MINUTES OF THE

SENATE Committee on Commerce and Labor

 

Seventy-First Session

February 21, 2001

 

The Senate Committee on Commerce and Laborwas called to order by Chairman Randolph J. Townsend, at 8:09 a.m., on Wednesday, February 21, 2001, in Room 2135 of the Legislative Building, Carson City, Nevada. The meeting was video conferenced to the Grant Sawyer Office Building, Room 4412, Las Vegas, 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.

 

COMMITTEE MEMBERS PRESENT:

 

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

 

STAFF MEMBERS PRESENT:

 

Scott Young, Committee Policy Analyst

Lydia Lee, Committee Secretary

 

OTHERS PRESENT:

 

Neill Dimmick, Director of Regulatory Operations, Public Utilities Commission of Nevada

Douglas R. Ponn, Lobbyist, Vice President, Governmental and Regulatory Affairs, Sierra Pacific Resources

Steven C. Oldham, Senior Vice President, Corporate Development and             Strategic Planning, Sierra Pacific Resources

Timothy Hay, Chief Deputy Attorney General, Bureau of Consumer Protection, Office of the Attorney General 

Fred J. Schmidt, Lobbyist, Southern Nevada Water Authority

Ernest Adler, Lobbyist, International Brotherhood of Electrical Workers            Local 1245

Robert G. Johnston, Lobbyist, International Brotherhood of Electrical Workers Local 1245

Ray Thomas, International Brotherhood of Electrical Workers Local 1245

Danny L. Thompson, Lobbyist, Nevada State American Federation of Labor and Congress of Industrial Organizations (AFL-CIO)

Barry Huddleston, Dynegy Incorporated

 

Chairman Townsend opened the meeting by stating:

 

            First of all, we do not have a session on the floor this morning, it will be at 4:30 this afternoon, so we’ll be able to take the testimony necessary to best understand the issue of divestiture.

           

            Before we start, let’s have a recap.  Committee, we are at that point when we’re going to have to start making decisions about what the energy plans are for the state of Nevada.  Tomorrow we’ll have the IPPs [Independent Power Producers], and that should wrap things up until we start going into discussion on the need for any kind of legislation.  The areas we have covered, and I want to reiterate that these will be the areas on which we will focus, will be conservation and demand-side management, which are things that can be dealt with immediately; . . . the issue of divestiture; the issue of transmission, although we don’t have total control over it; the issue of building plants, which, of course, we will cover again tomorrow;  lastly, the issue of alternatives and how we best approach that.  So those are the five basic areas we will be working on relative to the potential for legislation.  It is extremely important, those of you who are interested in this process, that you make sure you let us know if there are things we have not covered that you think are important.  Because this is the public’s process, and because this committee meets daily, we will see to it that everyone of your issues are dealt with in one way or another, but the best way to do that is to make sure we have all the information you can provide us.  This is complex, it is global in nature, and we want to do the best job we can.  I feel very strongly about the members of this committee, and ultimately, do[ing] the right thing.  We will go ahead and start on the non-controversial subject of divestiture.  I want to make sure that everyone who has not been here before [reads the document], there’s a document sitting at the [testifying] table, and it has to do with your responsibilities under testimony in front of a public body, so don’t hesitate to read it, because it not only references NRS 218 [Chapter 218 of the Nevada Revised Statutes], but it is something we expect particularly you professionals to know and to abide by. . . . The goal here today, Mr. Dimmick, is to give us the PUCN’s [Public Utilities Commission of Nevada’s] role in divestiture, the timelines, and any other insight you might have at this time. 

 

Neill Dimmick, Director of Regulatory Operations, Public Utilities Commission of Nevada [PUCN], began his testimony regarding divestiture, stating:

 

Earlier . . . Chairman Soderberg [Don Soderberg, Chairman, PUCN] took you through the history of what has gone on, how we got to the philosophical belief from the Energy Policy Act [of 1992] on through to trying to create a wholesale market.  In the process of implementing Assembly Bill [A.B.] 366 of the Sixty-ninth Session, parties were moving forward and we were unbundling dockets. 

 

ASSEMBLY BILL 366 OF THE SIXTY-NINTH SESSION: Reorganizes public service commission of Nevada and makes various changes concerning regulation of utilities and governmental administration. (BDR 58-1390)

 

Mr. Dimmick continued:

 

The only requirement at that time was, that as of a date certain, those services declared as potentially competitive had to be in an affiliate.  One of the services declared as potentially competitive was generation service.  Absent anything else, we would have expected the company [Sierra Pacific Power Company] to place its generation assets into a separate affiliate, not divest of them. . . . More than likely, that arrangement would have required the transfer price approval between the generation subsidiary and the regulated utility, through FERC [Federal Energy Regulatory Commission] tariffs or through a long-term contract approved in the process.  As we all know, between the enactment of that and moving forward, the two power companies [Sierra Pacific Power Company and Nevada Power Company] decided to merge.  At the time, as Chairman Soderberg pointed out, there was a philosophy throughout the country, at the FERC and what have you, that they did not want people to vertically integrate, become larger, and create even more market power.  The company [Sierra Pacific Power Company] apparently recognized or felt that [it] was necessary to recognize that issue, and as part of their merger, offered up, in consideration for the approval of their merger, the divestiture of their power plants.  We had a series of orders resulting from that merger application that eventually resulted in a process, which allowed the company to move forward anddivest the power plants, disaggregating them into bundles [and] putting them up for bid.  That process has started and we have actually had one bid that’s come in and been processed by the commission [Public Utilities Commission of Nevada]; however, due to events in California, that particular sale which was the Mohave Plant may not be effectuated in the run.  

 

Chairman Townsend interjected:

 

Mr. Dimmick, if I may be specific.  Approval of the Agreement and Plan of Merger, [PUCN] docket 98-7023, is that the one you are making reference to?  I want to be sure everyone understands that we are talking about a single item for now.

 

Mr. Dimmick continued his testimony:

 

Yes, there were a series of orders and compliances that were acquired and there are three orders, which specifically address divestiture as part of that process.  The divestiture process has gone-forward.  All the plants with the exception of two, we understand, have been sold, or contracts have been signed.  Obviously, the process sets forth that each application will be brought forward to the commission.  Everybody agreed in prior orders to allow a 60-day process, because you cannot drag out sales that have contracts and commitments.  That’s the process we are about to embark on.  We have been through one with the AES[The AES Corporation of Arlington, Virginia] procurement of the Mohave plant [Mohave Generating Station]; however, due to legislation in California, that plant sale . . . has been deferred, in terms of closure.  The next series of sales will probably land on our desks at the commission [PUCN] within the next few days.  It is my understanding, in agreement with the company [Sierra Pacific Power Company], that in light of the legislation in California, which puts some constraint on power plant sales in the north, that they will be filing on a staggered basis so that all parties can address each power plant sale as it comes in, on its merits.  Obviously, we have petitions before us to address that. One of the reasonsCommissioner Soderberg cannot be here is it’s a pending issue as to how we will go forward before the commission. 

 

Chairman Townsend asked Mr. Dimmick to describe the Mohave [power plant] situation, citing the delay resulting from the enactment of A.B. 6X [Assembly Bill 6X of the First Extraordinary Legislative Session] in California.

 

ASSEMBLY BILL 6X OF THE FIRST EXTRAORDINARY LEGISLATIVE SESSION: This bill clarifies that public utility-owned generation assets remain regulated by the California Public Utilities Commission until the California Public Utilities Commission authorizes their disposal under Section 851 of the Public Utilities Code.  The bill further prohibits the sale of any public utility-owned power plant until January 1, 2006, and requires the California Public Utilities Commission to ensure that generation assets remain dedicated to service for the benefit of California ratepayers.

 

Chairman Townsend then asked Mr. Dimmick todescribe the plant, its size, its owners, and any other available information.

 

Mr. Dimmick complied:

 

            The plant [Mohave] is owned by 4 parties and is located very close to Laughlin.  It has just gone through a series of negotiations to establish new air pollution control equipment and scrubbers to reduce the opacity over the Grand Canyon.  The largest owner isSouthern California Edison, which owns 56 percent, Nevada Power [Company] owns 14 percent, LADWP [Los Angeles Department of Water and Power] owns 16 percent, and Salt River Project owns the remainder [14 percent].  Three of the parties entered into agreements to sell their portions of the plant to [The] AES [Corporation].  The only party that did not agree at the time was Salt River Project.  Subsequent to that, A.B. [X1]6 . . . a brieflaw that said any company subject to regulation of the public utilities commission must defer any sale of their power plants until 2005.  That essentially stymied the major seller of the plant.  The company can address whether there is still some interest by [The] AES [Corporation] to buy their share or not.  There are individual agreements, to some extent they are linked by the fact they are joint owners. 

 

Chairman Townsend inquired, “Based on the percentage Nevada Power Company owns, how many megawatts does that company control?”

 

Mr. Dimmick responded, “Summer capacity in the Resource Plan is 196 megawatts . . . .  Capacity in operations is 222 megawatts; that is the rated capacity.  Obviously, in the summer there is some degradation, due to the heat.”

 

Chairman Townsend asked further, “Is that a coal-fired plant?”

 

Mr. Dimmick answered, “Yes, it is. . . . As I understand it, the coal is mined on Indian land and is brought down by slurry pipeline to the Mohave site and is de‑watered and burned in the plant.”

 

Chairman Townsend added, “When is your first hearing, regarding the bundledplant application  . . .?”

 

Mr. Dimmick elucidated, “The only application we now have pending is the consumer’s advocate [Bureau of Consumer Protection, Office of the Attorney General] has filed a petition to ask the commission [PUCN] to reconsider the issue of divestiture and has cited a series of events.  That is on the commission’s agenda in a few days.”

 

Chairman Townsend asked, “The bundles that have been contracted for, those contracts must be approved by you?”

 

Mr. Dimmick replied, “That is correct.  They must also be approved by the Federal Energy Regulatory Commission (FERC).“

 

Chairman Townsend asked, “Are any of those applications in front of you now?”

 

Mr. Dimmick answered, “No, we had anticipated we would receive the Harry Allen [Station] application, but as of today, it had not landed at our office.”

 

Chairman Townsend asked further, “You, as a commission, have 60 days in which to act on those?”

 

Mr. Dimmick responded, “That is correct.”

 

Chairman Townsend posed the question:

 

Is it your understanding, in this agreement and plan of merger, that there are conditions in this planned merger with regard to divestiture that give some flexibility to the commission, based on conditions changing?  Or is it simply that it’s a good deal and you need to go forward?

 

Mr. Dimmick rejoined:

 

I do not believe [so], other than the fact that each bundle will stand on its own merits.  If it’s determined, in the process of examination and review, that evidence comes forward that the sale is one that is not beneficial to Nevada, then certainly the commission can reject it.  There are other items that were contained in the 98-7023 docket, and subsequently, in the “global settlement,” [Agreement and Stipulation, dated, Final 07/27/00.  Original submitted as Exhibit D in Senate Committee on Commerce and Labor minutes dated February 6, 2001.  Original is on file in the Research Library.] that referred to how the proceeds from those sales would be distributed and utilized.

 

Chairman Townsend asked for clarification, “So the global settlement  [Agreement and Stipulation, dated, Final 07/27/00] has issues in it with regard to divestiture and the application of proceeds, so there was an adjustment there?”

 

Mr. Dimmick clarified:

 

Yes, the original orders in [PUCN Docket] 98-7023 outlined a specific way as to how the gains from the sale of any power plant would be allocated: the global settlement.  As part of the settlement of issues, a calculation would be made and gains after recognizing deferred energy balance and the $25 million incentive to phase in competition, remaining net gains after taxes were to be reserved for use to offset out-of-market power costs from the past QF [qualifying facility] contracts, which were guaranteed by the legislation to be paid for.

Chairman Townsend added:

 

I’m going to quote from the PUCN docket, 98-7023.  On my list it’s page 26 of 54, number 2, Commission Decision.  “Therefore, the commission will grant conditional approval of the merger only if the joint applicants divest their generation assets in a process and manner that is filed with the commission in accordance with the conditions outlined in this opinion and order.”  So, in other words, the commission has already granted the right to divest, [and] given conditions.

 

Mr. Dimmick stated, “That is correct, and the company came forward with the proposed divestiture plan. That resulted in the stipulation approving the process and moving forward.”

 

Chairman Townsend continued, “Is there anything in this docket I’ve missed or anything in the subsequent filing that says, if market conditions change, the commission will review those in a different light or somehow include those market changes in their deliberations?

 

Mr. Dimmick said:

 

I don’t recall without going back specifically through the order, but I believe that particular situation as you describe it, was not addressed specifically, but obviously, when a filing is made, and if market conditions have changed, that issue would be brought forward at the time for review of the sale.

 

Chairman Townsend added:

 

I don’t know if you were at the commission in 1997, when A.B. 366 [A.B. 366 of the Sixty-ninth Session] was brought through this House and signed?  Were you a member of the staff at that time?  This committee, as well as our counter-part who processed the original bill, because it originated in that House, was requested by the chairman [PUCN Commissioner Judy M. Sheldrew], your chairman at the time, to mandate divestiture.  She believed, at the time, that was the best way to ensure a competitive market.  I know this committee rejected that concept of mandating that because we didn’t think that was appropriate particularly with Senator Rhoads. . . .  Are there any questions for Mr. Dimmick?

 

Senator Carlton requested clarification, “You said there were 60 days to act at the PUCN [Public Utilities Commission of Nevada] level but I did not hear how long it would take for the FERC order.  Could you elaborate on that?”

 

Mr. Dimmick responded:

 

It is my understanding they do not have a 60-day commitment, they process them however their procedures move forward, if they are contested or not contested.  Generally, they move through rather rapidly.  They are part of a plan they have previously approved.  They specifically authorized the divestiture of the plants and the merger order.

 

Senator Carlton asked for greater clarification, “They specifically authorized that.  Was that a mandate or?”

 

Mr. Dimmick replied:

 

I believe the precise statement is that the divestiture is a key component in granting their approval of the process.  We have provided Scott [Scott Young, Committee Policy Analyst, Legislative Counsel Bureau] with a copy of the Federal Energy Commission order [Exhibit C].  I believe page 12 is the page to refer to.  I don’t have it in front of me to find you the precise quote.

 

Chairman Townsend added:

 

There were two orders issued, one on April 15, 1999, and one November 24, 2000.  Which one would that be in, do you remember?  “The Order Approving Merger and Accepting of Filing Proposed Joint Open-Access Transmission Tariff,” that’s the 2000

 

one.  The same was for April 15, [1999] there were two separate orders.

 

Mr. Dimmick said, “I believe the first order is the one that directly addresses the merger.  The second one is probably a follow-up with respect to tariffs that had to be amended to comply with the merger order.  I would have to check the document.”

 

Chairman Townsend conveyed:

 

Let me quote from Commissioner Massey [William L. Massey, Commissioner, Federal Energy Regulatory Commission, Department of Energy], under the April 15, 1999 order Exhibit C, in which the commissioner is concurring, “Since the applicants have committed to divest all of their generation facilities, the order finds these concerns moot and approves the merger based on that commitment.”  Are there any more questions for these gentlemen?  . . .  Thank you very much. 

 

Douglas R. Ponn, Lobbyist, Vice President, Governmental and Regulatory Affairs, Sierra Pacific Resources, introduced Steven Oldham, as being the officer who took the lead on the divestiture project within the company. 

 

Steven C. Oldham, Senior Vice President of Corporate Development and Strategic Planning, Sierra Pacific Resources, began testimony:

 

I’m here today to discuss the generation divestiture efforts at both Sierra Pacific [Power Company] and Nevada Power Company.  I’ve been involved in this generation divestiture project since July of 1998, when we made our decision to go ahead and divest the plants.  As Doug [Mr. Ponn] pointed out, I have some brief written comments [Exhibit D] that are available and I want to summarize those.  There are several factors that led to the company’s decision to sell the generation [plants].  First, it was our belief that in order to gain approval of the merger [between Sierra Pacific Power Company and Nevada Power Company] we would have to sell our generation [plants].  I believe this belief was confirmed in the orders of both the PUCN and the FERC.  Second, it’s a long-stated position of potential energy suppliers that in order to spur the development of robust competition in the retail markets, the incumbent utility needs to completely separate its generation functions from all other aspects of its business.  This creates a level playing field and eliminates any unfair advantage that a utility may have, in order to cause those folks to want to do business in the state of Nevada in a robust fashion and help keep prices down.  That divestiture, we think, is in the interest of retail competition.  The company [Sierra Pacific Power Company] believed then and believes now the robust competition and the provision of energy to our customers would result in lower energy prices for the customers.  These and some other factors led to the decision by the company to sell its generation and the factors that were at the heart of the decision of the regulators to order that divestiture as a condition of the merger of [Sierra Pacific Power Company and Nevada Power Company].  Over the last 2 years, the company has retained advisors, conducted an auction to sell our generation and we have contracts to sell two generation bundles in northern Nevada and five bundles, including the Mohave plant in southern Nevada.  Over the last 2 years, other events have also taken place that had an effect on the generation/divestiture project.  The order to sell the plants requires the company to enter into buy-back contracts with the new owners. This very valuable requirement has resulted in contracts for the output of the plants to be divested.  We have contracted to buy the output of the divested plants between now and February 2003.  Those prices that we have contracted to pay reflect the costs that were in place in calendar year 1998, so they are far below the current market price for that energy. 

 

Chairman Townsend interjected, “It’s important the committee understand the reasoning and your insight regarding the decision to only take those out to 2003, the buy-back contracts.”

 

Mr. Oldham responded:

 

From the company’s point of view, we felt we were going to exit the energy business in its entirety by the end of February 2003.  Therefore, [we] did not want to have contracts that extended past that point of time, they could have been out of the market prices at that point of time and we were concerned about that.  That’s the decision, it was March 2003, and I believe that tied to existing rules and regulations that we were litigating and discussing in front of the PUCN.

 

Mr. Ponn interjected, “I think it also corresponds to the ‘rate freeze’ or ‘rate cap’ period that was contained in the legislation.”

 

Chairman Townsend asked:

 

Was there also concern that if those contracts exceeded current market price at the time, post 2003, there was legitimate concern about the ability to recover the difference between market price and those contracts at the time, because they were entered into in good faith.  I just want to make sure we all understand how it works.

 

Mr. Oldham addressed this concern:

 

There was a concern that if the contracts did exceed market price and we had no retail customers, we would be selling into a wholesale marketplace that wouldn’t support that price.  Clearly, there would be a shortfall.  I don’t know that we were overly concerned about that, but that is one of the conditions we have:  if your customers, perhaps, would go away from you and not be your customer anymore, and you’re stuck with supply.  In exhange for these contracts, by the way, which we have valued anywhere between $870 million and $1.1 billion, below the current replacement cost, the new generation owners or the ones we have contracted with reduced the purchase price of the generators by about $470 million.  So we did, in fact, take a discount on the purchase price of the generation of about $470 and locked up contracts that have a value of somewhere between $870 [million] and $1.1 billion.

 

Chairman Townsend interjected, “So that was the trade-off?  The buy-back contract at 1998 prices for the discount on the generation?”

 

Mr. Oldham responded:

 

Yes, that is correct.  The proceeds of the sale were returned to the company and were going to be used, for the most part, to reduce outstanding debt at Sierra Pacific Power Company and outstanding debt at Nevada Power Company, improving the equity ratios at those companies to at least 42 percent.  Since last summer, several other things have changed.  The market price for energy in the West has exceeded even our most pessimistic of estimates.  From last summer and 2 summers ago, it’s wildly exceeded those most pessimistic estimates.  It has had an effect on the analysis of the decision to sell the generation.  As Mr. Dimmick has already pointed out, the State of California did in fact pass AB[X1]6, which prohibits the sale of Sierra Pacific Power Company‘s generation until 2006.   That’s the generation located in northern Nevada.  Those plants have been used to serve approximately 43,000 California customers ever since we’ve owned them.  They are partly California jurisdictional and we are not able to sell the Valmy coal-fired plant in north central Nevada, the Tracy Power Plant complex just east of Reno, and the Fort Churchill plant near Yerington. 

 

Chairman Townsend asked for clarification, “So, Sierra Pacific Power Company whose assets those are, are now precluded under AB[X1]6 from selling until 2006, is that your understanding?”

 

Mr. Ponn answered:

 

Yes, that is correct.  However, AB[X1]6 was passed as an extraordinary bill. There was very little discussion about excluding any utility under any circumstance from that requirement.  Subsequent to its passage, we have engaged in activities in California which may or may not ultimately exempt us from the provisions of AB[X1]6.

 

Mr. Oldham added:

 

I might add one other item, we received a draft order from an administrative law judge for the California Public Utilities Commission last week.  In that order, the judge denied our request for an exemption for California approval which we actually had filed long before AB[X1]6 was passed, and furthermore, the judge requires us, if it’s approved and affirmed by the full commission in California, to start the process over.  Even if we were to gain, as Mr. Ponn points out, an exemption under AB[X1]6 of some sort, we would be reapplying to the California commission.  That process could take upwards of a year, I believe.  That possibility exists.  In addition to what has happened in California, there has been considerable concern expressed in Nevada about the wisdom to continue with the sale of the generation.  The concern seems to arise from a couple of items.  First, there will be some loss of local control over the plants located in the state.  Those plants, the pricing, and other conditions of plan operation would be regulated by the Federal Energy Regulatory Commission (FERC) and not by the Public Utilities Commission of Nevada (PUCN).  The economics of selling the plants are likely to result in higher costs to our customer [s] over the next 5 years than if we did not sell those plants.  Obviously, over the next 2 years, between now and the end of February 2003, we estimate significant savings to the customers.  If we take that analysis out over 5 years, and had to replace the energy after February of 2003, particularly in southern Nevada, with market-based electricity prices, rather than purchasing fuel for those plants, it appears to us today that would cost our customers more than if those plants weren’t sold.  It’s less clear in northern Nevada.

 

Mr. Oldham continued:

 

The reason I say that, assuming we were to move forward with divestiture, AB[X1] 6 notwithstanding, the prices that the FERC has currently approved for the new owners to employ after the contracts expire in February 2003, are based on cost-of-service.  That would be roughly the same price that Sierra Pacific [Power Company] would be charging after February 2003.  I’m not so sure there’s a negative effect over the next 5 years in northern Nevada.  Our estimates today are there would be a negative effect in southern Nevada if we were to revert to market-based rates, rather than cost-based rates as if we owned the plants.  We have a duty to pursue the contracts and to sell the plants and to proceed with the process of the sale.  It’s a duty to enter the contract and it’s clearly a good faith duty on our part, and we intend to do so.  We have yet not filed the applications to sell the plants in front of the Public Service Commission  [Public Utilities Commission of Nevada], which as Mr. Dimmick pointed out, we had agreed upon a 60-day window for those reviews.  We intend to move forward with that fairly swiftly.  We also have a duty to offer an opinion and advice to you and other public policy-makers as to the efforts we are making and the effects of those decisions, and that’s what we’re doing here today.  One other thing that’s very important, if the plants are not sold, there will have to be provisions for price increases to our customers to cover the significant shortfall over at least the next 2 years.  As you know, and you have heard testimony on this subject, the company [Sierra Pacific Power Company] has filed a comprehensive energy plan we think may address those issues.  We have filed before the FERC, what’s called section 203 filing for each of the power plant’s sales.  The FERC has approved the transfer of the Mohave plant and the Tracy plant.  They take about 90 days to resolve, for their approval in that process.

 

Chairman Townsend stated:

 

Based on your handout [Exhibit D] page 4, you make reference to something I need you to clarify.  Number 1, at the bottom of the page, the company has incurred tens of millions of dollars in expense to carry out the orders of divestiture.  The expenses that would have to be covered by the proceeds of the sale and now will need to be recovered from consumers if regulators change their earlier order.  If the commission chose to exercise its authority to not allow the sale of the plants to go forward, or as has been discussed in the media, the legislature took action on that particular thing, is there a fairly quantifiable number with regard to your efforts to consummate these sales that would be understood by the [consumer] advocate and the commission [PUCN].

 

Mr. Oldham answered:

 

Yes, there is.  Through the end of last month, we spent just over $16 million over the preceding 2 years on this effort.  When you say “understood by the consumer advocate” and others, they clearly will scrutinize that number, but it is in the neighborhood of $16 million, to date.  Clearly, we would have to spend more funds to close this process down.  We’d have a lot of effort expended in explaining to our counter-parties on those contracts about what is going on.  We have advisors who helped us negotiate those contracts and put into place very favorable terms and conditions for the sale at the time, that we would have to settle up with.  Those costs would exceed that $16 million.

 

Chairman Townsend added, “You are probably somewhere closer to $20 million?  I want to be clear on how much it will really take to deal with this.”

 

Mr. Ponn testified: 

 

If the question is, what are the costs to unwind this?  I would only add, as a footnote, that in the global settlement there were a number of items that were going to be taken care of financially, out of the proceeds from the plant sales.  There was a balance in a deferred-energy account, there were progress payments, stranded-costs were foregone, et cetera.

 

Chairman Townsend inquired, “Some of this had been negotiated?”

 

Mr. Ponn responded: “They were linked together in the global settlement.  How we would take care of those items was a function of the proceeds of the plant sales, so those would be under some question.”

 

Chairman Townsend asked additionally:

 

It’s difficult for a committee of citizen legislators who are not part of that process to get their arms around some of the more sophisticated parts of those negotiations.  We have to be sensitive to those as we deliberate this issue, because there is never an action without a reaction.  We want to make sure we know most of the reaction.  You’ve entered into these contracts for sale, in good faith, for a lot of reasons. One, you have a contractual obligation, or a regulatory obligation under FERC, as well as PUCN, to do so.  You now have a contract in place with the various parties.  It was at the time, the philosophy of the company, the FERC, and the legislature that divestiture was in the best interests of “developing a robust market and retail market.”  So that’s kind of where you are.  In other words, you have to proceed because you’re obligated to proceed with those contracts.  You’ll be providing those to the commission within the next couple of months?

Mr. Oldham answered, “Yes, we intend to proceed with those filings.  A bundle approximately every 2 weeks, starting shortly.”

 

Chairman Townsend continued with more questions:

 

I want to touch on one other issue, while you’re here.  If the sale goes forward or the sale does not go forward, the fact is, we have a transmission concern in the state of Nevada.  Whether you are in the energy business or you’re simply a wires company, it is still your responsibility.  Is there a time you can address this committee with regard to your future plans regarding transmission and many of the things being discussed?  Many are already being applied for, new plant construction, et cetera. Is there a time you can walk us through it?  We have a wonderful map that you were nice enough to provide us.  We’d like to understand the transmission issues, because, whether you stay in the generation business or not, there’s new generation that will be proposed and developed, not only for Nevada needs but I’m sure other jurisdictions would like to see plants built, if they can secure contracts with them.

 

Mr. Ponn responded, “Mr. Oldham also has responsibility for the transmission side of our business, the new initiatives.  We can talk about that at your convenience, today or later.”

 

Chairman Townsend said:

 

We will try to set up a time next week that’s convenient for you      . . . to discuss the transmission issue.  It is extremely important to Senator Rhoads’ constituents.  He will be holding a sub-committee [meeting] in Elko in about week, so that community will have the opportunity to express its concerns about all kinds of issues.  My three colleagues, the fourth one, obviously, is not here, from southern Nevada, who have this tremendous not only cost of energy, but more importantly, the ability to deal with long-term future, have concerns about transmission, et cetera.  We want to specifically identify, probably using that map, the potential new generation that is now on the books for construction and its relationship to transmission lines, the size of those lines, who controls them, who’s going to own them, how close they are to the plants, and what it’s going to take to hook them up.  It’s not an area we have spent a lot of time on, but it is one of five components we are going to spend some time on.

 

Timothy Hay, Chief Deputy Attorney General, Bureau of Consumer Protection, Office of the Attorney General, began his testimony:

 

I have with me today, Dr. Jim Polito, who is our staff economist.  I want to make some brief remarks.  We have presented a handout, “Divestiture in the Public Interest” [Exhibit E] for members of the committee.  I will not go through it page by page, but I did want to make some comments, preliminarily.  When the issue of divestiture was first considered, I think everyone has fairly accurately recounted the history of why divestiture was thought to be in the public interest in the late 1990s, both by federal and state regulators; and state legislators, at least some state legislatures, had considered this issue.  The premise of that was that an adequate or at least rapidly-evolving, robust, wholesale market would exist on the generation side of the electric business.  Separating the ownership interest or control of the plants from the actual operation of the electric grid would assist in promoting that wholesale market to become fully functional and robust. The committee has already received a fair amount of testimony on the reasons that many parties postulate for that occurrence.  As we began to look at the issue late this year, it became fairly clear to our office that this was not the time for Nevada to lose control of its generating assets that had effectively and efficiently served the state’s interests for many years, and assets which the ratepayers had paid for.  On January 24, 2001, my office filed a petition with the PUCN [Public Utilities Commission of Nevada] to reconsider the policy issues that were the premise of the divestiture orders that are outstanding now, and to essentially impose a moratorium on divestiture until those policy questions could be reconsidered.  Our fundamental premise before filing that document was to, first of all, consider whether or not it would be legal at this point, in light of the existing orders regarding divestiture, for the commission to take action on it, and furthermore, would it be fair to the company, since the company had, as the previous panel noted, expended money to put these transactions together and had obviously been counting on receiving proceeds from the generation assets during this fiscal year for other purposes.  We made the determination before filing our petition that it was both legal and fair to have the issue of divestiture reconsidered at this time. 

 

Mr. Hay continued:

 

As Mr. Oldham’s testimony indicated, the California Legislature had taken some action that posed a legal impediment for some of the transactions going-forward as well.  The fundamental statutory obligation of the PUCN [Public Utilities Commission of Nevada] is still to ensure just and reasonable rates.  By losing control of the plants during this very volatile timeframe in the western marketplace, we thought that just and reasonable rates would be severely jeopardized if the state lost regulatory control over those assets.  Our analysis, which is before you, was premised on extending [control] through December 2005.  The cost and benefits of divestiture, and to make the concept simple: obviously, if the plants are sold, once the transitional purchased-power agreements expire in February 2003, the utility that is powering the grid is going to have to go out and buy power on the open marketplace, from that point forward.  Our analysis, which was based largely on numbers that were supplied by Sierra Pacific [Power Company] itself, makes the assumption that if you retain the plants, although you don’t need to go out and buy power for that period of time, at least from those facilities, you do have to go out and buy fuel for the plant[s].  The trade-off is the expenditure that the company would incur for buying fuel for the period from 2003 to 2005, versus the assumptions on what purchased-power costs would be during that same timeframe.  We think our analysis is very conservative and it shows that between January 2001 and December 2005, retaining the plants will save approximately $915 million.  I believe, if I’m interpreting Mr. Oldham’s written testimony [Exhibit D] correctly, on page 7, he indicates that it’s likely the total cost over the next 5 years for the state as a whole would be greater if the plants are sold.  I think we don’t have a fundamental philosophical difference on our methodology, at least.  Obviously, we can dispute or argue about particular assumptions and numbers.  It is the belief of my office and the attorney general that, at this point in time, losing regulatory control over our plants, when prices in the West have shown no indications of settling down for the next year or 2, is simply an unwise public policy decision for the state to make, as Mr. Ponn and Mr. Oldham indicated.  There would be issues related to both the global settlement as well as the companies’ contractual and legal obligations that would have to be unwound, if either the PUCN [Public Utilities Commission of Nevada] or this Legislature did determine that divestiture was not in Nevada’s interest at this time.

 

Mr. Hay continued:

 

We believe looking at it over a 5-year time period is a reasonable one, because we are making what we hope is not an optimistic assumption that after 5 years, the western marketplace and the market in general will be closer to being in a situation where there’s some equivalency between supply and demand.  We think the state would be very foolish to allow control of these plants to be extinguished this year when there are so many issues that are already out of our control, due to the volatility of the western marketplace.  This would simply be adding one further factor to the state’s long-run energy policy.  By long run, I’m talking of probably a 5–6 year period that we think would be very risky and unwise at this time.  I would be happy to answer any questions or go into our analysis in more detail, at the pleasure of the committee.

 

Senator Rhoads asked, “Tim [Mr. Hay], aren’t they mandated by FERC to sell those plants?”

 

Mr. Hay answered:

 

Yes, as the previous speakers from both the PUCN [Public Utilities Commission of Nevada] and the company [Sierra Pacific Power Company] indicated, the state order approving the merger, as well as the FERC order approving the merger, both contained conditions that divestiture occur.  The California situation, I think, is similar in that there are FERC orders outstanding as well, relative to California generating facilities that were also mandated to be divested.  We believe, although we have not talked extensively with the FERC staff at this time, that in light of the conditions in the western marketplace, the FERC order could likely be modified.  Obviously, we believe the PUCN [Public Utilities Commission of Nevada] has authority to modify its own order. This is one of the reasons why our petition addresses both the legal implications of reversing course in essence, as well as the practical implications for the citizens of Nevada.  It would certainly require either collaboratively or on the behalf of the individual parties to the FERC proceeding as well as the state proceeding, that those orders be revisited.  I think, in light of the California legislation, this issue will be reconsidered by FERC, whether it is driven by any Nevada interests or not, so it’s definitely on their agenda and will have to be considered.  You are quite correct that the existing orders do contemplate that the divestiture goes forward.

 

Chairman Townsend inquired, “I believe Mr. Schmidt will be coming forward with his own analysis.  I don’t know if you’ve had time to chat with him about whether you guys are close on numbers or not close on numbers.”

 

Mr. Hay responded:

 

I’ve briefly reviewed Mr. Schmidt’s testimony, and Dr. Polito talked to Mr. Schmidt’s consultant as well, about the analysis.  I think, conceptually, we’re on the same page.  Our numbers may differ to some degree, and Mr. Schmidt can certainly address that.  We made the overt decision to adopt the most conservative analysis that we thought was reasonable under the circumstances, to come up with the approximate $900 million figure.  There are certainly other econometric methods you could look at that might produce higher numbers, but we thought it was best to err on the conservative side in this analysis.

 

Chairman Townsend added, “Mr. Hay, as usual, we appreciate it.  You too, have provided a simple, clear, and cogent argument as the company did.” 

 

Mr. Hay responded, “My feeling is we probably could not fix this problem in one sentence.  Thank you very much, and we’ll be happy to talk about our materials in more detail with members of the committee individually at a later time, as well.”

 

Fred J. Schmidt, Southern Nevada Water Authority, distributed his written testimony (Exhibit F), and began his oral testimony:

 

The chairman has asked me to come forward, and I’m happy to do so, because my current client is very interested in this issue, as you may have read about.  I was your consumer advocate for the state when we handled the merger case, and the order was issued in that case.  I personally negotiated, along with Mr. Dimmick and several of the other gentlemen in the front row from Sierra [Pacific Power Company], the stipulation stating the conditions under which we would go forward with the divestiture plan.  I’m pleased to say that having heard the summaries of the other parties here this morning that I don’t really have a fundamental different view of history from what they have presented to you.  That means, yes, I agree we thought divestiture was the right thing to do 2 or 3 years ago; and yes, things have changed so dramatically in the marketplace over the last few months that it is appropriate to reevaluate that decision.  Not only is it appropriate to evaluate the decision, but I think it is appropriate to pause in the decision and take time to make sure we do the right thing in Nevada.

 

Fortunately for you, we created an off-ramp in the negotiated divestiture plan that was presented.   Also fortunately, there is an off-ramp in the methodology by which the company has gone forward with divesting these plants.  Because there was always a condition to require companies to return and obtain final regulatory approval, not only from the FERC, but more importantly for you because it’s the agency you empower and oversee, but it was necessary to come back to the PUCN.  I believe each of those   agreements to sell these plants is conditioned upon that approval.  Those sales agreements are not effective or effectuated if regulatory approval is not obtained.  What does that mean for you?  To me, it means that the commission, as you have heard Mr. Dimmick explain, has a fairly short timeframe in which to evaluate these things.  We did not leave a lot of leeway in terms of moving forward.  The 60-day timeframe could be triggered as soon as within the next week for the first sale of additional southern Nevada plants.  The Southern Nevada Water Authority believes it’s incumbent upon both the PUCN and the legislature to take action expeditiously.  I strongly agree with the statement Mr. Oldham made, I think that whether we’re going to move forward with divestiture at this time or not, it is something that should be resolved fairly quickly in fairness to all involved.

 

A couple of questions were raised by the committee, which I want to address.  In particular, [to] Senator Rhoads, who asked if the FERC had actually ordered divestiture, I don’t disagree that the FERC has made an order requiring divestiture, I would add a little qualification to what that order actually says, though.  First of all, the order to divest was always intended to be a process that was fluid and took some time.  The order to divest was essentially a permission, in part, and granted at the company’s request associated with the merger of the companies.  It was a condition the companies felt was necessary to offer, in order to obtain support for regulatory approvals that were necessary for the merger. It was not an order that had a specific date certain: in other words, if you don’t sell the plants by January 1, 2001, the merger all of a sudden dissolves.  If you don’t sell the plants by January 1, 2003, the merger doesn’t automatically dissolve.  In fact, if you look at the expectations of those who pursued the merger and the merger order, both at the FERC and the PUCN [Public Utilities Commission of Nevada], the expectation was that the plants would already have been divested and sold and in other parties’ hands by now. 

 

Mr. Schmidt continued:

 

Obviously, that has not occurred.  The first observation I would make is I think delay is not inconsistent with the orders that had been issued by the FERC and PUC[N].  To the extent there is any uncertainty about that, I think the clarification is to go back to the FERC and seek that clarification or support.  The FERC order also has another important condition.  The FERC order relied, in some part, and in the majority opinion that was issued by the FERC on April 15 [2001], the FERC deferred at some length to the PUCN [Public Utilities Commission of Nevada] with regard to the fact that there would still have to be a divestiture plan and that plan would have to be approved.  I think there is sensitivity to this issue of the transition of jurisdictional powers and the thing that is important for you to recognize as legislators is, at the moment divestiture occurs, jurisdiction shifts out of the State’s hands and into the federal government.  The federal government has taken, as the general policy initiative, the determination that market prices should determine the price of power from power plants.  There has been a lot of questioning and controversy in California about whether the federal government should step back in, whether that would make matters worse or better if they set caps on the prices or tried to cost-base the power from the wholesale plants.  The only thing we know at this point is that it’s not likely that the FERC would do that.

 

Mr. Schmidt articulated:

 

Why is that important to Nevada?  One of the things that Nevada had to do and the utilities had to do as part of this divestiture process is they had to go to the FERC and get approval for the so-called buy-back contracts that create short-term value for the next 2 years in the manner in which the plants are being divested.  They had to obtain tariff approval for what would happen from the plants, both for that and after that.  In that docket that was filed at FERC initially, the company took the position, as did our commission, that the price of power should be market-based from southern Nevada plants.  As your former consumer advocate, I intervened and opposed that thinking that that much flexibility, until we had certainty in the marketplace, was not appropriate, [and] that there should still be some cost-basis control over the rates when the plants were in new hands.  The FERC rejected that argument and determined, for southern Nevada for each of the southern Nevada bundles, that although they allowed for and supported with some modifications, the tariffs the utility filed that allows them to get the benefit of these 1998 so-called buy-back contracts.  The FERC also rejected the notion that the plant shouldn’t be   market-priced if the company doesn’t buy back all the power.  So, that becomes immediate, once they’re divested or after that period ends, they become market-based. 

 

In northern Nevada, as Mr. Oldham referred to, the scenario is a little bit different and that’s because there’s an expectation that there’s a load pocket there.  There’s still some expectation that there will be cost-based or cost-plus rates set for the plants in northern Nevada   after they’re divested.  I don’t know, especially given recent FERC decisions, whether you can count on that, particularly 2 years out from now. 

 

That’s my reading of the FERC orders.  I would reemphasize that I do think that in Nevada, at least at the state legislative and regulatory levels, there is still an opportunity or an option to make a decision not to divest at this point in time.  I have still not deviated from my position that divestiture at some point doesn’t still make sense.  If we stop this [divestiture] at this point in time, how credible will we be doing it in the near future?  I don’t know.  That’s why I would support Mr. Hay’s suggestion that a fairly reasonable period of time for delay is more than just a few months or a year or so, as necessary.

 

Chairman Townsend requested clarification of dollar comparisons:

 

Could we go to your page 5 [Exhibit F] and to Mr. Hay’s page 3 or 2 [Exhibit E], to get a dollar comparison?  Are we comparing apples to apples here?  He is talking about January 1, 2001 to December 2005, which, according to his modification, adds 2 years to the company’s analysis.  Where are you and your client on this issue?

 

Mr. Schmidt responded saying:

 

When the company, as some of you heard, announced that the short-term increased cost could be as much as $875 million a couple of months ago to ratepayers, we became very concerned about that.  We . . . determined that it would be appropriate to evaluate the assumptions in that analysis, and more importantly, determine whether the scope of the timeframe of the analysis was complete and whether all factors otherwise had been considered.  The company essentially says the number in cost, in the next 2 years, is $872 million-$1.1 billion.  The reason for the difference of the range in their numbers is they picked short-term prices for the cost of natural gas at a point in time late last year, and they updated it to a point in time more current within the last month.  As a result . . . there is a range in their number.  The analysis reflects 2 years, which is the timeframe for which the 1998 buy-back contracts would provide them this artificial ability to buy at lower-than-actual market prices for (even themselves) running the plants.  I don’t disagree with that analysis except to say I don’t think it will be prudent to use short-term contracting if you knew you were going to keep the plants for 2 full years and if you bought a longer-term gas supply, that assumption would clearly be lowered, even under today’s conditions.  I also think, and you may have already heard a lot of testimony or you will over the session about what has been happening with natural gas prices, I think the common wisdom is that they [prices] are eventually going to come down.  How soon and how much, anyone can speculate about.  That’s why these numbers vary so much.  What Mr. Hay did is he carried the analysis that the company gave for the 2-year look and took it out 5 years. 

 

Mr. Schmidt explained:

 

Assuming a 5-year delay and that is, by the way, consistent with what your counterparts in California adopted as legislation last month.  He essentially accepted or continued the company’s assumptions and that’s why I think he told you it was conservative and that the number is actually a savings over the 5 years to customers of $900 million.  In that analysis, yes, it’s going to cost more for the first 2 years; but the savings over 5 years exceeds the first 2-year cost to the point of saving customers an actual amount as great as $900 million.  [We asked] the economist that works with the Southern Nevada Water Authority to assume that you would have [a] longer-term gas supply if you knew you were required to keep the gas plants for 5 years and that market prices would not be as low as . . . the company’s assumption . . . but closer to what has actually been experienced in California, not as high as in California, but closer to that level.  He made two assumptions: on those market prices, and the savings to customers from the same analysis; but, looking out over 5 years actually jumped from Mr. Hay’s number of $900 million to $1.7 billion to $3.5 billion in savings to customers if the plants are retained and we avoid market prices that begin to approach what’s been occurring in California, on average over the last year, and that process stays for any period of time. 

Mr. Schmidt stated further:

 

You can see that the range of numbers deviates dramatically, based on your assumptions, and the only thing I can tell you with any confidence is I don’t think any of the numbers will be accurate.  I think things are changing so quickly that to rely on short- or long-term numbers at this point in time is risky at best.  Therefore, I conclude that the one thing you do know is if you keep the plants under Nevada jurisdiction and control, you can ensure that the cost of the plants will not exceed the actual fuel costs incurred in running the plants and the cost of service of the company based on its rate base, which has traditionally been the form of regulation in setting the price of the plants.  If you release the plants after 2 years, you don’t really have any way of knowing what those prices will be.  The assumptions can range dramatically and I think whether it’s a small amount or a large amount is very risky to speculate.  I think Mr. Oldham . . . agreed today that if you carry the analysis out 5 years, it’s likely, based on contract offers that are coming in today and proposals that are coming in to various entities, that keeping the plants will save money during that first 5-year horizon. 

 

Ernest Adler, Lobbyist, International Brotherhood of Electrical Workers [IBEW] Local 1245, began to testify:

 

It was actually a difficult decision for the IBEW to come here today and take a position on divestiture.  Essentially, what we had to decide, or the IBEW had to decide, was to take a position that was contrary to their employer’s.  We’ve had to make that decision.  Most of that decision was based upon the fact that we’ve been in contact with IBEW business managers in California and they’ve told us what happened, in view of the divestiture, in California.  We come before you to oppose the continued divestiture of plants in the state of Nevada as it is against the public interest and against the membership interests of the IBEW.  I’ve spoken to Jack McNally, the IBEW business manager in Walnut Creek, California.  He serves on a great many energy boards and consulting commissions.  We’ve talked in length about what the impact of divestiture would be in Nevada.  We’ve gone over some of the [Nevada] factors and compared them to California’s.  There’s been a common kind of buzz before this committee that divestiture wouldn’t be as bad in Nevada as it is in California.  Mr. McNally doesn’t necessarily share that opinion.  He thinks it may be worse here.  His opinion as to why it may have a bigger financial impact in Nevada than California, on a proportional basis, is: 1, when they divested in California the power companies retained their nuclear and hydro generation.  The PUCN order in Nevada contemplates divesting all power plants, that’s a difference which I think may make this potentially worse and perhaps, makes the IBEW’s position, that Mr. Schmidt and Mr. Hay have brought up, that the cost may be greater to divest than to retain the power plants very plausible.  We take that position. 

 

Mr. Adler conveyed:

 

Mr. Johnston’s going to talk in more depth about divestiture, but we are going to keep that brief, as well.  If the committee chooses to stop divestiture, there does need to be a mechanism whereby the utility can start recovering its actual costs.  The IBEW is not very big on the global settlement as the mechanism for doing that.  Let me tell you why.  It was a group of individuals who met and settled a lawsuit.  Nothing was really put on the table in terms of a filing, in terms of actual costs, before the PUC[N].  It wasn’t something contemplated by this Legislature.  It was something that had to be done because of the emergency financial situation at Sierra Pacific [Power Company].  We would instead suggest that if you do away with divestiture, that you repeal the caps that are in Nevada Revised Statutes 704 [chapter 704 of NRS].  To be blunt about this, [the] deferred energy accounting mechanism [should] be reinstated so that those fuel costs can be passed on so that the company does not become a financially distressed company to the degree that they are ineffective.  They should be allowed to file an application for emergency rate relief under NRS 704.110, subsection 3.  They should go through the regular process.

 

We have this whole statutory process in Nevada that’s existed for some 50 years and has worked extremely well.  We would suggest that you return to that process in order to allow their rates to be set by the PUC[N] and, that [it] be done by the PUC[N], [so] that we not do this through various groups meeting, and [so] that the Legislature does not have to become involved in that process.  That’s not your job.  Your job is to set policy, not to set rates.  I think we have gotten away from that, which is not a good thing.  Senator Rhoads brought this up the other day.  Is it necessary to abandon deregulation if you stop the divestiture process?  We don’t believe it is.  We believe that with the new merchant plants coming online that it is entirely possible to continue with deregulation allowing some of the big customers to go out into the market to buy power.  That’s not inconsistent with stopping divestiture.

 

Chairman Townsend remarked:

 

Based on the amount of capacity available on the market, we may have to throw some of them out of here, because we’ve got residential customers that need that for obvious purposes such as basic survival. 

 

Mr. Adler continued:

 

The other question that’s been put out there [is], How long do we need to stop the sale of the power plants?  People have thrown out numbers in terms of years.  After talking to some of the counterparts in California, they suggested that a timeframe is not as appropriate as the PUC[N] determining when enough new merchant plants have come online and enough transmission, a very important point, is there to make it feasible to allow the sales of some of these plants.  Maybe that’s a determination that needs to be made by the commission, not saying 2 years or 5 years.  Do we have the ability, in terms of new competitive supplies coming online and being able to deliver that, at that point, do we allow some of these sales to go forward?  Others will comment on divestiture and other impacts that are occurring in California, in terms of service to customers, that really have not been discussed to date on divestiture.

 

Robert G. Johnston, Lobbyist, International Brotherhood of Electrical Workers Local 1245, began testifying:

 

With respect to divestiture, I would just echo some of the concerns expressed by both Mr. Hay and Mr. Schmidt concerning the down-side risk if you extend the analysis out beyond the buy-back contracts of 2 years, and [concerning] the loss of jurisdiction, which would be immediate; there would be immediate transfer of jurisdiction to FERC.  One other point needs to be mentioned to the committee, that is the analysis of the savings, of buying back at 1998 rates, presumes that the buyers of those plants honor their contractual commitments to sell at those prices.  Given the current climate, I don’t think that’s an absolute certainty.  The decision would really be [the] FERC’s.  I think it needs to be acknowledged that there is a performance risk on behalf of the buyers of those plants.  They might be forced, by the economics of those               agreements, to seek relief from FERC from their contractual commitment to sell for 2 years at 1998 prices. 

 

Chairman Townsend asked, “Is that a legal possibility?  That’s the first time I’ve ever heard that.  Obviously, in today’s world, everything’s a legal possibility.  I’ve never heard that before.”

 

Mr. Johnston responded:

 

Senator Townsend, I just think, that given the events of the last year, I think it’s certainly at least a legal possibility.  I think the important point is the jurisdiction that would consider that type of plea would be FERC, not the Nevada commission.  I wanted to follow up and echo on a couple of concerns [noted] by Mr. Oldham and Mr. Hay.  Mr. Oldham stated that simply stopping divestiture is not enough, that S.B. 438 was really enacted presuming divestiture, as was the global settlement negotiated presuming divestiture, and there needs to be rate relief if divestiture does not go forward.  Mr. Hay referred to the commission’s primary responsibility still being to set just and reasonable rates.  I think it’s very important that the Legislature act very quickly to say yes or no on the divestiture, and that the Legislature, as Mr. Adler has indicated, at the same time look carefully at some of the constraints in the current law that are really hindering the ability of the commission to set rates that allow the utilities to recover their cost of operation. 

 

Mr. Johnston conveyed:

 

Right now there’s a disconnect, if you will, between what S.B. 438 anticipated and what the circumstances require; S.B. 438 anticipated and presumed a rate-cap, instead we’re seeing unprecedented applications for rate increases; S.B. 438 eliminated deferred energy accounting, which was the explicit statutory authorization for fuel and purchased-power cost adjustments.  Instead, we’re seeing monthly adjustments to rates under the global settlement, the F and PP [fuel and purchased-power] rider.  The problem with this disconnect is it has cast a legal cloud over these commission proceedings.  Is the commission acting within the scope of the law? 

 

Our concern would be that if the Legislature determines that divestiture needs to be stopped or suspended, a moratorium [be] placed in the public interest that, at the same time, those rate-cap provisions be eliminated, at the same time the Legislature explicitly authorizes the reinstitution of deferred-energy accounting, so that the utility has the ability to come to the commission through the front door, if you will, rather than trying to negotiate around these seemingly inconsistent provisions of the law, come in through this front door, lay it on the table as to what the commission needs to give them so they can charge rates that recover their current costs.  That would also give the commission authority to come out with a rate order to maintain the utility’s financial integrity, that would not be subject to multiple legal challenges.  Given the existing provisions of S.B. 438, we think those need to go hand in hand.  We think there needs to be a quick decision on divestiture and, hopefully, a decision to place a moratorium on divestiture of generation assets.  At the same time, there needs to be statutory authorization that would allow the commission to set rates that would keep the company financially viable and allow [for a] fuel-cost and purchased-power adjustment mechanism.  We think that would be a far better path to take than a continuation of these settlements that have riders that are very poorly understood by the public and that are also subject to legal challenge. 

 

 

Chairman Townsend said:

 

. . . The only statement that really got my attention was the one that the public doesn’t understand the nature of the global settlement.  If you go back to deferred energy and rate increases, which may be necessary to keep the company financially viable, they’re not exactly going to be thrilled by that because it will be substantially larger than the current settlement.

 

Mr. Johnston responded, “That’s correct, Senator, but the current settlement, the global settlement, has turned out to be less than global.  The company has now filed a CEP (Comprehensive Energy Plan), which, in effect, is a reinstitution of deferred-energy accounting.”

 

Chairman Townsend explained:

 

I understand that.  I am just saying, if you think the public doesn’t understand what went on in the global settlement, wait until they start getting those bills.  I’m not saying they don’t deserve it, because that’s not a decision the Legislature’s going to make.  That’s the decision the regulatory mechanism will make.  . . . There are very tough decisions that need to be made.  What we have to be careful of is, we make every effort to maintain the financial viability of our utility, [and] that we don’t overreact the other way in a manner that is also inappropriate.  We have to be careful.  It can’t just be, “Let’s go back to the old way and hope it works out good.”  We have to think it through.  That doesn’t mean we won’t go back to that, it just means we have to think it through.  I’m concerned if you think the public’s going to fully understand going back to the full issue of rate cases and deferred energy.  There may have to be a substantial amount of education on that.  That doesn’t necessarily mean it’s not needed.”

 

Mr. Johnston added:

 

I agree there’s no easy way out of this fix we find ourselves in.  I guess my point is that the inconsistency between the current statutes and what the circumstances require is complicating the problems, and it is casting a legal cloud over the ability of the commission to act.

 

Mr. Adler commented stating:

 

My concern is, we are not California in that we don’t have this pot of billions of dollars we can dump into this.  If this committee, and I have never seen a situation in this Legislature where a committee had so much responsibility dumped on them, quite frankly, in 20 years I’ve been coming here as a deputy attorney general and as a member, what could happen here is, you’re kind of in the Fram situation, either you buy the oil filter now, or have your engine blow up later.  It may be better just to take the heat to make certain that Sierra Pacific [Power Company] maintains itself as a viable company than to allow something to happen that would be disastrous 2 or 3 years down the line, maybe even sooner than that.  I really think it is one of those situations that maybe the tough decision needs to be made up front, and move on from there.  That’s our position.  I know that is a very difficult decision for this committee to make and we appreciate that. 

 

Chairman Townsend noted:

 

[From] our experience here, [you] know that this committee has had one or two tough decisions in the past.  We will deal with them as they come.  I think the expedited nature of this, not only . . . the company’s financial condition, but the rising cost of fuel and the ability to go out and look for contracts.  All those things are spinning out of control and we need to make sure we are in a regulatory posture to do the best we can.  This is tough stuff.  We don’t control 90 percent of it.  The vast majority of this committee sat here and made tough decisions on workers’ compensation in 1993, but we controlled every element of it.  Mr. Thompson [Danny L. Thompson, Lobbyist, Nevada State American Federation of Labor and Congress of Industrial Organizations] testified, probably 4 hours a day, on those issues, the individuals he represents, and all the other parties.  We at least had jurisdiction over the issues.  We don’t control 90 percent of this.  We’ve had an awful lot of testimony today with regard to FERCs responsibilities.  We don’t control them, so all we can do is the things Mr. Johnston has said.  That is: do the things we think best in the limited jurisdiction we have. That’s the tough part.  Who knows what the rest of the guys are going to do.  We can send letters and we can engage our delegation.  I’m hoping for the kind of relationship that former Senator Cannon and former Senator Laxalt had for years as members of opposition parties in Washington.   Perhaps we can also see that from Senator Reid and Senator Ensign, that could benefit the state.  We don’t have any insight . . . most of the people . . . are not clued in, your point is well taken.  This committee will be prepared, over the next week or so, to make some tough decisions.  We will need your help to explain it to the public because these are complex issues. 

 

Ray Thomas, business representative, International Brotherhood of Electrical Workers, Local 1245 testified:

 

I’m going to keep this real short.  We do support, as Mr. Johnston and Mr. Adler had indicated, rate relief for this company.  In short, it will stabilize the continuity of service and it will stabilize the employment factors for the employees we represent at Sierra Pacific Resources.  I have been here 2 years, in the state of Nevada, as a business representative.  I’m a 15-year member with the IBEW.  Our local represents some 22,000 members.  During the early 1990s when the competitive model hit the street in California, PG & E [Pacific Gas and Electric Company] decided at that point to start downsizing to meet deregulation when it finally surfaced.  What they did impacted our membership greatly.  They reduced our jobs at PG & E by 3,000.  We had the storms of 1995. . . . During those storms, we lost service to some 2 million customers.  A great portion of them [were without service] for as much as two weeks.  I lived in Redding [California] at the time and worked for a public utility.  We worked side by side with PG & E during these outages.  Due to positioning for competition, we had a large portion of these 3,000 employees. . . . We know what the negative impact of deregulation can bring. 

 

Today, we are here discussing divestiture and the fact that we don’t support it, hand-in-hand with the fact that we believe the company deserves rate relief for these increases in fuel costs.  Currently, PG & E is getting rid of 1,000 workers and Southern California Edison is reducing their workforce by 1,850.  They are looking to cut costs any way they can.  One of the concerns we have is, with the stoppage of divestiture, the financial impact to this company could have a direct impact on the distribution and distribution service provided by our employees at Sierra Pacific Resources.  [Also impacted] are response time, new customer hookup time, those types of things.  In closing, I’d like to reference an e-mail sent out to all PG & E employees by PG & E CEO [Chief Executive Officer] Gordon Smith on January 11, 2001, discussing the impact of their rate caps and the financial crisis they are in at PG & E.  He sent out several bullet points and made this clear to the employees of PG & E, that they were going to be reducing [staff] and they had a reduction in the ability to maintain current customer response levels at call centers; they were suspending some underground projects; suspending non-critical work at the request of others; extending average response times for new business connections to 24 weeks; continuing immediate response to customer calls for service to make safe, but sometimes delaying time for full restoration; reading some customers’ meters every other month and using estimated usage for non-read months; defraying equipment enhancement, projects overhauls, non-critical reliability projects, planned pole replacements that are not immediate safety issues, and other projects where impacts are reasonable in light of the cash crisis; [and] defraying non-critical gas pipeline replacements and   suspending community and charitable contributions.  That was as of early January, and we think the repercussions are even larger than that at this time.  We’re just asking that the rate relief be there and, of course, the stoppage of divestiture.  I think we are at polar opposites with the company at this point on that.  Again, we represent 22,000 members with the local, and we are affiliated with the American Federation of Labor and Congress of Industrial Organizations, which is the AFL/CIO.

 

Danny L. Thompson, Lobbyist, Nevada State American Federation of Labor and Congress of Industrial Organizations (AFL/CIO), testified:

 

The Nevada State AFL/CIO currently has 155,000 members.  If you do the math on family members, we represent about 400,000 Nevada citizens.  The AFL/CIO has a lot of regional functions that I’m required to go to, so I spend a lot of time on the road.  I’ve spent a lot of time in California and I’m very well-versed in what’s happening there.  I have to tell you, it’s a very bleak picture.  Our concern in this matter is jobs.  We, along with IBEW, do not support selling the power plants in Nevada.  When you look at what’s happening with rolling black-outs in San Francisco and other parts of the state [of California], companies that have employees making whatever, when the power goes off they can’t make the product.  Then the employee doesn’t work.  Given the fact that California‘s economy is such an integral part of the nation’s economy, in the end, it affects us all.

 

In Nevada, we represent all the casino workers, in turn, we also represent a number of miners in Nevada.  As you know, Mr. Chairman, Nevada has basically two industries, gaming and mining.  I want to talk about gaming for a minute.  Gaming today isn’t what it used to be.  With the proliferation of gaming throughout the United States, it’s a tough industry.  Nevada has to maintain an above-standard presence in that market to keep the people coming here.  We do.  We have a great gaming and tourism industry here, bar none. 

 

Mr. Thompson stated further:

 

Mining, at the same time, [is] a non-renewable resource, [and] you can’t go mine anywhere, you have to mine where the minerals are.  Today, with the price of minerals . . . what that means in those communities he [Senator Rhoads] represents, it isn’t good.  The price of gold is down and it’s affecting many of those companies adversely.  If you’re a gold miner in one of those small towns, and you get laid off, you don’t have a lot of other options.  Most of the time, the option is to move somewhere you can get a job.

 

I was sitting in the back of the room thinking that during my time serving here in the Legislature, I recalled, in 1983-1984, the strike on the Strip [Las Vegas].  That strike lasted less than a month and it crippled this state.  The economy of this state was . . . We were borrowing money from the state employees retirement fund, because we have an obligation that we can’t deficit spend in this state.  We’re very concerned about the possibility of not having control of power.  I was born in Henderson, and have lived there all my life.  I’m a desert rat and I like the heat.  I can’t imagine a time on the Las Vegas Strip, in the middle of July, to have a rolling blackout.  Reliability of our power system is critical when we are so narrowly focused on two basic industries.  If that were to happen . . . I know what it would do to the budget, given our current problems we have there.  I don’t believe that we can take that chance. 

 

Mr. Thompson asserted:

 

I know this committee has, over the years, as Senator Adler said, been a tough one.  . . . I would just urge caution.  I know that to stop these sales would be a difficult thing, not an undoable thing. When I look at California, and Senator Townsend, I spend a lot of time there and talk to a lot of people . . . I go to Los Angeles, where Los Angeles controls their own power system.  There’s no problem there.  They don’t have a problem.  I was invited to speak in San Francisco recently at a function.  I talked to people who were stuck in elevators for an hour because the power went off and there was nobody to come and get them.  The potential of what could happen in Nevada is a very, very, very scary thing, not just to those kinds of situations but to the economy, and the very well-being of the state.  This committee has a very tough decision to make.  I just want you to know that we think selling those power plants would be a mistake at this time.  We support building more power plants and are willing to do what it takes to make sure that happens, but right now we don’t support divestiture of the power plants.

 

Chairman Townsend said:

 

. . . Two days ago we made some proposals here with regard to renewable energy.  Since that is locally controlled, the plants would be built here, whether they be wind, solar, geothermal or biomass.  We would hope that you [testifiers] would be able to support that overall plan after the details have been worked out.  That is something we would really like your support on, because it’s important for the state and we do control those indigenous resources. 

 

Your points today are very well made.  We can’t just sit here, even though we’re policymakers, we’re citizen legislators.  We go back and see all the people and work with all the people that work in our state.  That’s the way it should be.  I think it’s better to have people here that are in the real world when we’re not [serving] here, as opposed to what Congress does, which is to become insulated and isolated from the people they represent.  Senator Carlton is in touch with those folks with whom she works as much as anyone.  It gives us an insight relative to the people you’re talking about. 

 

Senator Townsend noted:

 

We see what they do in the community every day.  Whether all of us have a disagreement with the company on any issue, the fact is there’s a huge employee base out there that keeps the lights on.  Whether you’re in Las Vegas when its 118 degrees and somebody is out on a road or up on a pole trying to keep those things on, or it’s somebody in the north. I happened to see a group of guys the other day in the middle of a snowstorm.  Our lights went out because one of the transformers went down, the guy’s in the bucket 40 feet off the ground, and it was 20 degrees out with the wind blowing, and he was up there fixing it.   We can never lose sight of that, those are real people out there, and we take them for granted because the lights are on.  You can never take for granted what those folks do.  I drive by their facility when they are loading up in the morning, those line people and I don’t know how they do it day in and day out.  It’s tough.  We can never forget that.  Not just what they do, but the impact those kinds of job losses are on various family members.  I think your points are well taken today.

 

Mr. Thompson added:

 

We are very excited about the prospect of the wind generation at the Nevada Test Site.  From geothermal to solar to whatever, we are very excited about building these plants and having these plants come to Nevada.  I don’t think there would be anything wrong with Nevada being the electric generation plant of the West.  I think that would be good for us and we’re excited to do what we can to make sure that happens.

 

 

Chairman Townsend clarified:

 

I want to touch base on something, committee, that was just provided to me, regarding some testimony that occurred yesterday that you probably know my feelings because . . . questions of the testifier.  This has to do, specifically, with a tribal housing authority questionnaire that was sent out.  These came back from 11 of the 26 tribes, who have energy audit needs.  It’s a simple one-page questionnaire, and it talks specifically about the number of units needing energy audits. . . .  We’ve got energy going out the door.  If we had an audit and helped those folks and got some weatherization, we could take a little demand off the grid.  Yesterday’s testimony wasn’t razor sharp, but we are going to get it there, because that weatherization stuff for people that are struggling is becoming more and more important.

 

Barry Huddleston, Dynegy Incorporated, began testimony:

 

I actually appeared before this committee at least 4 years ago and I may have been here 2 years ago, during the session.  At the time, I represented Destec [Destec Energy Incorporated], who owned a small cogeneration facility in Las Vegas.  We subsequently merged and became Dynegy [Incorporated].  We still own that small cogeneration facility in Las Vegas, but many other things have changed, obviously.  One thing that hasn’t changed, however, is our company’s commitment to Nevada and to being a responsible generation entity within the state of Nevada.  We believe the divestiture should proceed.  We believe the transition power purchase agreements have been negotiated freely and fairly.  Let me say, I understand the concerns going forward after the TPPAs [transition power purchase agreements] expire, and let me assure you that our company would be willing and I’m sure our partner NRG Energy [Incorporated] would also be willing to entertain longer term arrangements.  In fact, Nevada Power Company has an RFP (request for proposal) out now for 10 years for 1,000 megawatts of electricity.  We fully intend to bid in that RFP.  We are here for the long haul and we believe the process that has been outlined at the commission and has been discussed today gives the public all the protection necessary to determine whether these sales should go forward.  I believe that process will, in fact, indicate that these sales should go forward.  We’ve talked a little bit today about the specter of California, next door.  I want to spend a minute to address that.  I’m not going to tell you that California is a mess, because everybody knows it’s a mess.  However, Nevada isn’t California, and Nevada has within its power to make sure they don’t become California. 

 

Mr. Huddleston continued:

 

Just a couple of points, for example in California, the statute required that the utilities sell any remaining asset output into a power exchange, and required that the utilities purchase from that power exchange.  So obviously, if you’re buying at spot market prices at a point in time where you have a lack of supply, the price is going to go up and that would necessarily put you in the financial position that the utilities are in currently.  Now, California has adopted a longer term contracting strategy.  Obviously, if you look at what Nevada is doing, Nevada has had and will continue to have a long-term contracting strategy.  I don’t believe Nevada would be exposed to the same kind of spot-price volatility that California has been exposed to.  To sort of divert some attention, I think, from the California problems, there have been success stories.  With California being so close, it’s the one that’s most often discussed. 

 

There are deregulating success stories: Illinois, Pennsylvania and Texas.  Texas is an interesting hybrid, because Texas created a competitive wholesale market following the 1995 Legislature, and ultimately created an independent system operator for the . . . region of Texas in 1996.  They have had a competitive wholesale market now for nearly 5 years.  In Texas, they’ve gone from having a 15 percent mandated reserve margin under the old regulatory regime, to nearly 25 percent reserve margin today, under a deregulated wholesale market.  Clearly, the market works if you set up the rules correctly at the beginning.  In Illinois and Pennsylvania, I’d characterize those states as retail success stories, not necessarily wholesale success stories.  In Pennsylvania, when they had a 5 percent pilot beginning, they had an over subscription of almost half a million customers for that original pilot.  Subsequently, when they went to full retail access, they’ve had reductions in prices from regulated levels approaching 20 percent.  In that state, retail competition, clearly, has resulted in lower rates for the customers. 

 

Senator Schneider asked for clarification, “What was the retail price of power in Pennsylvania?  It was about 15 cents wasn’t it?”

 

Mr. Huddleston responded:

 

I’m not sure it was that high.  But, for example, the shopping rate for many of the utilities, which they call the “shopping credit” mechanism, they took the existing regulated rate and reduced it by 10 percent, then assigned certain portions to the transmission and distribution, and created what was to be an energy and capacity credit that would then be shown on your bill.  If you then could go out and find somebody to supply [for] less than that, you would.  The shopping credit was about 5½ to 6 cents for all the customers across the state, when it was first instituted. 

 

Senator Schneider asked, “The customers were paying about 13 to 15 cents, which were some of the highest in the nation.”

 

Mr. Huddleston responded:

 

It’s possible that in the nuclear utilities, that’s true.  In western Pennsylvania, where they had the coal plants and the “mine mouth” coal plants, the rates weren’t nearly that high, but for the owners of Three Mile Island and some of the other nuclear facilities, it is probably true.  Their rates were fairly high.

 

Senator O’Connell asked, “You mentioned that the nuclear was higher?  Doesn’t Texas have two nuclear plants?  If they do, are their rates also higher than their competitors?”

 

Mr. Huddleston responded stating:

 

There are two, Texas Utilities [TXU Corporation] owns a plant called Comanche Peak [Comanche Peak Steam Electric Station], and Reliant HL & P [Reliant Energy HL and P (formerly known as Houston Lighting and Power), a subsidiary of Reliant Energy Incorporated] owns a plant called South Texas nuclear [South Texas Project Electric Generating Station].  Those plants [provide] a very small portion of Texas’ generating capacity.  Texas has approaching 60,000 megawatts of generating capacity and those two nuclear units total somewhere in the neighborhood of 3,500 [megawatts].  It’s a very small piece.  It’s true for those facilities, the last numbers I saw for South Texas nuclear, for example, the “all in” cost for that was 12½ cents per kilowatt hour.  When you take into account all the other generation plants in Texas, it’s actually closer to 5½ [cents per kilowatt hour] on the average.  The question that we need to think about is, “What happens to the price of electricity when the transition power purchase agreements expire?”  That’s what Mr. Hay and Mr. Schmidt focused on in their testimony.  I don’t disagree that if you went to a spot market-based price in year 3, that you would clearly see a jump in price. 

 

However, that isn’t how prudent load-serving entities contract.  For example, we have a mix of contracts in our portfolio, nothing is fully short-term, nothing is fully long-term.  You have both short-term and long-term and occasionally intermediate.  We constructed a facility in North Carolina recently, and sold the output to Duke Energy [Duke Energy Corporation] for 3 years, with a right of first refusal for an additional 7 [years].  Those are the kinds of arrangements that generating companies are willing to enter into, as long as those arrangements are mutually beneficial. 

 

Mr. Huddleston expounded:

 

I believe that the fear that you would, all of a sudden, see some huge price spike in year 3, would be fully dependent on how you set up the market following the expiration of the transitionpower purchase agreements.  If the load-serving entities are entering into portfolio arrangements, then clearly, they’re going to mitigate any exposure to short-term prices.  Just as we’ve seen throughout history, if you go back 10 or 20 years, there have been price spikes under the regulated regime.  There have been price spikes in the gasoline market.  Those price spikes tend to go away because the signals that the market sends out tend to incite people to respond. That response is through investment in facilities.  Companies like mine are interested in investing in facilities. To the extent that the grid can support expansion, we are willing to enter into those kinds of investments.  I believe that it’s all within our own hands how we proceed, and to just immediately determine that we shouldn’t move forward is too short-sided for this important topic.

 

Chairman Townsend concluded the hearing on divestiture.

 

There being no further business or testimony, the meeting was adjourned at 10:17 a.m.

 

                                                                                    RESPECTFULLY SUBMITTED:

 

 

                                                         

Lydia Lee,

Committee Secretary

 

 

APPROVED BY:

 

 

 

                                                                                         

Senator Randolph J. Townsend, Chairman

 

 

DATE: