “The company” always planned for the distribution and transmission but because they were already buying power for 2002 and 2003, the sooner they knew a customer was leaving the easier it became to redefine the portfolio necessary to serve them.  If “the company” did not know a company was leaving the system they had to assume the corporation would be there and plan accordingly.  The consequences of under-planning in the current market were disastrous. 

 

Assemblywoman Buckley stated Mr. Higgins had talked about the concept that if the spot power or the fuel and purchase power (F&PP) could be reduced “the company” overall would benefit and the average consumer would benefit in the form of reduced costs.  In his model would he require as a condition to a large user leaving that there be a public interest showing that the rates of those left behind in the system, including residential and small business owners, would have to go down?  Mr. Higgins responded showing they were going to go down was very hard to do.  However, showing they were not leaving any costs behind, not injuring those consumers, and knowing the resource was a new resource was probably sufficient enough.  He did not know how, other than using the model, to show the price went down.  If someone left the system ”the company” stopped buying the $138 power and the average would drop.  He stated he could not show specifically if a hotel/casino left the grid everyone’s rates would drop for example, to $.03 per kilowatt-hour.  It would be hard to make economic assumptions particularly for the forward price curves for electricity.  Ms. Buckley asked if he could make the assumption without looking at the future cost but on the situation currently.  Mr. Higgins responded, based on today and today’s prices, the model should show it.  However, there were many assumptions based on models such as what did “the company” do with the power they had already bought and did they sell it. 

 

Ms. Buckley stated if his theory was true and there was a system benefit based on getting rid of those higher end costs, would he support residential customers to aggregate and use a sophisticated buyer to purchase power on their behalf.  Mr. Higgins urged the Legislature in this case to either deregulate and let everyone aggregate that wanted to, or do not deregulate and only let large customers.  If the state allowed small customers to start aggregating he would not be able to predict how many would aggregate and the state could quickly be driven into an economic reverse with respect to electricity.  All of the rules and issues that were needed for deregulation would be suddenly needed again.  All of those rules had recently been repealed by the Legislature.  In his opinion it did not make sense to begin aggregating small customers.  If Nevada had learned anything from California it would be small steps were maybe better than massive steps into an unknown situation.  He could not be sure how it would work.  He had been involved in deregulation in Georgia in a previous position and found out the issues they believed would be large were small and vice versa.  California never assumed they would have the problem they were having today.  “The company” had not had one customer in their California jurisdiction leave to a competitive market and they had been able to leave for four years. 

 

Mr. Higgins stated they did not know how these markets today would work.  If the state allowed everyone to aggregate there would be a large need for rules and showings.  Who would get to aggregate, he queried, and would it be every other customer, every fifth customer and it could become an unmanageable problem.  All of the costs, the transition issues and the uncertainties that competition created in the beginning would be here again.  With large customers leaving, it would be a manageable number of people, would be only customers of a certain size and above, which he recommended should be one megawatt and above, and customers that were sophisticated buyers, did not require new systems and structures to be put into place, did not require new and complex rules, and did not require new consumer protection laws.  He did not believe it would be a good choice to start aggregation.  If the state was attempting to do that he suggested all of the previous rules should be brought back and put into place and have competition.  He did not think aggregation at this point lead the state in the right direction.  He urged the Legislature not to vote for aggregation.  He believed it to be a wrong decision.

 

Assemblywoman Leslie asked if the portfolio standard would apply to the departing customers and the entities that would sell to them.  Mr. Higgins commented in his opinion there was no question if the state wanted portfolios or any other public benefits to be embedded in the electric system it was vital that those things moved with the customer and not stay in the system.  He stated it was simply wrong to insist that one group of customers bear a certain social policy burden or benefit while the other did not.  It was too easy for people to make decisions on how to escape policy rather than if it was the will of the state of Nevada to have a portfolio standard and let it apply to every customer equally.  If a company wanted to purchase from an outside supplier then the marketer had to deliver acceptable power to the company.  If the company acting under the law engaged a portfolio to meet a standard and that portfolio at some point went out of the market, and it could, that might be the responsibility of a customer that had left the system.

 

Ms. Leslie asked about the public benefits charges both past and future.  Mr. Higgins stated it was the same thing in his view, the public benefits were not unique to who the electric marketer was and should be paid by everyone.  He believed public benefit should stay with the customer regardless of the marketer serving the customers. 

 

Ms. Tiffany queried if the committee had legislation allowing aggregation and the Colorado River Commission (CRC) felt they had a supply of new resource and they could service the city of Henderson, would the CRC’s portfolio have to meet some standard to serve the city.  She also asked if the CRC was outside of what he had called competition.  Mr. Higgins understood the CRC, under a bill that had been considered, would have the right to serve the municipal and wastewater loads of its customers, including the city of Henderson.  In addition to providing water from the Southern Nevada Water Authority, the CRC under the bill would have the right to serve the electric needs of the member agencies of the CRC for their water, wastewater pumping and treatment.  He stated they were large customers and it was consistent with his recommendation that he had made today to the committee, to allow the large customers to aggregate.  If the committee moved now to allow the city of Henderson to become a unique entity in which all of its customers could be aggregated, he did not feel there would be success.  Two or three years from now when the Legislature might decide to begin competition then perhaps aggregation would be a good way to move towards, but he did not feel it was the right thing to do now.  Whether aggregation came under the banner of a city or a marketer, such as Shell, or anyone else, aggregation was not a good thing to do because it created all of the challenges, all of the system needs, and all of the problems competition created without having any underlying law to support it.  If the state wanted competition they should vote it in and not “back-door” the policy by creating aggregation.  Mr. Higgins stated allowing large customers to leave, such as the city of Henderson, made sense.  If there were a public benefit charge the major customer should not be able to escape it no matter who the supplier would be.  He believed the supplier should have nothing to do with the public benefit charge and whether it was a portfolio standard, a kind of public benefit, or another kind of public benefit charge such as low-income assistance, it should stay with the customer.

 

Ms. Tiffany asked specifically about the CRC.  If the bill was passed and they could aggregate without going back to deregulation, did the CRC have the mix he believed they should have, public benefits, etc., to go to a municipal area and become the supplier?  Mr. Higgins stated he had not studied whether the CRC could or could not; however, what he stressed was if the state wanted public benefits they ought to apply to Nevada and Nevadans, not to who the supplier was.  It was not right for someone to say that a customer that lived in Pahrump, for example, did not pay a public benefit charge, but a customer that lived in Hawthorne did. 

 

Assemblywoman Leslie asked Mr. Higgins about the small residential user and small business users.  If the state was not going to allow them to aggregate and could not guarantee the prices were going to go down, what was the standard for the residential customer to use to see if Mr. Higgins’ theory worked?  Mr. Higgins stated, because of the complexities of the business, it was difficult to prove it to the consumer.  He indicated the state could see how the electric portfolio was created, it was clear there was a shortage in the West, and it took a certain amount of explaining to understand that everyone would be better off if the utility did not have to purchase some of the high price power because large customers were being allowed to purchase the power themselves.  The large customers would not compete with the rest of the state for the resources that were dedicated to the average consumer.  He indicated the cheapest resources the state had were its own resources.  It was not necessarily going to be true forever and this was not a plan he might have brought to the Legislature five years ago.  Five years ago he would have said if a large customer left the system it would raise everyone’s rates because power was being bought at a lower cost.  Ms. Leslie stated she was concerned that once the state let the large users out of the system they were gone forever and she was worried that in a year a normal consumer would examine their utility bill and see increased prices.  Mr. Higgins stated she could be assured it would not be a year but five or six years from now the state would have to rethink how they supplied power in Nevada.  There had to be more power plants, more conservation, possibly renewables or maybe even coal plants.  The state could not simply stay with the same energy policies of the past because they had not worked.  He testified this was not a permanent solution, but one that would take the state through the next four or five years. 

 

Assemblywoman Von Tobel asked Mr. Higgins if when he spoke of large users he envisioned an organization such as the Clark County School District.  Mr. Higgins stated in the affirmative.  There were customers that could be served at many locations but essentially were sophisticated enough to be able to buy power.  The Clark County School system was a good example with 230 schools.  They were capable of handling the intricacies of buying power for their schools.  Ms. Von Tobel stated she had heard there was a possibility of the district wanting the option because power was really affecting their budget with an increase of 33 percent in additional funds.  Mr. Higgins stated he was not sure of the additional percentage; however, he could state, under the power cost scenarios he had seen, power increases were now in excess of 30 percent everywhere.  Power had definitely increased and had increased corporations’ budgets.  The idea of buying their own power gave them an opportunity to receive a lower cost.

 

Russell A. Fields, President, Nevada Mining Association, addressed the committee to request their support of certain amendments to A.B. 661.  He read from a prepared statement (Exhibit D) and stated representatives of two of Nevada’s major gold mines had worked hard to build a consensus on solutions for Nevada’s energy future.  The result of these discussions was what they called their plan to “Repower Nevada.”  The proposal was designed to maximize the resources of both Nevada’s consumers and its suppliers.  There were two primary components of the proposal:  it would encourage the efficient use of electric energy resources through re-engineering and management agreements and it would allow customers with an annual usage of more than one-megawatt to leave the system without harming residential or small business customers.  The proposal protected the utility and, consequently, the ratepayers by requiring sufficient notice be given of a customer’s intent to leave the system.  It required the Public Utilities Commission (PUC) to determine that leaving the system would not be contrary to the public interest before a customer would be allowed to purchase new electric supplies. 

 

Mr. Fields stated they had identified some criteria they believed was critical to protecting the public interest, such as requiring a customer pay its share of any unrecovered balance in the utility’s deferred accounts and stipulating a customer that left and then later returned to utility service must pay any incremental costs associated with the return. 

 

Mr. Fields indicated mining constituted approximately 25 percent of Sierra Pacific Power’s load in northern Nevada.  The concept of allowing large users to find and purchase new energy supplies and encouraging partnerships to increase efficiency would allow them to free up a significant portion of Sierra Pacific Power’s capacity for residential and small business consumers.  The western United States was clearly challenged by the lack of electric supply and transmission and he indicated this would be a benefit to everyone.

 

Mr. Fields submitted the proposal addressed the possible shortage of future electric supply and the resulting high and unstable electric prices by mobilizing private capital and credit to facilitate the construction of new generating and transmission resources; encouraging consumers with the capability, such as the mines, to utilize their credit to bring new supply into Nevada; allowing for the possibility of consumers to build their own power generating and transmission facilities, some of which would be available to all Nevadans; and “Repowered Nevada” by encouraging investment in the expansion and re-engineering of existing power plants.  He stated the suggested changes would stimulate infrastructure development in Nevada and increase the opportunity for economic diversification and job growth.  He urged the committee to vote favorable on the concepts discussed and asked that they amend A.B. 661 accordingly. 

 

Assemblywoman Leslie asked Mr. Fields how soon the mines in northern Nevada would be ready to leave the system.  Mr. Fields indicated he did not know the answer to the question; however, he did know that most of the major mines, until just a few years ago, had many providers of electric energy knocking on their doors to enter into contractual agreements to purchase power.  Those knocks on the door had not materialized over the last couple of years and he believed it was related to the uncertainty in the region and in Nevada’s policy.  He indicated the steps considered in A.B. 661, should the Legislature make it policy, would re-invigorate attention with regard to potentially building new power facilities including both generation and transmission.  The committee had heard testimony and he had listened to testimony indicating it would take a few years to build a new power plant.  Certainly the major mines, if they were allowed to look around the marketplace, would begin that process immediately and yet it still took time to negotiate those types of contracts. 

 

Assemblywoman Leslie asked Mr. Fields if he thought some of the major mines would be interested in building a power plant.  Mr. Fields stated that was a real possibility and their proposal was one that created options for things to happen such as building a power plant.  If something made business sense the answer was yes. 

 

Chairman Bache stated Mr. Fields was in a unique situation compared to any other business because the price of his product was not determined by his company but determined by the market and how gold was sold.  With the increase in power costs if the mines were not able to make other adjustments within the budget of the company, there would be layoffs and possible shutdowns of some mining operations, such as the elimination of a shift.  Mr. Fields stated the Chairman was exactly correct.  The mines were squeezed in a situation with low commodity prices, over which they had no control, and escalating energy prices that closed the margin of profit.  Mr. Fields stated there had been 12 people laid off at one mine as a direct result of increased electricity costs.  The margin was so slim the mine had to cut back their workforce.  He noted there had been a number of layoffs in the mining industry mostly related to price; however, it was a way of saying the cost of operation was too high to make a good margin.  Electricity was the second highest cost in the mines and was a very significant factor.  The mines would expect their plan to help major customers control and budget for their costs more accurately.  Mr. Bache asked if Barrick Gold Strike Mines and Newmont Gold Mines, being the two largest operators, would be interested in building their own power plants near their operation to avoid the problems with transmission constraints.  Mr. Fields stated that was an option that had been discussed in northern Nevada; however, at this point Nevada law and Nevada regulations did not permit that scenario to happen.  The discussion of the day, if made into law, would allow talks of that nature to continue and hopefully go forward. 

 

Rose McKinney-James, Representative, Clark County School District, deferred to Dr. Joseph Crowley, President, University of Nevada and the Community College System of Nevada, who spoke to the committee in regard to the amendment Mr. Fields was proposing.  He stated there would be significant energy savings in the bill as proposed and wanted to let the committee know of their support. 

 

Ms. McKinney-James stated she had an opportunity to discuss the concept proposed by Mr. Higgins and Mr. Fields and it had been helpful for her to hear their testimony.  She pointed out, as the committee was well aware, the Clark County School District was the sixth largest school district in the nation.  Recently she had an opportunity to participate in a statewide meeting of school superintendents.  As they had struggled to identify their priorities for funding the single most pressing issue for many of those superintendents was the ability to meet increased utility costs.  At the Clark County School District they had been forced to look at some severe budget cuts as a result of a 57 percent increase in their power costs.  She understood the state was in a difficult time with pricing that was creating a serious issue for a number of consumers.  As she examined the issues discussed by Mr. Higgins she was clear there was an opportunity for the school district to take advantage of the ability to leave the system and negotiate a price.  The price might not be lower than the current price but at least it would be stable and predictable, an important factor for the school district.  The school district was not in control of their revenues, the Legislature was.  The district had to make the budget and when they had circumstances of stability and predictability, it made the job easier.  There were details, she indicated, that needed to be worked out.  She wanted to see something in a format she could present to school district officials.  The concept could apply some downward pressure on electric rates by increasing capacity and allowing flexibility for the utility in terms of practices.  She was present to support the concept.

 

Ms. Von Tobel had asked if the Clark County School District was one of the sophisticated purchasers that could leave the grid and find new suppliers and Ms. McKinney-James had answered her question.

 

Ms. Leslie asked Ms. McKinney-James what she believed would be the safeguard that should be added to the amendment to protect small business and residential customers.  If they could not aggregate what could the state do to protect them?  Ms. McKinney-James responded that the state should ensure the system was stable and strong enough to continue with rates in the future that would level out from today’s rates.  When the markets leveled out it could be possible the Legislature would reconsider the notion of competition.  At that point the aggregation of small units could be very helpful.  When capacity was freed up and there was downward pressure on rates, the utility would have the flexibility and the skills to find out what the choices were in the market and could offer stability and protection for the small ratepayers.

 

Chairman Bache asked if Ms. McKinney-James felt there would be an increase in renewable resources for customers such as the school district.  Ms. McKinney-James stated any purchaser would be examining the market to meet individual needs.  There could be purchasers that were specifically looking for the renewable resource option.  One of the reasons the district was supportive of the portfolio standard was the fact it provided for an opportunity of new products and new resources.  She believed renewable resources were another potential tool and opportunity for customers to explore. 

 

Daniel Grimmer, Legislative Affairs Manager, MGM/Mirage, presented Cindy Ortega, Chief Financial Officer, MGM/Mirage, to provide testimony to the committee.  Several years ago she was tasked as the person in their company to understand procurement of energy, including natural gas and electricity.  As the committee knew, the procurement of energy was a very important topic currently.  She wanted to spend a few minutes to thank the committee for the passage of A.B. 369.  Her company also supported the rate controls that were present in the bill because it protected the customers from rate shock and kept the power company intact. 

 

Ms. Ortega stated her company, as well as other gaming companies, had expended a considerable amount of time and resources toward the topic of electric regulation.  They had participated in the 1999 legislative process, the PUC dockets and workshops as well as the Nevada ratepayers programs.  In all of the processes they were advocating the cause of all ratepayers.  The MGM/Mirage and company were the largest employers in the state of Nevada and they would not ever participate in a process that pitted the small ratepayers against the large ratepayers.  It had never been their objection to save money at the expense of small businesses and residential customers. 

 

As the committee was aware, electricity was a crucial element of their business.  If the lights went out, they were responsible for the care and welfare of thousands of people staying in their properties.  They did not have the luxury of shutting the doors and sending the employees home.  Reliability of power was critical to them and it was equally as critical to ensure the health of Nevada Power Company.  Ms. Ortega stated, under the structure that was proposed in the amendment from Mr. Fields, large users would be allowed to contract for power on their own bringing new sources of electricity into a market that was currently short.  As Mr. Higgins stated, she would like to the draw the parallel to natural gas.  As the committee might be aware, her company and other industrial users had been purchasing competitive sources of natural gas for several years.  The mechanism that allowed them to do that was similar to the proposal before the committee.  Her company and other users had entered into contracts with large companies such as Duke Energy, Shell Oil, and Coral Energy.  She stated these contracts stimulated new supply into the market and lessened dependence on a single source of gas.  She believed the success in the market of allowing sophisticated users to leave the system and contract for their own supply demonstrated they could do the same thing in electricity.

 

Ms. Ortega urged the committee to support the proposal that stated certain qualified customers could purchase new or increased electric resources as long as the other customers and the utility were not exposed to increased costs or increased risks.  The transaction could not be contrary to public policy.  Mr. Dini asked Ms. Ortega to define “qualified customers.”  Ms. Ortega stated there had been some discussion on the size of the load of the customers that could leave the system.  In her view a “qualified customer” was one that reached the one-megawatt power level.  Her company was at the 125-megawatt level.  Mr. Dini asked if there would be financial requirements in the definition.  Ms. Ortega stated only to the extent a company would be able to enter into a contract of the size needed in an electric contract.  An electric contract could be as high as $30, 40 or 50 million dollars a year.  A company would have to have resources to contract for that large of a transaction. 

 

Lawrence Semenza, Representative, Dynergy, Inc. and NRG Energy, restated the three requirements Chairman Bache had suggested be included in any amendments and proposals to the committee.  He reemphasized the points in regard to any proposal increasing the supply of energy so that costs were reduced.  Would the proposal insure the energy supply would not be interrupted?  How would the proposal help those that were struggling to make ends meet pay their utility bill?  He stated after the 1999 legislative session, when the deregulation legislation was enacted and various proceedings were undertaken before the PUC, there was the proposed merger of Sierra Pacific Power Company and the Nevada Power Company into Sierra Resources (“the company”).  There was an agreement made by “the company” at the time of the merger as to what should be done with the generating assets that were owned in the north and the south by the two entities.  It was agreed by “the company” the generating plants would be sold to outside buyers to diversify the ownership of those assets so that not one particular energy company would be able to control the market.  The PUC debated and enacted certain protocols for the divestiture of those generating assets in order to ensure they would be sold at maximum value, not only to the ratepayers, but also to the shareholders of the combined entity. 

 

The two companies Mr. Semenza represented formed a joint venture to examine the possibility of purchasing generating facilities and the companies ultimately were the successful purchasers of two of the plants in the south.  One was the Clark plant and the other was Reid Gardner.  As the committee was aware, Clark was a gas-fueled fired plant, as well as oil-fueled if the need arose, and Reid Gardner was a coal-fired plant.  In the north NRG Energy was the successful bidder and purchaser of the Valmy plant, a coal-fired plant in northcentral Nevada.  As a consequence of those actions, the purchase contracts and the agreements for the purchase power agreements (TPPAs) were signed in October and November 2000.  Subsequent to that time the Legislature determined deregulation and the sales of those generating facilities were not at the current time in the public interest.  Dynergy, an energy company that purchased natural gas and coal in large quantities, and NRG Energy, an operator of generating facilities, had formed a strong team to bring the generating facilities up to capacity and efficient operation.  They had looked into the possibilities of expanding the facilities and believed Reid Gardner could be expanded into another coal-fired generating unit and Clark station, sitting under the transmission system, had the capabilities of increased capacity by adding units.  In addition to adding capacity there was also the issue of repowering some of the older units at the plants.  Valmy had the capability of doubling the facility.  Dynergy and NRG Energy were experts in using state-of-the-art techniques to reduce the emissions in coal-fired facilities and reused water in order to improve the environment.  Had the companies been able to purchase these plants they could have implemented their ideas on the expansions as well as the repowering.

 

Mr. Semenza stated the companies had developed a proposal they believed would help them move to the next stage until the Legislature had stopped their purchase.  He had heard discussions in regard to the Commerce Clause of the United States being violated by enacting the current legislation or perhaps there had been an unjust taking of property without due process and/or adequate compensation.  The companies he represented were interested in a public policy statement from the Nevada Legislature, as well as legislation, that stated the buyers that were unable to consummate the transactions because of conditions would have the right to negotiate with the proposed seller of the generating facilities to enter into agreements.  He believed the agreements could include ideas representing: 

 

·            looking at the operation and maintenance of the generation assets,

 

·            providing marketing services for the electricity and capacity produced by such generating assets,

 

·            managing the fuel purchasing activities for such generating assets,

 

·          re-engineering or repowering the generating assets to produce increased electricity or produce electricity more efficiently or make available more capacity and have the rights to such additional electricity or both,

 

·            expanding the generating capacity of the generating assets or constructing or installing new generating assets on the real property adjacent to the generating asset and having the rights to such additional capacity and associated electricity, and

 

·          selling back to the utility 25 percent of the expanded capacity of the facilities so the utility could utilize the additional capacity into their utility rate base.

 

Mr. Semenza believed A.B. 661 should include language that the successful bidders/purchasers had the opportunity to deal with “the company” in good faith.  Dynergy, Inc. and NRG Energy would notify “the company” if they decided to withdraw; however, they wanted the right, because of the time, energy, expenditure of money and resources over the last two years, to acquire the plants, and some consideration in the form of legislation that obligated “the company” to deal with them to reach an agreement.  He believed if the committee examined the three questions again—how would a proposal increase the supply of energy, how would it ensure the energy supply would not be interrupted, and how would it help those that were struggling to pay their utility bills?—they could understand by repowering and increasing capacity by building more plants there would be increased supply and the price would be lowered; that his companies knew how to operate generating facilities and could fine-tune the facilities so they could achieve more capacity and would not have the outages that some facilities had based on poor maintenance; and by increasing the capacity, the market factors would reduce the cost of electricity to those struggling to pay their bills. 

 

Mr. Semenza responded to Mr. Higgins testimony in regard to the sources of energy “the company” acquired from their own generating facilities, purchase power and qualifying facilities (QFs).  He was clear there was no mention of “the company” building any new power plants.  There could be a variety of reasons; however, Mr. Higgins had mentioned the “credit watch” and the lenders looking closely at “the company” to see if they had the financial resources to make determinations of continuing loans for purchase power and operation of the facilities.  The companies Mr. Semenza represented had the financial capability and had been desirous to invest in Nevada in new plants and repowering plants.  In addition, under A.B. 349 there was a provision for the companies that generated electricity in Nevada to pay a percentage of mill tax on the generating.  This would benefit Nevada ratepayers also.  He believed by giving the “jilted buyers” the legislative authority to deal with “the company” and enter into agreements they would benefit Nevada and could answer Chairman Bache’s requirements.

 

Assemblywoman Buckley stated for the record these companies already had the power to enter into contracts for additional expansion of a facility or the maintenance of a facility.  Mr. Semenza stated without legislative authority that was correct.  Ms. Buckley stated then the only thing legislation would do that current contracting ability did not provide would be to give a “stamp of approval” to assist them in a PUC hearing process or something to that effect.  She asked how legislation benefited his companies.  Mr. Semenza stated it helped them receive the benefit of the bargain they had not been able to get.  The Legislature had taken away the right they had entered into, subject to the approval of the PUC, to acquire the plants, a business decision they had made because they had to make concessions in order to obtain the right to purchase those plants.  The legislation could give them the exclusive right to deal with “the company” for those assets to repower them or work with them to operate, repower and expand. 

 

Ms. Buckley restated what legislation could do that the companies did not have and what they could not do by contract was to give them the exclusive right only.  They could not gain title to the power plant so the action would not reverse anything in A.B. 369.  Mr. Semenza stated that was correct and would give them the opportunity to deal with “the company.”

 

Assemblywoman Tiffany rephrased “the company” would be “obligated to reach the agreement” and asked what that phrase meant.  Mr. Semenza stated it meant that they would have to deal with the companies in good faith to reach an agreement for them to be able to work in conjunction on those facilities.  He realized it was sometimes difficult to sit down when there was obligation or pressure to reach agreements, but companies regularly did so.  Ms. Tiffany indicated “obligates in good faith” also included exclusive.  Mr. Semenza stated “obligate” was the first important word because it obligated “the company” to deal with them exclusively to enter into a contract.  Ms. Tiffany responded it sounded like a “hostile takeover” to her.  Mr. Semenza indicated it was not a “hostile takeover” because they were not taking over the facility.  There was a laundry list of items they offered.  “The company” had never been a generating company and had acquired more of their power through purchase power arrangements and agreements.  In southern Nevada “the company” purchased approximately 53 percent of the power needs.  His companies were generating companies and there was a list of items they could enter into by contract. 

 

Assemblywoman Tiffany asked about the “sell 25 percent as mandated” proposal.  She wondered if it was a mandate and at what cost and what did they have to leave in the state.  Mr. Semenza indicated the discussions they had in the past with respect to the proposed power project at Apex, Nevada, although the state would not be directly contracting for that, was, in return for the water allocation to the various companies that were contemplating generating facilities in the Apex area, the obligation would be to sell 25 percent of the power in Nevada.  He was making the offer 25 percent of any new increased capacity from those plants would be sold in Nevada.  The rest of the power could also be sold in Nevada to large users such as the mines.  The companies had authorized him to divulge they would double the size of Valmy and they would.  All of the capacity could stay in Nevada at either market rates or cost base rates.  Ms. Tiffany asked if the 25 percent was sold to the utility.  Mr. Semenza stated that was correct.  Ms. Tiffany asked about the power left.  Mr. Semenza stated they could market it to the large users or to the utility itself or sell it out of state.  Ms. Tiffany asked if the committee had seen the amendment or was this just a discussion.  Mr. Semenza stated they had been talking about it conceptually and had worked out the details.  Hopefully they would prepare the amendment to present to the committee shortly.

 

Chairman Bache requested Mr. Semenza to meet with the parties involved in the conceptual presentation to draft an amendment hopefully by next Tuesday.  On the surface, he stated, the concept met with the requirements the committee had put forth.  Mr. Semenza stated he would work with his partners to have an amendment by the Tuesday deadline.

 

Assemblyman Parks understood the points Mr. Semenza made with regard to expanding facilities and wondered if there would also be a requirement to expand transmission lines and who would be responsible for that portion.  He asked if there could be complications involved in the building of the transmission lines as well.  Mr. Semenza stated his companies did not build transmission lines.  Sierra Resources built not only distribution lines to distribute electrical services but also transmission lines.  He believed if Valmy were doubled in size in order to get the electrons to the mines, for example, there would have to be a transmission system built.  The system was covered by Federal Energy Regulatory Commission (FERC) and if the need was there they could apply for the right to build a transmission line system to the location.  There was a tariff, paid by the customer, incorporated in the rate for the electricity that was provided through the transmission line.  The transmission lines could be built; however, it would not be the responsibility of Dynergy, Inc., or NRG Energy.

 

Timothy Hay, Chief Deputy Attorney General and Consumer Advocate, Bureau of Consumer Protection, Attorney General’s Office, addressed the committee and stated he found Mr. Higgins to be very persuasive and had almost convinced him for a while.  He indicated it was difficult to make comments without a written document or amendment.  He wanted to refresh the committee’s recollection that the details in these types of ideas could sound good in a broad sense; however, when legislative language and specific details were added the intricacies were very convoluted.  Language and drafting of the amendment would be extremely important to obtain his support.  He felt the Legislature had acted responsibly in enacting the bill that prohibited divestiture of the plants.  He also felt restoring deferred energy was an appropriate mechanism for restoring some stability to the Nevada marketplace and some stability to the financial status of “the company.”  He remarked “the company” and the state engaged in the global settlement last summer that he felt accomplished the goal of restoring “the company” to financial viability at a time of crisis.  Within a few months that settlement had become inadequate from “the company’s” standpoint to meet their needs, although he could argue if they had purchased their power differently after the agreement was signed, the state might not be facing the circumstances it was facing today in Nevada.  The Comprehensive Energy Plan (CEP) had been filed after the settlement and the rates were implemented without a hearing.  Some minor litigation ensued before the rates were implemented and the Consumer Advocate was unsuccessful in preventing the implementation.  After consideration the Consumer Advocate’s office determined they could justify leaving the rates in place.  The global settlement was the largest rate increase in the state’s history at that time and then the CEP rate increase became the largest rate increase.  The deferred increase contemplated under the reinstitution of deferred accounting, due next spring, was likely to be the largest increase again in the state’s history.  Ratepayers in the state, and in particular the small commercial and residential ratepayers, were bearing an extreme burden in this time of uncertainty in the market. 

 

Mr. Hay felt that everyone should strive for stability and predictability going forward.  The Legislature should be cautious, he believed, in examining the issues Mr. Higgins had talked about and should make sure the language was correct before taking action. 

 

Mr. Hay stated in the course of negotiations to return to deferred accounting “the company” had agreed they would provide a letter indicating they would transfer the revenues associated with purchased power capacity into the deferred energy account.  That letter had not been consummated as far as he was aware and was an issue that needed to be resolved among the parties.  The revenues were in excess of $100 million in adjustments that needed to be in the record.  His understanding was “the company” was unwilling to put a fixed number on the amount. 

 

Mr. Hay suggested the fundamental problem with the proposal presented by Mr. Higgins was the option for small commercial customers and residential customers was excluded.  He was not clear about the reason for that decision.  From the earliest days of the Governor’s energy policy committee that met in November, December and January of this year it had been their position the concept Mr. Higgins presented could work economically and if some of the load was reduced, there would be a benefit that could be measured and demonstrated.  He stated there was no functional reason why an aggregated group of residential or small commercial customers should not enjoy the rights of any other customer on the system.  Mr. Higgins had characterized customers in two categories, sophisticated customers and residential customers.  Previous testimony in both houses from experts had indicated there were sophisticated aggregators in the state and if the door was open it was imperative the door opened for an aggregator to determine whether residential customers should be able to partake of the same rights of the large users.  He noted Mr. Neighbors’ bill, A.B. 373, provided for community aggregation and was a very viable approach to allow residential customers or communities to benefit from the opportunities to leave the system that Mr. Higgins had outlined.

 

Mr. Hay believed anything that left residential customers out of the loop was almost by definition special interest legislation.  If any of the scenarios or timelines expressed became fact the state could be faced with a situation where large users of electricity left the system within 18 months when the deferred energy case was to be litigated.  The rates from that case could be amortized over a three-year period after the decision.  Residential and other captive consumers could be paying those rates for a substantial period of time after other customers had left the system.  Even if regulations were in place that assured customers that left the system were paying their fair share of the deferred or tail liability, the perception of residential customers could be they were the party that was injured.  He believed the action would be neither appropriate nor fair. 

 

Mr. Hay stated he did have sympathy for the large casino owners in the south and other industrial users because all customers had been through the scenario where “the company” had trouble and all ratepayers bailed them out and then found the same circumstances happening again.  He reminded the committee under the terms of the global settlement, which was entered into last summer, there was a provision for phasing in customer choice for large, medium and small consumers.  The small customer would have been phased in by September of this year.  If the problem was not having the ability from a system standpoint to process the small consumer, “the company” needed to answer how they would have done the phasing if the global settlement had not been abnegated by subsequent events.  There were experts that could explain how the systems could be put in place for residential and other small users of power.  The Nevada Energy Buyers Network had expertise in that area as well. 

 

Mr. Hay had concern with the “Repowering Nevada” presentation Mr. Semenza had made.  The prospective buyers of the plants went into the transactions knowing they were subject to regulatory approval and therefore subject to regulatory risk.  He believed they had made business decisions and had the ability to negotiate whatever contract with the utility to formulate agreements to maintain and operate the assets.  He did understand the concern from the buyer’s standpoint.  He was moderately concerned by the concept of the companies proposing a joint venture with the utility to expand the plants because if the plants could be expanded the benefit would be to native Nevada ratepayers.  If the idea was to enter into an agreement to expand the plants and the incumbent had a portion of that economic benefit, the state had circumvented the anti-divestiture provisions of A.B. 369.  The utility would then be able to sell unregulated power that would otherwise go to Nevada ratepayers.

 

Mr. Hay mentioned a recent analysis of a 1000-megawatt wind farm (Exhibit E)located in the Pacific Northwest that was able to sell electricity at 2.5 cents per kilowatt-hour, which was lower than the price of coal-fire generation currently.  He stated this information reaffirmed the wisdom of the committee acting on a robust portfolio standard. 

 

Assemblywoman Buckley asked about the issue of the small user aggregation.  There were a number of reasons why full-scale deregulation was stopped, but mainly it was because the state was in a crisis situation with regard to supply.  The small user had been guaranteed some buffer against any market bumps by having a rate freeze.  Because there was no longer a rate freeze some questioned why deregulation was going forward without sufficient consumer protections.  Against that backdrop, she stated, Mr. Higgins in his testimony indicated if the state allowed the small user to aggregate in essence there would be deregulation again.  She asked Mr. Hay to comment.

 

Mr. Hay stated there was a distinction that needed to be made.  As circumstances had evolved he did not believe small customers wanted to make individual choices and it was unlikely that it would be technologically or fundamentally feasible.  However, if a group such as the American Association of Retired Persons (AARP) wanted to contract with Shell or another aggregator and asked to be able to offer their members the opportunity to aggregate and the load was comparable to a small casino, that group of customers should not be treated differently from one large customer leaving.  There was a choice option that did not amount to wholesale opening of the market to competition in that an individual would not be able to choose between multiple companies.  Most companies would not want to serve the individual customers; however, he thought there was potential for providers that would like to serve one large industrial company as well as serve an aggregated group of residential consumers.  There were obviously other benefits an aggregator could derive from having the direct customer contact with a large group of Nevada citizens.  The AARP again was an example with its 200,000 membership in Nevada.  There would be community associations and other groups that would be logically aggregated and communities that could engage in activities suggested by Assemblyman Neighbors’ bill.  Mr. Hays suggested if the committee chose to move on the proposal everyone in Nevada should be represented. 

 

Ms. Buckley stated with regard to the expansion of possible sites already owned by Sierra Pacific Power she noted Mr. Hay had spoken somewhat negatively.  She was surprised and did not think Sierra Pacific Power had the resources with the transmission line needs to invest in expanding any of their power plants.  She felt it would be appropriate for the Legislature to make a statement they were encouraging the expansion of those sites, especially encouraging development in an area that was already available. 

 

Mr. Hay stated he might have misspoken on that issue.  He certainly believed if there were sites available that had water rights and permits it should be encouraged.  What the state wanted to avoid was the utility using the expansion value of that site and circumventing the regulatory structure by partnering with other companies to essentially allow them to extend financing and produce more generating resources.  The portion of a site that was developable should be sold to the new company and the value of that site should be returned to the ratepayers who had paid for it over the years.  If the state mixed the utility’s participation with that of the other party those transactions would have to be very carefully scrutinized to make sure what should be a regulated asset under the current system and the expanded capacity belonging the third party generator was clearly delineated.  It appeared it could be a situation where some of the value of “the company” that should belong to ratepayers eroded into an unregulated environment.  Mr. Hay reiterated any site that could be expanded should be, in an environmentally responsible way.

 

Mr. Hay stated there had been many discussions in regard to shortage of supply since last summer and his office had been checking everyday for the last few months for the amount of generation that was off-line in California.  They found it was usually between 12 and 14 thousand megawatts.  He believed there was a genuine question as to whether the shortage of supply was an endemic shortage or a shortage of actually withholding supply in the marketplace.

 

Assemblywoman Tiffany wondered if the state in considering the proposals was not eroding back into having some deregulation areas.  She was not against aggregation and large users leaving; however, when it was examined it was actually called competition.  When the repowering of Nevada was examined it actually circumvented divestiture.  She wondered how there could be regulated rules, reinstitution of competition and a quasi-divestiture.  Mr. Hay indicated his point was if the state moved in the suggested direction there needed to be very clearly delineated lines of statutory and regulatory direction.  The repowering provision he found troubling in that it appeared to open up a potential for confusion between what was now and should be a regulated asset and what otherwise would be unregulated because it was being developed by a third party.  Those contractual agreements needed to be carefully scrutinized assuming the committee moved forward with the proposal.  The Nevada marketplace should be viewed as a whole that needed to evolve responsibly.  One component was renewables, another encouraging the siting of new generation in Nevada, some of which was devoted to Nevada customers, and also making sure the incumbent utility was making appropriate decisions and doing what it could to minimize the effect of the volatile market on all Nevada ratepayers.  All of the components together could constitute an evolving market that made sense.  He believed the state could evolve toward competition without saying what was presented was similar to competition. 

 

Assemblywoman Leslie stated the obvious reason the major users wanted to leave was because they would be saving money.  If the committee did not allow the small residential users the option to leave was there a way to ensure some of the savings the large users obtained were able to be shared with the people left behind?  Mr. Hay indicated there might be some economically and hypothetically developed concepts that would allow the idea; however, practically he was not sure it would be easy to do.  Ideally it would help if the state could demonstrate that whatever laws were passed would lower the cost for residential consumers.  Unfortunately there was an era of high cost and it would be easier to demonstrate lower cost incrementally because the state was close to the peak of the energy crisis.  The easiest way was to make sure all types of consumers were on a level playing field and the PUC should solicit proposals for aggregators to come forward.  He was very concerned that consumers in Las Vegas this summer and next summer would have electricity bills higher than their mortgage bills. 

 

Thomas E. Wilson, President, Nevada Utility Reform Alliance, had submitted to the committee statements (Exhibit F) on a number of issues the Chairman had spoken on in the last meeting.  He stated for the large users to be able to make savings on their power meant there was power available that was inexpensive.  The power must be so inexpensive that they were willing to leave money behind for the deferred energy use, could deduct the cost for paying public benefits, transmit the power over greater distances and still save money.  He believed the idea would not work whether the Legislature gave them permission or not.  His group strongly opposed allowing the large users to opt out of the system.  Under existing law Sierra Pacific Resources must maintain backup for these industries.  He could not understand how the utility would be more stable when the large users that amounted to 20 percent of their profits left the system.  He stated management by crisis struck him as being false.

 

Jon L. Sasser, Representative, Washoe Legal Services, Nevada Legal Services, Washoe County Senior Law Project, mentioned he appeared at the last meeting and had offered an amendment that would allow the PUC to issue regulations to protect people that were consumers of energy but not customers of energy.  The amendment that had been offered had been questioned by Kevin Powers, Committee Counsel, as to the vagueness and broadness.  In reviewing, he had agreed with Mr. Powers and offered a substitute amendment (Exhibit G) that was more narrow and specific.  It made clear the PUC would regulate only utilities, not landlords, and if they chose they could require the utility to notify tenants prior to termination of service, to restrict termination in times when the health and safety of elderly or handicapped individuals might be threatened and establish procedures and priorities for the resumption of the utilities if they had been turned off.  He believed it narrowed the focus of the amendment. 

 

Steven Boss, President, Nevada Energy Buyers Network, testified in support of the direction of the proposal that was heard.  He had not seen any exact language; however, he wanted to comment on the size aspect of the proposal.  Nevada Energy Buyers Network (NEBN) represented mid-to-large commercial customers.  Currently their focus had been on assisting them in learning how they were using power, identifying the energy cost of operational decisions, and promotion of conservation to lower the overall energy bills.  In the future they intended to assist clients in purchasing power when they were allowed to do so.  Today he represented the Sahara Hotel, an eight-megawatt peak user and Shitaka Wholesale Foods, which had above 300 kilowatt-hours of peak usage with an annual electric bill in excess of $150,000.  Mr. Higgins had suggested the committee decide the size of the group of clients that were allowed to leave and he would like to make two recommendations.  The one megawatt number was the proposed number, and in the definition of one megawatt he suggested the committee examine one-megawatt of peak usage as opposed to one megawatt of annual usage.  The larger hospitals in southern Nevada generally had peak usage in the two megawatt range, but load factors of around 50 percent.  They were at the cutoff if defined as an average load.  He would suggest it should be defined as a peak load. 

 

Mr. Boss’ other suggestion was aggregated loads of smaller commercial customers should be put in the same group with the larger commercial customers.  He would like to have the level down to the 300 kilowatt-hour level with energy bills in excess of $150,000.  He stated the customer groups discussed should all have interval meters.  There were some other customers groups that were below the 300 kilowatt-hour level that could warrant the committee’s consideration.  For example, the average restaurant was 150 to 200 kilowatts of peak usage and an assisted living center was 200 kilowatts for peak usage and these types of commercial entities were sophisticated buyers.  All of the restaurants contacted had evidenced a desire to stabilize energy costs.

 

Mr. Boss stated one of the items he wanted to address was the issue mentioned of large users obtaining inexpensive power.  That was not the case because it was just the ability to go to the market place to purchase the commodity.  There was a price curve for electricity that started very high in the near term and decreased to reasonable levels as it went out three to five years.  In financial terms it was called a backward-weighted curve.  A large customer wanted the opportunity to see a price curve such as mentioned and lock in a price that was essentially the average of every point along that curve for the prolonged period of time the customer deemed in their best interest.  The further a company went out on the curve, the more benefit could be received from the lower prices quoted for years five, six, or seven.  In essence it would lower the cost today; however, the company would be paying above market at the end of the term of the contract.  That decision was an economic decision a large user wanted to make because they could then plan their business, price their products and services accordingly and operate at a profit.  Several of his clients had made these types of contracts with natural gas and desired the opportunity to try to do that with electricity.  The large users would benefit over time with the advantage they were higher load factor customers that made them more able to buy off-peak power than peak power.  Ultimately as the state moved toward a deregulated market everyone envisioned in the future and time-of-use meters were installed in residences that benefit would also be passed on to the residential customers. 

 

Mr. Boss indicated the proposal before the committee today, especially as he suggested it be amended, did three beneficial things.  The program promoted nongaming economic development because a benefit for a nongaming corporation was the ability to know that they could lock in their power prices at a level they could operate their business profitably.  Another benefit was it eased the pressure on the utilities’ balance sheet because even with deferred energy there was going to be a time when the utilities would be in the position to have to borrow money to cover the deferred energy costs.  The utility had other burdens including the financing of transmission and distribution infrastructure.  Nevada Power had indicated in the Governor’s plan that it needed to build 300 million dollars of additional transmission facilities and it would have to finance those on its balance sheet.  The more deferred energy or unrecovered energy costs the utility could take off the balance sheet, even for a short time in the near term, would assist the utility in meeting those goals.  

 

Mr. Boss emphasized if the state could broaden the marketplace to include more transactions as he had suggested, by lowering the limits of the customers that could take advantage of the choice to leave the utility, there would be more transactions, a more liquid market and hence more competitive pressures on overall pricing in the entire region.  Broadening the marketplace could also help companies make decisions to settle here in Nevada with new generating facilities because there would be a wider variety of credit worthy entities with which to contract and spread the risk of any one operation not being able to fulfill its obligations to purchase power. 

 

Chairman Bache asked for questions from the committee and seeing none closed the hearing on A.B. 661.  He hoped to be seeing written amendments at the Tuesday meeting and seeing no further business adjourned the meeting at 4:31 p.m. 

 

RESPECTFULLY SUBMITTED:

 

 

 

Cheryl Meyers

Committee Secretary

 

 

APPROVED BY:

 

 

 

                       

Assemblyman Douglas Bache, Chairman

 

 

DATE: