MINUTES OF THE
SENATE Committee on Commerce and Labor
Seventy-First Session
February 8, 2001
The Senate Committee on Commerce and Laborwas called to order by Chairman Randolph J. Townsend, at 8:00 a.m., on Thursday, February 8, 2001, in Room 2135 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
Senator Randolph J. Townsend, Chairman
Senator Ann O’Connell, Vice Chairman
Senator Dean A. Rhoads
Senator Mark Amodei
Senator Raymond C. Shaffer
Senator Michael A. (Mike) Schneider
Senator Maggie Carlton
Senator Alice Constandina (Dina) Titus, Clark County Senatorial District No. 7
Scott Young, Committee Policy Analyst
Silvia Motta, Committee Secretary
John King, Vice President, Business Development, Calpine Corporation
John Doyle, Manager, Project Development, Calpine Corporation
Steve Munson, Chief Executive Officer, Vulcan Power Company
B. J. Behroon, Director, Duke Energy North America
Jimmy Rexroad, Business Development Manager, Duke Energy North America
Richard W. Hyde, Regional Director, State Governmental Affairs, Duke Energy North America
Anne M. Cleary, Vice President, Mirant California, Mirant Corporation
Judy L. Stokey, Lobbyist, Nevada Power Company, Sierra Pacific Power Company
Duane Nelson, Director of Transmission and Business Development, Nevada Power Company, Sierra Pacific Power Company
Mark F. Sullivan, Manager, Comfort Smart Energy Systems, Smart Systems International
Chairman Townsend opened the hearing by introducing Bill Draft Request (BDR) 54-290.
BILL DRAFT REQUEST 54-290: Makes various changes to provisions governing the practice of medicine and respiratory care. (Later Introduced as Senate Bill 91.)
SENATOR O’CONNELL MOVED FOR COMMITTEE INTRODUCTION OF BDR 54-290.
* * * * *
Chairman Townsend addressed the committee, emphasizing the importance for the committee to review and learn about the state energy plan, and the various problems of siting rights-of-way being faced by the capital markets, which provide financing for the various plans.
Chairman Townsend said:
Now is the time and place to hear from the people who are in the generation business. And to emphasize again, the more the committee studies and hears [and] the more information is provided, it becomes clear that supply is the main issue. The ability for Nevada to provide supply to its own citizens is the most important issue we face today.
John King, Vice President, Business Development, Calpine Corporation, referred to his written testimony (Exhibit C), outlining the history and project developments of Calpine Corporation stating:
On my right is John Doyle, he is the project development manager for Calpine’s Moapa Paiute proposed 760-megawatt energy facility, located approximately 45 miles northeast of Las Vegas. Chairman Townsend asked us to share with you some of the key issues, the risks, and challenges facing the developers of large power generation facilities. Calpine was founded in 1984, headquartered in San Jose, California. We own and operate 47 geothermal and natural gas power plants, totaling approximately 5000 megawatts of generation. Calpine has a very aggressive development program; we are repowering North America with efficient and friendly combined-cycle gas power plants. There are 24 projects currently under construction, totaling approximately 13,400 megawatts. We have a stated goal of 70,000 megawatts in operation by the year 2005. The capital required to complete those plants would be approximately $35 billion. Calpine has taken a position and acquired 183 gas turbines in order to support its development program.
Calpine raised $8.1 billion in the year 2000 to support this development project, and will continue to go back to the capital markets to raise the necessary funds to build such power plants. These are very large infrastructure projects. Electricity is the third largest industry in the United States, behind health care and automobiles. There are 750,000 megawatts of generating capacity in the United States. Demand for electricity is increasing by 3 percent annually. . . . Load growth equates to a need of approximately 22,500 megawatts of new power annually, plus replacement of nuclear hydropower and aging fossil-fueled plants. Many of the fossil-fueled plants around the country and many of the utility plants are 30 or 40 years old, very inefficient. No market is growing faster than the West.
Two of the fastest growing cities in the West are Las Vegas and Phoenix in the Southwest. Nevada markets using Nevada Power [Company] and Sierra Pacific Resources’ plan, approximately 6000 megawatts of load in 2000; 6800 megawatts of resource requirements to serve that load.
Mr. King, proceeded:
As the California example proves, you do not want your supply . . . to just barely exceed your demand. The Sierra Pacific [Power Company] load growth is estimated at 3.5 percent, Nevada Power [Company] at 5.0 percent. That would project a requirement, in the year 2003, of approximately 8000 megawatts for 1200 megawatts, an additional resource over and above what the state currently has in terms of generation and import of capability. The additional resource was the proposed end to the transition purchase power contracts [which] I believe was proposed in March of 2003. The state of Nevada is currently a net importer of capacity, like California. Instate generation is part of the solution, so you do not have to rely on imports to meet your capacity needs.
Calpine [Corporation] is proposing the Moapa Paiute Project (MPP) energy facility, which would be in commercial operation by the summer’s cooling season of year 2003. The MPP has 760 megawatts of efficient base-load operation. In addition, we have designed this plan so that during the peak summer seasons we can provide an additional 350 megawatts of peaking capacity, for a total of 1100 megawatts. We will be connecting to the Kern River Pipeline with power lines that cross BLM [Bureau of Land Management] to interconnect at Harry Allen substation. The MPP uses non-potable or gray water for cooling. The water is provided by the Moapa Paiute Tribe, which is designated for the tribe’s use. There are positive attributes of water-cooled plants, favorable efficiencies from water-cooling; there is increased output from in- cooling, particularly when [outside] temperatures rise above 100 degrees. On windy days, air-cooled plants can experience some amount of problems, so you are going to greater reliability and stability from a water-cooled plant. The MPP is currently scheduled for COD [Commercial Operation Dates], Calpine is moving expeditiously to have this project on-line by summer of 2003.
Mr. King continued:
Three of the first four projected power plants sited in the state of California [that] have obtained permits [are] by Calpine. We have three power plants in construction in California. In addition, the first new merchant plant in Arizona is Calpine’s South Point facility, which will be in commercial operation this summer [2001]. Calpine also has a proven track record of being a leader in signing long-term contracts with local utilities, municipalities, states and irrigation districts. We were the first and only generator to sign a long power sales agreement with Pacific Gas & Electric [PG&E] last summer [2000] when they were experiencing problems, and are still the only generator with a signed long contract with them. We were the first to sign a contract with the state of California. In the packet that was distributed [Exhibit C], there is a press release showing that we signed a 1000-megawatt, 10-year contract with the state of California, totaling approximately $4 billion in value. We also have a long-standing practice in signing long-term contracts with entities and service territories where we locate our plants. The South Point project is selling to Imperial Irrigation District, who signed a contract with the State of California. We sold [to] the Sacramento Municipal Utility District, Northern California Power Association, and Modesto Irrigation District. Many electric entities that serve customers in California and surrounding states, are near where we located our plants. We are enthusiastic about offering that same opportunity to Nevada.
We have participated in the Southern Nevada Water Authority request for supply, and we are currently in discussions with them. It is our intention, and it is hopeful to sell long-term power in the state of Nevada from the Moapa Paiute Project. However, long-term sales are not prerequisite to us developing and constructing this plan; we are willing to construct this project at our risk.
The status of our MPP says we are very far progressed in the federal permitting process. We are on track to receive all federal permits by July of this year [2001]. This would support a summer 2003 commercial operation date, giving us approximately a 24-month construction period, which is standard and reasonable for the power industry. We have filed our Environmental Impact Statement (EIS) and expect a draft by March 1, 2001, and record of decision by July 2001. Our air permit is in draft form, we are in the Moapa air shed, which is in an attainment area, and we expect that permit by July 2001. Our BLM right-of-way permits for transmission, gas and road are expected by July 2001. We have all of our federal permits on track and lined up to support having this project in commercial operation for summer 2003, to help meet the state’s electricity needs. Some of the outstanding permits or issues would be the water-permit hearings and electric utility interconnection; these things are within the control of the state of Nevada, or within the influence of the state of Nevada. These are the things Nevada and Calpine and power plant developers working together can do, a lot, to ensure that power projects come on-line in a timely manner, in order to get this much electricity delivered to the market.
Mr. King continued:
There is a lot of uncertainty that faces developers. I know often it is easy to look across the divider and say, “Well this big money corporation’s got all the answers and all the cards.” For us, we look across and say, “The political figures understand the market, they have certainty, and we’ve got nothing but uncertainty.” In truth, these issues keep us all up at night; we have got very large capital decisions to move forward with these projects. When we look at getting a project on-line for commercial operation in summer 2003, that means we need to order major equipment well in advance of having any certainty with regards to permits. Calpine has allocated three gas turbines to this project, we dedicated to . . . each of these . . . approximately $35 million; these turbines could be put to use in another market, but we have allocated them to this project. In addition, we have major equipment orders, a steam turbine is site-specific cost of $25 [million] to $30 million. It has to be ordered approximately 25 months prior to the commercial operation of a project, meaning the steam turbine and our heat recovery steam generators, another $10 million capital, we would have to order this equipment, which is site specific, prior to having all our final permits for this project. That creates a lot of uncertainty.
Heading business development in the West, I have to make a decision between the equipment allocation, between projects, and several states. We are very supportive of the Moapa Paiute project. We spent approximately $4 million of development expenses already. Prior to being able to put this project in construction, we would probably spend another million dollars of soft development cost, engineering, arranging construction, contracting, etc. [and so forth], in addition to the equipment orders. We will have approximately another $30 [million] to $40 million dollars at risk, prior to having our final permits in place, so we can have the plant and commercial operation for summer 2003. If we waited to eliminate the risk, the project could not be on-line in that time frame.
Mr. King proceeded:
What we look for in terms of help is really the fact that both the State of Nevada and Calpine are on-line. Having this project on-line in summer of 2003 is good for the state of Nevada ’s ratepayers and citizens. Calpine is willing to put our capital and to move forward at risk on this project. What we ask for is that you help eliminate some uncertainty, you help by having hearing schedules that meet our time frame; that the electric utility connection/interconnection issues are moved forward in an expeditious manner. . . . If you build a $450 million power plant and you do not have your power utility lines connected to it, you have a very expensive paperweight. Calpine is committed to build this project, we are moving forward to have it on-line for summer 2003, we are making the necessary arrangements. In the next 2 to 4 months very large equipment orders would need to be placed, and we still have some permit hearing[s] outstanding. We will continue to move forward and take those risks. What we ask is, when it is applicable, that the state of Nevada helps, not to loosen an environmental standard [as] environmental standards help us build better power plants [and] we want to meet all of our environmental standards and all the laws, what we ask is for timely hearings and that things would move forward in an expeditious manner. That is the total of my comments today. I do want to say that Calpine is willing to put capital in the state of Nevada. We are willing and wanting to sell power to the state of Nevada and Nevada entities. We look forward to the opportunity of doing business in Nevada for a long period of time.
Senator O’Connell asked Mr. King for some idea of the cost to the consumer.
Mr. King said:
Senator O’Connell, we sell wholesale power, and we do not sell directly to customers. We sell to an entity such as Nevada Power [Company] or someone else who serves the final customer. We don’t really control prices to individual rate payers.
Senator Rhoads asked, “Have you filed for your transmission permit yet?”
John Doyle, Manager, Project Development, Calpine Corporation, replied:
Calpine [Corporation] has been in discussion with Nevada Power [Company] for the past 6 months or more on transmission issues. We have submitted applications for what is known as “firm transmission rights” for transmission of power, from our power plants to various delivery points; studies have been completed by Nevada Power on this, and there was another study recently completed. Out of those studies will arise the discussion and negotiations on the interconnection agreements with Nevada Power. We do not have the agreements in place, but that will be the next step in terms of our process.
Senator Rhoads inquired about the problems with the BLM. Mr. Doyle responded:
There have been issues with the BLM, as a matter of fact, there were issues about BLM talking about the concept of a global environmental impact statement, where BLM wanted to have an all-encompassing EIS, which would include all the potential independent power producers [IPP] to rely on Calpine and southern Nevada. We believe that issue is being resolved, and can now proceed on the basis of [the] BLM considering, at least from our point of view, the Calpine plan as being part of the Bureau of Indian Affairs [BIA] environmental impact statement, with BLM as a cooperating agency, on a stand-alone basis. But as part of our environmental impact statement, we do have to analyze what is called “cumulative impacts,” so the cumulative impacts do receive the effect of Calpine plus the other IPPs, together in terms of air quality and other issues, that would be considered in the EIS.
Senator O’Connell asked, “As far as your permitting process, have you found Nevada being any different, as far as the time-lines go, than any of the jurisdictions you are in?”
Mr. King answered:
We have had federal permits for the most part. BIA [Bureau of Indian Affairs] is the lead agency for our environmental impact statement. And our air permit is with EPA [Environmental Protection Agency], Region 9. The State of California has a much longer lead-time for permitting than does the State of Nevada, as does, some of the other western states, Oregon, and Washington. The State of Nevada permitting process has not been unduly long from Calpine’s perspective. We have some issues of needing hearings scheduled, to be heard in a timely manner. We are addressing those issues, and I feel they would be favorably resolved. There are other states, such as the states of Texas and Louisiana, their permitting is very expeditious; the Texas example is really quite remarkable. Texas was short of capacity in 1998, [and had the] highest power prices in the country on a wholesale basis, or among the highest. Texas sited and had on-line 6000 megawatts of due generation last summer, temperatures topped 100 degrees for 90 straight days, and the prices did not top $90 per megawatt hour. Texas has another succession of megawatts coming on-line for next summer. Supply, there is a tremendous amount of supply, things got built, there is no longer supply-demand imbalance. In fact, things have shifted the other way, ratepayers and consumers will benefit.
Calpine does not currently have a project that we’re permitting with the county or state entity in Arizona, our South Point project is on an Indian reservation. We were subject to BIA and federal permitting laws; that was an expeditious process as well. I cannot answer that.
Chairman Townsend pointed out there would be an opportunity to discuss the issues of common interest, such as permitting and transmission siting at the end of the meeting. He stated:
I think it is important that the committee, in particular, and our southern Nevada colleagues, know where these plants are going to be built and how they tie to the grid. That would probably be helpful. Then, I believe we have regulators here, I know Mr. Hay is here from the Bureau of Consumer Protection, . . . I do not know who is here from the commission [there was general discussion in the room].
Steve Munson, Chief Executive Officer, Vulcan Power Company, proceeded:
We are headquartered in Bend, Oregon, at 1183 North Wall Street. Our company is a geothermal developer, a developer of clean base-load and renewable energy. First, I would like to thank Governor Guinn and his staff for their support of geothermal and other renewals. They are supportive of indigenous clean base-load power within Nevada for the state of Nevada.
Our company is in the geothermal development business in Nevada. We currently have under ownership about 40,000 acres of BLM properties in the state. The potential output from these properties, which we currently have under ownership, exceeds 500 megawatts, and we have an option of an additional 300,000 acres within Nevada. Approximately $8 million has already been expended on drilling, other exploration, and development activities in this state by our company and predecessors. Our team includes a very experienced geothermal developer by the name of Tony Bingham, he was president of the company that built the Steamboat Power Plant. . . . That plant was built about 12 years ago. He also developed some of the Dixie Valley Steam Resources. . . . It is going to take great deal of funds to undertake the development that we have in mind, in Nevada. Our investment banker is PricewaterhouseCoopers Securities of New York, they are one the largest projects finance outfits in the world.
I would like to take you through the geothermal industry as it stands in Nevada, give you some idea of where it might go. The United States Department of Energy has called Nevada the “Saudi Arabia of geothermal.”
Mr. Munson submitted a report (Western Power Policy Analysis [Exhibit D]), then he made references, directing attention to a slide presentation (Exhibit E), explaining:
This is an industry that potentially can produce several thousand megawatts over the next decade, and already produces enough power for about 190,000 people in the state; it would be considered a mature industry that has been producing power for 12 years. The power has been purchased by Sierra Pacific [Power Company] and by Southern Cal-Edison across an interconnect line from Dixie Valley. I will take you through the potential, the benefits of geothermal, and discuss some requests to deal with obstacles of additional geothermal in the state. This is a geothermal power plant, it describes the production well, getting natural steam out of the ground; run the steam through a pipeline, clean it up, put it through the power plant, spin the turbine, and reinject virtually all the water. The temperatures are 350°F, there is cooling required, the vapor in that picture [Exhibit E] is water vapor, it is not . . . pollution; this is a very clean renewable form of energy. This is perhaps the world’s cleanest form of energy, when you take into account air emissions impact[s], which are negligible, and total land use. This power plant is an air-cooled geothermal binary plant. There are plants like this also at Steamboat, down along the highway, a very clean form of energy. Several $100 million of these types of plans have been built all over the world, called binary cycle technology.
Mr. Munson proceeded to other slides of Exhibit E:
You can see that there are about 2900 megawatts of geothermal on-line in the United States. Nevada is the second largest production state with about 190 megawatts. Our partner, Mr. Bingham, and one of our larger shareholders developed that project called “Coso” [U.S. geothermal power plant at Coso Junction, California] that is 240 megawatts of geothermal, about a $700 million investment; it has been operating for a decade. This chart tells two stories. This slide tells the story of geothermal development and shows that production leveled off about a decade ago in the United States. The reason being, no wholesale power contracts were available after that time from retail utilities. The industry could not get the contracts to expand production, and of course, at the same time, power plants were not being built around the West, which leads us to where we are today. This slide shows you that geothermal potential over the next decade, particularly in the dark red areas, could expand to add almost 5000 megawatts by year 2010, from multiple sites. The stars indicate the new geothermal reservoirs or existing reservoirs that can be expanded. They run from the Northwest through California and Nevada, into Arizona, New Mexico, and even Texas, as geothermal reservoirs of a particular type that may be developed. Our particular company has leases at Salt Wells Colada, which is up on the interstate, outside of Fernley; Antelope, which is on the Stillwater Range outside of Fallon; Aurora, which is a property located on the Nevada-California Border, properties called “native power.” All total, almost 40,000 acres, about $8 million of exploration expenditures. It is the largest property exposition in geothermal in the state of Nevada.
Mr. Munson continued:
Geothermal offers many benefits. Vulcan [Power Company] is a base-load power source, incremental units can be added as needed to match load growth, we have a very high availability; our plants go on-line and operate 95-98 percent of the year. It is very clean, there are virtually no emissions from geothermal power plants, very low-land use. It is renewable, we reinject the fluids, and we do not require water with the new technology. In fact, there is a combined-cycle technology now that can operate at high temperatures and not even require cooling water; we put it all back into the ground. It is a sustainable industry, I think it has shown that in the past decade. It offers massive economic benefits to rural communities, we are … located in rural areas. We provided this document [Exhibit D], which I have given to the senators at the Western Governor’s Conference. We were gratified that the Governor has adopted most of our policy recommendations, and this is provided for your review at a later date. [Note] the quantified benefits chart on page 15 [Exhibit D], as you can see, the benefits can be very large for Nevada, about $100 million a year, roughly, in annual benefits from the 190 megawatts of existing geothermal. Of that amount, the offset of any outside gas dollar drain is about $21 million. So, if you were interested to know just how large of an impact we could have locally, it is about $80 million in such things. . . . as employment payments, royalties, tax payment, those other benefits, and about $21 million, at least, that would not go out of state to pay for out-of-state gas fuel.
We offer high availabilities. Geothermal plants operate over 95 percent of the year that is roughly equivalent to the new gas plants, so it is based low-reliable power. You can see the coal and nuclear and even when we offer lower-capacity factors . . . you can see how geothermal compares, particularly the new binary and combined-cycle plants, in terms of total CO₂ emissions, to the other forms of energy.
Mr. Munson proceeded:
We estimate roughly 40,000 megawatts of new generating capacity is planned for the next 5 years in the West. Calpine may or may not agree with the number. The point is, it is a very large number . . . [an] estimated . . . 98 percent of that is going to be natural gas, unless there are some measures put in place that will support and encourage renewables. That may or may not be an accurate analysis, because of the things that are taking place right now, but that was the analysis of several months ago. We are price competitive today, and we can provide a hedge against fossil-fuel price-rated shops, if contracts are set up for gas that can fluctuate with gas price. We do not have that, we own our fuel source and are able to provide long-term security on rates, on the price of our fuel, so when we contract for the power, it is not subject to future increases. These projects, of course, are clean, and reduce “NIMBY” [“Not In My Back Yard”] requirements, NIMBY opposition in most places. We can get permitted quickly at most sites. The purpose of this chart is to show one analysis that was done in the Northeast last year, before the recent power price increases in many sectors. The dotted red line [Exhibit E] shows what would happen to the price of the total power in a major energy system in New England, if only 50 percent of the new generation comes from renewable. The point of this chart is that renewables are cost-effective and bring the price down, compared to other forms of generation. We act as a hedge against gas price-rated shops.
This chart [Exhibit E] shows two things, there are pollution problems throughout the West, as we all know. Those transmission lines indicate that we can get geothermal from rural locations to the urban load centers. One of the very interesting things that we found over the last quarter is that . . . green line [Exhibit E] that runs from the Columbia River through Reno [and] down to Los Angeles is a DC line (Direct Current) that is owned by BPA [Bonneville Power Administration] and others. That DC line, 3100 megawatts, was considered for closure last year because the loading is only about 1100 megawatts. We have determined that BPA and others are very interested in seeing geothermal put onto that line, which could service Las Vegas. You move the power south, then backhaul it to the Las Vegas substations marketplace. . . . [It] could provide a way of getting northern Nevada geothermal to Las Vegas and other areas. We believe that the transmission system is well located and in a good financial situation to provide much capacity for northern Nevada geothermal.
Mr. Munson continued:
The major three obstacles to geothermal development in the state of Nevada . . . are market, market, and market. We require [ourselves] to be in a position where we can service Nevada with additional power, we require mechanisms, including a renewable increased portfolio standard that is going to be introduced to this committee, [through] which we will require a purchaser to enter into long-term contracts for the base-load power. If those two mechanisms are not in place, it is very questionable whether we are realizing indigenous resource benefits in this state. We are contracting power all over the West, and we require market to be able to bring our power to a given market like southern Nevada and northern Nevada. That concludes my remarks and I would be very happy to answer any questions.
Senator Schneider asked, “You said you needed access to the market? You said your prices were competitive?” Mr. Munson replied, “That is correct.” Senator Schneider proceeded, “I do not understand. I mean there is a shortage of power all over the West . . . if prices are competitive? . . . It looks like nobody can buy your power.
Mr. Munson responded:
The problem is that currently there is not a party, a mechanism in place, requiring utilities to purchase a share of renewables; there is not currently a mechanism in place allowing them to do so. The ability to long-term contract on a wholesale power-purchase basis is probably the single most important factor today.
Senator Schneider added:
I guess I am a little confused. If, in the California market, if they’re having . . . “blackouts,” and you have an affordable energy source, it seems like you could sell it all there, right now; or you are just on the spot market to make a lot of money.
Mr. Munson replied:
To develop, there are several things that are needed to understand
what is going on with us, and our industry, and others in California. First, to develop geothermal power plants requires long-term power contracts, and those long-term power contracts are currently becoming available in California. In the last 10 days, there have been two auctions in California. Our company and others are bidding many hundreds of megawatts of geothermal to California. If the state of Nevada is going to participate in the growth of geothermal for use by Nevada customers, we require that a long-term contract entity be in place that can sign the contracts, which would allow us to project/finance these plants and sell the power into Nevada. We are not in the business of short-term spot market sales, we are in the wholesale business, and that requires long-term contracts. It is not currently possible to long-term contract for wholesale power in this state.
Senator Schneider emphasized:
My concern is that everybody wants competition. You are in here begging for competition, you say “lets deregulate everything, but we want guarantees.” That is what confuses me in this whole thing, everybody wants guarantees . . . down in Las Vegas, we have a developer, Steve Wynn is ready to build a new hotel, but he is not up here asking us to guarantee that if he spends $2 billion, that 5000 people will walk through his door. He is going to roll the dice and go at-risk. It seems to me that in Las Vegas this summer we are going to have “brownouts.” Put your power on the grid. Let’s go, build it. Take a risk.
Mr. Munson said:
Senator, that may be appropriate for other companies like Enron. Our company has, throughout the West, continually opposed deregulation of the power industry as not being in the best interest of the customers. We believe that long-term wholesale power contracts are the mechanisms by which the prices and long-term stability, as supply, can be assured. We have taken that position and still believe it’s the case.
Senator Shaffer asked, “Are you competitive because of the prices as they exist today, or could you be competitive if the prices were to drop? I know in the past, geothermal was very expensive, as far as the fossil fuel and others.”
In answer, Mr. Munson responded:
The geothermal power that is being produced in California now provides some of the less expensive power in that state. If one takes a long-term [contract] and assumes even the modest increase in gas prices, we are competitive. If you assume that gas is going back to $2 in MCF [million cubic feet], then that is a different story. At that point and time we would need the production tax credit, which Congress is almost certain to pass, that would be the same production tax credit that Steve Wynn has. But, at gas prices in the range of $5 and $6 in MCF over the next 10-20 years, we would be a very good choice to lock-in now for the state of Nevada, and others.
Senator Shaffer asked, “If you lock-in on long-term, what are the contingencies that you want?”
Mr. Munson responded:
The long-term contingencies simply would be take-or-pay contracts to take our power when it is available. This would be very similar to the contracts that were signed for the past 10 years. There is a format for those types of contracts. We will go out and spend our money to do the risky drilling, to finish up the $8 million of exploration that has been done to provide the steam. We take that risk.
Senator O’Connell asked Mr. Munson, “When you talk about the long-term contracts, what is the long-term that you are looking for?” Mr. Munson said, “In other locales, we currently contract in a 20 year. A couple of instances, we have offered 10-year contracts, we are willing to do 10-year contracts because that is the typical length of the project financing to get the plants built.”
Chairman Townsend inquired how long it would take to provide power if there was a long-term contract tomorrow. Mr. Munson said, “Year-end, 2002, Chairman Townsend. We have several locations where we could be producing power by year 2002, and additional plants can go for the peak year of 2003.”
Chairman Townsend made additional comments:
We have two different concerns, one is the peak issue in southern Nevada during the summer, the others you need to mandate in the north in the winter, such as last night, it was pretty serious in Reno this morning. I believe it was 14 degrees this morning, and 13 in Carson City, no matter how many blankets you have, you cannot live like that. You think you will be on-line by the end of year 2002, if you get a contract?
Mr. Munson responded:
Yes, sir. These are advanced state sites. One thing that could happen potentially, if they were a centralized purchasing entity, power could even be directed north or south as needed because the properties are located up here, with the potential of using the DC line for back-up, all of Las Vegas could service both markets.
Chairman Townsend asked Mr. Munson to be more specific as to the transmission issues from those sites. “I understand the DC-line issue, but it comes down to building the plants, you have to get it to somebody who is going to use it. So where are we with that in central Nevada?"
Mr. Munson indicated:
As Calpine also mentioned, one of the critical issues is to see timely decisions of interconnect to the grid. Virtually all of our sites are located within 15 miles of the existing transmission grid, so that we can get on the grid and then build the tap up to the DC, which has been discussed with BPA and others. We would have the same basic requirement to interconnect and get on the grid, then step it up to the DC line.
Chairman Townsend inquired if construction of the plant could be completed before the interconnect, permits, siting, and construction issues for transmission are completed.
Mr. Munson stated:
These issues can go, roughly, proceed simultaneously . . . [while] you are typically doing your drilling after you get your power contract. You are doing the balance of your development exploration drilling, and you are doing the transmission interconnect, where before you can start the construction of the capital-intensive power plants. But you do proceed on a simultaneous track to get these things done. We already started the transmission discussions.
Chairman Townsend asked, “In your estimation how many megawatts of power do you think are inside the borders that would be available to us under normal exploratory, meaning without excess cost to develop?” Mr. Munson stated, “Over the next decade, I believe, and others have contributed to our view, that perhaps 1500 to 2000 megawatts of new geothermal power could be brought on-line within the state of Nevada.”
Chairman Townsend also asked, “How much do you think is available if you started to drill tomorrow?”
Mr. Munson said:
If we started with a contract in the short-term, there could be 500 megawatts of new geothermal available within 5 years in this state, and perhaps as much as a 1000 megawatts, but I believe part of that power will go to other locations or other states. Our company is willing to commit that, with a market mechanism in place that would allow for these wholesale contracts, at least one-third of our Nevada power would go for use in the state of Nevada. If others did the same thing, there could be 500 megawatts or more, ultimately in Nevada.
Chairman Townsend asked, “At what size do you generally build these stages?” Mr. Munson replied, “These plants are typically built in 28-30 megawatt size.” Chairman Townsend asked, “And a 30-megawatt [plant] provides electricity for how many average homes?” Mr. Munson stated, “About 30 thousand.” Chairman Townsend asked: “Have you been approached by rural communities, who might have 30,000 homes, that could immediately build one of those structures? Including Reno?”
Mr. Munson replied:
No, sir, we have not. Although, we have had discussions with representatives of the rural communities who are very interested in seeing the economic development take place, we have not had requests for power contracts, if they happen to be have a municipal utility servicing them, or had those discussions.
Chairman Townsend continued, “If there are opportunities for rural areas to receive the benefits of that, perhaps aggregating municipalities for that development could be beneficial. Has that been discussed with anyone?” Mr. Munson responded, “Not in this state, sir, but in other states the public power entities are pushing very hard to acquire major renewable acquisitions, we believe.” Chairman Townsend added, “I think your map showed that the vast majority of this is located in central Nevada. Is that a fair generality?” Mr. Munson concurred, “Yes, Senator.”
Chairman Townsend commented:
Obviously, the broad representation on this committee, geographically, means we are going to cover all the issues. Any time there is an arrow to the quiver of solution here, we are going to look hard at it, and I would think that whether Senator Amodei’s constituents from the general Carson area or Senator Rhoads’. We would like to look at all the options; more importantly, find out from your industry what obstacles might be in the way and what role we can play, including the issue of contracts, before we end the 116 days left of this [Legislative] Session. If you can continue to reinforce with our challenges on the other side, with the Governor’s office, the things that are important and basic points, which I know are in your book because we have been through them before, that would be helpful to us.
Mr. Munson agreed, “Be happy to do that, Senator, and appreciate the opportunity to appear.”
Senator Schneider added:
I would like to mention one thing. It was in 1997, when we did our deregulation bill and talked about energy power. This committee voted for green power . . . and I was very supportive. I worked with Rose McKinney-James for green power. This committee is in support of that, Nevadans, in general, will support that. Again, everybody is at risk in a competitive market. I think it is incumbent that you, out there, know that to get into a competitive market, you have to be willing to step up and take the risk. We are here to help you, we will try to take down some barriers that may exist at this time. We will be supportive of green power, speaking for myself and hopefully for the committee. But I just can’t emphasize enough how I feel about a competitive market and putting your money at risk.
Mr. Munson added:
I would say that the entities at the greatest risk in the current market conditions are the utilities who did not have long-term stable price contracts. It is not just only for the ability of our company and industry to build the contracts, build the projects under long-term project financing, that I suggest for these kind of projects. I believe it is the solution, at least in part, the solution for utilities and the customers. I appreciate your support for green power, Senator Schneider.
Chairman Townsend asked:
Is not one of the advantages, besides the environmental issues of which Senator Schneider just articulated, the fact that you are not out there having to compete on the open market for a fuel source? And does not [that], in any shape or form, denigrate the other power providers who have been doing this for a long time and know what they are doing? But that is always a tough thing for this new generator, whether it is coal or gas, . . . the fuel and purchase power agreement issue. Off course, part of that purchase power agreement is the cost of fuel to create that contract.
Mr. Munson replied:
Senator, I believe that that is the major benefit of geothermal base-load power, that we provide a hedge against fuel price break shock. We do not have to compete for the purchase of our power. We do have to undertake the risks and costs of the exploration and drilling, but once the steam is discovered and the reservoir engineer tells us it is in place, we have steam that we own, and it is a stable relatively lower-cost form of fuel, and good for the long-term.
Chairman Townsend asked, “Under today’s conditions, do you have any idea what your wholesale price would be?” Mr. Munson responded, “We do not think it is advisable, in front of our competitors, to be specific about the price. But I will tell you that we have been selling power well below 8 cents a kilowatt-hour for the long-term. We are willing to continue to do so.”
Chairman Townsend continued:
I believe we heard in one of our hearings that someone from the solar industry would be willing to go out 10 years. This has been a few months ago, during . . . government hearings. Someone from the solar industry . . . specifically told [Assemblyman] Richard D. Perkins, Assembly Speaker, and I thought they would be willing to go out 10 years, at 7 cents. Is that a viable number in today’s world, relative to solar? Do you have any sense of that?
Mr. Munson indicated:
I am personally aware of some bids that were made for a 5-megawatt solar project in New Mexico, and it was in the range of 25 cents per kilowatt-hour. The only thing I can imagine is a combined solar and gas project might be trying to bid at that price before the gas run-up of the last 5 or 6 months. Perhaps that would be it, I have never heard of solar at that price. We do not denigrate the other resources. We think it should . . . blend.
Chairman Townsend mentioned:
The only reason I ask is, and I think, that the vast majority of us in this building are supportive of all these forms. I was trying to think if I should just take a napkin and write a contract on the back of it and buy it at that point, because I know that the demand would be there. Even if you only marked it up 10 percent, it is very good return on your money, but the number kind of just jumped out at me. This committee has taken testimony on the cost of all the alternative fuels. There were serious economic problems, which even when we factor in the benefits of the environmental sensitivities, I know that all of us who live in the north, when we drive back into Reno, we have to see that inversion problem, are very sensitive to it. The folks from southern Nevada are starting to see more and more of that on a non-windy day. We are real sensitive to the opportunities here and I think that is why Senator Schneider is looking for ways to be helpful. Of course, it will help Senator Rhoads’ constituents and everyone who represents those rural areas.
Mr. Munson continued:
Well, two points that I may add to the discussion on pricing. When FERC [Federal Energy Regulatory Commission] delivered its issue, it’s ruling in California to the utilities, it basically contained two messages. One, to allow the utilities to wholesale contract on a long-term basis for power, because the utilities thought that was required for their own stability. The other thing it did, FERC said they could not set prices within states, but would find 7.4-cent renewable, long-term contracts to be reasonable. I do not know if the use of the term prudent, but it was at least reasonable . . . it was at least reasonable.
In the discussions we have been having, we found that to be in that price range, the people seem to think, is a bargain today. I can also tell you that the prices we are offering are well below the ISO [Independent Service Operator] for contracts in California, which started above 8 cents over a decade ago. I would remind the senators that about 10 years ago, the geothermal contracts in northern Nevada came in at about 6.3 cents a kilowatt-hour. I realize the inflation rate has been low, but the prices we are offering, I believe, are below the inflation-adjusted price for our base-load power.
B. J. Behroon, Director, Duke Energy North America, said:
Thank you for the opportunity to be here and speak about our projects. Duke Energy Corporation is the tenth largest international energy company in the world. Under one of its four core business groups, the development of merchant power plants business, along with trading and marketing of energy, is carried out by our unregulated business called Duke Energy North America. Throughout the United States, Duke [Energy] North America has more than a 5000 megawatt net under operation, about 5000 megawatts under construction, more than 14,000 megawatts under development at various stages. In the West, our trading and marketing arm is the largest gas and power player. Also in the West, Duke Energy North America is constructing an additional 1000 megawatts at our Moss Landing California Power Plant. In Arizona, we are building a 600 megawatt power plant, and by the summer we will break [ground on] . . . two new projects, in the state of Washington and in the state of New Mexico.
Our current power project development activities in Nevada are considered strategically important and critical for our asset portfolio management. In Nevada we are actively developing two projects with total generation capacity of about 1800 megawatts. Those projects are scheduled to have commercial operation in the summer of 2003. These projects are well-advanced at various permitting stages, and as a result multiple contractual commitments have already been made in support of targeted commercial operation dates.
Jimmy Rexroad, Business Development Manager, Duke Energy North America LLC, stated:
We are developing, actively, 1800 megawatts of generation in the state of Nevada, which consists of two projects; 1200 megawatts located north of Las Vegas in the Apex area, and 600 megawatts generation proposed near Wadsworth, Nevada, to serve the city of Reno marketplace. This generation is natural gas fuel, some of the most efficient environmentally friendly power plants that can be built today. Combined, this investment would be a $1 billion investment in Nevada. I would not like to compare us with Mr. Steve Wynn, but we are moving forward without any guarantees, without any particular commitments from anyone to sell our plants.
We are in the business of risk management, and building power plants is a risk-management exercise. We expect to place this project in commercial operation the summer of 2003, which requires us to break ground on those projects on the fourth quarter of 2001. In particular in the northern climate around Wadsworth, we like to break ground before the first snow. This requires our permitting processes to be completed by late spring of 2001 in order to break ground. We have also begun making financial commitments for long-term equipment for these projects. Total of the northern project is in excess of $300 million in investment, of which a major portion of long-term equipment purchases are being made, as we speak. [We have] over a half-billion dollar investment in southern Nevada, as well has long-term equipment orders placed to include turbines, air-cooling equipment, in addition to long-term contracts for gas supply and transmission access.
. . . Duke [Energy North America] has found that various state and local regulatory agencies are extremely supportive of our permitting process, specifically, our air permits for both projects are well in advance. We expect both air permits before the end of March of 2001. Our special-use permits for both projects have been approved; we have water commitments with an aggressive timeline with the state engineer for approving our water.
We are in active cooperative negotiations with Sierra Pacific Power Company [SPPC] to meet our transmission needs. All of those agencies have been extremely supportive, including SPPC in meeting our timeline. However, there are several agencies that we go to repeatedly for the same information. If we had the opportunity to streamline the process, so that we went to one agency to solve water problems, one agency to solve land problems, that would be an opportunity to accel[erate] the process. As an example, we are standing before three separate agencies for land use in Washoe County, Nevada.
In Southern Nevada our primary concern has been resolving transmission; however, it is not the ability to deliver our power on the wires that is a concern. The regulatory environment for permitting transmission is complicated and extensive, but if we had the opportunity to streamline that process, we would select a method to aggressively permit transmission-line right-of-way in advance of the respective requirement.
Duke Energy is committed to the state of Nevada to build power plants and serve the western market and the Nevada load. All we ask from this commission or from the state of Nevada is fair and equitable treatment with regards to regulatory environment and permitting our projects. We believe that we will place generation in this state by the year 2003.
Senator O’Connell questioned if Duke Energy operates in Texas, at all.
Richard W. Hyde, Regional Director, State Governmental Affairs, Duke Energy North America, responded, “Duke Energy North America does not operate in Texas. We built a plant in south Texas, then sold it to Calpine.”
Senator O’Connell continued:
The reason I was asking, the gentleman before had noted how efficient their permitting process was. I was wondering if you had experienced it. And if so, could you give us any of the details of about how they have helped you in that process to come on-line much more quickly?
Mr. Hyde replied:
We did build the plant there. Basically, the process is, you obtain the necessary permits, you do not have to go to the public utility commission (PUC) to get approval to build a plant. It is much more of a streamlined process. There have been 23 plants in the state of Texas built in the last 3 years, with another 15 entering the various stages of the process. As a resident of Texas, I was very glad that those plants were there, because when it did get hot this summer, I was glad that the power was available for the air-conditioning.
Senator Rhoads asked, “In your Wadsworth development, where are you getting your natural gas from?” Mr. Rexroad responded, “Our pipeline gas would be delivered from a combination of two pipelines, Tuscarora and the Paiute pipelines.” Chairman Townsend also asked, “Did I hear you say that the PUC in Texas does not give permits to these plants?” Mr. Hyde confirmed, “That is correct. You do not have to go through a permitting process in the state of Texas to get approval to build a plant.”
Chairman Townsend added:
Through the PUC, you just [get the] normal . . . city [or] county kind of construction permit. Which gets to the issue Senator Schneider brought up, which is, you then are taking the risk without the traditional managed regulatory monopoly, vertically-integrated, utility service territory issues. And if you can sell it, you sell it. If you can’t, you can’t; you are on the hook. So the only person at risk, in your case of building that plant, would be your investors; hoping that they will get an appropriate return because there will be demand at the market level. Is that a fair statement? I just want to understand.
Mr. Hyde agreed, “That is a very fair statement, Chairman Townsend.” Chairman Townsend continued, “It is a different philosophy about building these competitive plants or merchant plants. Or like in your case, I guess they sell most of it in Texas?”
Mr. Hyde continued:
Texas is somewhat unique to the other states, electrically. Best way to describe it is almost an electrical island, very little power is imported or exported into the state of Texas; everything that we use, we generate ourselves.
Chairman Townsend asked, “If the total megawatts are 100 percent, breaking it
down in coal and gas fire, do you have any sense of that?”
Mr. Hyde said:
I could only give you my best guess. We could provide actual data later, but I would think, just off the top of my head, that coal is a significant player in the state of Texas. We do have two nuclear plants in the state of Texas and the gas plants. If energy sources are broken down, I would say coal is 40 percent, gas would be 25-30 percent, with the balance being nuclear; we do have some renewables.
Chairman Townsend inquired, “Was [that power] generated statutorily, regulative, or were those just people who wanted to take a risk and go on . . . market?”
Mr. Hyde said:
I think the reason we are a significant co-player goes back to the late 1970s when there was a federal order saying that you could no longer use natural gas to build power plants. At that point in time, the utilities began to build big coal plants, that is when coal became part of the supply mix. Now there is no mandate that so much has to be coal or gas. Right now most everything that is being built is gas plants.
Chairman Townsend stated, “I was referring specifically to renewables.” Mr. Hyde said, “I am sorry, I do not know the answer to that question, I do not know if there are mandates on renewables.”
Chairman Townsend continued:
I was curious because your issue tied into what Senator Schneider was referring to, that, of course, is something we believe has value. We do not have deregulation in the state of Nevada, but we have a need for supply. How we best get that is the whole reason for these meetings.
Senator O'Connell asked, “Do you know yet how many different taxes you will be subjected to in the state of Nevada?”
Mr. Rexroad responded:
Yes, we do. We have reviewed the tax structure of Nevada. As we best understand it, currently there is a property tax associated with the plants, and there are various minor business licensing fees that are required for the operation of the facility. Federal income taxes obviously . . . apply to these plants, those are the only taxes that we are aware of paying.
Senator O'Connell continued: “You would not be dealing with a franchise tax at all?” Mr. Rexroad confirmed, “No, Madam.”
Anne M. Cleary, Vice President, Mirant California, Mirant Corporation, testified:
. . . [Mirant Corporation] formally known as Southern Energy [Inc.]. In September of last year, the Southern Company who owns 80 percent of us now, made the corporate decision that it was in the best interest of shareholders to spin off the unregulated/deregulated/reregulated, whatever you want to call us, arm of their facility separated, from an equity perspective, from the operating companies that currently operate in the Southeast. On September of last year, an initial public offering of Mirant Corporation was made on Wall Street. We trade under the stock symbol of MIR. As of April 2, 2001, subject to some federal approvals and the approval of the southern company board, the stock of Mirant Corporation will be distributed in a tax redistribution to existing Southern Company shareholders. At that point, we will be two separate companies. There would be the Southern Company, which is regulated, operating companies such as Nevada Power [Company] and Sierra Pacific [Power Company] to be in the Southeast; Mirant Corporation, which is essentially energy supplier in both North America and other parts of the world.
The reason the name changed is because Southern owned the name “Southern Energy.” They wanted to keep that, so we have to come up with another name. The name Mirant came from the Latin word “Mira,” which was to be able to envision or see our customers’ needs.
Ms. Cleary continued:
I would like to tell you a little about Mirant, then the facility that we will be breaking ground on this summer in the northern Las Vegas area [and] to talk to you about other issues that I believe are critical from this state’s perspective, ensuring a balanced and overall good energy policy in the state of Nevada for consumers.
Mirant owns 15,000 megawatts, approximately, in the North American market. We are virtually in every major market in the United States. We have a trading/marketing arm, as well as a large development arm. We operate a variety of fossil fuels [plants] and a little of hydro. We have facilities in Europe and in Asia. Mirant is a large energy corporation. Here in Nevada, we have an office in the northern Las Vegas area. We have, in . . . stages of development, two facilities in the APEX Industrial Park. We will break ground on the first of two facilities, a 550 megawatt combined-cycle and air-cooled facility of commercial operations by the summer of year 2003. The facility is air-cooled. During the construction it will employee as many as 500 people, when it is in commercial operation it will employee between 20 to 30 people, depending on the time of year. We have equipment dedicated to it, and equipment on order. There are some issues related to transmission, relating to clarity, and getting some transmission issues resolved. I will also talk about what I feel is an important issue in this state, which is how consumers will have purchased power for them; why clarifying and identifying whose role and responsibility that is; and being about that process, in my mind, creates the most stable environment for consumers to be serviced.
Ms. Cleary referred to her handouts (Exhibit F), then said:
I work in California. I operate and manage 3100 megawatts in and around the San Francisco area. We are in desperate need of snow, water, and cooler-than-average temperatures this summer. As far as our needs in Nevada, I think stability in the transmission and distribution system is critical. It is not in anyone’s best interest that transmission and distribution is not a stable business in the state. We have enough instability in the state of California, which makes building generation more difficult; people want to know that the backbone in the infrastructure, that you were going to connect to, would be there and would be solvent. We do need some assistance and are working through the transmission process, and do need to know that there will be somebody strong and commercially viable, to ensure the transmission is built; that is not a role we are in. We will build transmissions, first to interconnect our facility, but knowing that there is a stable infrastructure upon which we will site a plant and be able to market our product is critical to us. As previous testimony indicated, if you cannot be interconnected, and the system is not stable around you, you really can’t service consumers in a very efficient manner.
Ms. Cleary proceeded:
[The] next item I would like to talk about, which is very critical, [is] sound energy policy in Nevada defining how consumers will be serviced. Some people call that default service, some people call that provider of last resort or standard offer. Default service does not happen by default. Nevada is reregulated. Nevada Power [Company] today, on behalf of its consumers, buys a good bit of power. It is a large importer of power and participates in the wholesale market to procure that power today. So in that sense, reregulation is already in Nevada. You do not need retail access to bring consumer goods, in the energy world, to consumers. You must have a strong foundation for how wholesale competition will take place in accessing consumers, which is not retail access; it is access to [the] wholesale portfolio that consumers are serviced from. If you want your standard offer or default service provider to be Nevada Power [Company], it’s fine, if you’re going to have them keep the generation, there needs to be a strong Chinese wall put between generation operations and the entity that purchases.
In my opinion, it is important and we take the greatest comfort in making investment when we know that there will be a level playing field for our participants in the market place. I want to know that my generation will stand . . . pursuit, compete on price, [and] other terms and conditions, with every other generator from the buying community. If Nevada Power is that entity, fine. But the most important thing for consumers is that they are protected by a set of contracts, not on long-term. It is kind of managing a bond portfolio, you want to have some short-term bonds and some long-term ones, some big bonds and some little bonds.
Ms. Cleary continued:
. . . as you look at how that portfolio is being amassed for consumers, it needs to be with a strong, creditworthy entity. You need to ask for credit; we need to provide credit to whatever entity is purchasing on behalf of consumer; they need to be able to provide credit. If the lessons we took out of California were, “the consumer does not need to ride on the spot market,” which would be a recipe for disaster, the entities that purchase need to be solvent and creditworthy, and that you need to anticipate the deals can go either way. I do not think California, California Assembly Bill 1890, [enacted in the 1995-1996 Session] put forth in California, that anybody envisioned the outcome that we have today. Yet, the transmission and distribution wires could be auctioned on the courthouse steps.
Credit is an important issue on both sides of the equation, anticipating that deals could go in either direction, monitoring and watching for those things to happen. I am here to ask you today for stable transmission companies. We do need some help in expediting that process, making sure that . . . [we’ve] done our studies, but now we need to be about the business of having people tell us they can firmly do the business. If we are going to connect at 500 kilovolts or 250, there is a lot of debate about that, we need to order transformers to hook up to the grid, we can’t do a lot of these things until somebody comes and says, “Here is how you are going to interconnect.” The second is a level playing field for buying and to service the consumer is extremely important; we want to see that process, we do not need long-term contracts, we are happy to make our investment, have short-term rolling contracts. But the process, I think, is the most important.
Senator Schneider asked, “Your company is strictly a wholesaler?” Ms. Cleary agreed, “That is correct. We do have some, and make some limited retail sales in the Pennsylvania market. But our overall approach to the market is that we are a wholesaler of natural gas and power.” Senator Schneider also asked, “So you will sell to like, Nevada Power?” Ms. Cleary concurred, “Correct, anybody who has the ability to buy at wholesale.” Senator Schneider continued, “So you want a level playing field with, like Duke?”
Ms. Cleary agreed:
We believe that Nevada is there. If Nevada Power is going to keep their generation, just make sure you keep it nice and separate and that we have a level playing field with that, that we know the rules; if Nevada does it, or your water district does it, or you put it out for bid.
Senator Schneider said:
If Nevada Power keeps their generation, they have had those plants for a number of years; their base . . . is now zero, so it is just the cost of buying the gas, operating that plant. And so, they are going to generate electricity at a lower price than you can building a new plant, theoretically.
Ms. Cleary stated, “Theoretically, that is fine.”
Senator Schneider continued:
So as a customer of Nevada Power, if I buy my retail power from Nevada Power, they are going to have a blended rate, they are going to buy some from you, on a 3-month contract; then they may have a 6-month contract with Duke or some other power company at different prices; then they are going to generate their own. Their own is probably coming in at a lower price than yours and Duke’s, so I, as the customer with my little house, get the blended rate, and that is what Nevada Power is doing right now.
Ms. Cleary agreed:
That is correct. Because of the uncertainty that exists today, there is not a portfolio of bearing tenants contracts being put in place. It is not my belief that there is a lot of longer-term, by long-term I might mean 3-5 years, not of 10 or 20 years. But you do not want all of your portfolio to run off in 3 or 6 months. . . . By level playing field, what I mean is that the rules are understood, that the buying auctions that take place are well known, so people can anticipate when those are coming and when they will have to respond. As we saw in California, almost from regulatory oversight and structuring design, [California] did not have any type of any time of hedging in place.
As legislators, and in the regulatory oversight of the commission, you may want to oversee whoever is buying on behalf of consumers, that they indeed have a variety of contracts, that in 3 months not everything is going to run out. The state of Illinois actually had a number of examples where the generation was actually kept by the investor and utility, but they actually separated them into functional separation and had a sales contract back between them. There was a significant amount of environmental upgrade that needed to be made to the generating portfolio and catch up on maintenance. Rather than having the consumer float, the generator owner took that equity risk, made the investment in the environmental, sold back under contract to the distribution company that essentially acted as the aggregator for, as you said, all the little households. They knew the price coming from both, the generation that happened to be common equity owned by the wire company, as well as from third-party suppliers, such as myself.
Senator Schneider inquired, “So one of your major concerns is that that wire company is a nice stable company?”
Ms. Cleary added:
It creates a better environment. People know that the wires will be cared for. They know that we would have access to the market that we service, because if the wires are not properly maintained and kept and there is not a good incentive for them to build additional wire to keep stable, then I [can] . . . generate all the power in the world, but it cannot get to consumers. The meter does not turn, I do not get paid.
Senator Schneider also asked, “If there was another company like Nevada Power . . . and then you have another retail company in the Las Vegas Valley selling, you can sell [to] . . . both companies. And so whoever cut the best deal with you, for your power . . . ?”
Ms. Cleary replied:
We can sell to whomever buys on behalf of wholesale, does wholesale procurement. So, if Nevada Power represents a group of customers and company X represented another group of customers, we can sell to either at the wholesale level. You do not need to leave a standard offer with the utility. There are some values to separating it, especially making sure that those contracts do not bring down your transmission and distribution business and vice versa. There are several models that we have been able to use around the country that have really worked out nicely. Generally, the times that people have, where you have seen the greatest attention at the federal level to prices that, quote unquote, “deem to be out of control” has been in places where the consumer is being taken care of by the party that was there to buy for them, [and] the company intentionally decided to stay short.
That is a wonderful thing. We know from California that it worked great for 2 years; it worked very nicely. But when the price went against them, . . . they did not like it. They went screaming in to the federal regulators and said, “The price control is on because I made the wrong bet.”
Senator Schneider inquired, “Do you think our market is relatively competitive right now, since our . . . power company generates . . . and they buy on the open market, they buy a substantial amount, like half or more?”
Ms. Cleary said:
Well, that is a nice environment in the fact that the main party that we have the opportunity to contract with today, Nevada Power, is a large buyer. They do not own as much as they need. In certain parts of the country where we try to break into markets, the divestitures have been necessary in order to create many suppliers in the marketplace. Nevada [Power Company] naturally has that, because they are not only a large buyer, but a large importer. The development of instate generation helps eliminate that important issue, but it also provides [for] many buyers to be in the marketplace.
Senator Schneider reconfirmed, “So we are fairly competitive right now, is what you are saying?”
Ms. Cleary stated:
You have the environment to be fairly competitive. What is not clear now, and a lot of it is just due to the regulatory uncertainty surrounding Nevada Power, whose responsibility it is to buy in the long-term which would look out for consumers, and the process for doing that is not clear. That is really the missing element and exactly my point, knowing so builds a better environment. We do not need the long-term contracts. Certain parties do because they do not have the equity base, you see that a lot in renewables. But for those of us who tend to be thermal-fire based, come from larger a equity basis. We will come in to build and take that risk, but what comforts us the most is knowing that we have a level playing field to access the consumer, and that the rules . . . are known and defined.
Senator Schneider addressed the committee chairman, “So, Mr. Chairman, what I understand she is saying is that we really need to define the rules until the PUCN [Public Utilities Commission of Nevada], decides what the rules are. I think we need to keep the attorneys off the PUCN and put a member of this committee on the PUCN, so it is interpreted correctly.”
Senator Rhoads asked, “Can you sell directly to a casino, for instance, or major industry?”
Ms. Cleary replied:
Not currently in the state of Nevada. Retail access is not [available] . . . for me to make a sale directly to a casino or to you at your household. There is an enabling legislation and a process [needed] for me to make that direct sale. There are certain gas models where, essentially, the consumer was represented by a large group, oftentimes the little pipe company, then some large industrial customers were able to bypass and go straight to market. That is one market model. You can have a large buying group like Nevada Power [Company] who today buys on behalf of everybody, and then you have rate making to determine retail rates.
Senator Rhoads added, “The reason I ask that is because a major mine in my area has like a 5-year contract directly with the power company.”
Ms. Cleary concluded:
Nevada Power [Company] is a licensed retail provider in the state of Nevada, absolutely, that is their role. Municipalities do so. I am here at my authority to sell currently from the federal government, which enables me only to make sales for resale. There are certain laws in every state that support that.
Senator Alice Constandina (Dina) Titus, Clark County Senatorial District No. 7, testified:
As it has become increasingly clear, there is no silver bullet for solving the energy crisis facing California and potentially threatening Nevada. Consequently, we have to consider a wide array of policies which address different aspects of this complex issue. These include financial energy assistance for low-income families, possibly public takeover of utilities, whether or not to vest, and also how to increase generation. It is increasing generation that I will address in a BDR [bill draft request] that will be presented to this committee very soon. It is not completed yet, but I wanted to mention it to you today because it fits with the subject you have been addressing. My simple understanding of this situation, you have to remember I am a political scientist not an economist, is that more generators on-line, power supply will increase, competition will thrive and prices, therefore, rates, will go down. That is what we would like to see happen.
Accordingly, my bill is designed to expedite, streamline the licensing and approval process for new generation facilities. I realize much of this is done outside the jurisdiction of the state, at both the federal and the local levels, but I feel that this proposed legislation is important for two reasons. First, given the current situation, we cannot afford to miss any opportunities to improve things. Second, I think passing this bill would send a message to people you heard this morning that this is a climate that is favorable to their locating here and operating. You may have seen an article in the paper this morning . . . “power plants on fast track,” which recounts a meeting that was held in Las Vegas before the BLM to discuss ways to . . . could also expedite the licensing and approval process. At that meeting, several environmentalists expressed some concern that this expediting really meant short-circuiting air and water pollution standards.
I would like to assure you that in the bill that I will introduce, it is not the case. The kind of expediting I will be addressing will be the bookkeeping paperwork; certainly not any kind of weakening of environmental standards. If I could just give you a couple of quick examples, . . . one has been suggested by the PUCN itself, that is to amend Nevada Revised Statutes (NRS) 704.890 subsection 2, paragraph (c), to state that in the event there is a required permit that has not yet been obtained, the construction permit may be granted, conditioned upon issuance of the necessary state and local environmental permits or approvals. This would allow the commission to proceed with the review of the application, thus expediting the process.
A similar kind of change, that has been suggested by one of the potential generators, would be for the state to provide a consolidated list of required permits and lead agencies for all potential jurisdictions, a list by county, with a generic listing if located in a specific jurisdiction, would be a tool that would allow all the agencies to be identified in advance, thus speeding of the process. Similarly, you could require data, adequate status from various agencies; acceptance of a single documentation format for the process of fulfilling a document requirement. Those are the kind of paperwork, bureaucracy things, I think we can do to help streamline this process, and bring more generation on-line faster. As soon as the BDR is drafted, I will present it before you. I’d appreciate your consideration of it at that time because I think it fits very much with the kind of needs that we are addressing.
Chairman Townsend addressed Senator Titus:
Thank you for your interest in something that this committee has been hearing about. Although we have many people who want to build, as you know, they already started the permitting process, we are trying to make a generic kind of statement, and hopefully your proposal will accommodate . . . so we will accommodate you whenever you bring your bill. Particularly, if you want to bring it in BDR form, that way, as we go through, if it has to have some technical changes before we introduce it, we can clean it up. That is entirely your decision. I am sure many of us would like to join you in supporting your bill, so if you will let us know how you want to deal with that.
Lastly I would ask, because I know you work with many people throughout the country and have a lot of good contacts in several areas, we heard something today that, although many of us followed this in great length, came as a point of interest, so perhaps, because it directly affects what you are attempting to do, you might want to look into it, and that is the fact that the state of Texas has placed a burden on the generator, saying: “You take the risk, you do not have to go in front of the PUC, because if you cannot sell your stuff, that is your problem.” I find that kind of a fascinating concept. I am not sure I know if it will work in Nevada, or if it would benefit our citizens. But Senator Schneider had brought up the issue of the risk; it should be more and more on the individuals who are providing that. I know Scott Young [Committee Policy Analyst] will help you with it in any way he can, so perhaps we can find out if that is something we might want to talk about or look at; obviously most of these things are going to be sited in Clark County. I think everybody here is pretty strongly supportive of local control of their issues and I do not think you want Carson City in your way, whether you want to build a plant or not, that is Clark County’s issue. You may want to look at that, I do not know the benefits of that. We are all wrestling with all these issues.
Senator Titus added:
We have also looked at the California statute that was passed to try to expedite the process. There are some things we can borrow from that, some may not be appropriate to Nevada, but we will certainly check into all of those possibilities.
Senator O'Connell requested that Mr. Young gather the information to share with Senator Titus.
Chairman Townsend continued:
There are going to be a couple of issues, depending on Mr. Hay’s [Timothy Hay, Chief Deputy Attorney General, Bureau of Consumer Protection, Office of the Attorney General] availability and interest. We will be discussing the issues of the current generation question very soon and its impact on generation. We just had testimony this morning, which we can provide you a copy of, Mr. Munson and Mr. Wellinghoff, regarding geothermal in the rural areas. One of the things that was fascinating to me was the ability to tie into the DC line immediately, send it to Los Angeles, then bring it directly to Clark County, which, until you kind of see it on a map, you can figure out not only how you can build out all of this stuff in rural Nevada, but how . . . you get it to the people who need it, our two urban centers. There are some things I know you would be interested in, therefore, we will get you the necessary copies.
Senator Titus concluded, “I appreciate the assistance, it is a very complex issue. It is interesting how all of these years we have worked on renewable energy, suddenly the price differential is not so great.”
Judy L. Stokey, Lobbyist, Nevada Power Company, and Sierra Pacific Power Company, introduced Duane Nelson, Director of Transmission and Business Development, Nevada Power Company, and Sierra Pacific Power Company.
Mr. Nelson testified:
I have been working in the restructuring area for a number of years and have been watching as our market develops for these new generators, and also watching the California market as its supply shrinks. What we are seeing is significant activity in the generation area in Nevada, in large part because of what is going on in California, but we can benefit from that. The permitting problems that we are seeing are being dealt with rather effectively for the generation side. Some changes have been made in UEPA [Utility Environmental Protection Act] last session, which facilitated permitting for generators in Clark County and Washoe County, for instance.
What representatives from our company have mentioned the last couple of days, and I would like to reiterate today, is building a generation plant does not mean it is going to get to the customer. You have to build the transmission-lines to connect to it. The significant development that we are seeing in southern Nevada, in particular, is costing something we have not seen before, is an amount of transmission that we are going to have to build. Now, that can be done. We have had significant experience in building transmission-lines, both in the south for the growth that has been occurring down there and in the north, as you are aware of the Alturas Project and the [proposed] Falcon-Gonder line. The experiences are different in different parts of the state because of the urban versus rural atmospheres.
Chairman Townsend asked Mr. Nelson to give an overview of the Alturas line, and explain Falcon-Gonder to the committee. He emphasized the importance of both issues regarding the rural and urban communities associated with terms that are unfamiliar to the committee.
Mr. Nelson continued:
My experience with Alturas is rather intimate. I started out, in 1991, doing the planning justification for the PUCN. Actually, their first turning was in 1993, but I started working on it even that early, justifying the project, working with other utilities for alternatives, even looking at tabbing the DC line. In any case, the planning process and justification for the Alturas line was significant, to say the least. The effort of justifying the need for the line was surpassed by immense degree by the need to justify where the line should be placed . . . that the line was necessary.
Chairman Townsend suggested use of a map [Exhibit G] to outline the location of the Alturas and Falcon-Gonder lines for everyone’s understanding. He requested the “big maps” that were used, illustrating transmission-lines and gas lines. He pointed out “the magnitude of where the original work came to and what the basic problems were. I think it reflects the siting and permitting issues that Senator Titus addressed and everyone has been concerned with.”
Mr. Nelson continued:
The Alturas intertie is a roughly 170 to 180-mile line that is terminated in Northern California in the town of Alturas. [The line] connects to a line that connects to the state of Oregon via Bonneville Power Administration’s [BPA] system, terminating inside of Reno at Valley Road, north [area] of Reno.
Chairman Townsend asked Mr. Nelson to explain the length of the California and the Nevada parts of the transmission line.
Mr. Nelson continued:
I know the number was about 80 percent of the line . . . in California. Again, it is noticeable . . . that it was easier to permit it in California than it was in Nevada. It looked significant when we started the process, but when we laid our case out, it was fairly clear and went forward very rapidly, in large part, because the California PUC has a significant role in overseeing the process, and does not resort to or allow local entities to each handle the project separately. Those local entities come before the state commission and give their testimony on location, purpose and need, questioning the project as need be. Significantly, in that case, we needed to justify there was a benefit for California; that was my job, and that looked to me that it was a very significant situation.
Fortunately, California has some major transmission-lines across our state and so the benefit of us working together. In the southern end, it turned out that significant problems occurred due to local interest. In my opinion, there were some individuals who thought, “You really do not need this project, and we can just kill it.” Without discounting that, I believe, because everyone has to have their opinion and may not have the knowledge that others do, there were individuals that fought and fought and used every tool they could. In an environmental impact statement process, it’s federally mandated and significant, some 2-year process. Then, they had a local process, a number of local forums with public hearings, where they could come back, [they] questioned the need and location; and then they had a state process, the . . . Utility Environmental Policy Act [NRS 704.820]. They questioned the need and location again . . . the location tie-together.
That project, consequently, was delayed by a couple of years, at least. The cost was increased significantly, in large part due to our local processes, which we have not smoothed out very well. We have them operating sequentially, a federal, local, and state process. As you heard a few minutes ago, there was a concept that the PUCN staff has brought forward, and actually worked with us on the Alturas intertie to facilitate that project, even though it was delayed for 2 years. It could have been delayed a lot longer, meaning to make the local and the state processes work coincident, or overlap with the federal process.
The commission staff had no control over the local process, only the state process, to move the local process and the state process parallel would help. If we do not do that, and I do not think by the way, the Alturas experience necessarily will be the same as all transmission-lines, a 170-mile transmission line is a lot longer than we are looking at for connecting these generators that are trying to come to town. We need to facilitate that process or we will see the transmission permitting becoming the ploy for the generation projects, not the generation permitting. Generation is local-site specific, transmission crosses territories and boundaries, social and government boundaries, so we need to overcome that issue, I think.
Chairman Townsend stated, “I am trying to get to the point one of your company members said so articulately, it may have been Mr. Higgins. It took you as long to go 15 miles in the state of Nevada as it did to go the 100-plus miles in California.” Mr. Nelson responded, “I hate to correct him, but I think it was longer than 15 miles. I do not remember exactly, but it was so significant, I had a lot of late nights until 12 or 1 [o’clock] in the morning, in hearings.”
Chairman Townsend continued:
The other thing that at the time did not appear to be important because the prices were very stable, but every time somebody showed up at one these hearings, I attended a great many of them, I particularly was fascinated by what went on in California’s town hall meetings. Every time someone in Nevada went to a hearing, they said, “Well just move it over here, about a block.” Well, “ching, ching [cash register drawer sound],” then the other guy would say, “Well, then I can see it, so just move it another block” or “Move it over here.” And then we are doing those visual drawings where the computer will put it into the actual photo; we started doing those. So, if a guy is on his roof standing on his tiptoes, “Ah, I can see it, I do not want it near me.” Well, pretty soon the line got to the point that every time you moved that 15-mile line, it was going to end up costing the ratepayer the same as the 100-plus-mile line. . . . Then they said, “Well just stick it underground.” OK, “ching, ching.” I mean, we have to understand that we need to balance these interests, if you want power in an urban center, you do not drive to the border and plug in. It has to come into your house or your business. That is tough, the more you tinker with it, and until technology changes. These costs got us all terrified.
I would like you to make your point because I think it is important, the more you can relate that to the Falcon-Gonder issue and how important that is, and what you are facing with the expansion of some of your lines. I know you have a couple of lines in Southern Nevada that have the potential of being upgraded.
Mr. Nelson agreed:
Yes. I am less aware of what is going on with Falcon-Gonder, but I do have an overview. The Falcon-Gonder line, the northern term [terminal], is in Carlin, Nevada; the southern term [terminal] is in Ely, Nevada. A southern substation we call Gonder and the northern term [terminal] is Falcon. That line, I do not recollect how long it is, but it is a significant line, 100 miles, more or less. We are going through the federal permitting process. Fortunately, it does not appear we are going to see the local issues as much as we have in our Alturas line. But nonetheless, the facilitation of having joined our common permitting processes is unparalleled, [it] would help if we can accomplish that.
The importance is that it will increase our import capability. An added benefit to that line is, you heard about a project, a generator that may or may not be built out in the Elko area, it would significantly benefit that project, because it would be able to give it a path, a highway, per se, to get to market, out to Utah, down to Ely, and also our existing paths up to Idaho and back into Reno, and towards the western part of the state.
Those transmission connections are the highways to get those folks’ products to market. We are the deliverer, we use the term of a company, and I probably shouldn’t keep using their name, but we are no more than the post office, we deliver mail, hopefully we do it more like a private enterprise. We deliver electricity and that is our job. We want to have these lines permitted in timely fashion, so that we can support the generators’ needs and get them to market, whether it would be in Nevada, whether it would be [to] an affiliate of our company. You may not be aware of it, but we would have to have separation between what I do and what our marketing . . . does in buying electricity. So, if these folks see that Chinese wall, or selling into California, as a transmission provider, we do not care. They are taking the risk, they are going to pay for the transmission-lines; we just need to get them permitted and built for them.
Senator O'Connell asked, “How many generators will a line accommodate?”
Mr. Nelson answered:
What we do when we plan a transmission-line is . . . determine what the size requirements are, based on generation; then we change voltage, or the size of the wire, but predominantly voltage. For instance, in southern Nevada, the amount of generation that is contemplated there would require a significant number of 500 kv lines, that is a 500 kv, 500,000 volts. Your house has 120 volts that is the highest voltage transmission-lines that we use in Nevada, it’s 500,000 volts. But if a smaller amount of generation, it might mean the same number of lines, but lower voltages. We try to plan for the least cost to serve the needs. There is roughly 10,000 megawatts of generation on the drawing boards. The planning that we are doing right now is to support the first set of generators that have come onboard, [with] the concept that we can expand into the future, if those other generators come on-line. We do have a map of a concept of what we are thinking for transmission in the south, and I would like to provide it to you folks.
Chairman Townsend requested, “Could you also point out Falcon-Gonder on your map, or is it on the big one?” Mr. Nelson replied, “No, it is not.” Chairman Townsend asked: “Can you collate those three separate groups? Try to explain how Falcon-Gonder is going through the actual Ely/Carlin issue, then show where the DC line goes through Nevada.
Mr. Nelson referred to two maps (Exhibit H and Exhibit I), pointing out the Carlin and Ely lines:
I do not know the exact routing, but basically, the Falcon-Gonder line would be built between those two locals. There are actually two DC lines in the state of Nevada. There is the Intermountain Power Project, located just on the other side of the border in Utah, that sends power to Los Angeles, and there is a DC line coming from there. The DC line mentioned earlier comes down through Nevada, east of Reno by Fernley, does not stop in Nevada, it goes all the way to Southern California delivering hydro power. The capacity is some 3000 megawatts of capacity. The original concept was to ship power south during the summertime, ship power north during the winter. Some of that has been done, but most of it goes south. We looked at tapping that line a number of times in the past weeks and months. The cost to do that is very significant, but we are looking at how we might do that to reduce the amount of transmissions lines that need to be built in Nevada to deliver our customers, the generators, a product to market. There is a possibility that that will be developed in due time, but these projects all rank, based on cost. We are trying to do it in a least-cost fashion. We are also concerned about environmental impacts, because we know that we are going to go through EISs [Environmental Impact Statements], we would need to justify these alternatives.
Chairman Townsend asked, “Could you address the cost to tying into the DC
lines?”
Mr. Nelson continued:
Yes. I have been told, this morning in fact, the DC tab rough estimate, plus or minus, 20 to 30 percent when we are at this stage . . . $140 million. Now the whole Alturas line was a $150-million project. We are not building a smaller transmission line, but it is not a cheap project. DC, direct current versus alternating current [AC], it is a technological, difficult project to tap that . . . line.
Let me explain these maps briefly to you. First, . . . the Northern Nevada map [Exhibit H] has three of the projects that we are working actively, with two of them, the Duke and MSDW, which stands for Morgan Stanley Dean Witter [Morgan Stanley Dean Witter and Company], MSDW is the peaking plant that will be on by next summer, if everything will go as planned with those folks. We are building a very short transmission line, less than a mile, to connect them to the grid. The Duke power plant, we have been actively working with to determine the transmission requirements and are entering the permitting phase for said transmission-line. We do not see any significant outstanding issues with those two projects at this point. The coastal project we have on there because we were aware of it. We’ve been talking with folks about that project for some time, and it has recently come up again. We have not received a true request to connect that project to the grid.
Senator Rhoads inquired, “Where would the coastal plant connect then, if it was built?”
Mr. Nelson said:
It depends on the location, of course, but generally in the Elko/Carlin area, and if they are located close to Falcon Substation, we probably will tie them up to the Falcon Substation, which will have 23 to 45 kv lines once we have the Falcon-Gonder lines. The Southern Nevada map [Exhibit I], with the bold Las Vegas on it, shows the various projects that are either on the drawing or on people’s mind, or in some cases, they are there digging around looking for fossils and that type of thing, to make sure we do not disturb the environment unacceptably. Those projects are where a lot of our effort is being expended in the transmission planning and permitting arena. We have a map [Exhibit J] that shows some of the concepts. It is more than a concept now, because we recently completed the planning study to serve a significant portion of that generation. . . . I am talking about the 3000 megawatts . . . in 2003 there is some[thing] close to 3000 megawatts coming on-line to serve those generators and get them to market, whether it would be Las Vegas, California, or alternative sellers that may serve other customers in Las Vegas.
This map [Exhibit J], with black lines, shows the type of transmission that would be required to integrate those power plants into the system. These transmission lines will be built incrementally, in pieces, if smaller projects come on-line. We have planned to expand out the system as necessary. I wanted to show you the concepts that we have, so when your constituents are talking to you about the transmission lines that would be necessary for the generating plants.
Senator Carlton inquired:
On the Nevada Power proposed, south of Harry Allen 500 kv Transmission Project [Exhibit J], it is noted that the diagram does not represent a physical route, only electrical connections that have been proposed. Is that telling me that the transmission lines are already there? They are going to be enhanced? Or what exactly is this showing me?
Mr. Nelson pointed out:
What those words are attempting to explain is that we have not picked the actual route, stakes have not been planted where we are actually going to put all the structures and all the wires. What we need to do is connect this electrical point, and underlined in the background you see all of those diagrams, those mean something to somebody . . . engineers. We know about those substations’ names that are three letters, and we know where we have to get to the major substations. We have not finalized the actual routing, the preferences of the community, and the environmental permitting agencies where those lines will be built.
Senator Carlton rephrased her question, “But is this where you are looking to build those lines?”
Mr. Nelson re-referred to Exhibit J, then said:
As you will see, we have drawn straight lines crossing boundaries that do not run parallel with the existing lines. For instance, if you see the Harry Allen Substation, south of there, kind of running southwest are some blue lines; we would attempt, if possible, to put them in existing corridors, if it met the electrical needs. . . . We would have to be careful; if you put too many lines in one corridor, and an outage or lightening strike occurs, one line does not go out, all three go out, then you have a blackout. So, we would contemplate whether we could put them in existing corridors and that would provide reliability to our customers. If there are already permits available, which Nevada Power has done significant work over the years to go in advance and try to permit corridors for these types of transmission lines. Some of these concepts that are on this drawing are not new, they have been looked at before and discussed with environmental permitting agencies. What I am saying is those dark lines do not depict exact locations.
Senator Carlton requested:
I would like to know the history, what corridors have been considered, what has been discussed? Because, if you look at the one line on this map [Exhibit J], Senator Shaffer, this goes directly through the eastern section of my district; it actually goes right above where my house sits. I would like some information on where we are going with this, if it is possible.
Mr. Nelson offered, “If you would like, we could get you some more detailed maps.” Senator Carlton reiterated, “I would like some history on this, regarding what has been decided, what has been proposed, who have we talked to. This is a brand new issue for me and I need to be brought up to date, so that I can talk to you intelligently about this.” Mr. Nelson added, “We’d like to get the information for you. I tried to get an actual map last night, which was presented the night before last at a BLM meeting.”
Mr. Nelson concluded:
We request that we work on streamlining the permitting process and bring [it] in-line. I cannot emphasize enough, we are talking about violating environmental laws or regulation, if we were to trying to do that, we’d be out of this year’s just changing that, we are not trying to change the process of what we are looking at, and what impact we are going to cause. We are just trying to streamline by putting the same operation in parallel with one another.
Senator O'Connell said, “I believe that is the message we all have been focused on for several months now. We do understand, and we’re going to work towards a resolution.”
Mark F. Sullivan, Manager, Comfort Smart Energy Systems, Smart Systems International, stated:
We are both Nevada-based companies. In our discussion today, you are going to see a little bit of contrast. Most of the discussions today have been from large entities. We are small with the potential of becoming very large. Most of those entities are from out of state, we are in the state. Perhaps most important, the other entities are predominately from the supply side, but we are here to speak about what can be done on the demand-reduction side. On my right is Ron Davis, CEO [Chief Executive Officer] for Smart Systems International, which is based down in Las Vegas. On my left is Dave Parker, one of my colleagues at Comfort Smart, based up in Incline Village, at Lake Tahoe. My family and I have been residents of Nevada 9 years. . . . I have a degree in math and economics from Dartmouth College, New Hampshire. I have an MBA from Harvard Business School. I have been in the financing business for 15 years, including starting my career with Goldman, Sachs & Co. in New York City. Mr. Davis, the president of Smart Systems, is actually a Silicon Valley entrepreneur. He has been in the business for 30 years, predominantly in high technology, rapidly growing companies. He has been CFO [chief financial officer], chief operating officer, and chief executive officer for several companies, both private and publicly held.
We are the definition of risk. Smart Systems [SS] has been in business for 8 years, started in 1992 by a gentlemen who was a successful entrepreneur in Silicon Valley [who] decided to relocate to Nevada. . . . [He] came across an idea that there was a problem that he could solve with technology. Smart Systems is known to Nevada in some respects. Last June, the company was awarded the industry appreciation award from Governor Guinn . . . recognition as our company grows. As I mentioned earlier, we will talk about demand-side management. Senator Titus earlier said that we cannot afford a single opportunity. We hope to present some concepts and some opportunities of which the state can take advantage and capitalize on, as this entire situation is addressed.
The current context, which everyone is very familiar with: the strong demand for energy, economy is growing, population is growing, electronic or electricity-using devices are proliferating. I think the key point [that] underlines our discussion from the management side is that the consumer has become used to it being there. Power is there, you do not see it, you do not touch it, you do not feel it, but you use it all the time; it is like the air we breathe. I believe that plays a very important role from the demand side in consumers’ expectation and perceptions, which are very important for how this issue is addressed. On the supply side, we all know there is a shortage of capacity, capacity is drawn more slowly than demand. We have had slow growth in the stocks of inputs, primarily natural gas and oil, their prices have gone up. We have artificial controls, such as OPEC [Organization of the Petroleum Exporting Countries] influencing the situation. We have a lot of the related issues, primarily environmental, that also have an effect, a situation and strong demand and tight supply means higher prices. Very simplistically, there are three potential solutions. We can reduce demand, we can increase supply, we can allow prices to rise to equilibrium; there is probably a fourth element, which is where we are really focused . . . reducing demand. The primary issue that we perceive in reducing demand is that it requires customer sacrifice.
People have gotten used to having power, if it is not there or they are asked or told to use less of it, it is less convenient, they are less comfortable, and it becomes a sacrifice; likewise, there is the intangibility. We have seen this at the state level with various comments coming out of Washington and Oregon, that the state of California is going to “suck-up” all of their power anyway, “so why should we try to save in Nevada, Washington and Oregon, if California is going to take it anyway. They [California] are not going to cut back their demand.” So there is the sharing of the whole-pie concept. The primary benefit to try to reduce demand is, in addition to obviously making more of the capacity that you do have, is that it can be implemented very quickly; switch to the supply side. We have seen over and over from earlier testimony that it takes time and money, it entails many social choices, environmental, . . . backyard syndrome, and all of the regulatory process to get there. Prior testimony about generating capacity coming on-line . . . most of it is 3 to 5 years out. One thing that we think that Nevada has that California did not have is the time to try to address the situation in a logical way.
Mr. Sullivan made reference to page 5 of a prepared series of charts depicting energy consumption and areas for potential savings in chart form (Exhibit K), stating:
The primary concept is that there is a lot of attention in the wrong areas, or they are not necessarily in the wrong areas, but there are better areas, more efficient areas that can be attacked. The pie chart [page 5 of Exhibit K] shows the typical household energy consumption, 46 percent of that consumption is in HVAC [heating ventilating and air-conditioning]. You have some very common areas of clothes drying, lighting, refrigeration, those are 3 percent, 8 percent, 10 percent. You hear continually in the press about rebates or incentives to turn in your refrigerator for an energy-efficient model, for washers and dryers, the same thing. The point is, take refrigeration at 10 percent, if you had a twice-as-efficient refrigerator, you would save 5 percent of your power bill. If you could do something twice as efficient in space heating and cooling, you would save 23 percent, or about 5 times the amount you save elsewhere. Therefore, a solution that can address HVAC, has some powerful ramifications.
In the 1980s, everyone thought that robotics was going to save the American economy, and it did not. It was the same concept, people were trying to apply robotics to production-lines, where labor was a very small content of the overall production cost. As a result, the most they could save if they eliminated all of labor was a small part of the overall cost, and it did not drive costs down enough. That is the fundamental premise here.
I would like to address on page 6 [Exhibit K], the consumer-sacrifice side. Is there a way to get consumers to do things, or make it easy for them to do it without having to sacrifice? We believe that there is, it sounds obvious. On the surface it is not to heat or cool spaces that are not in use, sounds very obvious. But there are a lot of dependent factors that go back to the consumer-decision process. The space cannot get too cold or too hot. When you get back, it can’t take too long to get it comfortable, you can’t have water pipes bursting. You need to have a system that will address those issues and make it automatic, easy, and not have it something that just passes, once the press stops paying as much attention to this problem, or once the solution starts to occur but continues on into the future. We believe that the way to do that is to make it automatic with technology, and use innovation so that there is no sacrifice and there is tangible gain.
Chairman Townsend commended Mr. Sullivan on his presentation [Exhibit K] then added, “You need to go in front of the chambers of commerce and construction groups, you have a good presentation. It is important to understand the concepts you outlined, very articulately.”
Mr. Sullivan proceeded to page 9 of Exhibit K and said:
Looking a various common wisdom solutions, this graph shows savings from energy-efficient windows, florescent lighting, and increased-insulation. Our approach will save, for example, 6.6 times what you can save with energy-efficient lighting. On page 11 [Exhibit K], it is not how much you can save, it is how much it cost you to get that savings. This graph will show the amount of time it takes to recover your investment, the payback period; the points on the line graph are the amount of saving you can get. Fundamentally here, what you want is a way to minimize the amount of time that it takes to get your recovery back, and maximizing the amount of savings; those two concepts are in a relation. If you link those together by a return-on-investment concept, our data will show you 16.1 times as high a return on investment as you get from energy-efficient windows; florescent lighting is roughly twice. Lots of institutional settings have switched to florescent lighting, but they could have put their money and time in something that would get twice the benefit.
I would like to quickly put up a case study to demonstrate, in the Clark County School District, where Smart Systems has installed 130 systems in 15 schools. They have been spread across different schools, they are not in every classroom in each school. What we are showing here is the approximate cost and the approximate savings. They spent 40 percent, roughly $300 per system, they have an estimated 50 percent saving . . . that is hard data coming off the systems and it is also confirmed by one of the school district officials, a payback period of 10 months and an annual return of 125 percent. To really draw this point out, if we extrapolated the entire Clark County School District with some estimates of how many classrooms are down there, it would cost them about $3.5 million, but they would save about $4.5 million the first year, with savings continuing every year thereafter. If you count that over 5 years, you add up to almost $19 million that you can liberate from the Clark County school budget. That is money that can go into computers, art, sports, [and] other things, 23,000 new computers equivalent, 700 new teachers. At a time when budgets are being drained by high power costs, we think this could be a very important part of the solution.
Mr. Sullivan moved on to page 13 of Exhibit K:
Let me go over impact increases very quickly. We show a graph that blends in the cost of installing a Smart System, and at the same time blends in the savings to show an effective rate. With the existing rates that were approved this past November 2000 and February of 2003, there is an increase of about 45 percent. A customer that put in Smart Systems would only face a 4.6 percent increase, effectively, because of the savings. That is a much more palatable situation to show. Page 14 shows the same [information] as page 13, but adds [in] the proposed 10.3 percent rate increase that Sierra Pacific Power Company has asked for. On page 15, it shows that, at the margin of the decision maker, the customer, the top graph is with no additional rate increase, the bottom graph is with the increase. In either case, between now and when things top out at the end of November of 2003, it is over $1000 of savings to the average household. What I would like to do is get to the practical level of some potential solutions or application for solutions in the state of Nevada.
On page 16 of the presentation [Exhibit K], obviously it is good for the state as a whole and the government can play a good role; it needs to be good for the citizens. It cannot unduly penalize or ask citizens to sacrifice. From the other side of the presentations earlier today, it would make more of existing capacity, it would reduce the overall amount of long-term capacity needed, which lowers cost and social trade-offs that need to be made. Where we think the state could be involved in this is, potentially, leading by example; the systems are appropriate for most any or most any state government building, office buildings, etcetera [and so on]. We think there are some allied areas, such as the university systems, school districts, [and] low-income families, where the state could provide assistance.
We believe there is potential here for incentives to other residents and businesses. If California is willing to set aside [$]384 million for refrigerator rebates, it seems this would be a much wiser use of that kind of money. There is the potential for combining social objectives with the benefit overall to the state. For example, as rate increases occur, they are likely to occur, we recognize that, at the margin, it’s tough for fixed- and low-income families. This could be a potential solution that is bundled in with that: to say rate increases, as approved, and something like this goes with it to a certain segment of the population. That helps solve the problem overall, for the state and for those types of people, specifically.
Mr. Sullivan continued:
Finally, I would like to mention where Nevada can very much help these companies, Smart Systems in particular, is keeping them in the state of Nevada. Smart Systems was founded in 1992 in Las Vegas, and has been there ever since, it is the definition of risk. The founder put much of his own money in and many friends’ money at risk to make it what it is today. It has made a major milestone in its evolution this past fall, when a group from California called . . . Energy Ventures, which is a $450 million institutional investment fund that focuses only on energy-related investments, . . . believed in this company and invested $11 million of equity capital into the company. As part of that, the issue has been raised, can we hire the people, can we find the right type of people in the state of Nevada, in Las Vegas in particular, to keep the company there.
Anything we can do, to move the company along and grow, attract the right kind of people to Nevada, will keep a great company in the state. I believe it could have a lot of those spin-off type benefits, such as you saw in the early age with WordPerfect [Corel WordPerfect] and Novell [Inc.] in the Salt Lake area. How many companies spun out of those and created a whole new “Silicon Valley?” So, it is non-gaming and high tech, it is clean jobs, it’s high-wage jobs, and I think it could be a tremendous benefit to the state, beyond just a power issue.
The main point that I would like to make is that there are lots of ways, lots of pieces that can be part of the solution. There are complex issues, there are politically diverse interests and diverse consequences; we have seen that in California. There are solutions, the innovation and technology will help drive those solutions; there are two Nevada companies represented here before [you] that are helping to do so.
We would like to volunteer ourselves to be available to you as a resource for any kind of analysis or studies or other things where we can help figure out where this type of solution can be integrated into what you are trying to accomplish for this state.
Chairman Townsend asked, “What is the average cost to a homeowner, in a house of 1800 to 2000 square feet, to install one of these systems?”
Mr. Sullivan replied:
The typical retail installed price is about $300 per system. If you think of somebody that has a home like that, they may have spent $2000, $3000, or $4000 for a heating and cooling system, which is a big investment for them. The whole purpose of making that investment was to keep themselves cool when it is hot in the summertime. Why not use it properly for another $300?
Chairman Townsend addressed John G. Edwards, a reporter for Las Vegas Review-Journal [who was present in the meeting], regarding Mr. Sullivan’s presentation. Chairman Townsend emphasized how important the information would be to the average home [owner].
Senator Schneider offered:
We should hire these guys before Senator Raggio’s committee, because of that savings. If Senator Raggio would spend $3500 million to convert the school district in Clark County with a $4500 million savings the first year, you can hire 115 new teachers, you get them free. I think it is a big investment we ought to make down there.
Mr. Sullivan concluded, “I should point out that those calculations [from graphic charts] are done at historical rates, obviously if rates continue to increase, the savings get greater.”
Chairman Townsend requested Mr. Young send a letter to Senator Raggio’s committee with Mr. Sullivan’s business card and set up a presentation.
Chairman Townsend then added:
It is very impressive information, between the providers of all the things that can be helpful to demand-side management. [With] a small amount of education, we can encourage people to see that and how that works for them long-term. The world has changed, we were talking about this just 20-plus years ago. We will make it possible for you to meet with both of the finance committees.
Chairman Townsend indicated there were non-utilities issues
scheduled for the next meeting. He
added, with Senator Carlton’s assistance, U.S. Senator Harry Reid, had been
invited to address the committee on commerce and labor on
expanding the tax credit for all renewables; scheduling would be dependent upon
Senator Reid’s schedule.
Chairman Townsend adjourned the meeting at 10:48 a.m.
RESPECTFULLY SUBMITTED:
Silvia Motta,
Committee Secretary
APPROVED BY:
Senator Randolph J. Townsend, Chairman
DATE: