MINUTES OF THE meeting

of the

ASSEMBLY sELECT Committee on Energy

 

Seventy-First Session

March 22, 2001

 

 

The Select Committee on Energy was called to order at 1:39 p.m., on Thursday, March 22, 2001.  Chairman Douglas Bache presided in Room 1214 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

Ms.                     Debbie Smith

Ms.                     Kathy Von Tobel

Mr.                     Lynn Hettrick

Mr.                     David Humke

Ms.                     Sandra Tiffany

 

 

GUEST LEGISLATORS PRESENT:

 

Speaker Richard D. Perkins, Assembly District No. 23

 

STAFF MEMBERS PRESENT:

 

Kevin C. Powers, Committee Counsel

David S. Ziegler, Committee Policy Analyst

Cheryl Meyers, Committee Secretary

 

 

OTHERS PRESENT:

 

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

C. E. Edwin Fend, Representative, American Association of Retired Persons (AARP), Carson City, Nevada

Harold S. Franson, President, AES Mohave, LLC, Laughlin, Nevada

Michael A. Pitlock, President, Pitlock & Associates, Carson City, Nevada

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

Michael Brown, Vice President, Barrick Gold Corporation, Washington, D.C.

James A. Chavis, Regional Manager of Human Resources and Public Affairs, Placer Dome America, Beowawe, Nevada

C. Kirby Lampley, Manager, Policy Analysis Division, Public Utilities Commission, State of Nevada, Carson City, Nevada

Douglas Ponn, Vice President, Governmental and Regulatory Affairs, Sierra Pacific Power and Nevada Power Company, Reno, Nevada

Terry Graves, Representative, Nevada Independent Electric Coalition, Graves Communication, Las Vegas, Nevada

Lawrence J. Semenza, Representative, Dynergy, Inc., Houston, Texas

Barry N. Huddelston, Director, State Regulatory Affairs, Dynergy, Inc. Houston, Texas

Fred Schmidt, Attorney at Law, Hale, Lane, Peek, Dennison, Howard and Anderson, Carson City, Nevada

 

Assembly Bill 369:  Revises and repeals various provisions governing the regulation of public utilities. (BDR 58-1156)

 

Speaker Richard Perkins, Assembly District 23, thanked the members of the select committee for their willingness to serve.  The energy issues in Nevada constitute the most severe crisis to face the state in several years, he stated.  Although there were many provisions adding to the crisis outside the control of the state, there were a number of issues that could be controlled to allow the committee to provide affordable and reliable energy to the citizens and businesses of the state.  A.B. 369 addressed one of the most complex issues facing the Legislature this session:  ensuring the delivery of affordable and reliable energy to our state.  The bill had been introduced to help Nevada avoid some of the devastating problems that had confronted California.  S.B. 362, introduced by Senator Dina Titus, was a companion to A.B. 369 and would streamline the approval of new power plants and support bills sponsored by Assemblywoman Bonnie Parnell and David Goldwater to provide energy assistance to low income residences.  A.B. 369 was a part of a package of potential solutions to Nevada’s energy problems.  The select committee would be hearing other bills that dealt with increasing the use of alternative energy, and insuring potential rate increases were approved after an open public hearing and the presentation of a compelling justification.  The rate increases recently passed, he believed, were an irresponsible action by the Public Utilities Commission (PUC).  The Legislature could stop unwarranted rate increases without proper procedures, he noted; however, it could not control the market and the forces causing energy prices to rise.  Mr. Perkins stated the underlying causes of increased electricity prices included rapid rise in demand without a corresponding increase in supply, unseasonable weather and higher fuel prices, especially for natural gas.  There had been low production levels, low inventory and high demand for natural gas, he noted.  The Legislature could insure that it took every possible step to increase supply, make sure prices were justified and make sure energy policies were implemented fairly. 

 

The sponsors wanted to explain how the key provisions in A.B. 369 would achieve their goals.  The provisions included a repeal of the provisions providing for deregulation of retail electric services, a moratorium that restricted the divestiture of Nevada’s power plants, and additional provisions to protect the public interest.  Mr. Perkins stated if divestiture of generating plants continued, Nevada could lose control of electricity prices and delivery upon expiration of the buy-back contracts.  The buy-back contracts would begin in the next two years. 

 

Assemblywoman Barbara Buckley, District 8, discussed the portion of A.B. 369 related to the repeal of deregulation of retail electric services.  A.B. 369 would repeal provisions that provided for the restructuring or deregulation of retail electric energy in Nevada.  She believed the bill was necessary because of previously unforeseen conditions in the energy market and because of the uncertainty of future prices and reliability.  She indicated deregulation of energy was an issue that might be discussed in the future.  Future legislators could reinstate deregulation if it was determined to be in the best interest of the residents of Nevada.  The sponsors had reviewed the legislative history of S.B. 438 of the Seventieth Session.  The bill made clear the issue of protection for citizens from rate instability for almost four years until March 2003.  Ms. Buckley stated the efforts of the Consumer Advocate and legislators concerned about the residents and small businesses in the state helped pass S.B. 438 of the Seventieth Session.  All of the parties, including the utilities, had agreed to the law contained in S.B. 438 of the Seventieth Session.  After that session, litigation was filed and the “global settlement” was entered into.  The “settlement” increased rates, allowed fuel and purchase power riders (FPPR) and released the rate freeze that all parties had agreed to, and which was law, even if deregulation was to begin.  Ms. Buckley stated if the Legislature allowed deregulation law to continue there would be no consumer protection for the residents of the state.  She stated there were other measures in the current session designed to solve various problems.  One such measure was A.B. 373, sponsored by Assemblyman Neighbors.  A.B. 373 would revise the aggregation statutes.  The bill would allow counties, including rural areas, to have protections if deregulation were to proceed in the state.  She stated instead of trying to fix all of the provisions related to the restructure of retail electricity services, the focus should be on what the Legislature could do now.  Deregulation and all of the other statutes that needed to be added to the laws could be examined in the future.  Section 31 of A.B. 369 repealed 28 separate sections, Chapter 704 of the NRS and portions of the 1997 and 1999 session laws.  These provisions are in regard to electric utility restructuring. 

 

Mr. Perkins discussed the subject of divestiture.  A.B. 369 placed a moratorium that would stop the sale of Nevada’s power plants.  The plant sales could only move forward if the sales were in the best interest of Nevada’s residents and businesses.

 

In reviewing the situation in California, Mr. Perkins stated, after the passage of the California Assembly Bill 1890 in 1996, investor-owned utilities were required to divest at least one-half of the fossil-fueled generation.  The affected companies had sold the bulk of the facilities.  Retail competition began in March 1998 and price spikes began to appear in the wholesale market in the summer of 2000.  He indicated hot weather, rapid economic growth, high fuel prices and insufficient growth in supply were some of the causes of the price increases.  However, he indicated, as early as July 2000 California’s Attorney General, the Federal Energy Regulatory Commission (FERC), the State Auditor and the PUC investigated the possibility of other factors involved, including gouging and manipulation of the power market.  FERC was investigating several companies and had notified 13 electricity suppliers to make refunds or justify the high prices.  The California Independent System Operator discovered wholesale suppliers overcharged $5.5 billion since May 2000.  He stated some of the same companies were involved in trying to purchase some of Nevada’s plants and were against A.B. 369.  The allegations of price gouging and market manipulation had not been proven yet; however, he indicated the necessity for Nevada to proceed cautiously.

 

He stated Sections 18 and 19 of A.B. 369 were the main provisions concerned with divestiture.  Section 18 proposed the disposal of generation assets must be approved by the PUC in advance.  The Consumer Advocate was deemed a party to any divesture action and any disposal of assets in violation of Section 18 would be void.  There could be no disposal of generation assets until July 2003.

 

From July 2003 to July 2007, disposal would be allowed in the case of a substantial financial emergency if the application was approved by every PUC and commissioner.  Section 19, he stated, covered the possibility of Nevada’s utility companies becoming the subject of a merger or acquisition during the moratorium.  He indicated A.B. 369 would apply to the new owners in that situation.  Section 32 of A.B. 369 directed the PUC of Nevada to vacate any order that required divestiture, to oppose divestiture and to request the support of FERC.

 

Ms. Buckley recited the provisions of A.B. 369 intended to protect the public’s interest.  She stated because of the global settlement and the actions of the PUC regarding the utilities’ January 2001 filings for more rate increases, some legislators had been concerned about public access to the decision-making process and approvals of rate increases without sufficient scrutiny in advance.  Sections 3 through 6 rescinded the PUC’s authority to appoint hearing officers on divestiture actions and required a hearing to be held.  The sections stated the PUC must insure that the public interest was served, customers protected, renewable energy encouraged and prudent business practices were required.  Sections 23 through 24 limited the authority of the PUC to dispense with hearings involved with issuance, modifications and transfers of certificates of public convenience.  Sections 28 and 29 stated the Consumer Advocate must intervene in all proceedings before the PUC under the act.  The select committee would additionally receive another bill draft next week that would govern the rate increases and procedures that would be followed in the rate increases.

 

Mr. Perkins stated other sections in A.B. 369 related to cleanup drafting of the repeal of the restructuring act.  Section 25 amended the statute that required the PUC to spend money from the reserve account to educate the public about deregulation.  Section 25 now allowed the PUC to use the reserve account to educate the public on the provision of utility services generally.  Section 26 revised the statute on portfolio standards for renewable energy.  The section clarified those standards had to be based on electricity use in the next calendar year.

 

Ms. Buckley stated the intentions of the packet of energy bills, including A.B. 369, could be summarized in simple statements:  ensure affordable, reliable energy for all Nevadans; protect residential ratepayers and small businesses from bearing more than their fair share of the burden of rate increases; increase energy supplies by streamlining the process for new plants and through greater use of alternative energy; make sure all price increases were fair, necessary and approved in a public forum; and provide financial assistance to citizens on fixed incomes and low income wage earners to pay utility bills. 

 

Timothy Hay, Chief Deputy Attorney General and Consumer Advocate, Bureau of Consumer Protection, Attorney General’s Office, concurred with Mr. Perkins and Ms. Buckley’s statements regarding A.B. 369.  He emphasized the legislation was very complex and would in essence repeal statutes the legislators deliberated over in past sessions.  He noted it was important to realize the region-wide crisis in energy in the west.  Legislation such as A.B. 369 would help to protect consumers in Nevada.  The sponsors had noted, and he agreed, divestiture was one of the most critical issues to face the state.

 

He indicated his office had filed a petition with the PUC in January 2001 requesting the PUC revisit the decision to allow the divestiture of Sierra Pacific Power’s generating assets.  The petition would not be acted upon until April 6, 2001.  There currently was an approval for the transaction that involved the Mohave Generating Station, and Nevada Power’s 14 percent interest in that generating station.  Mr. Hay stated the application to divest the Harry Allen facility in southern Nevada was also pending before the PUC.  He believed it essential those transactions be delayed and reconsidered.  Once the facilities had been sold, Nevada would lose the ability to control the price of energy once the buy-back contracts expired, and lose the ability to determine where the energy was placed.  If divesture continued and the plants were sold, he indicated, Nevada would have little or no regulatory authority over the price of energy or where the energy was ultimately marketed.  Nevada’s resources might be devoted at that time to surrounding jurisdictions.  Divestiture was in process at this time and he advised the committee to act expeditiously on A.B. 369 to place a temporary moratorium on divestiture.  The Attorney General’s Office would work with the Assembly and the Senate to expeditiously pass a divestiture bill.  He believed a divestiture bill was the most appropriate and timely approach to the issue.  To spend time working through the details raised by A.B. 369 in total, the opportunity could be lost to abate the divestitures already in progress.  He suggested the divestiture issue be considered separately for a temporary period of time from the remaining issues because of time constraints. 

 

He supported the issue of hearings held before rate increases were imposed.  Nevada Power and Sierra Pacific Power were allowed to raise the rates on March 1, 2001, by an average of 17 percent with some agricultural rates increasing over 100 percent.  Large commercial customers had experienced rate increases of 29 percent.  The decision for rate increases had been made without a hearing or consideration of the merits before the PUC.  Ms. Buckley had been concerned about the global settlement, he understood; however, that issue had been brought before the entire PUC, there had been a public hearing and the intricate provisions inherent in the settlement were discussed and there was a vote.  The Attorney General’s Office of Consumer Protection had filed several legal actions relative to the recent rate increases, although they were unable to obtain a temporary restraining order to prevent the increases.  He explained if the rates remained in effect over the next biennium, and the rates from the global settlement remained in effect, the increase would amount to approximately $850 million to Nevada ratepayers.  He noted the committee would have been very sensitive if it had put into adoption a $624 million tax increase without even a public hearing.  He believed if the rate structure would stay in place the electric bills, especially in Las Vegas, would be burdensome to the average residential consumer.  The internal projection from his office indicated the average bill in August 2002 in Clark County for an average residential user would be nearly $300 per month.  The situation needed to have all appropriate action taken to mitigate the impact of those rate increases in total.  Assemblyman Goldwater and others had proposed legislation to provide other sources of direct assistance for Nevada consumers that needed appropriate action.  He believed the first order of business for the select committee was to pass a temporary moratorium on divestiture to halt the prospect of losing control forever of assets that were very valuable to Nevada.

 

Assemblywoman Leslie expressed concern regarding the Mohave Generating Plant.  She asked if A.B. 369 was passed quickly through the Assembly and the Senate and the Governor signed the bill, could the sale of the plant be stopped.  Mr. Hay believed there was a good legal argument if straightforward legislation of a temporary nature was passed to stop the Mohave sale.  His advice was to go through the effort even if it would not be successful to prevent losing one of the lowest cost electric resources in the state.  The sale had technically been through the approval process.  The remaining steps to complete the sale involved transferring the title of the 14 percent interest of Nevada Power.  The portion of the sale of the plant owned by a California entity was allegedly stopped a few weeks ago by the California Legislature; however, that information was now uncertain.  The committee could take action to provide the temporary moratorium to stop all divestiture in the hopes of stopping the Mohave sale.  The Bureau of Consumer Protection would join in any litigation that might ensue from the passage of a temporary moratorium affecting the sale of the Mohave plant. 

 

Ms. Leslie asked if the hearing Mr. Hay’s office had before the PUC in April 2001 regarding divestiture could stop the Mohave sale.  Mr. Hay stated the petition filed in January was intended to ask the PUC to reevaluate whether or not divestiture was in the best interest of the state.  During that period of reevaluation the petition asked for a moratorium on divestiture sales occurring.  There was no knowledge of the timeframe the PUC could act on the petition and there was potential the Mohave sale could be completed before April 6.  The timing issue caused the Bureau of Consumer Protection to file a motion with the PUC and a motion for an order shortening time to set aside the order issued earlier in the year that approved the Mohave transaction.

 

Assemblyman Dini wanted to know how many lawsuits were possible with A.B. 369.  He asked what could be challenged in the drastic action the committee was asked to vote on.  Companies had based decisions on the laws that were passed in 1997 and 1999.  Mr. Hay stated he knew concerns had been raised in the Legislature concerning lawsuits that could be filed by the potential purchasers of the plants if divestiture were stopped.  He reminded the committee that there was a perception either A.B. 366 of the Sixty-ninth Session or S.B. 438 of the Seventieth Session forced the power companies to divest themselves of generation assets.  The perception was incorrect, he stated.  When Sierra Power and Nevada Power (“the company”) applied to the PUC to merge the two companies, they offered their generation to be divested as a condition of the merger consummation.  He understood that by action of the Legislature and the PUC the potential purchaser could infer rights had been infringed; however, most of the contracts had “regulatory outs” that indicated the potential of nonapproval.  An additional factor, in the instance of a lawsuit, which could mitigate the damages, would be the potential purchasers of the plant should have acquired the fuel sources necessary to run the plant before the title was transferred.  The fuel portfolios obtained in potential purchases were now substantially more valuable than at the time the contracts were entered into and in fact, he indicated, all of the purchasers could liquidate the value of the fuel portfolio and make a profit.

 

He admitted there was potential for lawsuits; however, the state had defenses to them.  The overriding issue had to be what was in the best interest of the state.  The committee was aware of the power company lawsuits, filed in both district court at the state level and federal court, challenging the constitutionality after the 1999 Session action.  The potential for a lawsuit was always there he stated.  The legal risks were worth taking and there were appropriate defenses.  Mr. Dini asked if the potential for insolvency of “the company” or the protection of the stockholders had any bearing on whether the committee passed the bill or not.  Mr. Hay stated “the company’s” Comprehensive Energy Plan (CEP) filing, the item the PUC took action on last month and imposed a $311 million rate increase as of March 1, contemplated both divestiture and non-divestiture options for “the company.”  By halting temporarily the divestiture of the plants there would not be immediate fiscal harm to “the company.”  There would be an issue, assuming “the company” retained ownership of the plants, of procurement of fuel supplies for plants that were to be sold.  The Attorney General’s Office was willing to work with “the company” and the PUC to make sure “the company” was fiscally sound to the point that they would be able to acquire the fuel supplies.  He did not believe putting a moratorium on divestiture itself would create great financial harm under the circumstances understood today.

 

Assemblywoman Buckley indicated Mr. Hay had testified he thought the divestiture issue should be resolved quickly and the remaining issues should not slow the action down.  She questioned what remaining issues he meant.  Mr. Hay stated the basic remaining issue, as Mr. Dini had noted, was the question of “the company” retaining control of the plants and the mechanisms necessary for the procurement of fuel for the plants.  Questions followed concerning what proportion of cost of fuel needed to be borne by ratepayers, what proportion was covered under the existing rates, and what proportion should be covered by shareholders of “the company.”  The opinion of Mr. Hay’s office was the rate increases of last summer and the recently imposed $311 million rate increase indicated financial issues of “the company” had to be addressed, either through a filing of a general rate case or a comprehensive audit of “the company’s” finances.  The last general rate case for Sierra Power and Nevada Power occurred the first half of the decade of the 1990s.  There were many general rates, he stated, that needed to be examined in the context of “the company” going forward as owner of its own generation.  He did not believe the Legislature could resolve those types of details in a short enough period of time to have them included in a bill that intended to place a temporary moratorium on divestitures.  The regulatory fine-tuning would be required as the state ventured into the new environment, assuming the deregulation statutes currently in the laws were repealed and “the company” retained control of its plants for a longer period of time than had been planned.  Mr. Hay stated the new environment would require action by the Legislature as well as by the regulators and other parties to the regulatory process.  If the Legislature intended to abate or put a moratorium on divestiture in a short timeframe, he indicated it would not be practical or feasible to resolve all of the other issues before the details were worked out.  During the period of time necessary to work on the details of divestiture, even if only a few short weeks, many of the other divestiture transactions, which were legally obligated to go forward, could occur.  The state could lose forever the benefit of retaining power plants.  Once the transactions closed, he stated, the action was probably irreversible.

 

Ms. Buckley asked Mr. Hay’s interpretation of the benefits of keeping the plants.  Some of the companies involved in potential purchases of the plants had complained Mr. Hay’s math was “fuzzy.”  The companies said Mr. Hay failed to take into account the money that Sierra Power needed to invest in maintenance and upgrades of the plants that had not been done.  The companies indicated Mr. Hay had not included the premium that Sierra was being paid.  Ms. Buckley asked Mr. Hay to comment why he felt retaining the plants would help Nevadans.

 

Mr. Hay stated his office made a presentation on February 24, 2001, to the Senate Commerce Committee concerning divestiture analysis.  The conclusion was, using the same methodology and the same basic inputs “the company” used, if “the company” retained the plants over a five-year period, “the company” would accrue a net benefit to ratepayers in the range of $900 million.  The estimates were conservative based on natural gas price projections that since that time had decreased substantially.  He believed Mr. Schmidt had presented some information to the Senate Commerce Committee that showed a much larger benefit than his estimates to consumers from retention of the plants.  The issue of whether or not the plants had been adequately maintained or would need extensive maintenance was a legitimate issue.  He felt the numbers for the maintenance would pale in comparison to the savings that would be retained by the state buying power from essentially their own plants versus buying power at much higher prices after the buy-back contracts expired.  He was confident in his analysis and if the committee wanted the information in a more formal fashion he could provide it.  Mr. Hay stated the buy-back contracts provided for a limited period of time, now less than two years, for Sierra Power to buy the energy outputs back from the plants for their own use until February 28, 2003.  In order to get the buy-back contracts, substantial discounts on the generating assets were imposed, totaling about $508 million.  The analysis would have to be offset with that number in order to make an accurate comparison.  Also the state was allowing Sierra Pacific Power to receive a lower purchase price for the assets in return for the right to buy the power back over the two-year period.  Once the two-year period was over, he stated, it was nebulous as to the price and where the energy went.  He believed that was too big of a risk for the state to take.  His office was confident in their numbers using a conservative methodology.  If Mr. Schmidt would present his numbers that were substantially larger, it would give the committee the range of analysis that was relevant.  He noted “the company,” in testimony before the Senate Commerce Committee, essentially concurred with his office’s analysis.  If the committee looked at the numbers over a five-year period, there would be savings although he was not sure “the company” necessarily agreed on what the number would be.  “The company” had acknowledged that if the analysis was extended beyond the two-year period of the buy-back contracts the net benefits to the state were substantial.

 

Assemblywoman Von Tobel reminded Mr. Hay he had stated his office could guarantee the financial stability of Sierra Pacific Power.  She asked him to explain the comment further in light of the fact that the financial stability of any company today was in question based on the Dow Jones activity in the past few weeks.  She stated Sierra Pacific Power’s stock had tumbled to half of what it was at one point.  She was concerned if “the company” did not go forward with divestiture and the Legislature did not provide them with deferred energy, how was “the company’s” financial stability guaranteed.

 

Mr. Hay addressed the issue of the PUC’s action imposing rate increases effective March 1.  Over a five-year period of time those increases amounted to over $1.5 billion.  “The company” anticipated receiving proceeds from the sale of its water division in the north in the amount of $350 million.  The rate increases imposed in the global settlement of last summer, assuming the course continued, which was questionable at this point since his office believed the CEP filing either violated or vitiated the terms of the global settlement, would total another $860 million in rate increases.  The total would be into the range of $2 billion in cash flow over that five-year period.  He hypothesized, just by looking at the numbers in general, “the company” would not be on the verge of financial collapse.  As the committee was aware, “the company” was still in the process of acquiring Portland General Electric, the company that supplied electricity to Portland, Oregon.  “The company” had contracted to pay a $1.1 billion acquisition premium for the asset.  He stated his understanding was that contract would not be completed.  He noted the deadline for the sale to occur was May 5.  If the transaction did not go forward with the cash required to complete the transaction, and the cash was not expended for that purpose, he hoped those resources would be redirected to investment in Nevada infrastructure, both in transmission and maintenance on generating facilities.  He did believe there was a legitimate concern when the assumption was made “the company” retained the plants they needed to have the financial flexibility and the credit worthiness to procure the fuel for the plants.  His office had indicated in testimony before the Senate, as well as privately with representatives of “the company,” they would work on a mechanism to help them procure the fuel.  He did not know if the mechanism would be a return to deferred accounting or some other similar structure.  It would be the intention of his office if the premise were adopted the plants would be retained in Sierra’s ownership for at least the five-year period of time.

 

Ms. Von Tobel stated it appeared Mr. Hay did agree that deferred energy would be an appropriate measure to satisfy at least the analysts’ prediction of “the company’s” credit worthiness.  Mr. Hay stated he was not sure the state would simply want to re-enact the deferred energy statute, as it existed prior to its repeal in 1999.  As he had indicated earlier, neither Sierra Pacific Power Company nor the Nevada Power Company had been through a general rate case for a number of years and for that reason there were a number of general rate case issues that needed to be resolved.  It would be his office’s recommendation before reinstituting deferred energy, or perhaps on a parallel track, that a general rate case be filed so that essentially everyone could start off in the new regulatory environment with all of the accounting data up-to- date.  His office wanted to be assured Nevada ratepayers were not paying more than their share for various components of the rate structure.

 

Mr. Hays stated the monthly adjustments under the global settlement were designed as a mechanism to allow “the company” to recoup its fuel and purchase power costs under a graduated schedule with the assumption being in the early part of the schedule there would be some under-recovery and the expectation that as prices levelized during the term of the agreement “the company” would have the opportunity to over-recover or recoup the money that they did not recover in the earlier years.  He still believed that structure had some merit.  Under the old deferred energy statute a company needed to clear its deferred account no more frequently than once ever six months.  However, the problem with that structure, as it existed then, was there was very little incentive for a company to mitigate costs that it incurred to procure fuel and purchase power.  He wanted that issue addressed, as well as the general concept of moving back towards a deferred energy mechanism, to insure there was an incentive to keep costs as low as possible, as well as to allow “the company” the credit worthiness to go to the fuel markets and purchase what they needed to keep the plants operating.

 

Assemblyman Hettrick commented Mr. Hay stated he did not think the Legislature needed to write the details at this point in time.  Mr. Hettrick believed the Legislature had to address the details of how the bill was paid whether by the shareholders or the ratepayers.  He asked how could the Legislature not know the details, stop divestiture and then ask “the company” to buy fuel.  How would “the company” know what they could do, whether or not they could contract, whether it was coming from shareholders and how could “the company” buy fuel if they did not have or know the revenue source?

 

Mr. Hay pointed out if the divestiture process continued, “the company” would be projected to buy fuel for those plants until mid-summer of this year.  The transactions to sell had not yet been filed with the PUC so the state had a period of time to work out the details.  The issue was whether the state wanted to risk having the plants sold while working on the details, making it a futile endeavor.  He emphasized the commitment of his office to work with companies expeditiously to insure there was a mechanism for continued efficient operations of the plants assuming they remained in Sierra Pacific Power’s ownership.  The timing issue was very critical.  The details, as everyone that was involved in the past energy issues was aware of, took time and consideration.  In the current market condition the stakes were higher for Nevada than ever before, and if the Legislature could do anything to prevent $275 to $300 average power bills for the city of Las Vegas in the summer of 2002, it should do it expeditiously and carefully, not wanting to have a whole new set of problems. 

 

Mr. Hettrick asked if the average bill in Las Vegas would not be cheaper because divestiture laws used guaranteed 1998 prices.  If the concern was higher energy bills, he stated, the Legislature should use the 1998 price guarantee for two years, solve the problem and fix it right.  He indicated he had a problem understanding how the Legislature could tell the power companies it was stopping divestiture and not tell them how they were going to buy fuel.  He stated he was aware they could last six months; however, “the company” had to look to the future.  Mr. Hay had mentioned he did not think security was a problem for them to buy fuel; however, in California there was no security and it had taken court orders to buy fuel.  He asked how Nevada would be different if there was no security.

 

Mr. Hay had indicated earlier, he stated, the Comprehensive Energy Plan (CEP) “the company” had filed was premised on both divestiture occurring and not occurring.  He believed the revenue stream provided by the $312 million increase imposed would be adequate for fuel procurement, but not the best structure for fuel procurement to occur.  He believed the Legislature should, first of all, make a decision as to whether divestiture went forward or did not go forward and if not, work on the details.  The problem was if the decision was not made quickly the state would lose the opportunity to retain control of the plants.  In that case, he stated, the rates in Nevada would have very little regulatory control after 2003 regardless of what the Legislature or any other regulatory body chose to do because once the control of the plants was lost, Nevada jurisdiction over its price and output was essentially lost as well. 

 

Mr. Hettrick agreed with the quick decision but wondered what the definition of “quick” would be.  He wondered if the Legislature should not take the time to do it right after laboring long and hard for two sessions to come up with the statutes in place now.  Some people were not happy after the hard work of two sessions and he wondered what would be the consensus if something were done in two weeks.  He posed the question of getting it right without hurrying the process.

 

Ms. Buckley stated the issues were very complicated and sometimes it was not clear to the general public some of the items discussed.  In stark terms, she stated, if the state allowed the sale of the power plants, the buyers after the two-year contract was over could charge anything the market could bear.  They could charge rates that could cause all of the power bills to go as high as in California.  She asked Mr. Hay if that was a correct statement. 

 

Mr. Hay stated in essence that was correct.  The other concern was the reliability of the system.  There could be an instance where the output from those plants, although it was needed and traditionally used in Nevada, may be sold at a higher price to a different jurisdiction.  The worst situation for Nevada would be having no control over the price of the output, nor control over where the output was sold.  There were some new plants planned for construction in Nevada that would hopefully come on-line in the 2003 to 2004 timeframe.  The concern was to protect the interest of the ratepayers and the state’s economy as a whole until adequate supplies were on-line to allow the situation in the western United States to return to a more normal situation.

 

Assemblyman Dini stated the issue of extra plants being built stimulated the question of it being absolutely necessary to stop divestiture.  He asked if divestiture were stopped, would that action inhibit the attraction of investment and capital coming to Nevada to build the new plants that would take care of the problems.

 

Mr. Hay stated Mr. Dini had probably noted in the Las Vegas morning paper, the state engineer had approved water rights for the construction of four plants in the south with the combined output of 2,000 megawatts.  The plants were scheduled to come on line in the 2003 to 2004 timeframe.  There was a peaking facility being built pertinent to Tracy in the north that would be on-line this summer, although it was a peaking facility not a base-load resource.  The state had to be aware that when the plants were in operation, Nevada would not necessarily be the recipient of the energy from those plants.  He indicated there would not be regulatory authority over those prices.  The state still faced the same issues there. 

 

His office believed protection of the core of the generation assets that had served Nevada throughout the years, until the supply was adequate to serve Nevada loads at reasonable prices, would be the best strategy the state could pursue.  He did not believe any action the Legislature could take or his office could take to put a moratorium on divestiture would act as a disincentive for those companies already in the process of permitting and building plants from moving forward.  There were a number of plants already planned for California and his office believed, and one of the reasons why his office premised their analysis over a five-year timeframe, by the end of the five years, if the plants that were planned to come on line, did come on line, and the market stabilized in the west, the state would be able to make a reasoned policy determination that would not be lost by allowing divestiture to go forward in whole or in part.  He proposed the state was looking at a critical window of two years; however, not much more than five years.  The adverse impacts between 2003 and 2006 were believed to be substantial.  During that period of time there was a cost of $1.7 billion reflected as cost to consumers if the plants were retained in ownership.

 

Ms. Buckley stated the committee would have a much larger discussion on the issue of divestiture in the next couple of weeks.  She asked Mr. Hay what were the chances of the new power plants in southern Nevada coming on line and what issues needed to be resolved before the state could assume they could help with power production.  She had heard comments regarding transmission lines that were not in place, possible transmission lines that would go through neighborhoods involving approval, and environmental concerns with southern Nevada including dust particulate standards and she wanted Mr. Hays to comment on those issues.

 

Mr. Hay stated the builders of the plants could address the issues if they were in attendance.  However, he pointed out as Speaker Perkins and he had noted on the Governor’s Energy Task Force Committee, the business environment as well as the permitting environment in Nevada compared to surrounding jurisdictions was very favorable.  They had heard testimony that indicated building a plant similar to the 500 megawatt combined cycle combustion turbines proposed in Arizona, rather than Nevada, would assess property taxes four times the amount of Nevada.  Nevada had inherent business advantages and he stated Nevada would attract power developers.  As was discussed in the Senate Commerce Committee, the bill introduced by Senator Titus to streamline the permitting process was designed so the environmental standards in place would not be diminished and the concerns of local governments and residents would be accommodated.  The bill allowed for the permitting process to move forward in a more orderly fashion.  The bill also covered permitting for transmission resources.  He indicated planning was proceeding on behalf of Nevada Power Company for the transmission assets needed to assure the new plants had access to the power grid.  The related issues, however, were the same as mentioned previously.  For example, there was an issue related to contracts that were in place for some of the power to be delivered to Nevada consumers or other constraints that were imposed on the generators; the state did not know whether that utilization of Nevada’s resources was necessarily going to benefit consumers in the form of energy.  He mentioned the Southern Nevada Water Authority was noted in the same press article in the context of releasing some of their available ground water rights to the independent power producers (IPP).  They were in the process of negotiating agreements that ensured at least some of the capacity of the plants was devoted to Nevada consumers.  The story quoted Ms. Mulroy, one of the Southern Nevada Water Authority officials, as stating at least 30 to 50 percent of the output of the plants would be devoted to Nevada as essentially a precursor to receiving the water rights.  In southern Nevada the issues seemed under control, at least from a procedural standpoint.  Facility sites, in particular transmission lines, had always been a contentious issue.  When Mr. Hay had served on the PUC and the Public Service Commission he presided over the site of the Alturas Power Line in northern Nevada.  The issue was contentious especially for the portion of the short line in Nevada basically because of the concerns raised by Ms. Buckley.  Even in sparsely populated areas there were neighborhoods, and the residents did not want transmission lines.  There was a need for a comprehensive approach, he declared, to insure the transmission capability was present by the time the new plants came on-line.  It was his understanding the planning process was proceeding.  Any IPP would not want to invest $500 million or more in a facility and then discover there were no lines to deliver energy.  All of the issues raised were appropriate.  He stated the most important concern would be to have Nevada’s resources, both air shed or watershed resources, utilized and not have the certainty the power would be delivered to Nevada consumers at reasonable prices.  Those were among the issues his office and the legislators would be working on in the next couple of years as the new plants proceeded from the permitting to the construction phases. 

 

Assemblywoman Tiffany queried Mr. Hay about the $2 billion revenue stream over the next 5-year period.  She asked if the money was the 34 percent rate increase, the 17 percent and then the 17 percent in March.

 

Mr. Hay stated the $311 million increase that was approved March 1 over the next five years would produce a little over $1.5 billion.  Assuming that the rate adjustment mechanism from the global settlement entered into last summer stayed in place, it would produce an additional $860 million over the remaining two years of that agreement.  Aggregating those two figures over the five-year period the number would be $2.3 billion.  To put the numbers in comparison, he believed “the company’s” gross revenues for 1999 were about $1.1 billion. 

 

Ms. Tiffany asked Mr. Hay if he felt comfortable the $2.3 billion revenue stream would cover the cost of buying fuel.  Mr. Hay believed part of the intent of the CEP filing, which his office was challenging for a variety of reasons, was to cover a non-divestiture contingency so that revenue stream would allow “the company” to access the marketplace to procure fuel for the plants.  It would make more sense on a long-term basis to look for a mechanism that would be more specifically geared toward covering those costs, such as deferred energy or some variation. 

 

Ms. Tiffany stated she felt the Legislature would be putting the utilities a little in jeopardy to tell them they could not divest, not talk about deferred energy but use the revenue stream as the backup.  She believed it was a risk for the utilities and therefore a risk to the state and the ratepayers.  Mr. Hay stated that of course the lawmakers did not want to jeopardize the reliability of the Nevada power supply, particularly for the summer months in Las Vegas with a peak load twice what it would be in the winter.  Unfortunately, because of the way “the company” filed the CEP filing, the underlying accounting data that would have been filed with a general rate case was not included.  His office had stated a concern with the way the PUC processed the rate increase as well as putting the other parties to the proceeding at a disadvantage to determine what the appropriate numbers were.  Many of the assumptions that were built into the filing were based on natural gas prices that were figured at late December prices, when natural gas prices peaked, and in the spot market natural gas prices had declined over the last couple of months by nearly 50 percent.  There was a constantly changing set of assumptions and if there was a deferred energy mechanism in place the issue could be addressed in a real time basis.  It was still the belief of his office, however, there should be a general rate case.  One company had not had a general rate case in almost a decade to adjust the accounting values of the assets and the rate base. 

 

Ms. Tiffany stated she was aware his office wanted to keep the utilities within a narrow margin of profit and yet keep them solvent and keep the rates down.  She was concerned about the revenue stream he had indicated with fuel already purchased for the summer, uncertainty of costs, and no deferred energy mechanism in place, the public would be placed at risk.  Mr. Hay did not believe the risk was substantial.  He indicated “the company” could have a different opinion.  He believed if the state went immediately into deferred energy it would amount to a huge rate shock to Nevada consumers.  He did not feel that would be in the best interest of the state.  Ms. Tiffany asked if he felt that was the trade-off.  He stated he believed that would be the trade-off.

 

Ms. Von Tobel asked for clarification from Mr. Hay regarding the transmission lines.  She asked if he felt confident if Nevada Power did not divest their plants they would be in a financial position to put in the transmission lines.  She inquired without the revenue stream from non-divestiture and without deferred energy would “the company” be financially able to purchase the lines.

 

Mr. Hay speculated part of the financial stability depended on the fate of the Portland General Electric acquisition.  The original intention of “the company,” he believed, was to use the proceeds from the divested plants to consummate the purchase of Portland General Electric.  If that transaction did not proceed, some of the funds could be redirected to investment in transmission in Nevada.  If the transaction did proceed, the state would have to make assumptions and would know the answer around May 5.  “The company” was receiving proceeds from the sale of the water division currently pending in the PUC and all indications were the transaction would close.  The $350 million received from the sale would be enough for a major transmission facility in the south.  A financial mechanism could determine some of those proceeds on a temporary basis could be used for the financing.  The water division was a northern Nevada asset and there would be some consideration as to the appropriateness of diversion of funds on a permanent basis for other utility investments.  A transmission facility investment could be recouped through the lines in place.  The investment would not fall into a category where the investment had no potential for return.  He was not sure if “the company” had any discussions with IPPs that would like to be connected to the grid and would consider a joint-venture financing for transmission if necessary.  There were a variety of options to explore to insure the transmission would be built on a timetable commensurate with the new plants.

 

Assemblyman Hettrick asked if he heard Mr. Hay state that “the company” was going to divest the plants and buy Portland General Electric and now “the company” was not going to divest the plants and buy transmission lines.  He wondered how “the company” would accomplish that.  Mr. Hay stated he could have misspoken.  The Portland General Electric acquisition amounted to over a $3 billion purchase price, with a $1.1 billion acquisition premium, and had been pending for a period of time.  It was his understanding the timeframe for either consummating or ending the potential contract was May 5.  If the acquisition continued, the ownership of such a large company would be a substantial burden to the remaining operating divisions of Sierra Pacific Power.  If the transaction did not close the potential for financing infrastructure developments in Nevada was enhanced.  There was a relevant factor and not a direct trade-off factor involved.  He did believe there were substantial savings to retention of the plants over the five-year period that would outweigh the short-term costs that would be incurred under the buy-back contracts.

 

Mr. Hettrick asked if Mr. Hay thought “the company” could borrow the $350 million today to build the transmission lines if there was no divestiture and there was no deferred energy in place.  Mr. Hay stated there needed to be a comprehensive look at “the company’s” finances in order to determine the answer.  Neither his office nor the parties to the pending rate increase had been afforded the opportunity to examine the finances.  If “the company” had filed all of the supporting financial data in the proceeding currently in the PUC there would be a better idea of their financial stability.  He did note that “company” representatives in the Senate Commerce Committee indicated planning was underway for the necessary transmission projects in Las Vegas, which implied “the company” had a way of completing those lines.  Mr. Hettrick suggested that way might have been divestiture.  Mr. Hay stated he did not believe the discussion of divestiture had been part of the analysis regarding the issue of transmission line projects moving forward.

 

Mr. Hettrick stated his understanding of the Portland General Electric acquisition was there was a requirement with initial funding, a down payment, and then the transaction actually paid for itself because of profitability in the operation of Portland General Electric.  Given the fact that Portland General Electric was self-funding, it would seem the purchase would be a significant asset and would be of significant value to buy, borrow money against or generate profit to help with funding transmission lines, etc.  Mr. Hettrick asked for Mr. Hay’s opinion.

 

Mr. Hay did not believe that to be a good case because the acquisition premium was $1.1 billion and was to be amortized over a long period of time.  When Enron purchased the facility less than three years ago, he stated, the price was less than $2 billion and Sierra Pacific was paying in excess of $3 billion.  He did not believe it to be a profit engine to develop resources for investment in Nevada.  He stated when the Oregon Public Utilities Commission (OPUC) approved their part in the acquisition, they put specific limitations on Sierra Pacific Power’s ability to feed any ratepayer dollars from Oregon into the Nevada part of the system for a substantial period of time. 

 

Mr. Hettrick stated he understood Mr. Hay’s position, but found it interesting that Enron bought the plant for $2 billion and kept it for 2 years and then sold the plant for $3 billion.  He stated it sounded as if there was huge profit potential with Portland General Electric.  He indicated there was clearly a potential to generate money and value that could allow for borrowing capability and security to buy transmission lines.  He could not imagine that Sierra Power would be in the process of purchasing a facility that did not make a profit.

 

Mr. Hay stated he did not intend to state “the company” would not make a profit.  He intended to say the conditions the Oregon Public Utilities Commission put on the transaction would preclude those benefits from flowing to Nevada.  Mr. Hettrick stated there was no need to have the profits flow to Nevada.  If a company could show profit potential, a company could sell the stock just as Enron did and either sell the company or borrow against the asset and the profits flow to Nevada whether the OPUC liked it or not.  When there was an asset, a company could borrow against the asset, remove the money and put it into transmission lines.  There was a lot more to the issue than the simple idea of “the company” paying more for Portland General Electric and the state not bringing the rate dollar here.  Clearly the plant had a value since it increased 50 percent in two years. 

 

Mr. Hays stated he would reexamine the conditions that the OPUC placed on the transaction.  He did believe it would substantially limit Sierra Pacific’s ability to benefit Nevada ratepayers directly or indirectly from the operation of Portland General Electric.  Obviously, if Enron chose to sell the plant, he stated, there was probably a good reason to do so.

 

C. E. Edwin Fend, Representative, American Association of Retired Persons (AARP), Carson City, Nevada, indicated he recalled the approval of S.B. 438 of the Seventieth Session and his strong opposition to the passage of the bill.  He believed passing that bill provided a handicap in particular to the senior citizens and residential customers.  The bill seemed to be supportive of the mining industry and other industries such as the Las Vegas casinos.  Now the crisis in California had surfaced and put an emphasis on where the state was headed.  The emphasis would be very evident in the heat of the summer, especially in Las Vegas.  If the state did not make a decision against divestiture, he stated, and did not make decisions to provide additional power companies in this state, he believed the state would be in serious trouble.  The rewriting of A.B. 369 had put emphasis and protection for the senior citizens on fixed incomes and low- income families that were in the original bill.  With the other bills the committee would be considering, S.B. 362 and A.B. 349, he felt there were programs that would be established to partially benefit the people to enable them to pay their utility bills.  One of the problems over the long-term, rarely mentioned, was the fact that although there was a portion of federal funding released for aid in paying heating bills in the north, there had never been a request for the cooling element in Las Vegas.  The only state that received less federal funding to aid in utility bill payments was the state of Hawaii.  He stated the population of Nevada had grown by 65 percent and the state was not Hawaii where there was a year-round comfortable temperature.  He indicated A.B. 369 would place the state back in good position.  He felt there was duplication, however, in quite a few of the bills before the Assembly and the Senate.  He also stated he wanted the state to begin to explore more geothermal plants, a renewable resource.

 

Michael A. Pitlock, President, Pitlock and Associates, representing AES Mohave, LLC, indicated the committee had a copy of Mr. Harold Franson’s testimony (Exhibit C), and a summary of a legal opinion outlining the issues associated with stopping the Mohave transaction from moving forward (Exhibit D).  The intent of Mr. Franson’s testimony, he stated, was twofold.  The first issue was to outline for the committee some significant legal issues associated with trying to prohibit the Mohave transaction from closing.  The Mohave transaction, he indicated, was at a different stage in the process than any of the other pending sales.  The transaction was the only one that had already received regulatory approval from the Nevada PUC as well as the Federal Energy Regulatory Commission (FERC), and also received its review from the federal Department of Justice.  In addition to the legal issues associated with the Mohave transaction, he believed there were other unique elements associated with the power plant itself.

 

Harold Franson, President, AES Mohave, LLC, Laughlin, Nevada, read from Exhibit C and indicated AES recommended the proposed A.B. 369 be amended to recognize the sale of Nevada Power’s 14 percent share of the Mohave Generating Station to the AES Corporation was at a different stage than any other proposed divestiture in the state.  He stated the committee should allow the Mohave sale to proceed as currently approved by the PUC of Nevada in its Order No. 00-8029.  The committee could amend A.B. 369 to remove paragraph 3(c) of Section 12 and the word “before” in paragraph 1(b)2 of Section 32.  That would have the effect of grandfathering in the sale of the Mohave Generating Station.

 

To provide a brief history, Mr. Franson read from Exhibit C outlining the transaction between Nevada Power and the AES Corporation on May 10, 2000, for the sale of Nevada Power’s 14 percent share of the Mohave Generating Station (Mohave).  The agreement had been approved by the PUC on October 12, 2000, and by FERC on October 27, 2000.  The Department of Justice determined on February 16, 2001 the sale of Nevada Power’s portion of Mohave to AES did not violate the Hart-Scott-Rodino Act. 

 

Mr. Franson outlined the liabilities Mohave would need to address in the near future that should be considered when evaluating the benefits of allowing the sale to proceed.  Nevada Power’s share of the costs would be approximately $77 million.  The Mohave Generating Station was now 30 years old and in need of major refurbishment in the new few years.  Exhibit C outlined the items that would need to be upgraded and/or replaced.  The budget was $5 million for the year 2001 for the type of work necessary.  In addition to major refurbishments, there would be several capital expenditure outlays necessary to keep the plant operational during the next 25 years and to improve the efficiency and maintain the nameplate output.  Those refurbishments were budgeted to cost $9,676,000 for capital projects in 2001 alone.  Mr. Franson stated Mohave had entered into a Consent Decree obligated to install low-Nox burners, SO₂ scrubbers and baghouses in order to reduce the emissions from the station.  If the investments were not started in the near future, the station would be required to shut down after 2005.  The cost estimate for the equipment was approximately $350 million.

 

Mr. Franson stated the Mohave participants were required to make certain lump sum payments under the Amended Coal Supply Agreement to provide for coal to Mohave.  The negotiations to reserve the coal were in process and the participants would be in a position to make those commitments and agreed payments within the next 60 days.  The current estimate for those payments was $13.5 million.  In addition, the pipeline that transported fuel to Mohave needed to be refurbished by 2003 in order to support operation beyond 2005.  The preliminary estimate for the refurbishment was between $127 and 145 million.

 

The participants had to resolve the current dispute with the Navaho and Hopi tribes in regard to the supply of water for the coal slurry pipeline and Black Mesa Mine.  The preliminary proposed settlement required a payment by the participants of $44 million in addition to ongoing operations and maintenance costs.  Mohave must obtain and pay for additional water to meet the requirements associated with the operation of the SO₂ scrubber to be installed prior to the end of 2005. 

 

Mr. Franson stated Nevada Power and AES had entered into an agreement that had been executed by both parties and approved by the PUC of Nevada.  A.B. 369, he stated, would interfere with the rights of both parties under their agreement.  Legislative action to interfere with the parties’ contractual rights would be a violation of the Contract Clause of the United States Constitution.  There were legal issues raised by the proposed S.B. 253 and the issues were identical to those raised by A.B. 369.  He submitted Exhibit D to the committee for the review of the legal opinions.

 

In addition to the legal and economic issues Mr. Franson had mentioned, there were other reasons to consider exempting the sale of Mohave in A.B. 369.  The purchase price for the sale of Nevada Power’s portion of Mohave was $133.5 million.  The money could be effectively used by Nevada Power for needed investment in operation and other expenses.  He stated Nevada Power would continue to receive energy from Mohave under the terms of a transitional power purchase agreement that had been executed by both parties.  Nevada Power would pay for energy at 1998 prices through March 1, 2003, under the agreement.  Sale of the station would eliminate Nevada Power’s exposure to the current litigation (Southern California Edison Co. v. Peabody Western Coal Co.) including the counterclaims.  AES would take on Nevada Power’s liability if the closing occurred prior to settlement. 

 

AES was committed to the long-term operation of Mohave, Mr. Franson stated.  AES’s goal for Mohave was to be a competitive and reliable supplier of electricity for the life of the facility.  AES had already initiated a generation expansion plan for Mohave.  AES had requested and Southern California Edison, as operating agent for the Mohave station, had completed a system impact study to connect additional generating capacity at the switchyard.  The next step was a facilities study; however, the study was being slowed down by the uncertainties created by the regulatory and legislative action in both California and Nevada.

 

Mr. Pitlock spoke to help put the Mohave transaction in the proper context.  Nevada Power’s 14 percent share of the Mohave Generating Station was somewhere in the range of 220 megawatts of energy; however, compared to Nevada Power’s total generation in the south it would amount to approximately 10 percent.  The Mohave share represented about 5 percent of their peak load.  This constituted a relatively small portion of the generating capacity and an even smaller percentage of the peak load, he indicated.  However, this one transaction created a significant legal cloud over the legislation.  Every attorney, he contended, stated there was a very good chance of winning every case they entered into.  The fact remained there was a certain type of risk associated with any type of litigation.  In Mr. Pitlock’s opinion and years of service at the PUC, he believed the risk associated with this transaction far outweighed the small magnitude of the capacity involved. 

 

Assemblywoman Leslie stated that while Mr. Pitlock may consider the amount of energy to be a small amount, with the energy crisis the state was facing she wanted to make sure the state kept every amount of energy they could in the state and not siphon off to California.  She requested the Chairman to allow the committee counsel, Mr. Powers, to give an opinion on the matter.

 

Kevin C. Powers, Committee Counsel, stated he did have an opinion.  AES had brought the memo to the Senate Commerce Committee and he had reviewed the opinion.  AES’s argument was premised on the Contract Clause and he would discuss that shortly.  The committee should keep in mind that the Contract Clause was not the only Constitutional provision that was implicated.  There were a number of Constitutional provisions that could be listed and could be affected by the type of legislation proposed.  It would be important to remember when the Legislative Counsel Bureau (LCB) drafted legislation and determined if it was constitutional, the LCB considered two issues.  First, every piece of legislation enjoyed the presumption of constitutionality and second, LCB looked at existing case law and asked if the piece of legislation was more likely than not constitutional.  LCB believed in this circumstance A.B. 369 was more likely than not constitutional.  With regard to the Contract Clause there were two tests the courts applied.  The first test was a higher standard and was applied when a state was a party to a contract.  The other test was a lower standard and was applied when a state was not a party to a contract.  The state was not a party to the AES contract.  Therefore, the courts would apply the lower standard, not the higher standard.  Mr. Powers stated several cases cited in the memo supplied by AES dealt with the situation when the state was a party to the contract, in particular, the U.S. Trust Case.  In that case the court applied the higher standard and did not apply the lower standard for contracts between private parties.  The case now involved a contract for private parties, between AES and Nevada Power for the sale of the Mohave plant.  He had examined AES’s memo and the main argument stated the legislation was neither reasonable nor necessary and therefore violated the Contract Clause.  The reason was certainly a standard.  When there was a substantial impairment of contract the court asked whether the legislation was reasonable and necessary.  LCB agreed there was a substantial impairment in this case.  Obviously when the legislation was enacted AES would not be able to perform under the contract and neither would Nevada Power.  The contract would be effectively destroyed.  Even if there was a substantial impairment, however, the standard was straightforward.  Unless the state itself was a party to the contract, as was customary in reviewing economic and social regulation, courts properly deferred to the legislative judgment as to the necessity and reasonableness of a particular measure.  Given the circumstances in the western electricity market, there was clearly a broad social problem that needed to be resolved by the Legislature.  The office of LCB believed the court would defer to the legislative judgment under the circumstances as to the necessity and reasonableness of the legislation.  The level of deference increased when the regulation was directed towards an industry that had been historically heavily regulated.  This case had a historically heavily regulated industry, namely the utility industry.  The United States Supreme Court had dealt with Contract Clause cases involving utilities and, in fact, specifically relied on the state to attempt to control prices when natural gas was deregulated to justify the state’s impairment of contract.  LCB opined, in taking all of the factors together, the legislation did not violate the Contract Clause.  Mr. Powers stated a caveat must be added:  the legislation would be pushing the outer limits of the Constitution.  LCB could not say with absolute certainty that the legislation was constitutional, yet they could believe it was more likely than not constitutional.  AES could, however, make a reasonable argument in court.

 

Mr. Powers stated there were other constitutional issues involved and LCB had reviewed several of the issues raised by the legislation.  In addition to the Contract Clause, there were issues under the Dormant Commerce Clause, the Takings Clause, the Due Process Clause and the Equal Protection Clause.  LCB had reviewed each of those.  Mr. Powers stated he would like to point out to the committee there was a “wild card” and it involved Federal Preemption Under Supremacy Clause.  When Nevada Power and Sierra Pacific Power and Sierra Pacific Resources merged in 1998 the merger required approval under the Federal Power Act and the approval had to be given by the Federal Energy Regulatory Commission (FERC).  In FERC’s order approving the merger between the three companies, the agency specifically conditioned its approval on divestiture of the generation assets of Nevada Power and Sierra Pacific Power.  FERC had retained jurisdiction over that transaction.  It would continue to retain its jurisdiction under the Federal Power Act.  Even if the Legislature would enact legislation passing a moratorium on the divestiture of those generation assets, it would be always possible for FERC, exercising their jurisdiction, to order that divestiture proceed.  In that case, under the Federal Doctrine of Preemption under the Supremacy Clause, the state law would be superceded by the federal order of FERC.  There was no certainty that it would occur.  FERC would have to review the approval of the merger if the legislation passed.  The committee could not control the issue with FERC; however, concerning the other constitutional issues, if the legislation was drafted properly and LCB believed it was, LCB believed the bill was more likely than not constitutional.

 

Mr. Pitlock requested to be allowed to respond to Ms. Leslie’s portion of the question regarding the energy possibly being sent to California as opposed to Nevada.  He had noticed a perception on the part of most parties to assume the owners of any new plants or energy sources in the west would automatically sell to California.  He disagreed with the assumption.  Given the financial condition of the entities in the state of California right now, and the concern expressed by the California Legislature about some of the prices, if he was an independent power producer and owned a plant that had the ability to sell power into Nevada or sell power into California, he would have to examine the risks.  There were some IPPs selling into California that had not been paid for a long time.  Nevada had always prided itself as a good place to do business.  He found it hard to believe that companies such as AES Mohave, if there was the ability to sell into Nevada or sell into California, would not chose Nevada at least for some of the energy.  Mr. Franson also stated the closer a company was to the point of delivery from the source of generation, the lower the cost of delivering the electricity.  Therefore, there was an inherent cost advantage to delivering and selling it to Nevada versus California or other states.  There was an economic advantage to AES Mohave to sell to Nevada.

 

Ms. Leslie stated a free marketplace existed and the opportunity to sell the energy where the company could get the highest price and that was what producers had done.  California was in the process of moving toward guaranteeing payment so she believed the argument to be thin.

 

Ms. Buckley asked if AES was being investigated for price gouging.  Mr. Franson stated he was not close to the situation; however, was aware the company had been given a “show cause” order along with Williams to show the state of California the availability of some of the units they owned in the state.  AES under the contract with Williams did not market any of the power.  Williams had title to all of the energy generated by the Southline plants.  AES did not market or sell any of the energy from those plants since they purchased them from Southern California Edison.  AES was not subject to the price gouging order from FERC.  Ms. Buckley asked if the allegations had to do with plant shutdowns in order to manipulate prices.  Mr. Franson stated under the contract with Williams, AES was ordered when to run the plants and AES determined whether or not the plants were available.  AES had severe economic penalties if they did not meet an availability target.  Their incentive was to have the units as available as possible.  They had run into problems involving the plants that were poorly maintained when they purchased them from Southern California Edison.  The level of maintenance prior to the sale was much less than what should have been done to keep them reliable.  Because of the severe shortage of electrical energy in California those plants have been called on to run many times more than they had historically.  The situation involved then a plant that was under-maintained and was now being run much longer than expected.  AES ran the plants as long as they could, but eventually the plants started to break down.  AES ended up with more forced outage hours than they would have liked.  That issue was being investigated by FERC.

 

Ms. Von Tobel stated more than anything else she was hearing uncertainty from the testimony.  If the committee allowed divestiture to move forward the certainty would be the contract would be followed.  If divestiture was stopped there seemed to be a lot of uncertainty.  The committee did not know what FERC would do and if she had learned anything it was uncertainty hurt companies.  What had hurt Nevada Power and Sierra Pacific in the past had been uncertainty.  With deregulation their stock prices were almost cut in half because of the uncertainty concerning what the legislative body was going to do.  No one could guarantee what would happen if divestiture was stopped by the passage of A.B. 369.

 

Russell A. Fields, President of the Nevada Mining Association, thanked the committee for the years of service to the matter of energy.  He stated the association appreciated the efforts of the committee to keep the state from entering into a situation such as California was in.  The goals outlined by Speaker Perkins and Ms. Buckley were consistent with the goals of the Mining Association.  The members of the Nevada Mining Association included the largest mining companies operating in the state.  He stated the Mining Association would like to address the basic need involved with structuring electric markets and achieving the goals of affordability and reliability mentioned.  The answer, he stated, was additional generation.  The mines, because of their large loads and heavy baseload needs, could help contribute to bringing new generation to the state given a favorable business market.  The committee had heard from IPPs and what the major retail customers, such as the mining organizations, needed were IPPs that could sell at retail not just wholesaling in turn to Sierra Pacific Power.  A.B. 369 was contrary to the idea of IPPs and would preclude the opportunity for those types of transactions on a very large scale.  Mines were some of the biggest customers utilities had.  If the mines were able to enter into arrangements with IPPs, there would be a significantly large amount of power Sierra Power did not need to obtain on the open market.  There were some barriers in the current business environment that did not make retail selling of power attractive to IPPs. 

 

Michael Brown, Vice President, Barrick Gold Corporation, provided a summary of the current state of the energy market and how it was affecting the mining operations and the 5000 employees of Barrick living in Elko and Eureka counties.  The Barrick mining operation in Elko and Eureka counties was one of the largest of its kind in the world, he stated.  The annual gold production of the mines topped 2 million ounces.  Members of the committee that had visited the area knew the mines were a very technology-intensive operation largely powered by electricity.  Barrick was Sierra Pacific Power’s largest customer, with a 135-megawatt electric load.  Last year in Nevada the company purchased $227 million of goods and supplies from Nevada companies and vendors.  The largest expense of that amount was electricity and totaled $42 million.  Under the rate increases that had been imposed they anticipated the amount would increase to $60 million this year.  Only the payroll at $100 million exceeded the cost of electricity.  Mining was a business that was driven by the ability to manage costs; they could not control the price of gold, could not boost sales through advertising and promotion.  He indicated to remain profitable, the engineers and accountants had to find new efficiencies and savings.  The current energy problem was stretching their creativity.  Barrick agreed with the premise Nevada needed a financially viable utility and they had taken a “trust but verify” position on the CEP proposed by Sierra Power and approved provisionally by the PUC.  National energy experts had advised them on the critical need to help Sierra weather the current storm.  Barrick had been looking for new ways to increase electrical supply in Nevada.  They had examined the proposed El Paso Gasfire Power Plant that Newmont Gold had embraced a few weeks ago.  They had looked at the merits of a clean coal fire facility because of the railroad lines that were available.  He regretted to inform the committee discussions with other potential suppliers of electricity had not been successful.  The current market was being driven by events in California.  While there were many IPPs on the drawing board in Nevada, few were willing to discuss contracts with Nevada users due, unfortunately, to an uncertain and ever-changing regulatory climate in Nevada.  He compared the electricity rush occurring in the state today to the gold rush of the past.

 

Mr. Brown stated with respect to A.B. 369 Barrick did not have a position for or against divestiture.  Barrick wanted to leave the matter to the state of Nevada, Sierra Pacific Power and other parties.

 

Mr. Brown stated they were concerned, however, with other provisions that might further discourage the development of new generation in Nevada, particularly Section 5 that repealed the guidance given the commission to promote and develop a competitive market for electricity.  The action would seem to miss the fact the utilities in Nevada at this stage did not have the necessary capital to build the generating assets the state needed.  The capital would need to be imported.  The utilities had declared they were on the edge.  The movement away from a competitive market would not generate the capital needed to keep the lights on.  He stated in order to avert the western energy crisis new generators would have to be built.  New generators could only be built when the builder had access to a market that would insure the builder recovery of costs, not only the cost of fuel supply but also the builders capital costs.  Currently the volatile wholesale market did not provide builders with the necessary assurance because builders could sell the commodity only to utilities with whom they would compete for generators.  The kind of generation needed may not be coming to Nevada.  Instead, an independent builder needed direct access to customers, in particular large customers with the capital, the credit and the financial worthiness to assist them in providing the revenue streams necessary to support capital investment for the new generators. 

 

Mr. Brown stated Barrick had discussions with IPPs relating Barrick was Sierra’s largest customer, had an excellent credit rating, and anticipated a presence in the state for a substantially long time.  Barrick asked the IPPs about having an arrangement where they could help bring a power plant or new electricity to Nevada.  One of the responses they had received from a leading national concern stated the Nevada market was not open so if there would be interest it would be to ship the electricity over the mountains to California.  A Barrick water lawyer, Rich Haddock, had found a provision in water law that was brought to the attention of the Governor’s commission that gave the state water engineer some leverage on where the power goes for the IPPs.  Mr. Brown encouraged the committee, understanding the Legislature’s great interest in divestiture, to take steps that would allow the mining industry to try to facilitate the El Paso project or other projects that might bring real generation to Nevada.

 

James A. Chavis, Placer Dome America, Regional Manager of Human Resources and Public Affairs, stated Placer was proud to be a part of Nevada.  The company employed over 800 employees and 3 mines in northern Nevada.  Placer Dome believed mining played a significant role in helping make rural Nevada financially independent.  Currently Placer utilized about 35 megawatts of power in their Nevada operations with the potential to increase to 70 megawatts in about two and a half years.  Adding generation capacity to Nevada’s system was the key to solving the problems of insuring adequate supply, reliability and reasonable cost.  Placer Dome wanted to be part of the solution, he stated.  He believed the company had the long-term demand that should help entice new generation into the state.  As recently as two years ago his company had been involved in talking with IPPs that were anxious to do business in the state.  Now those companies were no longer talking.  The only IPP that Placer was talking to was El Paso Natural Gas in the north.  He believed the uncertainty pertaining to deregulation and all the related issues had served as a disincentive for the IPPs to move to Nevada.  Placer competed in an international marketplace for their product sales.  Electricity and energy costs were a major factor affecting their competitive position in the marketplace.  Placer’s product was traded on the open market and there was no control over the price they received for their product; therefore, it was critical from them to be able to compete to get the prices for all of their purchases, especially electricity since it was the No. 2 expenditure.  Providing a mechanism for large commercial customers such as mining to opt for retail open access as soon as possible could benefit all of Nevada’s ratepayers provided that the arrangements provided net additional generation capacity within the state.  Electricity costs were an important factor, he emphasized, in the ability to stay competitive in the open marketplace.  If Placer could remain competitive, he believed they could continue to create high paying jobs for Nevada residents.

 

Mr. Chavis stated all of the larger mines had back-up generating capacity.  The mines had been looking at the total back-up generating capacity to see if there was something they could do during peak periods of power needs within the state.  He did not know what would be the final outcome; however, he believed the total was 40 megawatts in the original estimates.  Mr. Brown stated Barrick had been working with Sierra Pacific on a load-shedding program and they had been experimenting for the last couple of days when the power market was ostensibly in its shoulder season.  He believed they were able to put 35 megawatts of power back onto the grid for a couple of days this past week while the company put some facilities into deferred maintenance.  Sierra Pacific had been quite cooperative and helpful in that endeavor. 

 

Ms. Buckley stated the committee appreciated the expertise the mines brought to the discussion.  One of the reasons why the moratorium on deregulation and divestiture was linked was because the Legal Division gave the committee an opinion that made divestiture more likely to stand up in court to any challenge.  It would be helpful, she stated, for the committee to hear the rational from a legal standpoint.  She extended an offer to the mining community to help the committee create language that could be used in the comprehensive bill that followed.  The committee would encourage language related to partnerships or clear signals to people that Nevada wanted more supply.  No one, she believed, would disagree that Nevada wanted more supply.  She would be happy to work with the mining companies to encourage these actions. 

 

C. Kirby Lampley, Manager, Policy analysis Division, Public Utilities Commission, State of Nevada, extended the regrets of the Chairman of the PUC for not attending due to prior commitments.  So many of the issues discussed in the committee were pending before the PUC that he was limited in the comments he could make at the time.  He could answer general questions if there were some.

 

Chairman Bache asked Mr. Lampley how long he had been an employee of the PUC.  Mr. Lampley responded in his current position, approximately four months.  Prior to this position he had been with the PUC ten years. 

 

Ms. Buckley asked why the PUC had granted rate increases without having all of the surrounding documents before the committee.  Mr. Lampley stated the commission determined the financial condition of “the company” was in such a position the danger would be greater if the PUC did not allow the rate increase to go into effect than with prevention of the rate increase.  The PUC allowed the rates to go into effect pursuant to statute.  When a company filed for the rate increase, unless the PUC acted to suspend the rates, the rates went into effect in 30 days.  The PUC would have a pre-hearing conference the following day to study the procedures for examining the evidence related to the rate increase.  Ms. Buckley stated the question probably was not a fair one to ask of Mr. Lampley and suggested he convey to Mr. Soderberg that she had heard the arguments stating there was an emergency.  If there truly was an emergency he should put it on a one-week schedule, require all of the documents to be filed and set the hearing for the next week.  Approval of the rate increases without having the documents filed led to public distrust of the process, she indicated.  If there was a true emergency no one wanted “the company” to be denied; however, without full disclosure and a public hearing the public could not insure every penny was needed.  Mr. Lampley understood; however, there were a number of legal requirements the PUC had to adhere to, especially the noticing requirements.  The PUC had to give proper notice, inform all of the potential parties of the pending case, allow time for people to indicate they wanted to intervene in the case, and allow time for testimony to be filed and examined by all of the parties.  Over the years it had become a well-established method of dealing with a rate increase, he stated.  Ms. Buckley stated she tended to support due process.

 

Ms. Leslie stated the PUC had given the committee a good example of why the committee should pass a divestiture bill.  There was a state of emergency and the Legislature should move forward very quickly with the bill.

 

Douglas Ponn, Vice President, Governmental and Regulatory Affairs, Sierra Pacific Power and Nevada Power Company, wanted to explain “the company’s” position with regard to divestiture and wanted to be allowed a short rebuttal of some issues that had been raised.  He also wanted to propose some amendments to A.B. 369. 

 

Mr. Ponn stated “the company” had filed an application, as the committee was aware, to merge Sierra Pacific Power and Nevada Power Company.  In the application they had included the provision wherein they would divest their power plants.  That application was ultimately approved by the PUC of Nevada and FERC and other federal agencies.  In the last two sessions there had been concern with the incumbent utility retaining generation and what effect that would have on the robustness of the market for energy in Nevada.  As of today, “the company” was under contract to sell the plants to the buyers.  “The company” was under order from the PUC and FERC to sell the plants.  In the short run there was an economic benefit to their customers, he believed, to follow through with those transactions.  There had been testimony in the Senate and the numbers for “the company” ranged from $870 million to $1.1 billion for the benefit of the buy-back contracts of 1998 prices between now and March 1,2003.  In the longer term, there had also been testimony from Mr. Hay there may be a corresponding or offsetting to having sold the plants.  He believed the argument depended upon what assumptions were made in regard to fuel costs to run the plants in the longer-term market. 

 

Mr. Ponn was not before the committee as an advocate for selling or retaining those plants.  “The company” would comply with Nevada law as was directed out of the legislative session.  Until the law was changed they would perform their obligations under contract and order.  He indicated everyone was aware there was a decision to be made about the future of the plants.  His recommendation to the committee would be to put some certainty back into the market, the restructuring arena, and the business environment in the next few years.  Whether or not “the company” retained the plants was one of three or four decisions that would be made.  If “the company” knew they were going to divest the plants that would lead them to one course of action and if they knew they were not and soon, they would begin to secure fuel for those plants.  He did not believe divestiture was the only question that needed to be answered.  “The company” also needed to know what their obligations were and to which customers.  He hoped this legislative session would make some decision with regard to which customers could choose to leave the system and what options were available to what customers.  If “the company” was to remain the provider of fully-bundled energy service as in the past, they would need to know what their obligations were to which customers, how many of them there were, what loads they had to serve so they could start planning and providing for the exercise of the obligation. 

 

There needed to be some resolution, he stated, of how “the company” recovered the cost of providing at least the energy piece of those services.  Currently “the company” had two processes ongoing at the PUC to make monthly adjustments to rates per the global settlement and the fuel and purchase power riders (FPPR).  The rates in effect were the PUC approved from the CEP.  Whether those rates stayed in effect was in question.  He was concerned Mr. Hay would allege “the company” had no financial difficulties on the one hand because “the company” had $2.1 billion that came from the two documents and the filing they made pursuant to those documents.  Mr. Hay had stated it was $350 million times five years for the CEP and the balance with the FPPR.  On the other hand the committee had heard testimony from Mr. Hay indicating he was doing what he could and where he could, in court and at the PUC, to remove both the CEP and the FPPR or have them declared illegal or have them reversed.  There was a proceeding at the PUC the following day to try to resolve the issues.  The CEP, he stated, provided for the rate increase and also provided for the restructuring of some of the energy portfolio in order to level the rates “the company’s” customers had to have to reduce rate shock in the future.  The Legislature, he stated, needed to answer the question of cost recovery.  If the question did not get answered, he believed the consequences could be severe.  If “the company” was told not to divest the plants, the financial markets were looking at that particular transaction as providing a billion dollars in cash to “the company.”  The billion dollars would help pay for fuel, purchase power and finance the items necessary to serve their customers.  If “the company” did not receive the billion dollars and if there was an uncertainty that stayed in place about how they recovered or did not recover the fuel and purchase power costs, the market would place “the company” in the same category as the California utility companies.  “The company” did not want to see that happen.

 

Mr. Ponn spoke about the financing of transmission lines.  If “the company” was a utility the financial markets thought was a viable utility that could pay its bills, pay its creditors, pay its suppliers, then there would be the ability to obtain financing to complete the transmission projects.  He stated “the company” did not want the utility to become unhealthy and suffer the consequences of those actions.  He asked the Chairman if the committee would entertain some amendments to A.B. 369.

 

Ms. Buckley stated she was looking forward to the debate and discussion concerning deferred energy accounting.  She expected to have discussions concerning what it would mean if there was a rate increase on top of a CEP, and on top of the global settlement, or would the mandates become defunct.  She wanted to hear about retrospective reviews, no rate filing and when did the public get to look at “the company’s” books — not only at the cost of fuel but the 6.1 million paid to terminate executives.  She asked if the Legislature went forward with deferred energy could “the company” use those proceeds to not shore up its financial conditions planned for transmission lines, recover the costs of fuel purchases, but instead purchase Portland General Electric.  Mr. Ponn stated that was a fair question.  If deferred energy were reinstituted and went into effect as before it would allow “the company” to recover prudently incurred and scrutinized fuel and purchase power costs on a retrospective basis.  The way deferred energy worked was to set a rate and go forward with the rate accumulating any under-recoveries or over-recoveries, file an application and have a hearing, people had an opportunity to claim “the company” was not accurate in their practices, “the company” made adjustments and moved forward with the new rate based on current prices and amortization of the balance in the deferred energy account.  Mr. Ponn did not see any opportunity for any dollar to be recovered out of the process to do anything other than compensate for fuel and purchase power costs. 

 

Ms. Buckley asked if the Legislature were to explore and seriously consider reinstituting that mechanism to assist “the company,” would “the company” agree to a rate case or an audit before the Legislature gave them the rate recovery relief.  Mr. Ponn stated the rate case question was interesting and it was the first time he had heard people complain about not having rate cases.  Historically, rate cases were usually not filed to reduce rates, although Sierra Pacific Power had a sharing mechanism in place for a number of years and they had made annual filings to share earnings with their customers.  If deferred energy were reinstituted, in his opinion the process to accomplish it would be to have some transition wherein the current rates in effect resulted from the CEP and the global settlement, pick a date as a start date and start accruing on that date the cost of fuel and purchase power and use the rates that were in effect on that date.  He stated then they would move forward with something exactly like or similar to the old deferred energy process.  At the end of six months or a year, depending on when the filing needed to be made, there would be adjustments, allowing the opportunity for true-ups and refunds of the dollars collected under those two filings.  If a scenario were created where there was a lag between the two mechanisms or a scenario were the CEP and the other two rate increments went away, then “the company” waited to prepare a file, litigate, etc., a deferred energy case there would not be much time.  Mr. Ponn stated he believed, therefore, that there had to be a very smooth transition.

 

Mr. Ponn answered the second part of Ms. Buckley’s question in regard to the scrutiny of “the company” on the general rate or total rate side of the equation.  He stated “the company” was subject to audit at any time by anyone for anything they did.  “The company” could be the most audited and regulated industry there was.  There needed to be at some point a truing-up of all of the rates.  Mr. Ponn stated a general rate case, therefore, was not out of the question if appropriate, given it would interact with previous orders on what they did with general rates.  Currently “the company” was in a general rate freeze.  He stated the committee might not believe that statement because it was the other piece of the rates that were in a freeze.

 

Ms. Buckley stated she would look forward to the hearing.  She would especially want to ask Mr. Schmidt, in light of his statement at the hearing on S.B. 438 of the Seventieth Session, about his statements relating to the only thing consumers were gaining from that bill was the elimination of deferred energy accounting. 

 

Mr. Ponn asked the Chairman if he could provide amendments to the bill.  He stated in Section 6 of A.B. 369, Subsection 3, used the words “provide for stability in rates and for the availability and reliability of electric service.”  He proposed the committee might want to allow for rates to move and not be totally static.  The Chairman could not follow in the bill book to accommodate Mr. Ponn’s request and asked if Mr. Ponn was working off of an Internet copy.  He stated that was correct.  The corrected section was Section 5, Subsection 3.  If stability meant rates could not change at all, someone might argue it was a legal requirement.  He suggested an additional provision in that section to allow an opportunity for utilities to be compensated for their costs.  That did not appear to be currently a provision of that section.  The second proposed amendment was directed to Section 10, “requires the approval of every member of the commission with regard to a particular matter before the commission.”  There were also some specific requirements about attendance and voting.  He indicated he had been in various jobs in the utility industry for about 20 years and if there was a requirement to have a unanimous vote he did not know how often that requirement would be met.  The Legislature voted on a majority basis on most things and unanimous vote requirements were hard to achieve.  There were only three members to the commission; however, if there was an investigation as to how often they were unanimous on significant issues it would be less than half the time.  He stated there was a concern in regard to Section 13, Subsections 1(b), (c) and (d) and the definition of an electric utility being overly broad to the point it might add things that were not intended.  For instance, he stated, “the company” had an affiliate that was a telecommunication company and as such, an affiliate of a utility.  He did not think it was the intent of the Legislature to have such a company included in the definition.  Mr. Ponn stated concern with Section 14, Subsection 2, concerning what was not included in a generation asset:  “any hydroelectric plant facility, equipment or system that has a generating capacity of not more than 5 megawatts.”  He stated ”the company” was trying to sell their water utility in the Truckee Meadows to local government.  They had a number of hydroelectric plants and none exceeded 3 megawatts individually and the total was less than 15 megawatts.  “The company” would propose to make the language clear the bill excluded those plants, and he believed that was the intent.  If the bill could read “any hydroelectric plant facility or equipment that has a generating capacity of not more than 5 megawatts” it would be on an individual basis.  Washoe County had expressed the concern as well, he indicated. 

 

Mr. Ponn stated Section 27 indicated the annual report from the PUC to the Legislature listed a number of items.  He indicated “the company” currently filed resource plans on a three-year cycle with an update halfway between the filing.  The information was already available on that cycle and calendar.  If the reports were to be developed on an annual basis there would be information gathering that would not be as productive as the Legislature would like.  His suggestion would be those reports be made on the same cycle as the resource plans so the same information could be utilized.  He was concerned with the broadness of Section 27, Subsection 2(c), which read, “engaging in prudent business management, effective long-term planning, responsible decision making, sound fiscal strategies and efficient operations.”  No company could state they did not engage in any of the operations; however, the terms were open to interpretation.  Section 31 had a list of all of the statutes being repealed and he requested the committee not repeal NRS 704.988.  The statute gave the PUC the ability to look at the loads and resources and the state of the market. 

 

Assemblyman Humke asked Mr. Ponn for verification on Section 27 and asked if he wished the deletion of Subsection 2(c).  He did not know if the bill drafters wanted the language and if so, were there some terms of art used in the industry that could substitute for that language.  He asked if Mr. Ponn was saying that the language did not really add much to the practice as a company to engage in prudent business practices.  Mr. Ponn, referring to the earlier question from Ms. Buckley about general rate cases, stated every time “the company” entered into a general rate case and anytime anyone wanted to look at anything “the company” did they were subject to those kinds of tests.  He felt it was a nebulous section.  Mr. Humke stated there was a body of voluminous regulation and he ascertained Mr. Ponn was stating the regulations would cover the section in question.  Mr. Ponn stated there was nothing “the company” did that was not already subject to regulation and investigation.

 

Mr. Powers commented on the suggested revision on page 4 regarding the use of the word “stability.”  If it was the will of the commission the word could be changed; however, the common meaning of the word “stability” as used was to avoid drastic fluctuations in the rates and not as Mr. Ponn had thought, meaning not to allow rate change at all.  The other item mentioned on page 5 was the definition of electricity in Section 13.  The definition would cover a telecommunication affiliate and that was the intent of the bill.  Unless the telecommunication affiliate owned the generation asset it would not be affected by the bill.  The idea was to not let the electric affiliate sell their generation assets to a telecommunication affiliate or otherwise to a corporate manipulation or “shell game” to make the assets move between affiliates and subsidiaries.  The intent was to prohibit a telecommunications company from disposing of the generation asset if it owned one.  The grand intent was to prohibit the electric affiliate from disposing of the asset to a telecommunication affiliate or any other type of affiliate.

 

Mr. Power stated on page 6, as far as the exception for the hydroelectric plant facility, equipment and system, language had been worked on with Washoe County and he believed Mr. Ponn and Sierra Pacific Power had been working on language as well to try to achieve the exemption to what he suggested, the transaction between Truckee Meadows Water Authority and Sierra Pacific Power.  The difficulty had been people had stated different megawatt numbers and whatever language was necessary to achieve the goal it would be put in the bill.  The recommendation would be the language could be tied to the location of the facilities on the Truckee River.  The comments about page 13 dealing with engaging in prudent business management, effective long term planning, etc., must be read in context of the section.  The section dealt with requiring the commission to prepare an annual report for the Legislature assessing whether those things were happening.  It posed no duty on the utility but rather on the PUC to submit to the Legislature.  Mr. Ponn stated the information for that report would probably come from the utility.  Mr. Dini stated in regard to that comment it sounded as if the Legislature was asking the commission to make a statement that could affect the stability of “the company.”  If the commission happened to be displeased with “the company” the PUC could make comments such as “they don’t act in a prudent manner, do not have a long range effective plan, do not do responsible decision-making,” and be able to injure “the company.”  He did not feel the language should be in the bill and asked why it was a mandatory report.  He wanted further discussion.

 

Ms. Buckley thought it was part of the commission’s job to make sure that “the company” did engage in prudent decision making because if “the company” did not, the ratepayers paid.  Mr. Ponn stated all of “the company’s” investments were judged for prudency and expenditures were judged for necessity and the rates were judged for justness and reasonableness.  The words were already in the statutes and that was his point.  Those types of action happened often.  Ms. Buckley asked if the concern was not the choice of words, but rather the redundancy because that was how “the company” was already being regulated.  Mr. Ponn stated if the report had to be made annually he envisioned a lot of work done by a lot of people to make a showing that went into a report instead of a rate case or some other filing required by the commission that addressed just these terms.  He stated if that was what the committee wanted they would follow through.

 

Ms. Leslie stated Mr. Ponn had asked for NRS 704.988 to remain in the statute and she had not heard Mr. Powers discuss that issue.  Mr. Powers stated the provision as it existed had been enacted as part of the restructuring act in either 1997 or 1999.  It required the PUC to develop regular forecasts of electric capacity and energy based on the information submitted to the commission pursuant to the section.  The section was repealed in the new bill because the section was developed as part of the restructuring act and referred to imposing equitable obligations on the vertical electric utilities, such as Sierra Pacific Power, and also alternative sellers and customers.  It envisioned these equitable obligations being imposed in a competitive market.  That was repealed as part of the restructuring act being repealed.  The first subsection dealing with the commission developing regular forecastable electric capacity could be redrafted in a different section, he stated, and deal with a retained regulatory environment.  The commission was under the duty to do that already, as Mr. Ponn had pointed out.  The commission had the job of ensuring Nevada consumers would be provided with reasonable and reliable electric service.  Mr. Powers stated the section was not necessary unless Mr. Ponn was addressing the equitable obligation part of the section, and the only people under a regulated environment left to have the equitable obligation imposed were the regulated utility and the customers and the statutes already provided for that.

 

Terry Graves, Representative, Nevada Independent Electric Coalition (NIEC), indicated NIEC was a coalition of three cogeneration plants located in Clark County.  All three of the plants were qualified facilities under the Public Utility Regulatory Policies Act (PURPA).  The three facilities provided about 300 megawatts of output and all were under purchase power agreements with Nevada Power Company.  On a day such as this one the plants probably provided 10 to 15 percent of Nevada Power’s needs.  During the peak summer days when the air conditioning units were running the 300 megawatts probably represented about 5 percent of the load.  His clients were indifferent about the outcome of the divestiture issue.  His clients were more concerned about the issues after the decision was made.  If divestiture did go forward and the utility became a wires company, they wanted to insure the utility was able to recover its costs for any of its ongoing obligations as well as normal operating costs.  Those ongoing obligations would include the purchase power contract.  If it was decided divestiture should not go forward, there should be mechanisms put in place, he indicated, some form of deferred energy or some other form created to help the utility recover costs and maintain financial viability so it could service the contracts it had entered into.  Mr. Graves pointed out California had been having rolling blackouts in the last few days in a period of the year when there was mild weather.  One of the contributing causes was facilities, such as the ones represented by his clients, had been shut down because they had not been paid on their contracts, and were running out of money to buy fuel to generate power.  When the utility was not allowed to recover their costs the problem was exacerbated.  The 5 percent sounded like a small amount of power to be provided during the summer months; however, if the 5 percent were to disappear Clark County could be in a brownout or blackout condition.  He asked the committee to please consider recovery mechanisms for the utilities as they went forward with legislation.

 

Lawrence J. Semenza, Representative, Dynergy, Inc., represented two of the companies that had contracted with Sierra Pacific Resources for the purchase of Reid Gardner as well as the Park Generating Station in Clark County.  His companies had entered into a long period of evaluation and then entered into the bidding process and were successful in winning the bid for the acquisition of those two generating facilities in Clark County.  One of the major concerns expressed by not only the Legislature but by all consumers of electricity in the state of Nevada was the need to determine what were in the best long-term interests of the ratepayers as well as the state of Nevada.  The concern seemed to be with the sale of the power plants, divestiture, and there would be a period of two years in which “the company” would have the purchase-power contracts.  His companies had agreed to sell electricity to Nevada Power Company at the 1998 wholesale rates.  This was a benefit to the ratepayers in Clark County especially.  The costs that would be incurred by Nevada Power Company were lower than the existing market conditions.  The concern had been caused by the crisis and the mistakes that were made in the state of California that had raised the spot-market price for electricity.  The concern in Nevada was year three through year five where there was no guarantee as to what price the generators would be charging to the electrical distribution facility, Nevada Power Company.  Ms. Buckley had indicated the generating companies could charge whatever they wanted at market rates and they could ship the power outside the state of Nevada because there was no agreement past two years to maintain the energy in Nevada for the benefit of Clark County.  He introduced Barry Huddelston from Dynergy.  Mr. Huddelston could speak on the issues the companies had been dealing with the last few weeks in evaluation of the numbers that had been passed out.  He stated the numbers had been referred to as “fuzzy” and he felt somewhere Mr. Hay would have to produce the real numbers.  Mr. Hay had stated if the plants were retained by “the company” there would be savings for the ratepayers for five years.  No numbers had been discussed and there was no backup information, he stated.

 

Barry N. Huddelston, Director, State Regulatory Affairs, Dynergy, Inc., had appeared before the state commissions and legislatures in 35 states.  He had spent the last 20 years teaching or designing markets and the last 10 years with Dynergy.  He indicated the matter before the Legislature including divestiture and market design in total was a very complicated issue.  He had participated in the PUC leading up to the legislation and implementation of the 1997 legislative actions.  At the time it was his opinion the legislation was as close as anyone had come to getting it right.  Unfortunately there was no aggressive follow through and again there was discussion now on the same issues.  Mr. Semenza had passed out Dynergy’s numbers (Exhibit E) and he could assure the committee the numbers were not “fuzzy.”  They had determined from the marketplace what they would have to pay to buy power for the Vegas strip for years three, four and five.  Effectively, the numbers would be the cap for what the power could be sold for.  Exhibit E showed a commercial representation of what could be seen in the market today.  It was not an academic study, but rather a commercial representation of what could be purchased today.  The numbers indicated for the southern bundles there would be a total benefit to the ratepayers of $407 million over the five years by divesting the facilities.  Clearly the commercial markets indicated there was a benefit to divestiture over the five-year period.  He stated it was probably the first time the legislators had seen numbers that had indicated the benefits.  He would be willing to share the background information with the committee.  The numbers were being evaluated by an independent party with the findings available to the committee.

 

Ms. Buckley stated she knew Mr. Semenza very well, but did not know Mr. Huddelston or his company.  The Legislature had the Consumer Advocate and the former Consumer Advocate relating to the committee the state would save millions to the ratepayers if the plants were not divested.  Then, she stated, the committee had Mr. Huddelston’s company, which had a motive in that they wanted to buy the companies, telling the committee his company did not want to buy the companies.  Mr. Huddelston’s company was also listed on the list she read as being investigated in regard to California with allegations of manipulation.  She asked what Mr. Huddelston could say to her that would allow her to think it would be in the best interest of the people she represented to heed his testimony.

 

Mr. Huddelston knew the Consumer Advocate and the former Consumer Advocate having been in many proceeding with them in the past.  He was sure the gentlemen had given their all in determination of the numbers they represented.  He was also sure they had used experts in the business of making such forecasts.  The numbers his company had put together represented commercial opportunities.  They had their marketing department to forecast what they could purchase for the three years in today’s market and then put together an analysis.  What the charts represented was not an escalation of what the current prices were or an extrapolation of what California was or was not.  What was represented was what could be purchased and what they would have to compete against if they were to own the facilities and attempted to sell the output in the marketplace.  Ms. Buckley had mentioned earlier, he indicated, companies could sell for what the market would bear.  He contended the last part of the statement was very important; it was not that a company could sell for whatever it wanted, a company could sell for what the market would bear and if the market would not bear more than what the exhibit demonstrated then a company could not sell for more than that.

 

Mr. Huddelston commented on the investigation mentioned by Ms. Buckley.  He was not involved in California; however, he had read the reports that indicated for the months of January and February there were a certain number of transactions, in the thousands, that had occurred and cleared in the market at higher than what the caps indicated would have been appropriate.  Dynergy had been asked to come forward by March 23 and show whether there was a cost justification for those offers to sell in the marketplace above the caps.  In the California marketplace the caps were not price caps.  A company had the opportunity to show if the costs of the company resulted in a higher output cost than the market would clear and that was the order to show for Dynergy.  He had confidence the company would show the monies were prudently offered and additionally it was hard to refund monies that had never been paid.  He declared the amounts that had been identified would be shown to be prudent and his company would not be subject to the refunds.

 

Ms. Buckley indicated the other item that caused her some consternation was the California PUC had stated in a filing to FERC that Dynergy was not cooperating by turning over needed documents to conduct their investigation.  Mr. Huddelston stated that was a second area.  The investigation at FERC related to the jurisdiction Dynergy believed they should report to.  Dynergy had been granted market-based rate authority for the facilities they owned in California.  That market-based rate authority required them to file tariff filings with FERC and did not require Dynergy to file with the California PUC.  The investigation Ms. Buckley had referred to was one the California PUC had attempted to do on the individual generators in the state of California.  He understood, if Ms. Buckley had seen the same report he had seen, there were two companies, including Dynergy that had refused to turn over the documents to the California PUC, pointing out the jurisdiction lay with FERC.  Ms. Buckley stated in conclusion that issue was another reason she felt the state should not allow the plants to be sold.  The state would lose any jurisdiction to assist the consumers in cases of accusations of price gouging or manipulation of the markets.  The allegations were not proven, she stated, and she was not saying the allegations were true; however, the state’s PUC would no longer have any jurisdiction to look out for the best interests of Nevada ratepayers.  As a Nevada legislator, Ms. Buckley felt very uncomfortable allowing her constituents to have no relief if these types of activities were to happen in Nevada in the current market.

 

Mr. Huddelston respectfully disagreed with the jurisdiction Ms. Buckley portrayed the state had over plants.  It seemed to Mr. Huddelston personally, not representing Dynergy, having over 20 years of market design experience, the concerns voiced most often in the proceedings related to the jurisdiction over the retail rates and did not relate to the jurisdiction over the wholesale rates.  The concerns did not relate to the ownership of the assets.  As an example, Nevada Power Company had been regulated in Nevada for a considerable time and purchased and resold more than 50 percent of its energy.  Nevada Power Company did not generate 100 percent of its energy.  The retention of the plants, he stated, would not remove the market from Nevada Power’s rate structure.  The state had retained jurisdiction in the past over the retail rates for Nevada Power, over the retail rates of the load serving entity, not over the output cost or the output prices of the plants.  He believed the state would be able to find a way to retain the comfort in a planning and pricing framework without stopping the divestiture.  The divestiture and the ownership of the plants were almost irrelevant and three examples would be Mr. Graves’ clients, one of which was Dynergy.  Dynergy owned the plants, ran the plants, took all of the financial risks for the plants for years and still contracted fully for the output of those plants with Nevada Power Company.  Nevada Power had the contract as part of its portfolio and the state did not regulate the cost or the sale from Dynergy’s plants per se, the state regulated Nevada Power Company and in turn they prudently negotiated arrangements with Dynergy to purchase within the confines of the regulation Nevada Power was under.  Those plants, even today, were not state jurisdiction.

 

Assemblywoman Von Tobel appreciated Dynergy’s presentation of some concrete numbers.  She believed it was very relevant when projections over five years showed a true projection and concrete figures.  Ms Von Tobel commented whether the state mandated divestiture or not she believed the state had put Nevada Power in a very difficult position.  Nevada Power could not even tell the state whether it was best for them to divest or not divest because there were signed contracts.  She found it very difficult for the committee to get a perspective on what divestiture would do or not do to Nevada Power Company.  She had been looking for a perspective from Nevada Power on the consequences and had recognized the bill would place major uncertainty in the marketplace if there were lawsuits because there were contracts.  If the state tried to stop divestiture after the Legislature told “the company” they could divest she worried the state would weaken the power company faster than any other issue.  She appreciated the figures presented because Nevada Power was put in the position of not stating for the record any concrete numbers nor opinion on divestiture. 

 

Mr. Huddelston agreed with the uncertainty discussion as characterized by Mr. Brown from Barrick Gold Mines.  One of the very important items in any private industry and independent investment industry was “to have certainty of regulatory and contracts and rules of treatment.”  To the extent there was an environment where every few years the playing field was changed, then investors would be shy about putting substantial investments in place in that environment, especially when the restructuring was being done in the United States on a state by state basis.  Some states, he indicated, had taken different steps, for example, steps to encourage wholesale competition and merchant plant development as opposed to retail restructuring.  In those states the environment was extremely favorable for development of power plants for companies such as Dynergy.  Texas had in place a wholesale deregulation bill since 1995.  The bill had led to the expansion, in this year alone, of almost 7000 megawatts of generating capacity.  There was an additional 12,000 megawatts in the planning stages.  Texas had an independent system operator for the transmission organization and that transmission operator had put in place to date four projects that had eliminated substantially the commercial congestion of the past in Texas.  There were six more plants that would be on-line by next year.  There were substantial things he believed the state could do within the context of the market to give incentive to private investment.  He was not certain making a type of regulatory environment was what the state needed to do to encourage investment in the future.

 

Assemblyman Humke stated the Vice Chairman discussed Mr. Huddelston’s expert opinion in contrast with the expert opinions of the Consumer Advocate and the former Consumer Advocate.  Mr. Huddelston had discussed his company’s capacity for market analysis.  He asked Mr. Huddelston to discuss further on that topic in comparison to the ability of the Consumer Advocate to analyze markets. 

 

Mr. Huddelston stated his company did business in practically all 50 states and in many foreign countries.  His company had a staff of almost 7000 people, not all involved in day-to-day market activity, however.  They had over two floors of a very large building in downtown Houston that was strictly dedicated to marketing and trading gas liquids and electric power marketing and trading.  In that context they maintained very strict requirements on what the traders could and could not do.  Those requirements related to what they believed the forecasts were for primary case regions of the United States.  They had a lot of focus in the western United States.  The company at one time had owned 30 plants in California alone.  The company had divested all of the qualifying facilities they had owned in California and what was owned now were independent generating facilities.  The company had traded 95 million megawatt hours in 1997 at Palos Verdes.  Dynergy had done a substantial amount of business in the western United States.  He believed the company was familiar with what could and could not be done in the western and southwestern United States.  In that context, if his company were looking to buy plants and somehow manipulate the prices using those plants, the company would look at what the market would bear.  The analysis presented essentially characterized that assumption of what the market would bear over the five-year period.  In the first two years there would be contractual certainty and in years three, four and five the numbers could be characterized as market uncertainty.  His company would not be able to sell at a higher price than what was characterized in the information.  There would be no way the southern bundles would not result in a savings if divested.

 

Mr. Semenza wanted to include a closing commentary.  The proposition to create additional capacity in Nevada at the APEX facility would guarantee, if all four of the units were constructed, 2000 megawatts of power combined.  In the daily paper it had mentioned the proviso was 25 percent to 50 percent of the power would remain in Nevada although Mr. Semenza stated he did not believe there had been an affinitive agreement reached.  Dynergy would agree for the five-year period of time to maintain and keep the capacity from those two bundles or the bundle in the state of Nevada in Clark County.  Mr. Semenza stated the farther a company had to transmit electricity, the less beneficial it was to a company in terms of cost.  It would be much easier to serve the load that was closer to a generating plant.  He also understood there was the possibility to create additional capacity at Clark generating plant.  If it were a prudent business decision to build and increase generating capacity a company would not have to sell all of the capacity to Nevada.  A new company would sell perhaps 50 percent or 25 percent to Nevada so the company could get better market rates for the power sold outside the state.  If there were an increased capacity at the substation or the two generating stations, Dynergy would keep the capacity in Nevada for the five-year period of time.  In addition, Dynergy would be willing to enter into a contract with Sierra Pacific Resources and Nevada Power Company to sell them all of the capacity of those two plants for the five years.  He felt the action would give some certainty to the ratepayers in southern Nevada.  In the Governor’s special investigating committee convened to discuss the regulatory issues in Nevada, one of the suggestions had been to enter into short-term, medium-term and longer-term contracts for the purchase of power in order to guarantee some stability to rates.  One of the problems in California had been the power companies had not been allowed by law to enter into longer-term contracts to provide price stability and that had led to the instability of the pricing.  Dynergy would be willing to enter into an additional three-year contract with the state on the two generating facilities in southern Nevada based upon definitive terms to provide the capacity to Nevada.  He could say with certainty if the 1998 wholesale rates were not going to be a benefit to his company and the plants were not going to be divested, the state would have real electric rate shock starting this summer and for at least the next two summers.

 

Ms. Buckley wanted to question Fred Schmidt about the savings the plants would provide to Nevada ratepayers.

 

Fred Schmidt, Attorney at Law, Hale, Lane, Peek, Dennison, Howard and Anderson, and past president of the National Association of Consumer Advocates, stated his current role was a representative for the Southern Nevada Water Authority.  Ms. Buckley specifically questioned Mr. Schmidt about the information presented to the committee suggesting Nevada ratepayers would not benefit from the stopping of the sale of the power plants and that all the legislators had were figures with no backup.  She believed Mr. Schmidt had done an analysis and she wanted his opinion on the topic.

 

Mr. Schmidt stated the Southern Nevada Water Authority had a number of different consultants and contractors with interest in the issue.  When “the company” prepared the numbers to show the benefit of the two-year short-term buy-back contracts his company was concerned.  He personally was concerned because of his testimony in defense of the concept in four days of cross-examination on the witness stand defending the contracts.  The contracts had been questioned as being the wrong action at the time the power companies started to go forward with divestiture.  Now he hated to see the state lose the benefit; however, at the time “the company” prepared its analysis the gas prices were spiking in the United States and in particular for Nevada utilities at record levels never before reached.  The analysis the power company did in regard to the buy-back contracts calculated the benefit of those two years going forward from now and it was now less than two years because the plants would not be divested until this summer.  The gas prices assumed in the calculations that totaled $872 million and the $1.1 billion only spiked for a fairly short period of time.  One did not have to be a market expert to look at the futures price of gas; it was a publicly traded number.  Any assumptions that were made about the market today, he indicated, were probably incorrect.  He believed as volatile as the markets were today it would be a mistake to assume either the power company’s numbers, Mr. Hay’s numbers or the numbers he would calculate were likely to remain correct.  However, what he could tell the committee was the price that was calculated at the highest price experienced with natural gas was the worst-case scenario as far as was known now.  Mr. Schmidt stated Mr. Hay calculated his analysis based on the worst-case scenario.  Mr. Hay assumed the numbers for the first two years, and because “the company” on its model would run a remaining period of time, he took “the company’s” analysis to a five-year period instead of the two.  Mr. Hay’s and Mr. Ponn’s numbers were essentially “in sync” with each other because Mr. Hay’s came from Mr. Ponn’s numbers, but with a different period of time.  No one would deny loss of the buy-back contracts would cost Sierra Pacific Power Company and Nevada Power Company money.  In his current position and as a former Consumer Advocate he could not deny “the company” should be fully and fairly compensated for the impact if the Legislature and the PUC or both decided it was not in the public interest to sell the plants.  He felt there were vehicles to accomplish the compensation. 

 

When Mr. Schmidt saw the analysis carried forward to five years he decided to be more realistic because gas prices were half today of what they were in the winter when they spiked and now they had stayed steady for about a month.  The only difference in the analyses performed by the PhD economist who worked in the marketplace and who was hired by the Southern Nevada Water Authority was the use of the more current gas prices in an analysis done several months later than that of the other parties.  The numbers were not “fuzzy.”  The numbers, he indicated, that were given to the Legislature today, while an interesting offer, were “fuzzy” because the assumptions were not clear.  The assumptions in the analysis done by the Southern Nevada Water Authority were readily available to the committee.  If the committee wanted the expert that prepared the analysis to appear they would be willing to comply.  The Southern Nevada Water Authority stood by the numbers as they had testified in the Senate.  The numbers additionally, over a period of three or four weeks, looked more accurate than other numbers.  The most volatile aspect in the calculation of the analysis was what was the market price of power.  Mr. Schmidt stated no one could tell the committee the number.  Mr. Huddelston could not, especially in terms of what it would be in two years, etc. 

 

 

Mr. Huddelston could tell the committee what he would sell the state power for and do it and that would create a market price.  FERC had determined when the plants were divested in southern Nevada the companies that purchased them after the two-year buy-backs were authorized to charge market prices for power.  That decision, much like the other decisions, could be reversed.  The decisions now, however, were made by FERC and that was the basis for the calculation and expectation of market prices charged for the power.  If the committee would look at California the committee could see what market prices had done in the last year.  The situation was very unsteady and that was the reason the Southern Nevada Water Authority was making a tremendous effort, along with state government and state agencies, to expedite adequate supplies.  The only reason the prices were “out of sync” was because there was not adequate supply.  Until the supply was adequate the price would not stabilize for Nevada.

 

Ms. Buckley asked if Mr. Schmidt could tell the committee what the research revealed in terms of the benefit to the ratepayers over a five-year term.  Mr. Schmidt stated because the market price was volatile his company created a range.  The range created was based on changing one of the assumptions, which was the market price at which power would have to be acquired by Nevada Power versus keeping the plants.  In that range they had used the California information on contracting and, in addition, the Southern Nevada Water Authority had specific market information from 15 different entities from the issuance of an RFP on power supply, at rates that he felt justified the analysis performed.  He had used those numbers to create their market range, which showed if a five-year analysis was carried out, there would be $1.6 billion to $3.2 billion in savings.  The top end of that analysis did not assume market prices that had been paid for the last two months on average by all of California’s utilities or the state of California in the Department of Resources.  He felt the numbers he presented were very conservative and were presented to offer something more current on gas price expectations.  If “the company” had the certainty they would own the plants for a certain period of time, they would not have to buy “spot” gas and could hedge and buy a gas portfolio themselves for continuing to run their gas plants. 

 

Chairman Bache stated it was his intention to hear the main energy bill next week in committee.  Mr. Bache asked to close the hearing on A.B. 369 and deferred to Ms. Buckley.  Ms. Buckley asked before the vote on the bill if Mr. Powers could give a brief explanation of why the bill combined both divestiture as well as a stop to deregulation and how they fit together from a legal point of view.

 

Mr. Powers stated there were some principles underlying the restructuring act from a statutory basis that would be inconsistent with the moratorium.  Some reconciliation between the two was necessary, he stated.  One provision the committee had heard much about during the hearing was the hard rate cap that existed in the restructuring act and as the hard rate cap was drafted now and enacted in the law, it provided the utility could recover any short-fall during the rate cap period only through gain realized through the sale of generation assets.  If the Legislature prohibited the sale of the generation assets there would be no avenue under the statutes for the utility to recover its shortfall during the period of the hard rate cap and the restructuring act.  As one of the provisions that existed in the restructuring act, it needed to be reconciled with any kind of moratorium.  The restructuring act had also provided that a vertically integrated utility could not provide a potentially competitive service except through an affiliate.  When competition began and a part of the segment of the market was devoted to being served by alternative sellers, the incumbent utility could not serve that market unless they divested their generation assets to an affiliate.  A moratorium, however, prohibited the utility from divesting their assets to an affiliate, therefore the two statutory structures would be inconsistent and had to be reconciled.  Otherwise, he indicated, the utility would be stuck with a portion of its generation assets that could not serve any market or divest to an affiliate.  Because A.B. 369 repealed the restructuring act there was no inconsistency; the entire restructuring act was removed from the statutes and the moratorium would remain under the bill. 

 

Ms. Buckley questioned Mr. Powers concerning the struggle in the Senate hearings and their quest to achieve the same goals as the Assembly, stopping the sale of the power plants.  She asked Mr. Powers to comment on the legal ability to proceed with divestiture in any other way but the way the committee was contemplating.  Mr. Powers stated repealing the restructuring act in order to accommodate the moratorium was the cleanest approach to dealing with the conflict that would exist between a moratorium and a restructuring act.  The Senate had been dealing with trying to maintain as much of the restructuring act as possible and at the same time impose a moratorium.  Mr. Powers felt it could be done; however, some adjustments had to be made to the restructuring act and the parties that had presented their issues to the Senate Commerce Committee had not agreed upon a method whereby they could reconcile adjusting the restructuring act in light of the moratorium.  At this stage, he stated, the bill, S.B. 253, had not been changed from its original introduced version.

 

Ms. Buckley asked the Chairman if he could entertain a motion.  He answered in the affirmative.

 

ASSEMBLYWOMAN BUCKLEY MOTIONED TO AMEND AND DO PASS.

 

Ms. Buckley stated the amendments would be the exemption of the hydro plant by referencing the Truckee River location as suggested by witnesses, and remove Section 27 in regard to the annual report so there would be more time to examine the issue in the comprehensive bill.

 

ASSEMBLYWOMAN LESLIE SECONDED THE MOTION.

 

 

Assemblywoman Von Tobel considered everything she had heard including the uncertainty issues, and the financial stability of Nevada Power Company and she had to vote no on A.B. 369.  She was very concerned about the Mohave plant.  The state was throwing away the ability to have rates at 1998 prices for the new two years guaranteeing the committee’s constituents would not pay higher rates.  She knew there were other power plants scheduled to come on- line and the committee needed to make sure Nevada Power Company was whole and able to put in transmission lines.  She believed by stopping the divestiture the Legislature would stimulate controversy, legal challenges and more uncertainty.  She believed the Legislature was putting “the company” in peril and because of that issue she felt compelled to vote no.

 

Assemblywoman Smith stated Mr. Ponn’s remarks about uncertainty and the need for the industry to know with certainty where they were headed was instrumental in her thoughts on the matter.  She had felt as a consumer and someone that had not been involved in the process over the past several years the situation was like “a runaway train” and she thought her constituents felt the same way.  The sense of uncertainty was very scary both for the consumer in a home, small businesses and large businesses such as the mines.  She was also concerned about the short term versus long term.  The short term looked good; however, it was incumbent on the Legislature to examine the long-term benefits.  She indicated the Legislature should make sure where the state was headed and make sure the best thing was being done for the consumers and the power company.  She had heard about what the market would bear today and five or six years ago no one would have imagined the market today.  She was concerned by the projections presented being proved out and stressed caution on the part of the Legislature.  She would vote in support of A.B. 369.

 

Assemblyman Humke inquired in regard to the motion.  Mr. Ponn had suggested Section 10, the rule of unanimity, be relaxed and he asked the amendment be considered.  Ms. Buckley stated because she felt the subject of divestiture must be addressed by the Legislature immediately, she would be willing to remove that section from the bill so the committee could consider the section with the other portions of the major bill addressing rate increases with more time to consider.  If the Chair was amendable she would amend her motion to delete that section as well.  Mr. Bache stated if the second would accept the amendment the committee would consider it as part of the main motion.

 

Mr. Powers stated there was a necessary clarification with regard to Section 27.  The motion included a component dealing with the annual report.  The provision was part of the restructuring act and he asked if the committee was repealing with the rest of the restructuring act and was that part of the amendment.  Ms. Buckley stated that was correct.

 

Assemblyman Dini asked in regard to NRS 704.988 in Section 31.  Chairman Bache asked Mr. Powers to comment on the statute.  Mr. Powers stated the provision was also part of the restructuring act and required the public utilities commission to make regular forecasts of the electric capacity needs in the state.  The statute provided, under the restructuring act, that if it looked like the state was going to have insufficient capacity, the PUC could impose equitable obligations on customers, vertically integrated electric utilities and alternative sellers.  Since the legislation would repeal the restructuring act there would no longer be alternative sellers.  Under the existing statutes the utilities were supposed to have a three-year plan on electric capacity to determine what their needs were and then if they built a plant that had been approved by the PUC that would be included in the utilities rate base and that was how the customers paid for the investment the utility made in the plant.  Mr. Powers stated the section tried to accomplish the dealings with alternative sellers in a competitive environment.  The same issues would be accomplished now under the current regulatory structure.  The section was no longer necessary.

 

Ms. Buckley stated she obviously supported the motion for a number of reasons.  First among the reasons was the benefit to the people she represented and others in the entire state.  The estimates of the savings to the constituents would be anywhere from $1.6 to $3.2 billion.  A.B. 369 had the support of the Consumer Advocate charged with looking after the best interests of the individuals that lived in the state, by many counties that had considered the issues at length in their own commission hearings, and by the Governor.  One of her colleagues, she stated, was concerned about uncertainty and lawsuits.  She indicated there was no guarantee.  At the last session everyone had agreed there would be a rate freeze for years and that deregulation would begin and then someone filed suit within months of the shut down.  The Legislature had to do a cost-benefit analysis in everything they did.  She believed the interest of the ratepayers far outweighed the concern that AES, a potential buyer, might file suit against the state.  She did not take lightly the state stepping in and impairing a contract between two individuals; however, she felt the Legislature was faced with compelling circumstances.  She emphasized there was an energy crisis not seen in many years — rolling blackouts in neighboring states, the state admittedly short of supply — and these circumstances necessitated drastic action that she believed a court would understand and would uphold the action taken by the committee.  She supported the motion.

 

Ms. Leslie stated it was very important for the committee and the state to avoid repeating the mistakes in California.  She commented the legislators were the leaders of the state and their constituents looked to them for action and they could not afford to stall.  If the committee did not pass the action today the state could lose the Mohave plant.  She agreed with Ms. Buckley’s assessment of interfering with a contractual obligation in the private sector; however, she too felt this was a unique case.  The leadership must be there and she would support the motion.

 

Ms. Von Tobel stated the committee should remember the only power company in the state was Nevada Power Company.  If the statutes proposed weakened them to the point where “the company” could not borrow to purchase fuel the state would have no power.  She believed the Legislature was weakening “the company’s” position by telling them they could not divest and that was her biggest concern.  As a state, Nevada could not afford to bail out the power company as California had done with millions of dollars.  The legislators needed to be very cautious in legislation because if Nevada Power was hurt to the point where they could not borrow money the legislators had not done the constituents a service at all. 

 

THE MOTION CARRIED WITH ASSEMBLYMAN HUMKE AND ASSEMBLYWOMAN VON TOBEL VOTING NO ON THE MOTION.

 

*******

Mr. John L. Balentine, C.P.M., CPP Chairman, Washoe County Purchasing and Contracts Administrator, wished to offer Exhibit F into record in support of the considerations given to the Nevada Public Purchasing Study Commission by the Sierra Pacific Power Company and the Nevada Power Company.

Chairman Bache seeing no further business before the committee adjourned the meeting at 5:24 p.m.

 

 

 

RESPECTFULLY SUBMITTED:

 

 

Cheryl Meyers

Committee Secretary

 

 

APPROVED BY:

 

 

                       

Assemblyman Douglas Bache, Chairman

 

 

DATE: