MINUTES OF THE meeting

of the

ASSEMBLY sELECT Committee on Energy

 

Seventy-First Session

April 10, 2001

 

 

The Select Committee on Energy was called to order at 1:44 p.m., on Tuesday, April 10, 2001.  Chairman Douglas Bache presided in Room 4100 of the Legislative Building, Carson City, Nevada.  Exhibit A is the Agenda.  Exhibit B is the Guest List.  All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

 

 

COMMITTEE MEMBERS PRESENT:

 

Mr.                     Douglas Bache, Chairman

Ms.                     Barbara Buckley, Vice Chairman

Mr.                     Joseph Dini, Jr.

Ms.                     Sheila Leslie

Mr.                     Roy Neighbors

Mr.                     David Parks

Mrs.                     Debbie Smith

Ms.                     Kathy Von Tobel

Mr.                     Lynn Hettrick

Mr.                     David Humke

Ms.                     Sandra Tiffany

 

STAFF MEMBERS PRESENT:

 

Kevin C. Powers, Committee Counsel

David S. Ziegler, Committee Policy Analyst

Cheryl Meyers, Committee Secretary

 

OTHERS PRESENT:

 

Ernie Nielsen, Washoe County Senior Law Project, Washoe County Senior Services, Reno, Nevada

Charles Laws, Citizen, Reno, Nevada

Joseph Johnson, President, Toiyabe Chapter Sierra Club, Reno, Nevada

Judy Stokey, Government Affairs Executive II, Nevada Power and Sierra Pacific Power, Las Vegas, Nevada

Duane L. Nelson, Director, Transmission Business Development, Sierra Pacific Power, Reno, Nevada

Dave McNeil, Building Efficiency and Renewable Energy Projects Manager, Nevada Department of Business and Industry, Energy Office, Carson City, Nevada

Russell Teall, President, Biodiesel Industries, Inc., Las Vegas, Nevada

Fred Schmidt, Representative, Southern Nevada Water Authority, Las Vegas, Nevada

Timothy Hay, Chief Deputy Attorney General, Consumer Advocate, State of Nevada, Carson City, Nevada

Douglas R. Ponn, Vice President, Governmental and Regulatory Affairs, Nevada Power and Sierra Pacific Power, Las Vegas, Nevada

 

 

Chairman Bache stated the committee would begin as a subcommittee until members were released from other committee meetings.

 

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

 

Ernie Nielsen, Washoe County Senior Law Project, Washoe County Senior Service, proposed amendments for the committee’s consideration with respect to A.B. 661 (Exhibit C).  The issues he would speak on were the energy task force and determination of utility services.  With respect to the energy task force he was very supportive and was happy the committee proposed the development of a task force concerning renewable energy.  His first amendment had to do with giving conservation and energy efficiency the same status on the proposed committee as had been given to renewables.  He suggested the amendment in part because seniors would be experiencing higher energy prices this summer and beyond, and there needed to be as many tools as possible to be able to reduce their usage of energy.  There were a variety of ways to accomplish this, he indicated, in the form of incentives, rebates, promotions, reduced interest loans, appliance exchange programs, etc.  The bill appeared to him to be the only bill in either the Senate or Assembly that was capable of providing the kind of assistance he was speaking about on behalf of conservation and energy efficiency.  He had submitted previous exhibits outlining a matrix from other states that described assistance benefit charges other states had provided to raise funds for a variety of purposes including low-income programs.  He stated it was important to recognize why states had provided that type of support for conservation and energy efficiency.  One of the basic premises was the conservation and energy efficient investments that were cost effective for the system at large might not be cost effective for the individual because of a system of average pricing.  The gap between what was economic for an individual and for the system needed to be provided by some incentives or other mechanisms by which to promote conservation and energy efficiency. 

 

He referred the committee to California’s bill S.B. 5 that asked the California budget for $860 million to pay for conservation and energy efficiency.  It was clearly the least-cost way to address the demand for electricity and natural gas.  The dialogue he admitted sounded like the old demand-side programs that the state had involved itself in the periodic resource process the state had for their utilities.  Those programs had not been significantly in effect for the last eight or nine years.  The biggest advice the California people gave Nevada was the fact they had been short-sighted on the demand side and if they had not reduced their demand-side efforts they might not have been in the energy crises they were facing now.  The trend around the nation was to provide the same demand-side efforts through separate entities.  Vermont had a nonprofit utility that was delivering demand-side energy.  Oregon had recently put 3 percent of their sales tax into a nonprofit to deliver energy efficiency and conservation.  Mr. Nielsen stated the amendment he was proposing provided energy efficiency and conservation the same status as the Legislature had given renewables with respect to the task force. 

 

Mr. Nielsen indicated the second proposed amendment was an amendment that would authorize the Public Utilities Commission (PUC) to ban terminations of service during periods of extreme temperatures.  There were a few rules in existence that had been developed by the PUC.  The rules focused on individuals with health risks and stated their electricity or gas could not be turned off.  There was nothing within the PUC rules that provided for periods of time defined by when weather was extreme as to when services could not be terminated.  He suggested that the bill authorize the PUC to consider and pass such a rule, in case there was any doubt they had the authority. 

 

Assemblywoman Smith appreciated Mr. Nielsen’s comments and had also noticed the bill actually dealt with some of the savings issues in Section 88, 1(d) that mentioned the heating of water by solar power that was a savings, but then the bill did not address the savings in the beginning.  She had been concerned about the Legislature promoting conservation enough and had just read an article from the California Energy Commission that estimated spare refrigerators and freezers throughout the state used enough energy to power 200,000 homes.  She stated the number was incredible and that type of education in conservation could go a long way to help the state with the energy problems.

 

Assemblywoman Leslie stated she applauded the idea of adding conservation to the task of the renewable energy task force and the membership itself.  She asked if Nevada had industry in that area.  Mr. Nielsen stated part of the reason states put money into conservation was to develop those industries.  In Nevada there was an additional problem in that many low-income people would not be able to engage those industries even if they were present.  Currently high-efficiency refrigerators and furnaces were available; however, they might not be affordable or the financing might not be available.  There were a number of barriers facing a low-income person from accessing available mechanisms.  There were some industries the state might want to be able to promote, such as radio-controlled or timer-controlled mechanisms for energy use of a refrigerator or hot water heater to control peak-hour usage.  The customer may not experience much difference in rates, but to the utility it would make a large difference.  Ms. Leslie asked if the state could find people from Nevada to serve on the task force.  Mr. Nielsen stated one of the amendments he had proposed suggested money be allowed for the services of consultants and experts around the country.  He believed he could get the expertise from around the country and there would be people willing to serve from Nevada with respect to conservation.

 

Charles Laws, Citizen, submitted to the committee a draft of his proposed suggestions to A.B. 661 (Exhibit D).  Mr. Laws was a retired environmental engineer and had spent the last years of his professional career as a renewable energy development specialist under contracts.  He was present to support A.B. 661 and to offer some amendments.  He believed the bill represented a major step toward a sustainable energy policy; however, there were some omissions in his opinion.  Producing more energy from more diverse, more secure sources was worthy; however, getting more from what was produced was essential.  He wanted to reiterate what Mr. Nielsen had presented with emphasis.  The development of renewable energy must be partnered with the development of conservative and efficient energy use.  These essentials, he stated, appeared only as three minor inclusions in Section 88 and those sections detailing new duties of the Consumer Advocate, Sections 92 through 96.  He emphasized renewable energy and its extended development and application would take time and in that time a parallel development of efficient equipment and structure must occur.  He hoped the committee would recognize that renewable energy and energy conservation development must proceed together.  Energy conservation must be an equal partner to renewable energy development.  His proposed amendments included inserting the term “energy conservation” wherever the term “renewable energy” appeared in A.B. 661.  He pointed out Section 27.3 that established the trust fund for renewable energy and energy conservation.  It could be noted, he stated, Section 30 and Section 56 were identical.  He recommended a modification to Section 28 because fossil fuel meant a fuel from the earth, mineralized remains of plants and animals.  In Section 83 he recommended the committee delete “fuel cells” as fuel cells were converters of energy, not sources.  He ended with a recommendation for modification of Section 96 so that the Consumer Advocate may exempt an “appeal” of building from the process and reversing the roles between the local and governing agencies and the Consumer Advocate’s office by stating that the Consumer Advocate “shall assist” such governing bodies in their enforcement.

 

Joseph Johnson, President, Toiyabe Chapter Sierra Club, wanted to go on record in support of the amendment that Mr. Nielsen had presented to the committee on conservation.  It was their concern that much of the discussion and presentations had to do with generation either of alternative fuels or many other items such as net-metering.  On a short-term basis, he indicated, conservation and energy efficiency was very important.  He had submitted a proposed amendment to the committee (Exhibit E) that was basically a concept.  He wanted to discuss Section 43, page 19, and the new subsection (d) that A.B. 661 proposed.  He believed he understood the concept generated in the section, which was the creation of credits to be awarded on the basis of real-time pricing and not accepting the full demand-side reduction the metering system would require.  He proposed the language that existed allowed the charge to be on the average charge or what the utility would charge the customer generator for electricity during that same period.  For the customer generator it would be a flat rate for the 24-hour period and there was no tariff that recognized real-time pricing.  The attempt he believed was to offer a system whereby credits could be awarded and he proposed the basis of the credit be based on the average cost of the purchased kilowatt at the time of production.

 

Realizing it would be better to have the public service commission he proposed a new section that was out of language in S.B. 507.  He believed it was important for net-metering of solar generation that the utility should recognize the benefit to be gained of matching the production cycle of the photovoltaics against the demand side.  In southern Nevada there would be a real benefit to be gained by that realization.  He believed in the new section there was the potential that some recognition or ability to accept the utilities’ desire to see some method of addressing line charges.  He felt in lifting the caps as this bill did and with the projected 50 percent increase in retail rates for electricity, photovoltaic became a real alternative for the retail customer.  The state may expect to see a large number of people, including residential construction firms, utilizing solar energy.  He suggested there be some recognition in the required Portfolio Standard of the net-metered production even though very minimal at this time. 

 

Judy Stokey, Government Affairs Executive II, Nevada Power and Sierra Pacific Power, stated Sierra Pacific Power and Nevada Power’s (“the company”) position had continued to be in favor of renewables as long as they were a reliable resource at a competitive price.  Ms. Stokey introduced Duane L. Nelson, Director, Transmission Business Development, Sierra Pacific Power who would address three specific areas in A.B. 661 in regard to renewables.  The main area would be the net-metering section, then the state bond financing and the makeup and scope of the task force. 

 

Mr. Nelson wanted to focus on net-metering.  In 1997 the Legislature had set a limit on net-metering of 10-kilowatts for any installation and a limit of 100 customers in each utility.  “The company” felt very strongly the limitation was important to address because there was a situation where those customers did not pay the full cost of providing the service they used.  In fact net-metering installations only paid for residential, a flat rate of $3.00 per month if they generated all of their electricity needs.  The PUC recently approved the distribution rate alone at about $15.00.  The rate did not cover the metering, billing, customer service and the other transmission components and backup generation.  He referred to a chart in Exhibit F that showed what a solar system would provide in the way of output to the system load.  The committee had heard solar was very coincident with the system load.  In fact, he stated, it was not.  For the photovoltaic process the loads continued to rise into the evening, especially in the south, where the heating load required people returning from work to turn on their air conditioning and the peak was actually later in the evening than what the photovoltaic system could provide.  Therefore not only were there transmission and distribution charges that were not being paid for, “the company” had to buy generation to provide that capacity when the sun went down.  This cross-subsidy could be greater in the larger customers.  Medium commercial customers had a flat rate of $50 per month and in fact the distribution charge alone had been approved to be about $440 per month in the north.  This was a very important issue to “the company,” he stated. 

 

He referred to page 2 of Exhibit F, and said the customer interest did not warrant changing the level of customer limits in the bill.  Currently there were seven net metering installations in northern Nevada and none in the south.  With the recent interest in photovoltaics and the energy crisis, “the company” was working with only two additional customers in the north and one in the south.  Although there had been numerous phone calls, the cost of the system was large enough the customers did not feel they could be justified in the expense.  Subsection 2(d) of Section 43 had a new clause that would extend net-metering to a wholesale transaction.  That wholesale transaction was a situation where someone would be encouraged to over-generate and sell the excess to “the company.”  Basically “the company” would be paying them to use the wires owned by “the company” because they would be paying the rate that “the company” charged for using the wires providing backup generation.  There was no limitation on when the net-metering customer would provide the energy to the system.  Qualifying facilities were allowed many years ago under a public utility regulatory policy act and were intended to encourage clean energy.  “The company” had gone beyond that and recently had developed a tariff for large customers to be able to generate power from their standby generators and that would be filed with the PUC shortly.  Once the approval was gained “the company” would move ahead and work on parallel generation tariffs to address the need that was inherent with the energy crisis the state was in.  There needed to be more distributed generation and clean energy.  Parallel generation tariffs would allow “the company” to do that. 

 

Mr. Nelson asked the committee to look at page 28, Section 83, because it was on the same topic of renewables.  He suggested a change to the definition of renewables.  The committee had heard that fuel cells were not a renewable energy source, but rather a method of converting that energy.  If the words “fuel cells” were changed to “hydrogen that was not derived from fossil fuels,” it would be a workable solution.  He specified “hydrogen that was not derived from fossil fuels” because it was commonly derived from natural gas and that was not a renewable.  He suggested that the language include “hydro” on the list.

 

Mr. Nelson stated the state-backed bonds for renewables were a good solution for developing Nevada’s renewables; however, there did not appear to be any requirements to sell that energy back to Nevadans nor any requirements to pass the savings back to Nevadans.  On page 22, Section 57, he suggested the committee add a provision that would allow renewable resources to augment their fuel source with a fossil fuel to some extent in order to bridge that difference between the peak output from the solar panels so it would benefit the offsetting peak load on the system.  In Section 62 “the company” was suggesting there be a change from “may” to “shall” so the director of the PUC would develop the necessary regulations they thought were needed to manage these bonds and “the company” suggested omitting Section 63.  The section gave too much freedom for people to interpret or misinterpret what “the company” felt was clear.  In Section 64 there was a suggested language input to require the sale of energy back to Nevadans.  In Section 72, he stated, the section appeared to release renewable generation sites from many of the requirements that everyone had to operate under to design and build a safe system in Nevada. 

 

Mr. Nelson referred to page 29, Section 86, subsection 1, and compared it to Section 88 where the taskforce had a broad scope of work ahead of them if the bill went forward.  “The company” suggested there were some areas of expertise that were lacking in the sections, especially in the areas of electric utility planning.  If the taskforce was going to study distributed generation someone on the taskforce should know about utility planning and how to determine the benefits from the distributed resources.  Other areas where experts were needed were project financing, because of the magnitude of the bonds involved; building codes; education and energy efficiency.  An alternative to addressing all of the issues and maintaining the broad scope of the proposed taskforce would be to narrow the scope of the taskforce to handle just renewables.  There was some information needed in Nevada, for instance, as to where renewables in Nevada were located near transmission lines.  Currently the area was not well mapped or understood and they had seen people spending money exploring projects that did not come to fruition because they did not realize the transmission system nearby was weak.  Section 90, page 32, had a suggested possibility of the Consumer Advocate taking over the task of managing the taskforce and all of the responsibilities outlined in the bill.  “The company” felt the action would place the Consumer Advocate in a place of conflict.  On one hand the Consumer Advocate’s office would be approving bonds to be used for renewables and on the other hand reviewing resource plans that the utilities provided to the PUC for approval.  The conflict could be the utilities did not pick the same projects the Consumer Advocate would.

 

Chairman Bache asked why they saw the need to reinstate the 100 limit on the net-metered customers.  He had been entertaining the idea that perhaps there should be a split in the category of net-metering.  One category could be net-metering where it was a residence or small business, and another would encompass businesses that could generate much more power that could have large solar panels on the roof, and have the ability to generate far beyond the 10-kilowatt limit currently in law.  The large net-metered customers could be defined as a customer generator as opposed to net-metering being limited to a lesser amount.  Mr. Nelson stated if the state were to do that “the company” would be taking the same path that they were taking now as a utility.  “The company” was moving forward with allowing distributed generation if the intent was to provide an encouragement for people to build solar versus micro-turbines.  They wanted to address any inherent inequities where customers were not paying for the full amount or not being paid for the full amount of their generators. 

 

Mr. Bache stated he had no problem with amending the bill because he felt it was a legitimate concern on the transmission part of the bill not being covered by the $3 minimum fee the customers paid even if they generated all of their own energy.  The transmission was a concern; however, he did not understand why “the company” wanted the 100 cap.  Mr. Nelson stated in a sense they had removed that by taking the business transaction to an equitable business transaction and allowing parallel generation and paying them what “the company’s” avoided costs would be on the wholesale market.  There was no inequity then and essentially no cap.  Mr. Bache was looking at the proposed language in the amendment and it did not seem to be clear on the issue.  Mr. Nelson suggested the situation under net-metering was a situation where “the company” paid for the user to use their transmission and distribution systems instead of the customer paying “the company” and they bought the backup generation to back up their source when it was not available.  He suggested that limit on the financial transaction be capped where it was currently.  There was a different business transaction wherein “the company” bought from parallel generators in an equitable fashion and the PUC could approve and open that transaction to anyone.  The cap was only on the situation where net-metering was involved because of the inequity. 

 

Assemblyman Hettrick asked if, under the present plan for net-metering, “the company” purchased the metering equipment or the customer purchased the metering equipment.  Mr. Nelson stated “the company” was required to provide the metering equipment at no cost to the customer.  Mr. Hettrick stated he felt it was appropriate there would be a transmission line charge and asked if it would be appropriate that somehow there was a fee for the meter.  Mr. Nelson stated “the company” believed for anything beyond a small program as the original net-metering program, “the company” should be fully compensated for all of the costs.  Mr. Hettrick stated he believed net-metering had great potential and he thought the state should expand the program; however, the utility should be allowed to recover the actual costs involved with net-metering to be able to afford the program.  If the utility had to pay for the meters, the transmission costs and the backup energy source, it did not seem like a fair exchange of power that needed to flow into the system.  He recommended the committee weigh all of the pros and cons. 

 

Assemblywoman Buckley asked Mr. Nelson if he had performed a cost/benefit analysis.  If someone was involved in net-metering and able to bring back power to the grid, with the high cost of power one person’s use of a transmission line paled in comparison.  Mr. Nelson stated he had not done any cost/benefit analysis; however, the diagram in Exhibit F indicated a summer peak day.  Two years ago in the spring, he stated, the utility was taking energy at no cost to dump hydroelectric power from the northwest and net-metering customers were putting out the same output of energy and the utility was paying them $.08 per kilowatt hour in a residential situation.  Ms. Buckley stated the committee had heard that the state should not depend on just one source of energy and should not depend on cheap energy in the northwest from hydroelectric because one day it may not be available, like today.  Mr. Nelson stated the utility agreed with her.  They would like to buy the net-metering power at a cost that would be less than on the open market. 

 

Mr. Bache stated with the net-metering system most of the customers would have solar energy which would generate more power during the peak energy times in order to shave the peak.  The utility would not be paying as much in that situation.  Mr. Nelson stated he had not obviously made his presentation clear because the chart in the exhibit was intended to show that the peak output from the solar panels did not align with the peak consumption on the system.  The utility would have to buy the generation anyway.  The solar was generating output when the cost to procure the energy was less expensive.

 

Dave McNeil, Building Efficiency and Renewable Energy Projects Manager, Nevada Department of Business and Industry, Energy Office, stated that his office supported the bill, particularly the comments in the bill that would serve to support the expanded use of renewable energy and increased energy efficiency within the state.  He referenced the written comments from his department in Exhibit G.  His department wanted to request one minor amendment to A.B. 661, specifically related to Section 86 concerning the makeup of the renewable energy taskforce.  They would like to have all renewable interest or resources represented on the taskforce including biomass energy.  The majority of comments applied to the proposed transfer of the Department of Energy to administration by the Bureau of Consumer Protection.  His office supported the interest of state government and the Legislature to increase the effectiveness of existing state agency resources that could be leveraged towards support of the renewable energy strategy for the state as well as energy efficiency.  They saw some real benefits associated with the transfer of the office to the Bureau of Consumer Protection given the tenuous funding support, the revenue source for the office, and the fact that the Bureau of Consumer Protection could provide the opportunity of nonfederal cost share that they could match with grant programs now supporting the agency.  Another benefit of coordinating their office with the Bureau of Consumer Protection would be the ability to leverage the expertise of staff between the two agencies.  The Department of Energy spent hours of time covering the renewable interest of the state. 

 

Mr. McNeil stated his agency was concerned, however, about the particular focus and mission of the Bureau of Consumer Protection.  He asked for clarification on the Legislature’s direction in the merging of the two agencies in regard to focus and mission.  His agency served not only to promote the renewable energy agenda but also a wide array of energy efficiency strategies with the state, in particular building efficiency, both residential and commercial.  The agency also supported a significant effort aimed at improving the diversity of the state’s transportation energy options, in addition to a number of other programs on an ongoing basis, including consumer education.  The office spent a great deal of time working in support with the state’s Division of Emergency Management in energy emergency response-type activities.

 

The United States Department of Energy (DOE), through their state energy program, had served to support the large array of different programs developed within the DOE.  The Nevada Department of Energy served as the state’s outreach mechanism for that particular program.  Regardless of where the Department of Energy was housed, the department would expect the same diversity of program support to be continued.  He had included recommendations that affected Sections 92 through 99 of the bill dealing with the statutes that his agency had been responsible for administering as they related to NRS Chapter 523.

 

Assemblywoman Leslie related her thanks for a previous meeting with the DOE intended to clarify the department’s responsibilities.  She asked Mr. McNeil if any of the current duties performed under the current DOE grant would be in conflict if the office were moved to another department.  Mr. McNeil stated he did not perceive any conflict at this time and the office had benefited in the past from its status as essentially a nonregulatory type of agency.  They had enjoyed certain types of freedom working with members of the utility industry to develop various types of programs.  He stated he was not certain that was an issue.

 

Russell Teall, President, Biodiesel Industries, Inc., was present to testify in support in part the remarks made by Dave McNeil and speak to the issue from a business perspective.  He was currently involved in the renewable fuels industry with a particular project called biodiesel.  Two years ago at a national conference he had met the head of the state energy office, James Brandmueller, who asked him to stop in Las Vegas to present a demonstration of their product for the Nevada Department of Transportation (NDOT).  The Department of Energy had assembled many of the local fleet managers to observe the fuel made from recycled cooking oil.  The fuel was nontoxic and biodegradable and had passed the tests of lowered emissions.  The state energy office, along with NDOT, offered to help to bring Nevada law into conformance with federal law to designate biodiesel as an alternative fuel.  His company began to look at the economic development programs and business incentives for establishing their business in Nevada instead of California.  They began to look at the resources, especially the hotels.  Their feedstock for the biodiesel as he had mentioned, was recycled cooking oil and the tourism base in Nevada generated a lot of cooking oil.  The MGM Grand Hotel in Las Vegas generated over 50,000 gallons a year of biodiesel.  With the support of the Department of Energy again they were able to secure a grant from the DOE for doing a study of the feedstock available in the area and that was completed along with a process demonstration unit.  They had now established a full-scale plant in conjunction with Haycock Petroleum in Las Vegas.  The fuel was blended with petroleum diesel and sold into fleets.  The company was recently the low-bidder for a series of municipal contracts in southern Nevada that would total 2.2 million gallons of biodiesel per year.  They were also in discussions with a petroleum distributor in northern Nevada, Western Energitixs, to establish a similar pattern in northern Nevada. 

 

Mr. Teall was concerned with A.B. 661 in two areas.  There had been fine work done by the Department of Energy, particularly with its policy of alternative fuels and nondilution of alternative fuels.  He was concerned with the incorporation of that office into the Bureau of Consumer Protection that had more of a focus, to his knowledge, on generating capacity.  His plant operated on a diesel generator powered exclusively by biodiesel.  They were tied into the grid and provided their own power and heat.  His other concern was Section 83 and 86 of the bill.  He believed it was a good idea to include biomass in the definitions of alternative fuels.  He indicated the committee might not believe Nevada had a large biomass resource; however, he wanted to assure the committee, as a representative of the biodiesel industry, there was a tremendous resource.  He assumed the biodiesel industry was included in the definition of biomass and under the taskforce he believed there should be some representation for biomass and its potential.

 

Assemblywoman Leslie asked if there was language in the bill that caused Mr. Teall to believe if the bill moved the State Energy Office, attention would be diverted from their focus.  Mr. Teall stated he was not assuming that it would or would not happen, but rather he felt everyone should be aware of the valuable functions they performed and any kind of consolidation that occurred should include those functions. 

 

Chairman Bache seeing no other witnesses for A.B. 661 closed the hearing and opened the hearing on A.B. 369.

 

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

 

Kevin Powers, legal counsel for the committee, stated the amendment was complex and lengthy (Exhibit H).  An overview of the amendment could be divided in three different sections:  the moratorium, new provisions related to deferred accounting and ratemaking, and the restructuring act.  The first reprint of the bill created a moratorium until July 1, 2003, and during that period there would be only two opportunities for an electric utility to dispose of its generation assets:  a complete sale of its business by selling all of its generation assets and other assets through an approved merger, acquisition or other transaction as long as the buyer was not an affiliate or subsidiary or holding company that held a controlling interest in the electric utility; or by excluding the state or an agency or instrumentality of the state from the definition of “person” in the bill. The state during that period up until July 1, 2003, was permitted to acquire a generation asset from the electric utility.  In the Senate amendment, during the same period up until July 1, 2003, the electric utility could dispose of its generation assets with the same limitation; however, the difference was during the first period up until July 1, 2003, the term “person” included the state or an instrumentality of the state and therefore during the phase one period up until July 1, 2003, the state or an agency of the state could not acquire an individual generation asset.  The state, like other parties, could completely buy an electric utility and that would include all of the assets, including transmission lines, generation, distribution, metering and billing and any other assets.  In sum, the Senate amendment took away during the phase one stage the ability of the state or an instrumentality of the state to be a potential buyer of an individual generation asset. 

 

Mr. Powers stated the second part of the Senate amendment involved phase two beginning July 1, 2003.  The Assembly’s first reprint provided that on or after July 1, 2003, to July 1, 2007, the electric utility could dispose of its individual generation assets only if it proved a substantial financial emergency by clear and convincing evidence, except for disposing of all of their generation assets.  From July 1, 2007, on, the electric utility could dispose of its generation assets if the PUC approved the disposal after finding if the disposal was in the public interest.  The change made by the Senate amendment took away the first component dealing with substantial financial emergency.  The Senate amendment stated on or after July 1, 2003, the electric utility should not dispose of the generation asset unless the PUC found the disposal would be in the public interest.  What the amendment did in this case was essentially, after July 1, 2003, create a regulatory mechanism for review of those disposals with no conditions except in the public interest.

 

The next provisions, Mr. Powers indicated, dealt with deferred accounting and rates.  This was a significant provision that was not included in the Assembly bill.  He would try to provide a brief overview.  This part of the amendment reinstituted deferred accounting.  Deferred accounting was removed from the statutes for electric utilities in 1999 by S.B. 438 of the Sixty-Ninth Session.  These provisions were found in Section 17 of the amendment beginning on page 8.  There were some differences from the statutes before 1999.  He explained beginning on March 1, 2001, each electric utility was required to use deferred accounting.  The previous statute in 1999 had the option of deferred accounting available to the electric utilities.  He believed when the repeal occurred Sierra Pacific Power was not using deferred accounting and Nevada Power was using deferred accounting.  Section 17 required both of the companies to use deferred accounting and allowed them to record increases and decreases in cost for purchased fuel and purchased power (F&PP) in those deferred accounts if they were prudently incurred.  The phrase “prudently incurred” was added in Section 17.  That phrase was not in the statute and the definition of F&PP also included the “prudently incurred” standard.  There was another difference that was contained in the definition of the cost for F&PP.  That difference was a specific reference to purchased capacity.  F&PP included purchased fuel, purchased capacity and purchased energy.  Purchased capacity was the availability of electricity when the utility needed it and purchased energy was the electricity.  The insertion of the purchased capacity was a new change from the 1999 statute.  Deferred accounting provided the utility would file an application to clear its deferred account after each 12-month period with one exception, they could file an application after a 6-month period if there was a net increase or decrease in revenues necessary to clear the deferred accounts that was more than 5 percent of the total revenues generated during that period from their base F&PP rates.

 

Mr. Powers explained additional amendments were made to the existing rate setting statute, NRS 704.110, to account for the application of deferred accounting.  One significant difference was that after filing the application to clear its deferred accounts under the old statute there was a one-year period that the PUC could set up for clearing deferred accounts, and the amendment provided for a three-year period, to be determined by the PUC, to clear deferred accounts.  Another amendment proposed to NRS 704.110 was the utility had to file a general rate application at least once every 24 months.  Currently there was no requirement the utility had to file a general rate application.  The general rate application had not been filed in several years. 

 

In order to implement deferred accounting, Mr. Powers indicated, Section 45 had a transitory provision that took the process from the current rate setting mechanism to the new deferred accounting mechanism.  He would try to summarize for the committee.  The electric utilities could not file any more F&PP riders and any F&PP riders that did not go into effect before April 1, 2001, were void.  The F&PP rate that existed on April 1, 2001, was the rate that would continue until there was another general rate application filed.  Secondly, subsection 3 of Section 45 established a provision whereby any cost for F&PPs that were unrecovered by the utility before March 1, 2001, could not be recovered in the future.  This subsection specifically provided the PUC should not allow the electric utility to recover such costs for F&PPs from customers. 

 

Mr. Powers stated the next provision dealt with the Comprehensive Energy Plan (CEP).  The rate set forth on March 1, 2001, in the CEP became a component of the electric utility’s rates for F&PP.  When the electric utility was required to file its first deferred energy case those rates would be reviewed for prudence, fairness and justness by the PUC.  The procedure for general rate applications and deferred energy applications were split between the two companies, Sierra Pacific Power and Nevada Power with a two-month difference in the dates for each filing.  Nevada Power had to file a general rate case on or before October 1, 2001, and had to file an application to clear deferred accounts by December 1, 2001.  After the application was filed to clear their deferred accounts, the PUC would investigate the prudence, fairness and reasonableness of the rates in the CEP.  On the same date the PUC had to issue an order on the general rate plan and the application to clear the deferred accounts.  The transitory provision provided that on April 1, 2001, there was an established CEP rate and the F&PP rate and all of the other base rates for what the utility charged for electric service.  The total rates that were in effect on April 1, 2001, remained in effect until the PUC ruled on the first general rate application.  The bill did provide for the constitutional safety valve that during that period the PUC could adjust the rates but only if it was absolutely necessary to avoid an unconstitutional result.  If it was not absolutely necessary to avoid an unconstitutional result the provision in the bill prohibited an adjustment in rates during the period.  Looking at the outside date of October 1 for the general rate application and the typical six months processing time for the PUC to complete a general rate case, the latest that the rate cap stayed in effect would be until April 2002 for Nevada Power.  Sierra Pacific Power was on a different two-month interval so the latest those rates would take effect would be June 2002 and Sierra Pacific Power would follow the same process. 

 

Mr. Powers stated the final element that was tied to deferred accounting was the acquisition of Portland General Electric in Section 46 of the amendment.  The section dealt with the Portland General Electric transaction and the transaction, at the time it was entered into, did not require PUC approval.  This statute provided that transaction could not go forward without such PUC approval.  If the PUC approved the acquisition of Portland General Electric and the acquisition took place before July 1, 2003, each electric utility that Sierra Pacific Resources owned the controlling interest in, Nevada Power and Sierra Pacific Power, could no longer use deferred accounting on the date that Sierra Pacific Resources acquired Portland General Electric.  There would be one application to clear the remaining deferred accounts at that point and then there would be a return to the typical regulatory structure that existed for vertically integrated electric utilities.  Mr. Powers stated these statements covered issues dealing with deferred accounting and rates. 

 

Mr. Powers indicated the final component was the restructuring act.  A.B. 369, first reprint, repealed the restructuring act in its entirety.  The Senate amendment No. 219 did not repeal the restructuring act, but rather made amendments to the extent those amendments were necessary to reconcile any conflict between the moratorium, deferred accounting and the restructuring act.  The restructuring act was preserved and the “status quo” on the restructuring act was preserved to the extent possible after reconciling those conflicts. 

 

Douglas Ponn, Vice President, Governmental and Regulatory Affairs, Nevada Power and Sierra Power, concurred in the accuracy of Mr. Powers’ summary of what was contained in the amendment from the Senate Committee on Commerce and Labor.  He had a qualifying statement that due to contractual obligations and regulatory orders, “the company” continued its ongoing opposition to the imposition of a moratorium on the divesture of the plants and the conditions contained in the amendment that tied the used of deferred energy accounting to the consummation of the Portland General Electric transaction.  He noted on the record “the company” opposed both of those provisions. 

 

Ms. Buckley stated last session Fred Schmidt, Representative, Southern Nevada Water Authority, indicated the state should not begin their experiment with deregulation unless deferred energy accounting was eliminated and there were consumer protections available to the small residential customers who could get left behind in the form of a rate freeze.  She stated now there was an energy crisis, little supply, a proposal to go forward with deregulation with no consumer protections, no need to use an affiliate and no rate freeze.  She asked why these actions were in the best interest of everyday Nevadans. 

 

Mr. Schmidt stated, as Ms. Buckley summarized and he still believed, the only protections that were of significance in the bill in 1999, when he testified as the state’s Consumer Advocate, were a rate cap and the elimination of deferred energy.  The purpose of deferred energy was to require the utility to accept and assume the risks of acquiring adequate power supply for the load they would continue to provide, as provider of last resort, and the load they would be obligated to supply if competition did not commence.  Unfortunately, he stated, a gamble was taken and the utility did not secure supply in advance of the summer peaking season in the year 2000 and was arguably late in doing it for 2001.  As a result, by the time he had left his position as Consumer Advocate in the year 2000, the utility was faced with an energy market whose prices rose dramatically in 2000 and the rates, at the rate cap level, under which the utility was able to collect revenue from rate payers, was inadequate to cover the cost they were beginning to incur for the portion of the power supply they had to buy.  As had been discussed in previous hearings, “the company” generated power and bought power.  However, in the summer, “the company” bought almost half of their power.  A variety of parties met and determined “the company” would not survive the year 2000 financially unless the rate cap was not followed and a provision was implemented to have monthly rate hikes.  The monthly rate hikes were done with the F&PP rider mechanism.  That mechanism was intended to give the utility relief from what they were experiencing and was intended to still inspire them to try and drive the cost down and contract ahead to avoid even higher power costs.  The mechanism never provided them 100 percent of the cost they were actually incurring, although it could eventually catch up if rates began to stabilize. 

 

Mr. Schmidt stated the utility made it through the year 2000 with a horrible year of poor earnings.  Sierra Pacific Power made a few million dollars and Nevada Power actually lost money.  The holding company lost quite a bit of money.  “The company” as a whole at all levels did not perform well in the year 2000.  Now the state was faced with the year 2001 and the power supply situation was worse this year than last year.  It was worse in the western United States as a whole but the power company had started acquiring power late last summer and primarily through the fall and early winter of this year and now appeared to have enough power supply for the summer of 2001.  The price they will have to pay for that power because it had not been previously secured at favorable rates, was, once again, substantially greater than what the revenue would generate based on the rates that were in place or with the F&PP rider mechanism that increased their revenues each month, unfortunately not at a fast enough pace to allow them to cover their costs.  As a result of that, “the company” had argued throughout this session that they needed deferred accounting again. 

 

When he appeared earlier before the committee and in his appearances before the Senate committee, he was asked if there was a way that deferred accounting could be brought back in place, as it was the only way the utility could survive.  He indicated that was the situation the state was in currently because the risk was being shifted back to the consumers and “the company” now wanted deferred accounting.  Last week the Governor directed Mr. Hay, himself, Harvey Whittemore on behalf of large casino industry, and Mr. Ponn to get together to try and solve this problem.  The perception that part of the problem was being created by the effort to prevent “the company” from selling their power plants was not true and was a perception commonly held.  When “the company” negotiated to sell its power plants in a mechanism, which he had defended before the PUC in four days of testimony because people thought it was anti-competitive, it was a mechanism like the rate cap and like getting rid of deferred energy, to allow this mechanism for so-called buy-back contracts.  If “the company” actually sold its plants it was entitled to buy back all of the power at a rate that was already set the year they began divestiture.  Because prices of fuel had risen so much it became a highly subsidized rate, in other words it would be a windfall to go back to that lower rate, and would not be what it would cost to generate power from those plants today.

 

Mr. Schmidt stated the reason “the company” needed deferred energy now had nothing to do with the previous issue because “the company” had not sold its plants yet.  A higher cost of fuel and running the plants was incurred by “the company” today.  Those rates were not likely to go up, at least in the short-term.  They rose in the winter, came back down and had stabilized for about a month but at a much higher rate than they were in 1998, which was the buy-back rate.  “The company” had in its revenues now, to the extent that the F&PP rider had captured it, the ability to pay the fuel prices or at least knew what costs they were experiencing today.  What “the company” did not have, he said, was revenue adequate to pay for the power it had now committed to buy to keep the electricity flowing in the summer of 2001.  Unfortunately, there was still bad news for everyone in Nevada and that was it did not look any better for 2002.  “The company” had begun to acquire 2002 power and the price was higher than they had experienced in the past.  The power purchased now for 2002 was at even higher rates.  Deferred energy accounting looked like the only way to “bail out” “the company” from the problem.  “The company” needed to be “bailed out” or the choice was “the company” could not financially survive but would either fall into bankruptcy or be bought out.  The statute was not a consumer protection statute in the short sense of the term, but rather a utility protection statute so the state could make sure “the company” kept being the state’s utility because many people perceived the alternative was likely to be worse.  In terms of the protections the consumers had, when deferred accounting was implemented and acknowledged, the rate cap was gone through the bill, the protections that he had asked for and the Legislature had implemented and “the company” agreed to in 1999 would be gone.  The protection that was captured out of the bill, whether the Legislature passed the original A.B. 369 or an amended version, was the state kept the security that the power supply, which was the base of supply for the state, remained controlled by the state and under the utilities’ operation to provide service at cost base rates for Nevadans for at least two more years.  The state also got the mechanism of standards put into law under deferred energy accounting that were not present before, the prudence standard.

 

Ms. Buckley appreciated the answer and stated, however, he was not really addressing her question.  Her question asked if it was wise for Nevada to proceed with deregulation in a time of an energy crisis without all of those consumer protections that he had told the Legislature last session they needed before they should begin with deregulation.  Mr. Schmidt looked at the bill as three parts.  The first part was prohibiting the sale of the power plants for a timeframe, the second part was reinstituting deferred energy accounting and the third part asked if the state should repeal deregulation at this point in time.  Ms. Buckley stated that was correct and she was focusing on the third part at this point in time.  Mr. Schmidt stated when he testified before the committee several weeks ago he supported A.B. 369.  A.B. 369 addressed those issues in a manner that the Southern Nevada Water Authority felt was acceptable and from a consumer perspective, he had no problem with the bill. 

 

He was before the committee today to propose an amendment based on direction they were given and urged primarily at the last minute last week by the Governor to try and resolve the debate about how to implement deferred energy.  That was the issue he was before the committee to sponsor.  They did not discuss other sections among the bill when the group met.  The Senate committee had written amendments for part one of the bill, how the plants could be sold and who controlled when that was done, and for part three, whether the status quo was kept on the statute that was passed in 1999.  Testimony had been offered on those sections of the bill for a number of weeks and all he had urged was, because the issue of divestiture was so imminent, it was important to act on that quickly.  Evidently the Legislature was not able to do that to date because of the need of “the company” to have the issue of deferred energy resolved as well.  The proposal addressed that issue and he believed with probably the least impact on ratepayers that could be done in terms of reinstituting deferred energy.  He pointed out it would cause rate increases; it mitigated the rate increase by essentially getting rid of the monthly rate increases, and implemented a rate increase that would take effect by April 1 for southern Nevada and June 1 for northern Nevada.  There could be another increase six months after that, depending on whether that captured all of the costs “the company” was now incurring.  The costs today, as he had explained, were higher and the rate increase was likely to be fairly substantial.  It could be mitigated as a consumer protection and drafted into the language over a period of three years, he indicated, which was different than the old deferred regulation that required any balances to be cleared within one year.  

 

Ms. Buckley asked to look at the deferred section of the amendment and stated she had been convinced over the past couple of weeks that the state needed to have deferred energy accounting.  Her question of Mr. Hay was whether he had performed any calculations on how much deferred energy accounting would increase bills and would the consumer receive those price increases anyway if the state did not allow deferred energy accounting.  She thought that even if deferred energy accounting was not used, “the company” would file another CEP and the state would see the increases anyway and she wondered if this created a more orderly process.  She also asked if the state could do more than just using the word “prudent” to make sure “the company” got the standard it needed to ensure the lights stayed on and the state did a little more to protect consumers from imprudently purchased power contracts.

 

Timothy Hay, Chief Deputy Attorney General, Consumer Advocate, State of Nevada, agreed with 99 percent of what Mr. Schmidt explained.  In June or July of 1999 the Legislature made the policy decision to take any risks on increased F&PP costs away from the consumers and imposed the risk on “the company” and its shareholders.  As the financial condition of “the company” deteriorated shortly after he became the Consumer Advocate, and particularly in the warm May of the previous year, it became apparent there was likely to be serious financial trouble for “the company.”  This situation had led to the conclusively controversial global settlement.  In the global settlement some of the risks to F&PP costs were shifted back to the ratepayers although it was done under an adjustment mechanism that made it an incremental adjustment to avoid rate shock.  There were also adjustments under caps “the company” had agreed to so that the amount of the shifting of the risk to the ratepayers was limited by the agreement itself.  By returning to full-fledged deferred accounting, the state had essentially come full circle and all of the risks of increased F&PP costs were shifted back to the consumers.  When the first deferred case was decided there would be a dollar amount associated with the timetable and structure in the amendment, if adopted by the Legislature; however, it was very difficult to predict because of a number of assumptions.  He believed under the existing rates in place and the CEP rate, which the Legislature endorsed, what amounted to a $500 million rate increase on an annualized basis would be imposed.  He estimated that there could be another rate increase in the $500 million range at the time the next deferred case was decided. 

 

Mr. Hay spoke on the question relative to prudence.  As Mr. Schmidt had indicated in discussions with the Governor the previous week, the old deferred mechanism, which had an implied prudence standard, was really not adequate protection and at least by having mentioned the word prudence in the statute it would be easier for the state to litigate whether “the company’s” purchasing decisions were in fact of such a nature that they should be passed on to consumers.  Mr. Hay stated if the committee wanted to look at other options there were certainly more extensive and more creative ways of allocating the risk between “the company” and ratepayers if sharing mechanisms were discussed.  If “the company’s” earnings reached or exceeded a certain level, the earnings would be spread between the ratepayers and the shareholders.  When he had joined the PUC as a commissioner in 1996, Sierra Pacific Power had participated in a sharing mechanism that he felt worked equitably.  The Governor had stated that he wanted them to come up with deferred mechanism within 24 hours and they had not examined more creative or inventive ideas.  There were, however, other certain consumer protections the Legislature could examine and consider. 

 

Ms. Buckley thought it was important that the bill implementing a moratorium on plant divestiture moved quickly.  She believed that was also what the Governor had in mind when he asked them to work something out within 24 hours.  Since the bill had not reached the Assembly at this time she wanted to give them 24 hours as well to come up with more incentives that would preserve “the company’s” financial well-being and help consumers know they were not overpaying. 

 

Mr. Ponn stated in response to Assemblywoman Buckley’s question he believed the 25 percent estimate was close to the expected rate changes going forward.  He had testified “the company” had increased residential rates by approximately $.02 per kilowatt-hour as a result of the previous mechanisms.  In order to achieve equilibrium in the marketplace, the committee could probably expect another increase similar to the $.02.  Ultimately, with or without deferred energy and with or without legislation, someone would have to pay the price of energy in the market.  Whether it was the Legislature or the PUC or a judge that ultimately said the cost to produce electricity was “X” and the price therefore needed to be “X,” it would happen. 

 

The question was what the state wanted to do to get there, at the expense of the utility’s financial health or existence, or through legislative fiat and the use of state monies to delay the inevitable time when that would happen, were policy questions.  The state could look to California and examine the choices they made and where they were today and what happened during the time period when the consumer did not pay the price of energy and when they ultimately did start paying the price.  In regard to the suggestion there might need to be something more than prudence language, he stated he did have a different perspective.  He remembered deferred energy cases that eventually were litigated just as general rate cases.  Anyone who had an interest could intervene in those cases and present witnesses, could argue some cost or expenditure should not be included or recovered from customers.  With the strength and language in this bill he would expect the standard to go even higher and the general rate cases to be longer and perhaps more litigious.  He stated whenever there was talk about some incentive to make “the company” more efficient in its deferred practices, the troublesome part was if the incentive meant “the company” would collect something less than the cost, that was just a long-run way of creating a financial problem for “the company.”  As long as the incentives had something contained within them that said “the company” had the right to collect what it costs to produce the energy it would be satisfactory.  He had heard the suggestion “the company” could collect 95 percent, 90 percent, etc., for the F&PP budget.  He had testified that “the company’s” F&PP budget for this year was expected to be $2 billion and if 5 percent were taken away that would be $100 million.  He emphasized $100 million was two-thirds of the earnings of the total company for one year.  Something that took even a small part of recovery away from those prudently incurred costs would have significant financial impacts because of the large dollar amounts involved. 

 

Chairman Bache asked Mr. Hay and Mr. Schmidt about divesture and the proposed Senate amendment reinstituting deregulation but not establishing a start date.  He wondered if that fact put the state more at risk with the Federal Energy Regulatory Commission (FERC) than if the Legislature repealed deregulation as in the original A.B. 369.  He had great concern that FERC would examine the language in the bill, depending on which language was used and make a decision.  FERC was the ultimately authority on the divesture issue and their decision could be different based on what the statutes stated. 

 

Mr. Hay stated when the Senate voted on the amendment there was originally a vote to accept the Assembly language that repealed the deregulation or restructuring statutes.  The vote was reconsidered and reversed.  The chairman of the Senate Commerce and Labor Committee stated the language did make much difference in or out.  From a legal perspective the committee should defer to Mr. Powers.  There had been informal conversations with the FERC counsel and the indication was if a state passed a conclusive anti-divesture statute of some limited duration, FERC would acquiesce to the state’s jurisdiction because generation was an inherent part of the state regulatory structure.  He did not believe the state’s legal standing was specifically related as to whether or not the Legislature left the restructuring statute in place or repealed it for a period of two years.  He believed the state’s legal standing was okay for a two-year period.

 

Chairman Bache asked what it was that made the Senate change their mind on the language in the bill in regard to divestiture and repeal versus putting restructuring on hold.  Mr. Hay stated there was some confusion during the hearing at that point and Mr. Ponn and Mr. Whittemore were present when the second vote on reconsideration was taken, and they might be able to explain. 

 

Mr. Ponn explained it was the original vote on the Senate side that effectively concurred with the repeal of most of the restructuring statutes.  The purpose of the hearing was to convey to the committee what the parties the Governor had convened to try to reach an agreement had agreed to.  One of the items the committee had received and reopened the proceedings for was if the parties agreed to the repeal of all of the restructuring provisions as contained in A.B. 369.  The agreement of the parties had been that they would not try to address that issue in the agreement but rather preserve for the committee’s consideration the status quo.  The issue was explained in the committee hearings, they concurred with it, and changed their vote.  He did not believe it necessarily reflected the position of any party at the table or otherwise on restructuring going forward.  The intent was to remove it from consideration at that point in time. 

 

Mr. Schmidt stated Mr. Ponn had accurately captured the understanding of the parties.  He did not believe there was going to be an agreement in light of the ideas being presented at the time including those on deregulation.  “The company” had presented an amendment the previous week on the manner and under what conditions they would to allow customers of 1-megawatt size to go if they brought new generation in to the grid.  All of these issues were being debated at the same time and the parties did represent to the Senate committee that it was acceptable to them if there was not a final resolution on all of the deregulation issues as part of a bill that stopped divesture and reinstituted deferred energy. 

 

In regard to Chairman Bache’s question as to which version of A.B. 369 was more defensible, Mr. Schmidt believed the less onerous the restriction on divesture, in other words the shorter the timeframe or the sooner it could be reopened again, the most constitutionally defensible it was.  The restructuring issue, repealed or not repealed, was, in his understanding, on hold at the request of the Governor.  The Governor made his views clear that he did not plan to open deregulation for the next couple of years.  It did still allow the Governor the discretion, whereas A.B. 369 did not.  He had not conferred with Mr. Powers, however, on whether either of those provisions made the bill more constitutionally defensible.  He would urge the committee to vote on the language that supported constitutional defensibility so there could be assurance the power plants did not transfer ownership unnecessarily before the power supply was adequate for the loads of the state. 

 

Chairman Bache called on Mr. Powers for his legal opinion on the matter.  Mr. Powers stated the focus was on the question of whether the state should repeal restructuring in this legislation or amend it to maintain the status quo.  If the issue turned on probabilities it must focus on FERC as a constitutional matter.  A review of most constitutional provisions that would be implicated in this matter had led to the conclusion that placing a moratorium on divestiture and some provisions for competition and restructuring was not on the surface unconstitutional.  The constitutional issue arose under the Supremacy Clause and the preemption by FERC.  As a federal agency, FERC, when they had jurisdiction, could enter an order that would override state law.  In approving the merger between Sierra Pacific Power, Nevada Power and Sierra Pacific Resources, FERC specifically and expressly conditioned its approval on divestiture of the generation assets.  In particular, FERC stated the order was null if the divestiture did not occur.  What the legislative body had to consider was the message it would send to FERC.  Mr. Powers stated the merger between the utilities had been consummated and had been in existence for two years and if the FERC approval became a nullity the result was dissolving the merged corporation.  FERC might not see that as a possibility given they had been a unified entity for two years.  FERC could step back and amend its order not requiring divestiture or proceed on and order divestiture.

 

Mr. Powers stated there was a possibility that FERC would determine whether or not to order divestiture based on the effect the unified Nevada Power and Sierra Pacific Power had on the wholesale markets.  Many of the parties who had objected to the merger between the companies expressly argued that there was too much market concentration in having one utility in Nevada control almost all of the transmission and distribution assets plus own generation assets.  The parties’ arguments were dismissed by FERC on the basis that they were all rendered mute because of divestiture.  If this state passed a bill that put a moratorium on divestiture then all of the parties’ arguments for market power must be reexamined by FERC.  FERC would then have to make a decision.  The state would send a message to FERC if it acted on the restructuring act, repealed it, and imposed a moratorium on divestiture.  The state would therefore indicate it had reinstituted a traditional regulatory market where the state would have vertically integrated monopoly utilities.  FERC would be sent a message that the state would not delve into the issue of competition and therefore did not pose a threat to competition in the wholesale markets.  The state would not have competition in the retail market and instead the state would have the traditional regulatory structure that FERC had dealt with for many years.  Alternatively, if the state had vertically integrated electric utilities that had to keep their generation assets but at the same time the state opened the retail markets for competition, FERC could see that as too much of a threat to the wholesale markets and may find the possibility of anti-competitive behavior by the vertically integrated electric utilities intolerable, or find the whole scheme inconsistent and incompatible with their attempts to control the wholesale rates for electricity.  Under that circumstance FERC may feel it was necessary to order divestiture despite Nevada law. 

 

In conclusion, Mr. Power indicated the question was one of probability.  If the message was the state was not going to have any retail competition, he believed that could increase the probability that FERC would not take action and order divestiture.  If the legislative body sent a mixed message that the state would have monopolies but have competition it was impossible to predict what FERC would do under the circumstances.  He would defer to what Mr. Hay had to say in regard to that issue because of his contacts at FERC.  Ultimately, however, it would be the commissioners at FERC that would make the decisions.  Finally, that decision would be impacted by the markets in California.  If FERC believed divestiture of generation assets in this state would somehow improve the wholesale energy market for California and the rest of the western United States they could take the opportunity to act on that and anything the Legislature did that made it more likely they would take the opportunity would undermine the moratorium on divestiture.  There was no way to predict with certainty; however, the likelihood FERC would take action was greater if the state did not repeal restructuring and impose a moratorium on divestiture.

 

Chairman Bache addressed all three witnesses and referred to the language in the proposed amendment on page 9, Section 17, subsection 6, on the deferred accounts “costs for purchased fuel and purchased power means all costs which are prudently incurred by an electric utility which are required to purchase fuel, to purchase capacity and to purchase energy.”  The purchased capacity concerned Mr. Bache in the deferred energy part of the bill as opposed to the general rate part of the bill.  He worried “the company” could be reimbursed for purchased capacity and then “double dip” and receive compensation for the fuel.  He asked for comments.

 

Mr. Ponn stated it had never been “the company’s” intention or desire to “double dip” anything, anywhere.  There were allegations or assertions there might be opportunities for “double dipping” and he stated that was not what they were trying to accomplish anywhere.  This was an ongoing issue on the regulatory front as to whether the capacity component of F&PP contracts should be included in either deferred energy or general rates.  He stated if “the company” was not able to recover the capacity components, given the way they were sold purchased power, in one part versus two part contracts, they paid per kilowatt hour which included capacity and energy, it would negate the value of the component to “the company,” therefore the benefit to the state would be negated.  He was adamant if the capacity component was not a part of the final proposal the value of the proposal was greatly diminished and would not fix the problem. 

 

Mr. Schmidt stated Mr. Bache had correctly flagged a change in the way in which deferred energy would be reinstituted and had correctly pointed out the concern.  The concern was the capacity, because “the company” had built generation and had a component to recover it through its rate base in general rates.  When new customers were added or expanded, they collected all of the new capacity through buying power, because new plants would not be built now, “the company” would still get to recover the component in the general rates from those new customers that was built into the rates when the general rates were last set.  It created the opportunity for potential double collecting as long as the system was growing in terms of customer growth and the amount of capacity being purchased as opposed to being built.  It had been a concern and an issue for about nine or ten years and the PUC in the late 1990s set up a formula for resolving that issue in deferred cases because “the company” felt that they were entitled to all of their purchased costs under the deferred energy section of the law.  The Consumer Advocate argued they were only entitled to that component which was not already being collected in general rates.  The formula the PUC created was heavily litigated and in fact when the global settlement was settled last summer there were three cases pending for Nevada Power alone in the district courts as to whether “the company” was entitled to back money incurred in purchasing capacity as well as energy.  One of the efforts of the bill and the negotiations that took place the previous week was to put that issue aside so that deferred energy was not just reinstituted and ultimately back into that dispute.  They recognized when they discussed the change that the bill needed to be clear about whether capacity was in or out.  “The company” felt of course it was absolutely necessary to be in and in order to make sure the mechanism did not result in so-called “double dipping” the utility was required in the proposed amendment on rate-making to file a general rate case at the same time the deferred energy case was done again.  As long as the general rates were adjusted at the same time the deferred rates were adjusted the potential for the problem Mr. Bache identified did not exist. 

 

Mr. Schmidt stated on page 11 of the bill, the new amendment to NRS 704.110, subsection 3, added a new sentence that required “the company” to file subsequent general rate cases at least once every 24 months.  There would never be more than two years without correcting to make sure the capacity components of the rates was not being double collected through any purchased power.  The negotiators had tried to address the problem and felt the language avoided the very contentious litigation that involved at least $100 million by the time the agreement was reached last summer on the global settlement.  He believed the resolution of the issue was fair to ratepayers.  When the rates eventually decreased the component to have general rates would be valuable to residential ratepayers because it would make sure the residential rates would lower in proportion to what “the company” was incurring.  Now it was a very important component to having rate design correctly done.  Rate design had been out of date for some time because it had not been done recently but six years ago.  General rates every two years would make sure that would not happen again.

 

Timothy Hay stated he concurred with Mr. Schmidt’s analysis on the issue and he felt the regular filing of the general rate cases would prevent rates from getting askew as he believed they had been.  Obviously it was all premised on all parties having the opportunity to fully litigate the issues in front of the PUC.  The PUC had the ultimate decision to make the judgment on the issues.  He commented that after listening to Mr. Powers’ analysis it was clear during the negotiations on the deferred mechanism, as well as the agreement to stop divestiture, there would be another legislative component or that the issues relative to whether or not repeal of the existing statutes should occur would be considered at a future point.  The item was discussed but it was not clear to him that it had to be resolved in the first two components of the bill including stopping divestiture.  In order to accomplish stopping divestiture the Governor insisted on reinstituting deferred energy.

 

Mr. Bache asked Mr. Ponn to clarify the capacity and asked if capacity was something that would work in general rates as opposed to the deferred rates.  Mr. Ponn stated the short answer was no.  The long answer was it was an ongoing concern but the parties to the negotiation dealt with it and because of the synchronization between general rate cases and deferred cases he believed the interests of all parties were covered.  If capacity was out of the deferred energy process the amount of potential under recovery there, especially with regard to booking these costs going forward March 1, was significant and negated the benefit to “the company” of the proposal.

 

Ms. Buckley stated the legislators were elected and it was not their job to agree to any deals made, however well intentioned they were.  She stated the legislators had to look after the people they represented.  She believed the concern was very legitimate.  If “the company’s” concern was that they needed to book the costs right away to ensure “the company” had money to buy power, then the legislators agreed.  She suggested a provision to ensure when the general rate was done there could be no double recovery of the costs in that area.  Mr. Ponn stated a provision to prohibit double recovery did not mean anything to “the company” because they never were intended to double-recover anything.  What “the company” needed was a provision that said the costs associated with fuel purchase power obligations and contracts would be someday fully recovered to the extent they were prudent.  Deferred energy accounting did just that, and that was why they needed the capacity costs in the deferred energy side of the equation so they could start booking on their books and records those costs and those revenues associated with that part of their business.  Mr. Ponn stated they needed the financial wherewithal based on those entries into their financial records to go and borrow money to finance this summer’s obligations and contracts and market position so people would sell them the power they had contracted to buy.  If “the company” was in good enough financial position they could go forward and build infrastructure.  He stated it was a very significant concern to “the company.” 

 

Mr. Bache stated he hoped Mr. Ponn could understand the way the language was structured had sent up a “red flag” in his mind.  He understood that Mr. Ponn had no intention of double recovering on the part of “the company”; however, the language raised the question for clarification.  Mr. Ponn fully understood the problem and believed there were two gentlemen sitting beside him and more behind him that would make sure “the company” never over-collected or double-collected $1 in their rates. 

 

Assemblywoman Von Tobel applauded the effort and the direction of the Governor for the negotiations and the amendment.  She asked Mr. Ponn if he felt confident the bill with the amendment would support the financial stability of “the company” in the near future and in the long run.  She suggested the consumer protections in the bill were if “the company” was solid financially they would be able to keep the lights on and that was what her constituents wanted.

 

Mr. Ponn stated he could not guarantee, and they had all learned from the last session not to make promises or guarantees about the future going forward.  He could state that without provisions such as these and without the ability to book and recover the costs of providing the services they provided, they would not be financially viable going forward.  He believed this was the best direction the Legislature should take at this moment.  Any crafted solutions needed to be tested with the time going forward but he supported the bill as a way to get stability back into the rates that their customers paid and get financial stability back into “the company’s” condition.

 

Assemblywoman Leslie stated her constituents were always asking her why they could not go back to the way it used to be.  She wanted a simple answer for them.  In regards to the amendment she did not understand why the bill suggested the state wait for a year for a large power increase.  Should she tell her constituents they should be putting aside money for June 2002?  And why were the customers not continuing to pay as they went rather than wait? 

 

Mr. Ponn stated if A.B. 369 were examined with the provisions that repeal restructuring and then add the amendments on divestiture and deferred energy, it was probably as close to the way it used to be as the state could get given what had happened in the world, California and the market place.  He did not feel the end result, if all of the provisions were enacted, would be much different than if the state went back.  With regard to changing the rates now, he felt there had been changes in rates recently.  The monthly F&PP riders and the CEP were both significant changes in rates that provided a lesser amount than what they were going to need going forward.  The rates would be used going forward and then balance everything up through a simultaneous general rate case and a deferred energy case.  He stated “the company” would benefit in terms of financial stability from the deferred energy accounting if properly instituted and there would be an opportunity for everyone to look at all of their costs so that when the rate change did occur there should be no argument about whether it was properly scrutinized and whether or not it was at the right level.  As long as “the company” was booking the obligation to get paid and everyone knew they were back on deferred energy with the ultimate balancing plus carrying charges to either side down the road, he thought it would be a fair way to proceed.  Ms. Leslie stated she understood the reasons and felt they were good reasons; however, for the consumers in her district, the people on fixed income, how did she explain to them what they should be doing to prepare?

 

Mr. Hay answered Ms. Leslie by stating one of the benefits of the global settlement, although unpopular, was it accounted for on a month-by-month basis the increases the utility was experiencing for F&PP costs.  His preference as a consumer and as an advocate was it was better to implement gradual increases than have large rate shocks next summer.  The mechanism built into the global settlement was a type of deferred accounting mechanism; however, the problem from “the company’s” standpoint was it did not offer relief to them adequate to support their financial needs.  Obviously that was a negotiated arrangement and everyone made their own assumptions at the time it was done and his office still believed if “the company” had engaged in some different practices once the agreement was signed, they would probably be in better shape currently.  He thought the timing on the rate cases, if the state adopted the structure suggested in the bill, was going to be critical.  Since no one could predict what the ultimate impact on rates would be, although everyone could agree that it would be an upward adjustment, it was more important for the Legislature to consider Assemblyman Goldwater’s bill that dealt with direct assistance to low-income consumers.  Two bills were pending in the Senate Commerce and Labor committee—one to allow a different rate structure so that the bottom tier of residential rates could be protected, although the utility was not enthusiastic about the bill when first heard; and also the audit bill that was pending in Senate Commerce and Labor.  Everyone, he stated, would need to have some assurance after the track record of the last few years that whatever was done was based on some empirical data and not necessarily derived from a litigated proceeding.  Having a legislatively monitored audit of “the company’s” finances would provide useful information to help provide assurances.

 

Mr. Hay stated the real answer as to why the state could not go back to the way it was before was simply because Nevada Power bought 50 percent of its power on peak and that was where the pricing pressure had occurred.  There was no way the state could go back ten years and tell the utilities they should have been building plants to get prepared for the crisis at the end of the century.  The purchase-power costs that were unavoidable in the western market were irrationally out of control at this point.  There had been a stable decade in the 1990s and it would be nice to look forward to that again however no one could assure that would ever happen. 

 

Mr. Hay stated for the record that one of the explicit agreements that were made as the amendment was drafted was “the company” would withdraw the CEP filing and indicate that it was noncompliant with NRS 704.110 for the reasons that were stated in the motion to dismiss filed by his office in February 2001.  The language did not appear in the draft for drafting reasons however he wanted to make it clear that was the agreement.  “The company” did acquiesce to that for the purposes of going forward with the amendment.  In essence voting on A.B. 369 validated the CEP rates, the agreement was to acknowledge in fact the CEP filing was inappropriate and inappropriately processed.

 

Chairman Bache stated there were a number of committee members that had to leave for another committee.  He stated on Thursday the presentations on A.B. 661 should be finalized and there would be a work session on other pieces of legislation.  Chairman Bache adjourned the meeting at 3:57 p.m.

 

 

RESPECTFULLY SUBMITTED:

 

 

 

Cheryl Meyers

Committee Secretary

 

 

APPROVED BY:

 

 

 

                       

Assemblyman Douglas Bache, Chairman

 

 

DATE: