MINUTES OF THE

SENATE Committee on Commerce and Labor

 

Seventy-First Session

March 16, 2001

 

 

The Senate Committee on Commerce and Laborwas called to order by Chairman Randolph J. Townsend, at 7:00 a.m., on Friday, March 16, 2001, in Room 2135 of the Legislative Building, Carson City, Nevada.  The meeting was video conferenced to the Grant Sawyer Office Building, Room 4401, 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 Raymond C. Shaffer

Senator Michael A. (Mike) Schneider

Senator Maggie Carlton

 

COMMITTEE MEMBERS ABSENT:

 

Senator Mark Amodei (Excused)

 

STAFF MEMBERS PRESENT:

 

Kevin C. Powers, Committee Counsel

Scott Young, Committee Policy Analyst

Heather Miller, Committee Secretary

 

OTHERS PRESENT:

 

Michael A. Pitlock, Lobbyist, AES Mohave Limited Liability Company, and Shell Energy Services Company, Limited Liability Corporation

Kirby Lampley, Policy Analyst, Public Utilities Commission of Nevada

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

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

Fred J. Schmidt, Lobbyist, Southern Nevada Water Authority

Scott M. Craigie, Lobbyist, Pinnacle West, and CalPine Corporation

Madelyn Shipman, Lobbyist, Washoe County

Renny Ashleman, Lobbyist, Mirant Americas Incorporated

Harvey Whittemore, Lobbyist, Nevada Resort Association

Pete G. Ernaut, Lobbyist, Reliant Energy, and WPS Power Development             Incorporated

 

Senator Townsend began, “We have two bills, or bill draft requests [BDRs] this morning, committee.”

 

BILL DRAFT REQUEST 53-287:  Revises provisions governing portfolio standards for renewable energy resources and imposition of civil penalties by public utilities commission of Nevada.  (Later introduced as Senate Bill 372.)

 

BILL DRAFT REQUEST 53-558:  Makes various changes to the provisions relating to labor commissioner.  (Later introduced as Senate Bill 373.)

 

            SENATOR O’CONNELL MOVED TO INTRODUCE BOTH BDR 53-287 AND             BDR 53-558.

 

            SENATOR SCHNEIDER SECONDED THE MOTION.

 

            THE MOTION CARRIED.  (SENATOR AMODEI WAS ABSENT FOR THE             VOTE.)

 

*****

 

Senator Townsend said:

 

Ladies and gentlemen, we are here this morning to discuss issues regarding utilities [and have] a work session on Senate Bill (S.B.) 253.  A number of things are extremely important in this and it will be, in fact, a work session.

 

SENATE BILL 253:  Prevents certain electric utilities from disposing of certain generation assets for a limited period and places restrictions on disposal of such assets after that period. (BDR 58-1122)

Senator Townsend stated:

 

The Federal Energy Regulatory Commission [FERC] issued a news release yesterday, actually it was Wednesday,  “Commission Issues Show Cause Order, Launches Non-Public Investigation of Two California Power Marketers” [FERC News Release, dated March 14, 2001, Docket No. IN01-3-000, Exhibit C].  This has to do with the prices they were selling into the market.  [Also,] “Commission Orders Potential Refunds for California Electric Power Sales, Comments Sought on Long-Term Price Mitigation” [FERC News Release, dated March 9, 2001, Docket No. EL00-95-017], and that’s coming from [FERC] Chairman Curt Hébert, Jr., and “Commission Moves to Remove Obstacles and Expedite Energy Supplies to Western Markets” [FERC News Release, dated March 14, 2001, Docket No. EL01-47-000], so, obviously [these are] areas with which this committee is familiar.  [The] FERC is taking an extraordinarily expedited role, [and] you usually see them mull over things fairly quickly.  Ladies and gentlemen, we have S.B. 253, which, as you’re well aware, prevents certain electric utilities from disposing of certain generation assets for a limited period, and places restrictions on disposal of such assets after that period.

 

Senator Townsend continued:

 

This committee received a memorandum, and I don’t know whether any of you have this, but this is to Harold Franson [of AES Corporation of Arlington, Virginia] from Joseph Malkin and William Kramer [California Attorneys Joseph M. Malkin and William J. Kramer, of Orrick, Herrington and Sutcliffe, San Francisco, California; Exhibit D].  Originally presented at the March 7, 2001, meeting of the Senate Committee on Commerce and Labor], dated March 6, regarding the unconstitutionality of S.B. 253 as applied to the AES Corporation’s purchase of the Mohave Generating Station [from Nevada Power Company].  To be quite specific, Mohave and the sale, to my knowledge, is the only one that currently has gone through, and been accepted, by the Public Utilities Commission of Nevada.

 

Michael A. Pitlock, Lobbyist, AES Mohave Limited Liability Company, and Shell Energy Services Company Limited Liability Corporation, testified:

 

Mr. Chairman, if I could just interrupt you for a moment.  Michael Pitlock, representing AES [Applied Energy Services Corporation] Mohave LLC, I believe Scott [Scott Young, Committee Policy Analyst] is passing on a supplemental memo that follows up on this original memo [Exhibit E].  The AES Corporation had their attorneys take a look at this issue, at least part of the issue, in a little more depth, in light of the comments from Mr. Powers at the first meeting.  So the second memo is a supplement to the first one and it gives you a little more detailed analysis of the issue.

 

Senator Townsend queried, “Is this the first time Mr. Powers has seen this?”  Mr. Pitlock answered, “I believe so.  I just got it late last night.”  Senator Townsend commented, “Okay, then I will not ask anything until you have time to look at it, all right?”  Mr. Pitlock stated, “Thank you, Mr. Chairman.”

 

Senator Townsend stated:

 

Let’s go to the very, very specific things as testified to in front of this committee in the last hearing on this issue.  . . . There were certain numbers brought to us and because this committee is a policy committee and not one that is going to argue over pennies, because that is the regulatory mechanism’s responsibility, let’s see if we can reframe the issue, and anyone who wants to clarify it can certainly do so.  There was representation . . . if the plants are kept or sold, there are buy-back contracts at 1998 rates, at which there will be certain savings until 2003.  I believe the representation was around $800 million to $880 million, [which] was going to be at current price rates.  Now that may have changed because of the changing market rates.  I believe there wasn’t too much disagreement as to the short-term benefit to our consumers.  There was additional testimony, in fact, if you were to stop the sale of the plants and run out over a period of 5, 6, or 7 years, then the benefits started accruing to the public. 

 

I know, Mr. Hay [Timothy Hay, Chief Deputy Attorney General, Bureau of Consumer Protection, Office of the Attorney General], you have a document in front of you that outlines some of that.  Does everybody still have that document?  I don’t know whether you do or not.  I can’t remember the date this was brought [to the committee], but probably the first hearing.  The time period of projection was July 2001 to February 2003, [with] Sierra Pacific Resources [projection] accepted . . . the BCP(Bureau of Consumer Protection) and the Southern Nevada Water Authority (SNWA) estimated an $870 million to $1.1 billion savings to the customers as a result of the buy-back contract.  Then, we went from July 1, 2001 to December of 2005.  The bureau said the turnaround would be $915 million savings to the customers long-term, and the SNWA estimated $1.7 billion to $3.5 billion [savings].  So, there is at least agreement in principle, that keeping the plants would in fact benefit our consumers over the next 5 to 7 years.  The detailed differences are a result of different assumptions, cost of fuel, and the fluctuating nature of the commodity. 

 

We’ll make copies.  I am sure it is buried in all the materials you have.  So if that is the premise, if someone wants to change his or her position, now is the time.  But, if the premise is long-term ratepayers in the state of Nevada benefit by keeping these plants, then let’s take the next step, and the next step is twofold.  You have some situations . . . which are, number one, the global settlement [“Agreement and Stipulation,” dated Final 07/27/00 (Exhibit E.  Original submitted as Exhibit D in Senate Committee on Commerce and Labor minutes dated February 6, 2001)], number two, the CEP [Comprehensive Energy Plan, Public Utilities Commission of Nevada Docket No. 01‑1045], which has been accepted, and number three, costs incurred by this company as a result of regulatory requirements to contract with companies to sell these plants.

 

That brings the larger question, which I am now putting in front of all of you.  If we set aside the sale of these plants, and we look at protecting the interests of Nevada ratepayers by staying with the cost-based rate mechanism we have had for 50 years and we keep that in place, then the question is, what happens to the global settlement?  What happens to the CEP?  What happens to those costs incurred by the utility [as] required by the regulatory mechanism?  How are those dealt with?  How and when would a rate case occur?  What is the role of deferred energy, since that was part of our original regulatory mechanism?  And, I do not know who wants to start, but Mr. Lampley [Kirby Lampley, Policy Analyst, Public Utilities Commission of Nevada], do you want to start?  Let me be specific and this could help you.  If the policy of the state is to defer the sale of these plants, and the company has incurred X number of dollars, legitimately so, is there a current mechanism that allows them to recover it?  Or, allows them at least to come in and ask for recovery?

 

Kirby Lampley, Policy Analyst, Public Utilities Commission of Nevada, answered, “The only mechanism in place right now, I think, is with the global settlement [Exhibit F].  The companies are allowed to come in once a month and provide an update, which is capped to their costs of fuel and purchased power.”  Senator Townsend queried, “Well, how could they recover them?  How could they recover administrative contract costs incurred under the FNPP [Fuel and Purchased Power]situation?  Because that is not fuel and it is not purchased power.”  Mr. Lampley responded, “I am not sure I understand.”  Senator Townsend clarified, “Well, the global settlement was only fuel and purchased power, wasn’t it?”  Mr. Lampley replied, “That is correct, Senator.” 

 

Senator Townsend questioned:

 

Then, how would they have an opportunity to come in and make their case that your agency required them to sell these plants in order to merge?  The FERC agreed they entered into contracts in good faith.  They’ve incurred X number of dollars of cost.  Where does that fit in?  Or, do we have to wait to change the mechanism again so they have an opportunity to go to the commission and present their case?

 

Mr. Lampley answered, “I’m not sure currently there is a mechanism for them to recover those costs.”  Senator Townsend responded, “Okay, that’s fair.  Is that your sense, Mr. Hay? 

 

 

 

 

Mr. Hay, Chief Deputy Attorney General, Bureau of Consumer Protection, Office of the Attorney General, answered:

 

I agree, the global settlement [Exhibit F] is not the vehicle to recover those legitimate transaction costs they may have experienced in going through the process to solicit bids on the [power] plants.  The global settlement did call for a general rate case to be filed no later than October, 2002.  That would be one vehicle to recover such costs.  Obviously, in light of changing circumstances, there may be the potential for a general rate case to be filed at an earlier time as well, which would be another vehicle.

 

Senator Townsend asked, “Is that the general way it would be done?  Under normal circumstances, it would be a general rate case”  Mr. Lampley replied, “Yes.”  Senator Townsend asked, “Okay, our former commissioner, are you shaking your head, ‘yes’?  I know you can’t speak as a commissioner, but you can speak, based on your experience.  Is that fair?”

 

Mr. Pitlock responded:

 

For the record, Michael Pitlock.  Not speaking on behalf of anyone but myself as an individual and former commissioner, I would agree with Mr. Hay, a general rate case would be the appropriate place to consider these types of costs.  Possibly accelerating the timing of that general rate case would be the best way to deal with it. 

 

Senator Townsend questioned:

 

Do all of you agree if there are costs incurred, they could legitimately bring those forward for commission review under a general rate case, as that is where it would be normally put?  Is that your sense? 

 

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

 

Mr. Chairman, I think in general that would be true, but there is still some uncertainty around when we would file any next general rate case.  Assuming we do not file it until October 2002 for implementation in March 2003, the test period for that case probably starts July 2002.  There is an ambiguity or an uncertainty there about whether or not these costs would be included.

 

Senator Townsend questioned further:

 

So, is it fair to say if this were a normal situation, and you went with a general rate case, there would be an opportunity at that time, but since [there is] the issue of the date when you could come in, you might want language to make sure that is included in the potential for cost recovery at the commission level.  Is that what I’m hearing? 

 

Mr. Ponn answered, “That’s correct, Mr. Chairman.  I think it would be a clear expression of public policy if there were language stating the costs are available for an application for recovery.”

 

Senator Townsend commented, “I do not think the committee is looking at guarantees for anything because that is a commission issue.  Mr. Lampley, you wanted to say something?”

 

Mr. Lampley affirmed:

 

Yes, Senator.  The reason I did not think there was any way to recover the costs is because, normally, when the commission looks at costs they do not consider past costs that are not part of the continuing expense of the company.  However, in prior periods, the commission has allowed companies to accrue those costs in a deferred expenses account for future recovery. 

 

Senator Townsend asked, “So, you are saying if the DEAA [Deferred Energy Adjustment Agreement] were put back in, that is where you would look at it, as potential recovery?”  Mr. Lampley answered, “I do not think in the DEAA, not [for] a contract cost.”  Senator Townsend noted, “I understand, but you just said a deferred account.”  Mr. Lampley clarified, saying, “There are other deferred expense accounts.  There are many types.”

 

 

Mr. Pitlock explained further:

 

A common practice in a traditional regulatory framework would be to establish what would be called a “regulatory asset.”  In other words, you take these costs incurred for this unusual set of circumstances, you set them in an account called a regulatory asset, and then at some future time, whenever that is, when a case is before a commission, they [could] consider the prudence of those costs at that time.  If they agree they were appropriately incurred, they may allow an amortization of those costs over some period of time in the future. 

 

Mr. Ponn added:

 

Excuse me, Mr. Chairman, I think in order to establish a regulatory asset [account], which may be the appropriate way to handle these, you still need some expression of intent [signifying] they are, in fact, costs which should be recovered.  So, you cannot just unilaterally create a regulatory asset. 

 

Senator Townsend said:

 

Thanks.  Okay, let me ask this of the parties that participated in these numbers.  Have those [accounts] changed since these [figures], this was 2 weeks ago or so, have those changed because the prices of the commodities, coal, gas, et cetera have changed?  Mr. Hay, do you have a sense of that?

 

Mr. Hay responded:

 

Mr. Chairman, we have not updated the numbers, but as I think you are aware, at least the futures prices for natural gas have declined substantially since the first of the year.  Many of the projections are driven by those numbers, so that would be, probably, a continually changing target.  It would make our numbers appear even more conservative than the ones we presented in February to you, if we incorporated those new cost data and updated the numbers.

 

Fred J. Schmidt, Lobbyist, Southern Nevada Water Authority, said:

 

Because there were some suggestions some of the math was fuzzy, maybe to understand what the numbers were and [what] the key assumptions were, without going into a lot of detail, would be helpful.  The calculations Sierra Pacific Resources performed in its latest numbers were based on prices in natural gas that peaked in the winter:  Those for Nevada Power [Company] in their assumptions, were in the range of $10, and Northern Nevada for Sierra Pacific were about $8.80.  The prices Mr. Hay used in his assumptions for natural gas carried forward those assumptions on how to price, in the short-term, natural gas through a continuum of 5 years.  The difference, and the reason the Southern Nevada Water Authority’s [SNWA] calculations were so much different, was our calculations were done a little bit later than the first two calculations, and we looked at what the price of natural gas was going for at that time and going forward.  As a result, I would agree with Mr. Hay, the price of natural gas has come down and our calculations are actually looking much better right now, in terms of accuracy.  We assumed a natural gas price of $5.30, which is pretty consistent, or in the range of rates, where the market is right now, in terms of what the power companies experience in buying gas for the plants. 

 

Senator Townsend queried, “All of that means you agree with the statement his numbers were conservative?”  Mr. Schmidt replied, “His were conservative, and, I think, the numbers and range we projected are much more realistic now in terms of the results to customers.”

 

Senator Townsend commented:

 

I guess [it is] one of the things we forget, because we deal in big policy issues here, big numbers, and all of those things.  This is one of those things that are extremely important, and the committee needs to make a decision quickly because the employees at these plants are also assets of this state and assets of the company.  I know what it would be like for any of my employees, if they were just wondering whom they were going to be working for next week.  It’s just not fair to them.  We have to make a decision, we are either going to do this or not, so they know what their future is, because that is very, very important.  These people have been out there, we forget about them, [but] they’re out there in the freezing cold, or the burning heat.  They keep the lights on, and the air conditioners going, and heaters going, and we tend to forget about those people.  We want to make this decision, committee, as soon as we can, because if nothing else, dollars are at risk, and particularly, the future plans necessary for those employees to make . . . .  [They] need to be able to have some certainty.

 

Let’s go into the issue of the global settlement [and the] CEP.  Global settlement was accepted by the Public Utilities Commission [of Nevada (PUCN)] as an FNPP mechanism [adjusted] on a monthly basis in order to accommodate the changes that occurred in rising fuel prices.  It was not done as a DEAA; it was done as a different mechanism that was less than a dollar-for-dollar recovery.  In the long term, it looked like it benefited our customers, but it also put a tremendous squeeze on the company.  It ultimately resulted in them [the companies] coming back in for a CEP, which, of course, was accepted by the commission, and done so conditionally.  Those conditions remain to be reviewed, I take it, over the next couple months?  Mr. Lampley, is that fair?

 

Mr. Lampley replied, “Yes sir.  A procedural order was just issued in that case, setting forth a pre-hearing conference on March 23.  We’ll figure out how to proceed from there.”  Senator Townsend asked, “So you are going to get all the usual suspects in a room and figure out how to sort through it?  Is that the way you do it?”  Mr. Lampley affirmed, “That’s correct.”  Senator Townsend then asked, “How long would a commission anticipate [it needed] to analyze what you gave them?”

 

Mr. Lampley answered:

 

There are a number of unknowns at this point.  For example, is this going to evolve into a general rate case, is one of the questions we need to resolve.  In which case, there are filing requirements for the company, a number of statements, and so on, that have to be filed.  I think we touched on some of this previously.  So, depending on how that goes will determine how long it is going to take.

 

Senator Townsend remarked:

 

I know our colleagues in the other house, particularly the majority leader, were deeply concerned by the fact the global settlement was not held in the normal regulatory manner.  So, one of the concerns would be, if we go back to normal rate-of-return regulation, we make sure all of those hearings fall under the previous requirements.  Now, that is the good news.  The bad news is, there is going to be a lot of dollars there.  That, in fact, may be different.

 

Let me ask Mr. Hay.  If we go to rate-of-return regulation and we suspend the current mechanism, which is both the two previous filings, and we suspend those, in your opinion, how does that clear it up if you go back to a normal, general rate case, deferred-energy accounting?  How do you clean up those two requests that were granted, and go back to a normal accounting mechanism?

 

Mr. Hay responded:

 

Let me just comment on Mr. Lampley’s statement.  I do not think the CEP filing can evolve into a general rate case.  It’s our contention it was not filed as one.  It did not comport with the statutory requirements, and if the commission chooses to go down the path of a general rate case, I think the appropriate thing to do is instruct the company to refile the CEP filing in the nature of a general rate case.  Since the next called-for general rate case, under the global stip [stipulation Exhibit F] was to be filed no later than October 2002, I think it implied something could be filed earlier without violating, totally, the global stipulation requirements.  Although the adjustment formula in the global settlement was designed to increase over time, which everyone, at the time the agreement was entered into, agreed would result in under-recovery at the front end, and potentially over-recovery as the caps rose.  We believe there are significant issues raised by the fact the CEP filing was filed, essentially, on top of the existing rate adjustment mechanism that had been agreed to. 

 

The commission is receiving legal briefs on a number of issues on Monday, including whether or not the CEP filing in fact abrogates, or in some other way vitiates, the terms of the global settlement.  So, we will be making some legal determinations in the next few days if that is the case, because we may be looking at a situation where we have got both an illegal filing that has been acted on in the CEP filing and if, by the filing of the CEP filing, the global settlement itself has been abrogated.  In which case, we are kind of back to ground zero, and we’d have to get together, and probably a full-blown, general rate case is the only way to put all those pieces together in any sort of coherent fashion.

 

Senator Townsend asked:

 

So, you are saying there are legal issues out there dealing with these two components, is perhaps the only way to resolve them to allow the old mechanism to go back into play, go to a general rate case, and sort through it?

 

Mr. Hay answered:

 

That would certainly be one logical way of looking at it.  It was our position, rather than the CEP filing, if the company had chosen to come in and actually amend the global stipulation rate mechanism, it would have been another alternative.  If something happens and the CEP filing is determined to be inappropriate, I think the mechanism would still be there as well if we did not want to go through the full-blown general rate case, but obviously, there are so many issues on the table, it might be the only way to really sort them all out.

 

Senator Townsend continued:

 

Mr. Ponn, let me ask you, [as] I am not exactly sure the committee understands.  We understand the CEP, but not in the context of going back and talking about the global settlement, and finding out if it worked within that context.  Is there a reason you didn’t use the portion of the global settlement allowing you to come back in before October 2002, for a general rate case and just apply?  . . . I [need] to understand a little more. . . .   If we’re going to unwind all of this and go back to where we were, we’ve got to know where we are.  It seems like there are a lot of balls in the air.

 

Mr. Ponn responded:

 

Mr. Chairman, I think we are starting to mix a couple of issues here.  The crux of the difficulty the utility and its customers are experiencing are rising fuel and purchased power costs.  It was a part of the global settlement to allow for the tracking and partial recovery, on a current basis, of those increases in fuel and purchased power costs the utility was experiencing and causing [it] so much financial difficulty.  Whenever the fuel and purchased power rider contained in the global settlement became apparently inadequate and was leading us into a dire financial situation, there is a legal history about what we filed and how we settled those court cases.  Beyond that, whenever we filed the comprehensive energy plan, it was another attempt, still, to try to keep up with the rising fuel and purchased power costs so they did not wreck havoc on the company, the system, the state, et cetera.  So, where we are today is we’ve patched together, among us, a system to recover some of those costs which we hope will be partially adequate.

 

But, I think rather than talk about redoing general rate cases which take a lot of time to prepare, a lot of time to process, and maybe too much time to be of any help to anybody in this situation, I think the question being begged, is whether or not we should reinstitute deferred energy.  . . .[Then] you can have a basis upon which to recover those fuel and purchased power costs, and beyond that, upon reinstitution of the mechanism, you might have a basis to start deferring those costs, which has a big financial advantage to everyone.  If you can defer those costs and recover them over some period of time the commission deems appropriate, it has big financial pluses.  If we evolve out of this debate into something that says, “Let’s scrap the global settlement” or “Let’s scrap the CEP,” the timing is a real problem unless you have deferred energy sitting there ready to start making the recovery of these costs current.

 

Senator Townsend questioned:

 

Mr. Hay, if deferred energy is put back into the system, and we go back to a normal rate of return, what happens to the global settlement, including all the FNPP writers, in your opinion?  Is it beneficial to the consumer?  Does it hurt the consumer?  Or, is it a wash? 

 

Mr. Hay replied:

 

We believe the global settlement still, both in retrospect and currently, was an appropriate mechanism for balancing the risks between the company and the consumers, and to allow appropriate recovery.  There are so many accounting issues out there, I am not sure we can just do the leap from reinstituting deferred energy, and kind of leaving anything else on the table.  I think the global settlement itself provides essentially a deferred mechanism, in that it operated under a rolling average, looking retrospectively at fuel prices over the past 12-month period, with a lag.  So . . . analytically, it’s somewhat similar to deferred energy.  The fact it has caps in it makes it somewhat different.  We believe if we did go back to a deferred-energy type structure, we’d still have to look at the prudence of the company’s purchasing practices, from the time the global settlement was entered into until whenever we’re into a new regulatory arena.  It would certainly be an option if the legislature chose to reinstitute deferred accounting.  We have not actually made a judgment on the appropriateness of that policy, in light of current circumstances, and how it would impact consumers. 

 

Senator Townsend requested, “Could you make that determination by Wednesday?”  Mr. Hay affirmed, “Yes, we could.” 

 

 

 

Senator Townsend inquired:

 

Is it too much pressure?  I just want to make sure you have an opportunity to think it through.  We’re going to need your insight. We understand how it works, but . . . I am not sure the committee would understand how it works if we put it back in light of the other two issues.  That’s where I am confused.  I don’t know what it does, because on one hand, we do not want to have any over-recovery, but on the other hand, we have to make sure there is stability in their revenues so the people they contract with for the purchase of fuel think they can pay them.  Since southern Nevada needs more transmission, they have got to be able to go out and either borrow, and they have got to be credit-worthy in order to borrow money, so I am not sure of the effect of that.  It is your expertise, so we’re going to depend on you and the rest of the people at this table, to look at the issue.

 

Mr. Hay answered:

 

We’ll certainly evaluate it, Mr. Chairman, and I would note since March 1, the company’s been accruing about $25 million a month under the rate increase approved by the commission.  So, those dollars, obviously, are stacking up fairly rapidly.  That’s on top of the dollars, some $860 million, they would recover under the global settlement, should it run its full course and should they hit the caps for each of the adjustment periods.  It is our belief there is a lot of money out there that needs to be accounted for, and there has to be a comprehensive way of doing it.

 

Senator Townsend said, “Yes, my concern is just to make sure we do not preclude the ability to get our arms around all of the numbers.  We do not know where they are going to fall, we just want to make sure there is nothing left out.  Mr. Ponn, then Mr. Pitlock.”

 

Mr. Ponn replied:

 

Mr. Chairman, to Mr. Hay’s point, the company certainly has no objection to anyone looking at any of our numbers around fuel and purchased power.  We just filed three audit reports dealing with related subjects.  I think there are probably five people at this table who can say they have never voted for a dollar of over-recovery on a deferred-energy case.  I think if you look at the history, it’s certainly not about making money on fuel and purchased power costs, it is about something approximating timely recovery of those costs.

 

Mr. Pitlock added:

 

Mr. Chairman, you talk about unwinding things and going back to a more-traditional regulatory framework.  If you’re going to consider that process, I think one other aspect to this needs to be worked into it.  At the time the global settlement was put in place, there was a difference between Nevada Power [Company] and Sierra Pacific [Power Company], and how they were dealing with their fuel costs.  Nevada Power [Company] was still on deferred energy at that time.  Sierra Pacific [Power Company] had been off of it for some time, and was in an annual sharing mechanism.  So, those different starting points, I think, have to be factored into the analysis as well.

 

Senator Townsend said, “That’s a good point, [and] was one of the things leading us to what we did in the first place.  Senator O’Connell has a question, then Mr. Schmidt.”

 

Senator O’Connell queried:

 

My question is for you, Tim [Mr. Hay].  If we proceed with the company keeping the plants, and there are lawsuits due to that, how is the money from the lawsuits figured into the cash situation?  And, is it allowed for when you’re looking at the rate cases and the recovery? 

 

Mr. Hay responded:

 

Thank you, Senator.  It is our opinion all of the contracts executed have regulatory “out” provisions, as we’ve already discussed.  Only the Mohave Agreement has been approved by the commission.  I don’t believe there is much risk of liability for those other contracts yet to be approved, because I think the regulatory out provisions will allow the parties to essentially walk away from those agreements and just bear their own costs.  As we have indicated, we think the company is probably entitled to recover some, or all of the transactions costs they have incurred.  Certainly, if the company found itself in litigation, or even [if] the state is a party, those would all be costs considered in the appropriate mechanism down the road.  As you know, if we do get into litigation, it’s probably going to be years, before we know what the numbers may be.  I don’t believe the litigation risk, on the transactions not yet approved, is a high one.  I think there are probably mitigating factors on the Mohave sale as well.  I have not reviewed in detail the memorandums Mr. Pitlock produced, but I think litigation risk is something we have to bear in this arena, certainly.  Obviously, the reason we got into the global settlement was because the company had challenged the actions of the commission and the Legislature in enacting S.B. 438 in the ’99 session [Seventieth Legislative Session].

 

SENATE BILL 438 OF THE SEVENTIETH LEGISLATIVE SESSION:  Makes various changes related to electric restructuring.  (BDR 58-861)

 

Mr. Hay continued:

 

We thought we had many of those issues resolved, but these things are difficult to predict.  Certainly, if the company incurred a liability, it would be something in the commission’s purview to determine how those expenses should be allocated between the shareholders and the ratepayers and the state. 

 

Senator Townsend noted:

 

Yes, it would have to be.  We are going through a mechanism which tells people to do something.  Now, if they do not do it prudently, then that is something the commission would determine.

Let’s get back to the bill and the actual issue of deferring the sale.  Mr. Schmidt, in essence you are saying, based on the future price and the drop-off from the demand in the winter, and the price coming down to $5 and change for natural gas, you are saying you probably are now getting closer to the upper end of your projections savings for the public.

 

Mr. Schmidt replied, “Not only are we getting closer to the upper end of the savings . . .”   Senator Townsend inquired, “Which is $3.5 billion?”

 

Mr. Schmidt answered:

 

Right, but the number was potentially harmful, although we were all recognizing the loss of the buy-back contracts, [it] could cause costs the company would [find] difficult to recover.  Those costs, which were estimated to be $872 million to $1.1 billion, are dropping.  If the gas price continues to drop, the difference between 1998 buy-back arrangements and the costs the company would incur in running the plants declines.  So, the harm also reduces.  I think those are good things, but I’m not implying, and do not by any means say, there isn’t going to be a cost.  The buy‑back contracts create an artificial benefit to the company in the short term.  The artificial benefit has an offset.  The offset was in the price the plants were sold for.  If the plants sales go through, there is a write-down on the actual bids on the plants of almost a half-a-billion dollars because of the buyback contracts.  I believe it is $490 million, to be exact.

 

There is a double harm in terms of getting rid of the plants.  Not only do you lose the longer-term benefits to customers by keeping control and the savings that occur by keeping control over time, but you also lose the difference in the value of the plants, because there had to be reductions in the bids the companies made when they priced out these plants.  They had to go out and assume risk.  That’s important for one other reason.  It should not necessarily be assumed a company losing the option of buying one of these plants is automatically harmed other than its ability to immediately obtain a market position in the market in Nevada. . . .  Many of the entities went out and bid on these facilities and succeeded, [then] had to secure a fuel supply or fuel source, particularly on the gas side.  If you secured a fuel supply for buying a gas plant last fall, before the prices spiked up, and now you lose the obligation, but also the right, to buy these plants, you have significant value in your remaining gas supply, which is also marketable and, in some instances, could be substantial. 

 

Senator Townsend announced:

 

Committee, Mr. Pitlock handed out a revised version or addendum or however you want to phrase it, to his original March memo [memorandum].  We have a March 15 memo on the unconstitutionality of S.B. 253 as applied to AES’ purchase of the Mohave Generating Station [Exhibit E]. . . .   Mr. Powers [Kevin C. Powers, Committee Counsel], could you give us your insight here?  I believe the bill talks about all the generating assets, and not just specific ones.

 

Kevin C. Powers, Senior Deputy Legislative Counsel, Legal Division, Legislative Counsel Bureau, complied:

 

Yes, Mr. Chairman, and if the committee will indulge me, this may take a little longer than anticipated.  Since this is an important issue everyone is concerned about, I want to cover the position of the Legislative Counsel Bureau (LCB) on this matter.  It is important to recognize, from the LCB drafting standpoint, we follow certain precepts when we are drafting a bill.  Some of those precepts involve the constitutionality of legislation, and we always begin with the presumption every piece of legislation enjoys the presumption of constitutionality.  We base our drafting on that.  Then, we look [at it] in light of the existing case law.  We ask, Is the bill, more likely than not, constitutional?  Having reviewed this bill, I am not [analyzing it] under the contract clause [provision in the U.S. Constitution, Article I, Section 1D, prohibiting states from passing a law impairing obligation of contract], but many different constitutional provisions.  We have concluded the bill is, more likely than not, constitutional; and just so the committee is aware, AES’ position involves the contract clause, but several other constitutional provisions would be implicated by this bill: the contract clause, the dormant commerce clause, the takings clause, the due process clause, the equal protection clause, and then [the] federal preemption under supremacy clause. 

 

This office considered all of those constitutional provisions when drafting this piece of legislation and again, we concluded more likely than not, this bill is constitutional.  However, I do add the caveat, because of the nature of the bill prohibiting, outright the sale of property owned by the utilities, and because existing contracts are involved, we are pushing the constitutional envelope.  I believe after, and I will discuss this further, given the presumption of constitutionality attached to legislation and the deference courts give in this arena to the legislature, that again, more likely than not, this bill is constitutional. 

 

AES’ position is, under the contracts clause, this bill is not necessary or reasonable to further legitimate public interest and, therefore, is unconstitutional.  One thing has to be kept in mind, there are two types of standards to be applied in contract clause cases.  The first standard goes to contracts to which the state is a party, and the second standard goes to contracts to which only private citizens are parties.  In their memo, AES relies on cases involving both types of contracts and, in fact, relies on case U.S. trust in which the contracts were contracts to which the state was a party.  That is a higher standard, and so they are relying on cases not necessarily directly on point. 

 

Mr. Powers continued:

 

The main thrust of AES’ argument is while the scrutiny might be somewhat less exacting where a change in state law impairs a private contractual obligation, courts, nonetheless, examine such laws in accordance with contract clause principles of necessity and reasonableness.

 

I think there are some general principles the committee should be made aware of which guided the LCB’s decision in concluding this bill, is more likely than not, constitutional.  This is from two recent U.S. Supreme Court cases, . . . involving contract clause challenges based on private contracts.  First statement [Exxon Corporation v. Eagerton, 462 U.S. 176 (1983)], “This Court has long recognized that a statute does not violate the Contract Clause simply because it has the effect of restricting, or even barring altogether, the performance of duties created by contracts entered into prior to its enactment” by private parties.  “The Contract Clause does not deprive the States of their broad power to adopt general regulatory measures without being concerned that private contracts will be impaired, or even destroyed, as a result” of those broad regulatory measures.

 

Because we have a contract, and we will focus on the AES contract because the AES contract is a contract between private parties and doesn’t involve the state, this higher standard for contracts, involving the state, is not applicable here.  Instead, the more deferential standard for contracts involving private parties is applicable, and the standard is to determine whether the statute violates the contract clause.  The determination must be made whether the impairment was reasonable and necessary to fulfill an important public purpose such that the impairment is justifiable.  If a statute impairs contractual obligations between private parties, courts properly defer to legislative judgment of the necessity and reasonableness of a particular measure.  That deference is even greater in situations in which there is a heavily regulated industry.  In this case, we have a heavily regulated industry.  The electric industry has historically been subject to strict regulation. 

 

So, the final point to be made in determining whether or not this bill is more likely than not to be constitutional is if there is a strong deference to legislative judgment.  There is a broad public purpose to be served here, protecting consumers in the wake of a crisis in the electric industry.  We are involved in a heavily regulated industry, the electric industry, historically subject to the strict regulation, and this type of regulation involved in this bill is a foreseeable type of state regulation that could not have been wholly unexpected by the parties.  Taking all of those factors into consideration, there is a reasonable and necessary state measure here, that, I believe, given the deference of court into such measures, would be constitutional under the contract clause.  Of course, again there are other constitutional principles involved here, and on all of those, as mentioned earlier, the LCB has concluded this bill is, more likely than not, constitutional.

 

Senator Townsend posed, “That, of course, is independent from the fact as long as there is a person licensed to practice law and is breathing, he could still sue anybody.  Is that fair?”

 

Mr. Powers responded:

 

That is fair, Mr. Chairman.  A lawsuit can be brought under any circumstances, whether or not the claim initially has merit.  And, I will say this, if AES were to bring a lawsuit challenging S.B. 253, if enacted, they could make a reasonable argument it violated the contract clause.  They might be able to convince a lower court, but I believe a higher court applying the precedent from the Supreme Court, and general deference given to the legislature, would find this bill constitutional.  I would also like to make the point, at this moment, AES has not completed the sale.  Nevada Power has not, as I understand it, transferred title to AES for its  interest in the Mohave plant.  Once title is transferred to AES, then the constitutional calculus would change.  AES would own the plant, and if the Nevada Legislature attempted to restrict or take their ownership of the plant, then a takings would be involved.  The constitutional calculus would be very different.  Right now, title is still in Nevada Power, as I understand it.

 

Senator Townsend continued:

 

Then, Mr. Powers, I do not know if you want to answer this . . .  Mr. Pitlock, but add to this aforementioned discussion, the effect of A.B. 6X [Assembly Bill 6X of the First Extraordinary Legislative Session of California], I guess, that is the official title of the bill prohibiting sale of the generation 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. (Dutra)  Cited as:  California ABX1 6.

 

Mr. Pitlock answered:

 

Mr. Chairman, that piece of legislation in California also affects AES Mohave, because they’re buying more than just Nevada Power’s share of the Mohave Generating Station.  Mr. Chairman, if I might just make a comment, to attempt to put this discussion in the proper context,  AES Mohave is only making these arguments with respect to this single transaction between AES Mohave and Nevada Power for its 14 percent share of Mohave.  We’re not applying these arguments to divestiture in general.

 

Senator Townsend offered, “I agree.”

 

Mr. Pitlock continued:

 

I think it’s important to keep in mind that the AES transaction is at a different stage.  Also, in the grand scheme of things, [it] deals with a relatively small portion of the generation.  At best, the Nevada Power share of Mohave is somewhere around 220 megawatts of energy.  Given the current limitations because of emissions, the actual output is more in the range of 180-some megawatts, from what I’ve been told from the engineers at AES.  So, I want you to keep that in context.  The original language in the bill set forth three standards for being exempt from the bill. One was that a contract had to be entered by a certain date, [and] regulatory approvals by a certain date. . . . AES Mohave was the only transaction that met those first two.  If those two remained in the bill, as the only criteria for exemption, the AES transaction would be the only one exempted.  You’d be exempting only a relatively small portion of the total generation and possibly, at the same time, greatly reducing the legal issues by being able to put away all of these arguments AES is making at this time.  Thank you.

 

Senator O’Connell questioned, “Mike [Mr. Pitlock], would you repeat those three different conditions again?”

Mr. Pitlock repeated:

 

The original language in S.B. 253 was modified a little bit based on, and I am not sure what status that draft had but we had a bunch of changes to the bill after the first hearing, but the original S.B. 253 had three criteria in it, that if all three were met, the sale would be exempt. . . .  The first criterion was the contract or agreement had to be executed before January 1, 2001.  The Mohave [Generating Station] transaction met that criterion.  The second one was the commission had to approve the agreement before January 1, 2001.  The Mohave [Generating Station] transaction also met that criterion.  The third one, is a long way of basically saying the transaction had to be closed before the effective date of the bill.

 

Senator O’Connell asked, “Now, does that mean the title was turned over then?”

 

Mr. Pitlock replied:

 

Yes.  It is the one criterion which, as of today, has not been met.  Depending on the effective date of the legislation, there’s at least a possibility even that criterion could be met before the effective date of the bill, depending on how long it would take.  They have been working on the closure of this transaction for some time.  What we had recommended initially in our testimony, at the last hearing, was to simply eliminate that third criterion and go with just the first two, because you would still only be affecting the AES transaction. 

 

Senator Townsend interjected:

 

Let me ask . . . if the committee decided that was not the public policy, Mr. Hay, what would the dates have to be on page one, lines 16 and 17, in order to deal with AES and keep them in the loop, as they say? 

 

 

 

Mr. Hay responded:

 

Before I address your question, Mr. Chairman, [there is] just another piece of information the committee probably needs to have.  Our office is considering filing a motion, in the nature of a motion, to set aside the commission’s earlier approval of this transaction.  There may be a regulatory concern as well.  If I understood your question . . . assuming it was the will of the legislature to prevent the closure of the transaction, you could alter the dates in sub[section] 1 and sub[section] 2 to reflect the time when the actual documents were signed and approved by the commission.  I don’t think you need to, but it would probably be the appropriate way of addressing that issue.

 

Mr. Pitlock said:

 

The sales agreement with Nevada Power and AES was executed on May 10, 2000.  The commission, the PUC[N] approval from Nevada, was on October 12, 2000.  The federal energy regulatory commission approved the sale on October 27, 2000, and the U.S. Department of Justice made its determination on February 16, 2001.

 

Senator Carlton asked, “Michael, what was the FERC date again, please?”  Mr. Pitlock answered, “The FERCapproval was on October 27, 2000.”  Senator Carlton replied, “Thank you.”

 

Senator Townsend said:

 

Now, Mr. Hay, Mr. Schmidt, you’re the two people who are out front on this issue.  The current dates are in here, relative to when you can sell the plants, did we come up with an agreement among all the parties on when it needs to be?  It’s now no sooner than January 1, 2003, an electric utility may apply for approval to dispose of an asset after July 1, 2003.  Is there a time frame?  Do you not want a time frame?  What is your position?  We’ll start with you, Mr. Hay, on those dates.

 

 

Mr. Hay replied:

 

Mr. Chairman, as we’ve indicated earlier, our economic analysis is premised over a 5-year period ending in January 2006.  We think it is an appropriate timetable.  If there is additional supply committed to serve the needs of Nevada customers before that time, obviously, the legislature in 2003 could revise dates.  The other issue we should mention is our concern was making sure the resources otherwise potentially divested were actually dedicated to Nevada consumers after the buy-back contracts ended.  Obviously, while we still have supply constraints in the West, besides just the issue of the economics of keeping the plants, the importance of protecting the supply for Nevada, I think, is an overriding concern as well.  Realistically, and I don’t know if Mr. Schmidt will disagree, probably the 2005 and 2006 time frame would be an appropriate window to reevaluate . . . if the company wants to divest its facilities.  The market conditions would probably exist to allow it to occur, or at least they would be substantially more favorable than they are currently.

 

Mr. Schmidt added:

 

The general premise for why do this is based on the shortage of supply, which does not turn around overnight.  It is also my understanding, from listening to Kevin’s [Mr. Powers] descriptions or discussions of the constitutional issues, that the shorter the prohibition of the time frame, the more likely the statute will be upheld as constitutional, because of the lesser the amount of impairment in terms of the obligation.  Particularly, during the first 2 years which is, I think, why the bill was drafted the way it was.  Initially . . . if the new owner has to sell the plant output at potentially a loss, because of the buy-back contracts, even though it has been factored into its bid, the impairment, in terms of its interests, is lessened.  I think that is why the bill was written the way it was originally written, given we would reevaluate after 2003.  The Southern Nevada Water Authority thinks, because of the shortage of supply in the crisis situation, the critical element for the Legislature to address and act quickly on is to ensure we don’t allow the sales to go forward until we get a handle on the supply situation.  So, time frame is not as critical.  The analysis though, I would agree with Mr. Hay, was primarily based on a 5-year period, and was done because the California statute, which affected a lot of Nevada’s plants as well, was done on a 5-year basis.  So rather than make it complicated and pick a lot of different years, that’s at least why we did it, as Mr. Hay had done his analysis that way, and we thought that made sense.  As far as the time frame though, we leave that to you.  At a minimum, taking some action soon or now we think is critical.  We do not disagree with 2006.

 

Mr. Scott M. Craigie, Lobbyist, Pinnacle West and CalPine Corporation, testified:

 

I do not want to interrupt your progress toward getting closure on these dates.  When you get to the end, however, I would like to introduce an issue I think fits right here, and suggests we need to look at this issue, [S.B.] 253, in a more global way.  So, I’ll walk away until you get closure on where you are now, because I understand the progress you are making, but I would like to have that moment when it’s timely.

 

Senator Townsend acknowledged, “We will come to it.  It’s an important issue, but, what I’m trying to do rather than talk here all day, is to take a bill and go through it, line by line, and get sense out of it.”

 

Mr. Powers said:

 

Right now the bill establishes an absolute prohibition on divestiture up until July 1, 2003, and then it’s a limited prohibition because there are circumstances under which the plants can be sold.  Any absolute prohibition extending beyond the 2-year period, the position of this office is you probably cross the constitutional line.  So, if we are going to have an absolute prohibition, anything beyond 2 years is raising serious constitutional questions.  A more limited prohibition after that date would be the preferable approach recommended by this office. 

 

 

 

Senator Townsend asked:

 

Mr. Craigie,  . . . I want to go over two things before we get back to both of those issues, which are whatever your issue was and the conditions after 2003.  First and foremost, we had a debate, and if you look at either the bill or the nice, colored reprint of this thing, Sierra [Pacific Power Company] is in the middle of selling its water company to a group of government entities in the north, and we want to make sure that is not what we’re in the middle of doing.  . . . Let’s just go to the bill for now [In section 5, subsection 2, paragraphs (a) and (b) of S.B. 253], it says, “The term does not include any hydro[electric] plant facility, equipment, or system that has a generating capacity of not more than 3 megawatts; and (b), Any net metering system, as defined by in NRS [Nevada Revised Statute] 704.771.”  Does the language in [paragraph] (a) cover your sale, Mr. Ponn?

 

Mr. Ponn responded:

 

I think it does, Mr. Chairman.  We certainly concurred with that piece of the legislation, which exempted, effectively, the hydro units associated with the water utility.

 

Mr. Schmidt said:

 

We do not have a problem with the exemption, and it covers that sale, though you should be aware the California statute prohibiting sales by Sierra Pacific Power Company, as contrasted to Nevada Power Company, would appear to still prohibit those sales.  The transaction, with regard to the sale of the water division, is really broken into two pieces now anyway.  It probably can go forward whether or not there is a hydro component, or I would expect it could until they fix the California problem.

 

Senator Townsend asked, “So what you are saying is California legislation did not bother to . . .”  Mr. Schmidt interjected, “Exempt small hydro[electric generating] facilities.”  Senator Townsend continued, “. . . be sensitive to Nevada’s needs, is that fair to say?”  Mr. Schmidt replied, “It was sweeping.” 

 

Mr. Powers interjected:

 

Mr. Chairman?  That is an excellent segue as to why the bill, this current bill, was drafted as it was, as opposed to the California approach, because the California approach is, in fact, too sweeping.  There is a commerce clause issue with the California legislation.  The ability of the California Legislature to regulate the sale of utilities in Nevada would be prohibited by the commerce clause, and it is the opinion of this attorney, to that extent, the California legislation is unconstitutional.

 

Senator Townsend noted, “I just want to make sure something, having nothing to do with what we are trying to deal with here doesn’t get caught up in the net.”  Mr. Schmidt added, “The other complication is some of the hydro[electric generation] plants, actually most of the hydro[electric generation] plants, are actually located in California, as opposed to plants located in Nevada.”  Mr. Powers said, “On the basis of that information, Mr. Chairman, then I concur, [to] the extent the plants are in California, then the California Legislature has authority to regulate them.”   Senator Townsend continued, “Using lines 32, 33, and 34 [of page 2], you’re comfortable it will not interfere with what your office wants, and Mr. Ponn, and all the parties to this?” 

 

Madelyn Shipman, Lobbyist, Washoe County claimed:

 

I think the concern I heard on the proposed language is there are four hydro plants, each less than 3 megawatts.  Just to be clear it’s a total, though, of more than 3 [megawatts], so you would be having a total of something like 10 or 11, or possibly up to 12 megawatts, on four hydros as part of that water transaction. 

 

Mr. Ponn said:

 

Mr. Chairman, maybe I can clear that up.  If you look at section 5, sub[section] 2, it says, “The term does not include: Any hydroelectric plant facility, equipment. . .”   I think it still reads, “or system,” last.  If you remove the word “system,” I think it clears the ambiguity, because each plant would have less than the 3 megawatts.

 

Senator Townsend asked, “So, if you just take out ‘or system?’”  Mr. Ponn responded, “Yes, sir, and then also, you may want to go back to section 5, [subsection] 1, [paragraph] (e), it says ‘Is used and useful for the convenience of the public. . . .’  If you add the word, ‘Nevada,’ it may also help to clear up the confusion.”  Mr. Lampley interjected, “I had the same concern Mr. Ponn did.  The total is actually greater than 3 megawatts, so if you remove ‘system,’ I think that would clear it up.”  Senator Townsend queried, “Maddie [Ms. Shipman], will you give that some thought, to make sure you are comfortable with it, because it’s a very serious issue.  We would appreciate it, and it’s no intent here to interfere with this transaction.”  Ms. Shipman affirmed, “Yes.” 

 

Senator Carlton stated:

 

I have some notes on the working draft from the other day, and the “green” has 75 megawatts and I made myself some notes concerning the sites specific to the Harry Allen [Substation] plant because it was a joint plant.  One part was going to go one way, and one part was going to go the other.  If someone could just refresh my memory on why we might have wanted to raise the megawatts to 75 [megawatts], and why we needed to add Harry Allen [Substation] to this piece of legislation, can anyone do that for me?

 

Mr. Craigie answered:

 

Just in a nutshell here, and I will not try to prosecute the case, I will try and just summarize what the issue was at the time, and get back to that issue later.  Pinnacle West purchased the Harry Allen [Substation] site specifically to build more generation on that site because they have certain air permits, and other pieces, facilitating that development project, right away.  The reason we were changing the 70-megawatt number is because the summer rating of that particular plant is higher than the 75 or 70 [megawatts] number.  That way, we could just draw the winter rating number.  We just wanted to make sure we drew a line separating Harry Allen [Substation] only, without getting into some of the other facilities down there.

 

Senator Townsend insisted:

 

And, we do want to get to the issue of conditions. . . .   You are on point.  We are going to come back to the issue of 2003 conditions, and whatever other point you wanted to make.  The issue is a very simple one on section 6, and this is where we get into the potential.  I don’t know whether this is your client, Mr. Schmidt.  Is there someone here from Henderson? [There were several.]  I don’t know whether you want to participate in this because there is a great deal of talk surrounding Henderson’s interests in this, so I want you to be able to defend yourself or make your position if you’d like.  [Representatives declined the offer from their seats.]  All right, let’s go to this issue, particularly with regard to sub[section] 2 of section 6 on line 45:  “The term does not include the state of Nevada or an agency or instrumentality of the state of Nevada.”  Mr. Schmidt, is the water authority an agency or instrumentality of the state?

 

Mr. Schmidt replied, “No.  I do not believe it falls within the definition listed there.”  Senator Townsend asked, “So, would you be considered under C [paragraph (c)], a political subdivision of a government, or an agency or instrumentality of a government, or political subdivision?”  Mr. Schmidt answered, “I believe we are under C [paragraph (c)].” 

 

Mr. Powers added:

 

I would concur in that interpretation.  The Southern Nevada Water Authority is a political subdivision of the state, so it would be included in term “person” under paragraph (c), and, therefore, would be precluded from having any generation assets sold to them by Nevada Power and Sierra Pacific Power [Company].  At this juncture, I think it is important to point out the one exclusion for the state certainly was intended to encompass agencies such as the Colorado River Commission or any other agency this state would create to buy generation assets.  However, this again is one of those areas where we are pushing the constitutional envelope because we are then moving into a commerce clause problem [by] favoring the state over out-of-state interests in the interstate market for buying and selling generation assets. 

When the state is acting in a proprietary capacity, the courts usually allow it to exclude other entities from participating in the market.  Once you start expanding the entities who can participate in the market to political subdivisions, then it appears the state is moving towards economic protectionism, and therefore, could raise serious commerce clause issues.

 

Senator Townsend posed, “I guess then the question comes, What is the difference between the Colorado River Commission and the Southern Nevada Water Authority?”  Mr. Powers answered, “The Colorado River Commission would be an agency or instrumentality of the state.  It is [created] by statute.”  Senator Townsend responded, “I understand what it is, but one is defined as being able to buy these assets and one is not.”

 

Mr. Powers affirmed:

 

Correct, and the Southern Nevada Water Authority is specifically defined by statute to be a political subdivision of the state of Nevada.  A political subdivision is an independent governmental unit that owes its creation to a superior governmental unit, whereas an agency or instrumentality is carrying out the functions of the superior governmental unit.  So, in this case, the superior governmental unit is the state, and the Colorado River Commission is carrying out its, the state’s, functions, therefore, the Colorado River Commission is an agency or instrumentality of the state.  The Southern Nevada Water Authority is not necessarily carrying out, directly, functions of the state, but instead is an independent political subdivision, a separate legal entity, that owes its creation to the state, but carries out separate functions. 

 

Senator Townsend inquired, “Mr. Monroe and Mr. Hillerby.  Do you have any insight at this time, relative to those two provisions?”  [Mr. Monroe’s answer was no.]

 

Senator Carlton asked, “Mr. Chairman, I have another question I am not sure about.  With everything you just said and the definitions you just gave, would the Colorado River Commission fall under the jurisdiction of the PUC[N]?”  Mr. Schmidt answered, “No.”  Senator Carlton continued, “So, they would be doing business without regulatory oversight?”  Mr. Schmidt responded, “In laws this legislature has previously passed, under the Colorado River Commission’s enabling statute, they have a specific law exempting them from the PUC[N].” 

 

Senator Townsend resumed:

 

Which now kicks us back to Mr. Powers’ issue.  If you go past 2003, in our attempt to defer the sale of these, then the constitutionality defense provision requires us to put certain conditions in, under which they could be sold after July 1, 2003.

 

Mr. Powers replied:

 

This office would highly recommend [doing so], so it is not an absolute prohibition beyond the 2-year period.  Now, the extent of the conditions is certainly a policy judgment to be made by the legislature.  The constitution doesn’t require specific conditions, but to make it more constitutionally defensible, it should not be an absolute prohibition beyond 2 years. 

 

Senator Townsend asked, “The conditions [now] in this bill, are they more defensible than other conditions we might come up with?”

 

Mr. Powers responded:

 

I believe these conditions certainly enhance the constitutionality, by providing mechanisms where the utility is able to sell its generation assets under certain circumstances.  Since the LCB [Legislative Counsel Bureau] believes this bill, more likely than not, [is] constitutional, we believe these conditions are sufficient.  . . . There is one exception, and I guess the term “absolute prohibition” is somewhat inaccurate, but during the 2-year period in this bill, as it stands, there are two possibilities for the generation assets to be sold.  The first is if the Governor declares competition may begin and triggers the ability for the PUCN to approve sale of the generation assets.  The second one exists outside the Governor’s approval and is this bill. . . .   [As it] stands now, it allows Nevada Power [Company] and Sierra Pacific Power [Company] to sell all of their generation assets through a merger, or a change of control, or some other acquisition, or transfer in their certificate of public convenience and necessity.  So even during the 2-year period, there is the ability for Nevada Power [Company] and Sierra Pacific Power [Company] to sell all of their assets through a different entity.  I know you are looking somewhat puzzled, Mr. Chairman, but the reason that’s in there is, given the strict prohibition on selling generation assets individually, if Nevada Power and Sierra Pacific Power decided they do not want to operate anymore in Nevada, they have the opportunity to go to the PUCN [Public Utilities Commission of Nevada] and ask for approval for any sort of merger, acquisition, or change of control they enter into.  The PUCN could only approve it if it is in the public interest, and at that stage, it is in the public interest only if the entity who acquires the assets would continue to operate the electric utilities in Nevada.  It is in there as an opportunity for Nevada Power [Company] and Sierra Pacific Power [Company] to get out of the electric business in Nevada entirely.

 

Senator Townsend questioned, “Were the PUC[N] to accept the total sale of the company, then this bill would not prohibit the acquiring entity from selling off the generation?”

 

Mr. Powers answered:

 

No, this bill specifically apprises them.  We can go to the language.  It is on page 2, beginning with line 6.  This is an exception from the definition of “dispose of a generation asset,” and “The term does not include a transaction approved pursuant to NRS 704.329,” which is the merger and change of control provision, “or a transfer authorized pursuant to NRS 704.410,” which is the transfer of the certificate of public convenience and necessity, “except that any person who assumes or has assumed ownership, possession, control, operation, administration or maintenance of the generation asset” is subject to the provisions of section 7.  That is the restriction on the individual sale of generation assets.

 

Senator Townsend asked, “So, they could only sell the whole company?”  Mr. Powers replied, “Correct, but they could sell it under this bill, as written, to an affiliate, if they sold everything to an affiliate.”  Senator Townsend continued, “If we use the language currently in section 7, with regard to the disposal of generation assets as a condition after the 2003 to 2006 [time frame], does that help you defend the statute?”  Mr. Powers asked, “Could you restate the question please?”  Senator Townsend rephrased, “If we use the language that is currently in sub[section] 2 of section 7 to be the conditions after 2003 to 2006 as the exceptions, does that help you defend the statute?”  Mr. Powers affirmed, “It does, Mr. Chairman.”

 

Mr. Craigie said:

 

Actually, there are a number of us representing entities that have come to this state, attracted by the provisions and the combination of Assembly Bill 366 of the Sixty-ninth Session, and S.B. 438 [of the Seventieth Session]. 

 

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)

 

They have come here to invest and build generation in the region, and a number of us who are representing companies in this area, have had conversations here.  What I would like to do right now is just ask everybody to take a look at the broader picture before we move too far along with this particular bill, because this bill is a legitimate policy consideration, one, I believe this committee and this Legislature should go through on what to do with the disposal of the generation assets of Sierra Pacific [Resources].  We have to remember the critical issue here in the West, and I think it is generally accepted by all, is the lack of supply.  I think it’s important for us not to just focus on the existing generation and make some hard and fast rules because there is a ripple effect with this policy decision.  There will be structural changes in the entire marketplace, not just in the fact this incumbent company will continue to own some or all of the generation here.  Conditions in this market have attracted my clients and others to come here because they believed, and continue to believe, eventually this market will open up to a market where there will be more than one buyer and more than one seller.  So, what we want to suggest is, as you take a look at this bill, you have to keep in mind Sierra Pacific [Resources], right now, probably because of some of the regulatory uncertainties you have been discussing from the time you opened this hearing, is not going to be in a position to do some of the investment necessary to meet our generation and even transmission needs, in the very near future.  They’re facing a genuine financial crisis.  I believe that.  We need to have outside investors to work on our supply shortage here.  There are a number of situations to be considered, and policies put in place by this Legislature, in order to allow for that.

 

One is there cannot be one customer.  A lot of the companies that are here building, including both of my clients, believe there needs to be more than one customer.  They cannot afford to invest themselves in a 2- or 3-year long process building generation.

 

Senator Townsend asked, “Can I stop you there?  I am confused.  Are you going off into construction of generation?”  Mr. Craigie affirmed, “Yes.”  Senator Townsend requested, “Please make it clear, because we are talking about divestiture, not about the construction of new facilities.”

 

Mr. Craigie replied:

 

And, what I am suggesting, Mr. Chairman, and maybe not as well as I should be, but what I am suggesting, is the structural changes you make, when you start with [S.B.] 253, are structural changes that create a deterrent to those who have come here.  They saw a market was opening up, they still see a market opening up, and we do have structural needs these people can help us satisfy.  But, if we look specifically at holding all those generation assets, then you probably have a company that is going to be using all those generation assets, then providing direct retail service to business and residential customers across the state.  Now, the Southern Nevada Water Authority does create, at least, the possibility of a second customer as it ventures into purchasing generation on long-term, purchased power contracts.  Again, these people are not going to come, they are not going to stay, they are not going to build here if there is only going to be one customer, because that one customer has them all captive, and you will create a deterrent to these people coming.  My suggestion is, as you do [S.B.] 253, take a look at some of those other issues, and I am not going to prosecute Harry Allen [Substation] here, but I believe a case-by-case review on some of these plants is a good idea.  In the public policy arena there is a desire to have some of these plants, possibly, sold for various reasons; AES has brought one the risk of a court case.  I understand the company’s position, where the company says “all or none,” and I believe it is where they are as they discuss these issues with some people.  That is, either sell all the generation assets or sell none of them.  I think for them it is a totally reasonable position.  They have contracts they have entered into in good faith with a number of potential buyers, and it would be probably inappropriate for them to show favoritism on the sale of any one plant over others. 

 

As [to] the legislature, I believe there is the opportunity, too, for you to look at some individual cases and say, “Yes, it might be in the public interest,” say in AES’ case, just as an example . . . “The legal liability or the legal risk for us, it might be worth letting that one go through.”  In the case of Harry Allen [Substation], a 70 megawatt peaker that, if sold, would allow us to build 500 megawatts of baseload and add it to our area.  I’m suggesting we really do need to take a look at [S.B.] 253 in the broader view.

 

Senator Townsend said:

 

I respect your insight.  However we have not gotten to an issue that might change this dynamic.  That is the ability, if this company is going to remain a rate-of-return based monopoly, then it is going to be required, under its certificate of convenience, to go out and acquire or build power to serve its customers, thereby instantly triggering a need to go to a blended portfolio of contracts.  They would be coming to people like you saying, “If you’re going to build, we want X.”  Now, yours is a little different because you are trying to acquire a plant at the same time you’re trying to build; his is different because he believes he has already acquired a plant in good faith and we can’t stop it; and Mr. Ernaut’s [Pete G. Ernaut, Lobbyist, Reliant Energy] is different because everybody is different. 

 

Now the Governor has stated, and I believe Madam Minority Leader has stated, in no uncertain terms, they want the sale of these plants stopped for the public good.  They didn’t say, “Except for all of our friends who have some deal in the works.”  They just said they want them stopped.  So, how do we look at this and say every one of these has a condition that is really in the best public interest.  That’s tough, that’s really tough.  Now you are getting to the broad picture, with one exception.

 

Mr. Craigie interjected:

 

Mr. Chairman, first of all I am not asking anyone to make any decision on specific plants, here.  I do believe many of the people in this market right now, putting together these development programs, will [take the] view this will be a one-buyer marketplace.  If this company does, as you say, remain a monopoly provider to this region, many of these people will find this a less desirable place to come and take the risk.  These people come in with all their investment dollars at risk.  They don’t have any guarantees at all; they don’t ask for any.  But one of the things they want is the ability to play one purchasing entity against another in a competitive market, and in every competitive market around the country, even in Arizona.  What they did there [Arizona] was create a multiple-buyer environment in order to inspire these people, “incentivize” [incite] these folks, to come in and invest.

 

Senator Townsend replied:

 

Well then, it begs the following question:  under the testimony here, and Mr. Hay, maybe this is an area for you, under the testimony here in Southern Nevada, we are producing approximately 22 [megawatts], how many megawatts are we producing that we own?

 

Mr. Schmidt said:

 

The amount of generation owned by the company is approximately 2000 [megawatts].  There are another approximately 600 megawatts under contract, which are the QFs [qualifying facilities] and the hydro facilities the CRC [Colorado River Commission] has.  The CRC and the QFs comprise the difference between 2000 [megawatts] and the 2600 [megawatts] you are referring to.

 

Senator Townsend asked, “Okay, and at peak we got up to, Doug [Mr. Ponn], last summer?”  Mr. Ponn replied, “Forty-seven [megawatts].”  Senator Townsend reiterated, “Forty-seven [megawatts].  So, we are 2100 megawatts short during peak.”  Mr. Ponn responded, “I would not call it short, Mr. Chairman.”  Senator Townsend asked, “There is a difference between, let’s put it this way, the differential between peak and baseload, is that better?  What makes you more comfortable?”  Mr. Ponn answered, “We meet the peak with a combination of what we have in the form of our own generation and other purchased power contracts and imports.”

 

Senator Townsend continued:

 

Then, getting to the two points Mr. Craigie made, which is, in fact, the ability of his clients to be attracted here, so if they do not sell everything or cannot contract for everything here, they can send it across a transmission line and send it to the highest bidder somewhere else.  It begs the question of the company’s ability to finance its need for transmission, because we can never forget that.  It also begs the question, if we actually, in the winter time in Southern Nevada at 2600 [megawatts], actually can cover our load with our own either QF contracts or our own generation, but [if] we cannot do it in the summer, then doesn’t it beg the question, some of our larger users are the actual problem during the peaking time and we ought to get rid of them.  Maybe they are the ones who should go to Mr. Craigie’s clients, Mr. Pitlock’s clients, and make them come up with the new generation the West needs.  Doesn’t it beg that question?

 

Mr. Ponn replied:

 

Just so there is no misimpression left on the record, Sierra Pacific [Power Company] and Nevada Power’s [Company] ability to attract capital to construct infrastructure would be greatly enhanced, and probably not a problem, if we are getting full recovery of the energy costs.  I do not think it is fair or appropriate to use shortfall recovery as a way to say something about our ability to attract capital going forward.  To your second question, there were certainly times last summer, and there will be times next summer, when the system, the company, and perhaps other customers, will be better off if large customers had an alternative source.  We are not on the system during those high-cost times.

 

Senator Townsend said:

 

So, if we could get rid of those large customers and make them go to these various new merchant providers, and find additional capacity by entering into long-term contracts that would get them away from us.  Then Mr. Schmidt’s or Mr. Hay’s clients, which are our residential, small, commercial customers, and perhaps our friends at the water authority, who have a huge demand on electric and it drives the cost of water, might be better off?

 

Mr. Ponn replied, “Yes, I think I would testify, in response to a question the other day, the whole system could benefit from those large customers being given a choice and other alternatives.”

 

Senator Townsend said:

 

Well, we may not give them a choice.  We may say, “You have been asking for it, you got it, you’re out of here.”  Now we cannot do it tomorrow, because obviously there is not enough capacity.  But if they knew they had to leave, then they could go to the merchant people who want to build additional capacity, and it would help them in their relationship.  You have to be careful what you ask for around here, because you may get it.  I think that is the issue.  If a large user becomes a problem for our residential customer, or a little person who has a gas station and a card store, then we have got to figure out a way to make them not a problem.  You have accommodated them all of these years, and I think it is a concern.  Go ahead, Mr. Pitlock.

 

 

 

Mr. Pitlock said:

 

Now, representing Shell Energy.  If I can give you my interpretation of what Mr. Craigie was talking about, I think a lot of the entities looking to come into the state to build generation are looking at the state as a potential for a vibrant, wholesale market.  I think what Mr. Craigie is saying is the characteristics of that vibrant, wholesale market are not only multiple sellers, but multiple buyers.  And so, in looking at how divestiture fits into the big picture, we may want to think about how can we get to the point, while still securing supply and stability and price, get to the point where there are those multiple buyers, and not just the incumbent utility, but possibly the incumbent utility, major customers, and an entity like Shell Energy, who would like to provide service to the residential class.  It’s not just the big guys who get something.  I think if we look at the wholesale market in terms of not only just sellers, but buyers as well, you get to a vibrant market that’s going to cure the supply problem.  Thank you.

 

Mr. Craigie said:

 

Mr. Chairman, I would like to just make a suggestion.  Some of the companies here building merchant plants, and we have had them in here [testifying] a couple of times, you may want to invite them to come back on a specific topic.  That is, as we begin to reevaluate how we have structured this particular marketplace, and we go forward, how does it impact your incentives, and what are you going to be looking for?  What are your reactions to some of the steps on the horizon here, both in this House and the Assembly?  Secondly, what are the steps you would suggest we consider, in order to keep your investment dollars in Nevada building these merchant plants?  I think you would get a reasonable response, and I think you would get a perspective which, in this state, we have not had yet, because we have not had exposure to it.

 

Senator Townsend replied, “They are absolutely going to build in the best, easiest, lowest-cost place to build, and they will find a way to get it anywhere they can sell it for the highest price . . . .”

 

Mr. Craigie remarked:

 

And Mr. Chairman, if your goal is to have a number of people come to this state and build major regional power plants to sell outside of the state, then I think if you take that approach, it’s very likely to be the outcome.  If, at the same time, you want these people to come to Nevada and build power plants that are going to be native generation and selling to our state, which I think is a reasonable goal, then I think it would behoove us all to listen to what it is going to take for them to come here and build with a market plan focused on selling into our state.

 

Senator Townsend responded:

 

I agree, except to the following extent: If he or she goes to one of those merchant plants and says, “I want 200 megawatts over 10 years,” and they cut a deal, then what we do here is very irrelevant, very irrelevant.  So, I think it has more to do with the market, and less to do with the political process, in terms of where they are going to build.  Renny, please come on up, this is a workshop. 

 

Renny Ashleman, Lobbyist, Mirant Americas Incorporated, testified:

 

I will be very brief.  I agree with the discussion as to the need for multiple buyers, and with the Chair[man’s] views along those lines.  I would like to bring to your attention the concern we have raised earlier in this context because it bears on this.  Are we just going to build and sell out of state, or are we going to come here . . . anyway, at least to some degree?  There’s a question as to whether you build your second plant and your third plant, but we are going to come here to some degree.  When I say we, I mean all the IPPs [Independent Power Producers] that are currently planning.  However, under what you’re apparently proposing to do now, there is a real concern the power companies are going to be the people doing all of the retail marketing, or maybe all the very large buyer retail marketing, and they are always buying from themselves.  They also control the generation. 

 

We’ve glossed over the need for some sort of a Chinese wall, some sort of a separation between the selling arm of the power company and the generation arm.  There will be times in the market, because we have newer production, when much of our production [of] is inherently cheaper and more efficient than the production [of] the company, and there will be times when they ought to be buying our power instead of theirs.  The others ought to be sold somewhere else because it is not all peak.  We need to have the right to have access to that market.  It is an attractive feature to the IPPs [and it] will make them more likely to deal with the local market than the foreign market.  It is not the end of the world if it doesn’t happen.  The plants will probably get built, I agree with the chairman, but it might be a little better for Nevada consumers to worry a bit more than we seem to be, about the issue. 

 

Senator Schneider commented:

 

. . . There are just red flags all over the Internet, all over the West Coast about what we are doing here.  The story in the paper this morning, “Reacting to suspicion that some power suppliers have shut down California plants to raise prices, the Assembly approved a proposal Thursday that would let state regulators find generators.”  That is in California.  That happened yesterday.  “Senate Leader John Burton on Wednesday announced that the Senate committee will investigate whether electric wholesalers illegally withheld power to drive up prices.”  You know, Mr. Chairman, we want to dump power plants off to some of these big generators and they are in a business to make money, as they should be, but it is like your new Lexus coming out.  I do not think you are going to sell me one for $100 over list when the thing comes out, because there’s going to be a big demand and there’s a shortage.  But you would probably sell me a little 300 [series model Lexus automobile] sitting around, $100 over list to get rid of it because you have got a lot of them.  That’s what the market is all about and, in California, we’ve watched it, there is a shortage down there, and Mr. Craigie’s client got burned really badly in public relations when they dumped power into San Diego last summer.  Their quote was, “In due regulation, you have some winners and you have some losers, and we are fortunate enough to be one of the winners,” as they raked out $100 million in a matter of days down there.  You look around at the generation companies on the stock market, and their stocks are soaring because they are making a lot of money.  Now, that is just the way it is.  It is very simple.  They control the generation, they are unregulated, there are three or four of these companies, totally unregulated, and controlling all of the generation, which is the way it will be. 

 

I am very concerned, this summer when there are going to be shortages and [in] the article here, there is another article about California, [it says] they are going to have shortages.  They went on alert already this week.  When the temperature heats up, we are going to have more shortages down there, and it is going to put pressure on Nevada’s ability to get generation.  These people want to sell to the highest bidder, as they should in an unregulated market.  Where does it leave our consumers here in Nevada?  Nevada Power isn’t building any more generation.  Every day they require more.  It seems like we are letting our base go if we tell them to sell this.  It seems like we are putting our residents at jeopardy to some degree here, and I am really, really concerned about it.  My opinion is we have got Mr. Whittemore over here representing very big users.  I feel, let them go cut a big deal somewhere and bring electricity in because we have a shortage.  You can get a good deal out there, see Mr. Craigie, get the best deal you can, because Nevada Power [Company] cannot supply us enough power as we go forward, right now. 

 

It is kind of unregulated [because] they’re out buying every day, they’re buying power and bringing it in. . . .   Here is Mr. Craigie and Renny up here, they want to sell some power real bad.  They want to build some plants.  Go for it.  I think we [have] got to protect the citizens, you know, Ma and Pa in the street.  The big guys are sophisticated, they can protect themselves and do their good job, but Mr. Chairman, there are just red flags all over, and I think we have to pay real attention to what we are doing here.  [It is] my opinion let’s hold onto our base, they’re generating electricity fairly cheap.  Let them decide when they want to sell those plants.  It should be their decision.  They have stockholders to answer to as they go down the road 2, 3, 5, 10 years, and the plants are not efficient anymore, let them make the decision.  We are adding 20,000 residential units every year in Las Vegas, and have been for the last decade and a half, or whatever, and we are going to continue to.  There is just a huge demand for electricity increasing daily.  We are fairly deregulated right now, as far as generation goes.  I think it should be their decision, Mr. Chairman.  There are just too many red flags for me to say they have to sell by [20]03 or 2006, it should be their call.

 

Senator Townsend said:

 

Okay, we have resolved a couple of issues.  I do not want to go without dealing with Mr. Craigie’s point about the larger picture.  I think, Mr. Hay, you need to give us some insight.  If we are precluded from a blanket moratorium longer than, say, 2 years, because of the issues Mr. Powers brought up, and there are conditions which we need to put in, even if we didn’t put an [20]06 date and we just left it alone, and those conditions perhaps were some of the things currently in the bill, I would probably not include the one about if the Governor makes a decision to go to a competitive marketplace.  Is his a position [on which] we need to spend some time and bring [in] people?  Because, I will be honest with you, if we do not move a bill one way or the other, whatever the committee decides . . . I am assured by the Majority Leader in the House [Assembly], we will get a bill from them.  I guess the issue is, number one, is there a whole lot more issues needing to be brought up just for this bill, or can those be put off to another day?  It is important we deal with this, one way or the other.

 

Mr. Hay replied:

 

Thank you, Mr. Chairman.  I’d like to comment on both what Mr. Pitlock and Mr. Craigie said.  As the committee knows, our approach has been to suggest ways to allow the wholesale market to evolve, and [an element of this approach is] comprised of allowing larger customers to go out and contract with independent generators as long as it enhances the supply dedicated to Nevada.  It would apply also for smaller customers, if Shell [Energy] or some other entity wanted to do the same thing and essentially aggregate residential customers and enhance supplies.  I think we can all agree, at least most of us can agree, for the next 2 years, it is a bad idea to sell the plants.  I think the conditions in the bill, as explained, are very appropriate ones and set out the right public policy arguments for when divestiture ultimately should be allowed.  We certainly do not want to engage in activities which act as either a disincentive to new investment in Nevada, or a disincentive for capturing some additional energy for the benefit of Nevada customers, whether they be large customers, the water authority, or aggregated groups of small customers.  I think that dynamic allows the market to evolve and I think we can all, in retrospect, say when we started on the course in [19]95, [19]97 and [19]99, we thought the evolution of the wholesale market would take place in more orderly fashion.  It has not occurred.  I think it is important to send a clear signal as soon as we can on what’s going to go on with divestiture, just for the sake of all the parties at this table, as well as all the citizens of Nevada, who are impacted by it.  I think moving expeditiously on a 2-year moratorium is appropriate in allowing sales to occur under conditions, as Mr. Powers has explained, for some intervening time after the 2-year period.  I think it is probably the best public policy we can come up with at the moment to accommodate the needs of both the consumers of Nevada, and to protect the health of our economy.

 

Senator Townsend questioned, “We have in front of us, committee, a draft version.  I cannot remember, did this come from you originally, Mr. Powers?”  Mr. Powers replied, “Senator, is it the one that has the green print?  That was, I think the second one, based upon Mr. Hay’s suggestions, and then the green was originally, I believe, some suggestions which came out of a discussion with Mr. Schmidt about the hydro[electric generation] plants and perhaps Harry Allen [Substation].”

 

Mr. Schmidt interjected:

 

Mr. Chairman?  We think timing is of the essence on this issue.  One of the reasons section 13 is in the bill, is [the] unusual provision that it takes effect immediately, rather than tweak a variety of the different sections of the bill, which is what I think Mr. Hay originally proposed, and got us to the second draft.  The first draft, as originally drafted by Mr. Powers, I believe, was something, if you can do it quickly, we can take these other issues up during the rest of the session.  But, if you can adopt a bill with a foundation, hopefully, in constitutionality, and dealing with this problem immediately before we get to this summer, that is our preference, rather than to make exceptions for anything other than the hydro[electric generation] issue, which is already being completed.

 

Senator Townsend questioned, “Mr. Powers, have you ever been in front of the supreme court yet?”  Mr. Powers answered, “The Nevada Supreme Court?  I have not.”  Senator Townsend asked, “Okay, is that left up to Ms. Brenda Erdoes [Brenda J. Erdoes, Legislative Counsel, Legal Division, Legislative Counsel Bureau]?”  Mr. Powers responded, “It would be the attorney general who would defend the constitutionality of any legislation passed by this body.”  Senator Townsend asked, “We can file an amicus [curiae]?”  Mr. Powers answered, “Yes, we can.”

 

Senator Shaffer commented:

 

I am sitting here thinking I am going to go back to Las Vegas around June 6.  I think it is going to be pretty hot down there, and I would like to know, is this the best we can do at this point in time?  Are we sure that in July and August, I do not have to leave town and come back some time in December, or something like that?  I do not think the people Harvey Whittemore represents are going to go away this summer, they are going to still be here.  I do not see them leaving, I do not see anyone coming up with any supplement to what we already have to deal with right now.  I would like to know, is this the best thing we can come up with right now?

 

Mr. Hay answered:

 

July 6, 2001 or June 6, 2001.  I think we’ve adequately planned and secured supplies for a normal summer this year.  Barring extreme conditions, it is probably the following year and seasons that are of concern.  To the question of this bill, I think some suggestions made today should be incorporated into a draft before it is moved out of here.  I also agree, time is of the essence.  So, perhaps next week, with those suggestions made today, then I suggest, if the committee decides to do this, and again I am not here testifying in support of [S.B.] 253, I am here to answer questions from the committee.  Every time I testify on this bill, some lawyer sends my lawyer a letter with my name in it.  

 

Senator Shaffer asked, “Mr. Chairman, I am curious where the Assembly is.  Does anyone know where they are today?” 

 

Mr. Ponn answered:

 

They had their organizational meeting yesterday for the Assembly Select Committee on Energy.  They are having a hearing next Tuesday for Assemblyman Goldwater’s bill on financial support for low-income customers.  Next Thursday, they are hearing, I think, the number over there was . . . [A.B.] 369, which is their more comprehensive bill.  They are promising additional ones to follow.

 

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

 

Senator Carlton queried:

 

Mr. Whittemore has been brought up a couple of times, and I just have two questions for him, if you would please?  I want to congratulate your clients on doing the comprehensive energy studies they are doing inside their properties right now, for conservation efforts.  I would like to know if you have had any conversations with them, as far as some of the solar technology and some of the other things we’ve discussed here in this committee, on generating electricity that way?

 

Harvey Whittemore, Lobbyist, Nevada Resort Association, testified:

 

Obviously, Senator Carlton, we are very concerned about expanding the capacity of the system to look at all sources of additional generation, including renewable, solar, net metering, all of the things this committee is going to talk about . . . for the next 81 days; we are going to evaluate.  Our biggest concern has always been that we know, in Nevada, we have too little generation to basically allow us to receive the best price possible for the power we’re purchasing.  Therefore, anything this committee does to expand and implement the ability of IPPs to come into the state quickly, provide additional resource, [and] do it in a cost-effective manner, will ultimately benefit both our employees and the companies themselves, in terms of being able to deliver a cost-effective product.  We are in the light business, as one of our member institutions, Glen Shaffer from the Mandalay [Bay Resort and Casino], suggested [saying]: “Listen, we need to keep those lights on.  Yes, we are going to do it with an eye towards conservation, but we need to have the ability to attract our customers and show them what Las Vegas is about.”

 

So, our concern is, again, we do it in a way that is cost-effective, but we are looking for additional generation resources.  Thank you.

 

Senator Shaffer asked, “Harvey, when you are going to bring on additional IPPs, is the grid sufficient at this point in time, or do you need additional grid for what you are planning?”

 

Mr. Whittemore answered:

 

Obviously, one of the concerns we have is . . . not only do you have to build the generation facilities, you have to tie them to something.  Obviously, through the discussions presented here over the first 40 days, we know there needs to be additional transmission built in the area.  We need a fiscally sound utility to provide those transmission capacities.  That is why we entered into the negotiations in July, with respect to the global settlement.  Our concern was: we needed to have a utility which was fiscally sound and capable of providing services on a long-term basis to the citizens in Clark County specifically, and also provide additional generation resources, when they were made available, to us.  . . . Divestiture is probably going to be, long-term, a good thing.  The question is timing.  Obviously, we applaud the efforts of the committee to determine whether there needs to be a moratorium or a conditional divestiture, or however this is going to be described.  The question is one of timing.  Is it 1 year?  Is it 2 years?  Is it 3 years?  We certainly agree with your committee counsel’s recommendation as to the constitutionality of this bill. . . .  We have had our people look at them, and we believe in his words, and we would echo them.  This bill is constitutional.  It is, more likely than not, constitutional. 

 

This is a very close question, though.  Again, one of the things we need to continue to look at is how it is ultimately drafted.  What are the conditions?  What ultimate mechanisms take place?  What is the timing?  At the end of the day, we know we are at risk from people suggesting we are part of the problem because our demand is so high that what we are worried about, and I will be very frank with the chairman and this committee, we are concerned about being kicked off the system.  Yes, we want to have the ability to go out and shop, but we also need a period of time . . . to be able to negotiate those contracts.  So, when I hear the chairman suggest we need to be kicked out, it worries us.  On the other hand, it may be something you have to do, but we need to have some capacity to know when it is going to take place so we can negotiate those contracts on a long-term basis, and to engage in negotiations with the IPP to develop those resources on a very quick basis.  We are concerned. 

 

Senator Townsend asked, “Is it fair then, all the members up here, discussion about the larger users be set aside for another debate, as opposed to in this debate?”

 

Mr. Schmidt replied:

 

We think that is an important discussion to be had, but if you start to try and resolve all those things, some of these plants are going to be closed.  If you do not vote on and get this bill through, things are going to happen because action was not taken.  I think time is, as Mr. Ponn said, certainly, now is important.  Time is of the essence for this bill.  Other issues are important, too.  It is not to diminish them, but they can be addressed.  We still have a couple of months.

 

Senator Townsend asked, “Can we address those next week?”  Mr. Schmidt answered, “I think it would be fine.”

 

Senator Townsend said:

 

Okay, but we do not have to have them in this bill.  We are only looking at the decision to suspend the sale of these plants for the next 2 years unconditionally, then for another 3 years with conditions.  I think that is what Mr. Powers has said is constitutionally defendable.  . . . Without getting into specific details, Mr. Hay, is this acceptable to you?

 

Mr. Hay responded, “Yes, Mr. Chairman.”  Senator Townsend continued, “Mr. Ponn, you’re along for the ride here because you have contractual obligations you must meet, and you will go ahead and meet those, unless either told by the commission or by the State, or an act of God, or something, you cannot.”

 

Mr. Ponn replied:

 

All of the above.  Again to repeat, Mr. Chairman, if the committee’s appetite is to pass this bill, I think some minor suggestions today ought to be amended into it, significant suggestions that should be amended into it before it is out of this committee.

 

Senator Townsend remarked, “Committee, the concern now would be to build a consensus.  Are you actually doing this bill also, Mr. Powers, in creating it?  Mr. Powers answered, “I will prepare any amendment to this bill.”  Senator Townsend continued, “I am working off the one with the green, I do not know whether it is the best one to work from.  Is it the one everybody has?  . . .  Whatever this is, it was February 27, is that the date?”  Mr. Powers noted, “The way to distinguish it is it has the reference to the 75 megawatts at the bottom of page 2.” 

 

Senator Townsend continued:

 

I am not asking the committee to vote on this.  What I am asking you, is to understand the changes in this version we might all agree on.  Going down to page 2, leaving in the term “hydroelectric,” taking out “or system,” and going back to 3 megawatts at the bottom of the page, so we don’t interfere with the sale of the water system.  All I am asking for, Committee, is for you to allow Mr. Powers to draft it.  It does not mean you have to agree to this now, nor do you have to agree to it when the amendment gets back.

 

Senator O‘Connell suggested, “Mr. Chairman, under (e) just above that paragraph, I believe it was suggested we add the word ‘Nevada’ just before ‘public’.  They thought it might clarify [regarding] California.”  Senator Townsend asked, “Do you have it, Mr. Powers?”  Mr. Powers responded, “Duly noted, Mr. Chairman.”

 

Senator Townsend commented:

 

Because this is different in the bill version, you have different pages. . . .  We have taken out all of those dates.  So, that includes all of the people who have chosen to enter into contracts.  Mr. Powers, is that why we are taking all of those dates out at the top of page 2 in the draft?

 

Mr. Powers answered:

 

I recommend against removing those provisions.  I think it was suggested on the part of Mr. Hay, and he [might] like to elaborate more on why he wants them in.  As I understand it, the existing subparagraphs (1), (2) and (3) [of section 3, subsection 1, paragraph (c)] encompass all the generation assets presently contracted for sale, and there would be no generation asset escaping those provisions, which is the reason we have AES here.

 

Senator Townsend commented, “Well, that is the point I want to make.  If you leave in [paragraphs (1) and (2), they are outside, but they are encompassed   by (3), that was the testimony.“  Mr. Powers agreed, “Correct.  My recommendation would be just to leave those provisions of section 3 . . . as they are in the bill as introduced, no change to subparagraphs (1), (2) or (3).”  Senator Townsend said, “Well, then you are going to give AES a shot at (1) and (2), because if you leave them in at January 1, 2001, they contracted in May 2000.”  Senator O’Connell interjected, “That strengthens their lawsuit.”  Senator Townsend continued, “So, if you leave them in, you have got to change the date, is what I am saying.  . . . Is that not true, Mr. Hay?”  Mr. Hay replied, “I believe, if I am following you, Mr. Chairman, it would be true.”

 

Senator Townsend suggested:

 

. . . Let’s just use the bill, because the draft has gotten everybody confused.  We have gotten our own attorney confused, we have a problem.  So, under section 3, there was a recommendation to take out (b), disposal of a generation asset means to “execute a contract or agreement to sell, lease. . . .”  You recommended taking it out, Mr. Hay?

 

Mr. Hay answered, “It was our recommendation, yes.”  Senator Townsend responded, “Okay, now going down to the date.  You originally recommended to take the whole thing out, and Mr. Powers is saying you need to leave it in to encompass everybody.  But obviously, you have to change the date.  Do you want to take it out or do want to leave it in?”  Mr. Hay responded, “Mr. Chairman, our preference would be to end page 1, line 15 with a period after ‘agreement’ and take the rest out.”  Senator Townsend asked, “Which is what you put in your draft?”  Mr. Hay affirmed, “Yes.”  Senator Townsend continued, “That satisfies you it encompasses everybody?”  Mr. Hay affirmed, “Yes.”

 

Senator Townsend said, “All right.  Moving on.  Section 5, which is the definition of the generation asset, is the one where on line 27, it says ‘utility on or after January 1,’ it would say ‘utility before January 1, 2001.’  Mr. Hay affirmed, “Yes.”

.

Senator Townsend continued:

 

Then you go down to line 30, where it says, “Is used and useful for the convenience of the” and put in “Nevada public” or “public of Nevada,” or whatever the term is, Kevin [Mr. Powers].  Then you go down to line 33, and you simply take out, “or system,” so it would say, “Any hydroelectric plant, facility, equipment, that has a generating capacity of not more than 3 megawatts;” covers Ms. Shipman.  Okay then, committee, what is your pleasure, particularly you southern Nevada members, with regard to lines 45 and 46, where it says, “The term does not include the State of Nevada or any agency or instrumentality of the State of Nevada,” because that does include the Colorado River Commission?

 

Senator O’Connell responded, “Mr. Chairman, I think it would only be fair to have them under the PUC[N], if indeed, we leave the language in, knowing of their interests currently.”

 

Senator Townsend asked:

 

Do you have a sense of that, Mr. Hay?  If we leave the Colorado River Commission in as an entity that could acquire any of these assets, should they be under the jurisdiction of the PUC[N]?  Do you think the PUC statutory authority and its regulatory structure would encompass that kind of acquisition or not?

 

Mr. Hay answered:

 

My initial reaction is the PUC[N] probably does not have statutory jurisdiction over the CRC [Colorado River Commission].  In any event, and there may be some implications with their relationship to the federal government as well.  We’d have to take a look at it, but I will defer to others who may have a more sophisticated analysis. . . .

 

Mr. Schmidt responded:

 

Mr. Chairman, if I may.  Although the CRCis not regulated by the PUC[N], as a comparable or parallel state agency, in terms of its sales on wholesale activities, if the power company were to sell a generation unit to the CRC [Colorado River Commission], the PUC[N] would have jurisdiction over the transaction from the perspective of the utility, even though it would not have jurisdiction over what the CRC [Colorado River Commission] did after that.  It is not [a case where] there would be no PUC[N] oversight with regard to the utility’s decision to sell or not sell a unit to the state.

 

 

Mr. Whittemore added:

 

Mr. Chairman, if I might add, when we had the discussions about exempting the Colorado River Commission 2 years ago, this language, I think, is consistent with it.  The only thing I would suggest, and I would look to the other members of the panel, is whether it’s expansive enough, whether you might not want to include, “the state of Nevada or an agency or instrumentality in the state or Nevada, or any joint venture created by those entities.”  I think you want to give the state flexibility to engage in these activities, however they deem fit.  Again, pointing to the California experience, if this is authorizing language, and I think this is directed to Kevin [Mr. Powers], Mr. Chairman, you might want to expand, in such a way to allow the state the flexibility to do bonds, [and] other sorts of things, or joint ventures with those types of facilities.

 

Mr. Powers questioned, “Are we talking joint ventures with private entities or joint ventures with creations of the state?”  Mr. Whittemore answered, “Creations of the state.”

 

Senator Townsend said:

 

Yes, be specific.  If the local government and the state wanted to purchase, or if the school districts wanted to purchase something using the state’s fiscal abilities, and they wanted to do it jointly, this says only “or,” which would preclude them from joining.  Is this something you would be interested in, committee?

 

Senator O’Connell answered, “I am sorry, somebody had brought some information to me, and I kind of missed out on this.”

 

Senator Townsend clarified:

 

That is okay.  On sub[section] 2 [of section 6], where it says, “The term does not include the State of Nevada, or an agency or instrumentality of the State of Nevada,” Mr. Whittemore’s suggestion, in asking Mr. Powers, was very simple:  Should there also be an ability for the state, or an agency, or an instrumentality to be able to go together, to combine, in order to buy some of these assets.

 

Mr. Whittemore added:

 

Specifically, a local government, a school district [could] says, “Wait a second, we’ve computed what our power requirements are going to be.  Give us the flexibility to go with the state, or the CRC, or some other basis to do something like that.”  I think it would be a wise move to give yourselves flexibility.

 

Mr. Ponn remarked, “I think the issue is the same issue embodied in S.B. 211.  I do not know if you want to legislate [S.B.] 211, in this bill or not.”

 

SENATE BILL 211:  Expands authority of Colorado River Commission to provide electric services to political subdivisions.  (BDR 58-633)

 

Senator O’Connell said:

 

I think it is a foundation question here, how you feel about giving government a leg up over the private sector.  I have a bill currently, requiring anybody who is competing with the private sector to be under the same regulations, fees, whatever, as the private sector.  I think the more we get into regulation, the more we are going to have competition from government.  My basic philosophy is it should not be.  They should not be subsidized by taxpayer dollars when the same courtesy is not accorded to the private sector.

 

Senator Townsend replied:

 

Senator O’Connell’s point is well-taken and I could not agree more with regard to the state buying assets of the utility.  I have watched it occur in the other jurisdictions [and] to me, [it] is a road that can’t have anything good associated with it.  When you are bonding for billions of dollars to buy an asset from a private company, I don’t understand it.  I think it goes back to Mr. Craigie’s basic principle.  His type of clients, or Mr. Ernaut’s clients, or any of the other gentlemen around here, want to come and build.  It sounds like a disincentive if, all of a sudden, the state can own it, because the ability to subsidize those rates would be too tempting, and it would bother me.  I do not know if we just want to take out 2, is it your recommendation?

 

Senator O’Connell affirmed, “It would certainly be my recommendation.”

 

Senator Townsend queried:

 

Does anyone have a problem with it on the committee?  Okay, we will take out 2.  And, then over on page 3, where it says January, on line 2, [it should read] January 1, 2003.  I believe it was recommended, Mr. Hay, and I want to make sure this is absolutely clear, it is 2006, but at 2003, the conditions kick in to protect the constitutional defensibility of this?

 

Mr. Hay answered, “We’d be comfortable with that, Mr. Chairman.”  Senator Townsend asked, “Do you understand, Mr. Powers?”  Mr. Powers answered, “Well, if I understand Mr. Hay correctly, he agrees leaving 2003 in is sufficient to proceed with the bill.”  Senator Townsend continued, “Okay, and then leave the conditions in, from there on out?”  Mr. Powers affirmed, “Correct, so beginning in 2003, those conditions would be the avenue for selling generation assets.”

 

Senator Townsend asked:

 

And then, Mr. Hay, going down to sub[section] 4 of section 7, which on page 3, line 33, you would remove all of it because it references, “If the governor establishes a date for retail competition.”  You would simply take it out, correct.  All the way over to page 4, line 7?

 

Mr. Hay affirmed, “Yes, Mr. Chairman.”  Senator Townsend continued, “And then you would remove section 8 [and] section 9, and start up again on sections 10, 11, 12, and 13?”  Mr. Hay affirmed, “Yes.”

 

Mr. Powers suggested:

 

At this juncture, I would like to again recommend to the committee, if we go with the moratorium during this 2-year period and then with the conditions, it has to be reconciled statutorily with the existing restructuring act.  This was one attempt at reconciling with the existing restructuring act.  Any other avenue could certainly be used by the committee, but there has to be some reconciliation between the restructuring act and the possibility for competition starting and the moratorium on the divestiture, since the restructuring act envisions divestiture at some point.

 

Senator Townsend replied:

 

Then, Mr. Powers, there has always been an ability in the legislative mechanism to have a trailer bill encompassing the needs to accomplish something that could not be done in a short period of time.  I would not want to hold up this decision based on what Mr. Schmidt is saying.  Based on that, and in the spirit of working with the House [Assembly], and the Governor, whether the House starts it or we start it, there [would] be a follow-up bill going back in and cleaning up the affiliate rules, because we do not want to have the incumbent incur any more dollars associated with something unnecessary for the public good.  We would have to ensure their position with regard to their blended portfolio of long-term contracts, [in order] to get us through until more generation online is available to them. 

 

Some of the other issues Mr. Hay brought up, relative to how you reconcile some of the structures in the financial recovery area, . . . Can’t we do that in a separate action?

 

Mr. Powers responded:

 

I have a two-part answer.  Yes, I agree the Legislature certainly could proceed and deal only with the moratorium and remove any pieces of legislation dealing with the restructuring act.  However, if the testimony today indicates anything, the day this becomes effective is the day many people will be at federal courts seeking preliminary injunctions.  If facially [on its face], this statute, with the restructuring act, provides some sort of statutory avenue where the court can view the inconsistency as creating a facial problem, the statute then, may be another avenue parties can challenge the law in court.  It is hard to identify, given the two different goals between a moratorium and the restructuring act, exactly how the court will perceive any conflict.  There is a possibility, as a simple fix, to go along with the moratorium and simply suspend the provisions dealing with the restructuring act during the period of the moratorium in this bill, and then, in a subsequent bill, this Legislature can come through and do anything it needs to do with the restructuring act. 

 

Senator Townsend queried, “Can you put a provision in suspending it during the period on the moratorium, that isn’t going to take up 400 pages?  Mr. Powers answered, “Yes, I can.”  Senator Townsend continued, “Sections X, Y, Z, et cetera, are not effective until a certain date?  . . . I don’t want to use your time or the committee’s time to slow this up in any way, shape, or form, if we can do it cleanly and effectively.”  Mr. Powers affirmed, “It absolutely can be done cleanly.”  Senator Townsend asked, “Mr. Hay, is it satisfactory to you?”  Mr. Hay answered, “Yes, in fact we have already discussed that option and it would be fine with us.”  Mr. Ponn interjected, “Mr. Chairman, while you’re directing the redrafting, I think there was a lot of testimony early this morning about clarifying the costs incurred and [having costs of] the divestiture process be recoverable.”

 

Senator Townsend asked, “What is your sense, Mr. Hay, if this moratorium goes into place, what is Mr. Ponn’s ability to recover costs he legitimately incurred?  What mechanism do you suggest is available to him, or do we need to create one to allow him to go in and make his case?”

 

Mr. Hay replied:

 

Mr. Chairman, as we discussed earlier, I think there are a variety of mechanisms and I believe, in order to appropriately determine how to do that, we need to look at the entire financial condition of the company.  I think we all agree the amount of transactional expenses should be recoverable.  There may be other financial factors out there [potentially] mitigating against, or at least reducing recovery, because they may have been over-recovering in other areas.  I think it takes a comprehensive regulatory proceeding, but we can state on the record we do believe legitimate transaction costs that are approved should be recoverable. 

 

Senator Townsend replied:

 

Mr. Ponn, I do not disagree with you, I just do not know how you would put a one-time mechanism in to do it, although I believe strongly you should be able to go to the appropriate PUC[N] forum and make your case.  I just do not know how to do it without holding the bill up, because I do think time is of the essence, and I do think we can spend time with you next week trying to figure it out if it is not part of the bill.  I just do not know how to do it without creating some new thing.  We have got a lot of new things out there . . . but I think your point is well-taken [which is]:  Are we assured of getting a chance to make our case and recover?

 

Mr. Ponn answered, “We were looking for language which made it clear the dollars spent pursuing these transactions were recoverable in the proper form with the proper scrutiny.”   

 

Senator Townsend indicated:

 

Let’s do this then, if this is fair to both you and Mr. Hay, I am going to have Kevin [Mr. Powers] go ahead with this.  You two should spend some time together today, immediately, because we are going to put this on a fast-track provision.  I may have to make some arrangements next week to accommodate this as soon as possible. 

 

Senator O’Connell asked, “Mr. Chairman?  Can we make a commitment to a trailer bill to address this issue?” 

 

Senator Townsend affirmed:

 

Without question, I think we have to have a trailer bill to deal with every technical problem.  I think the thing Mr. Hay has said doesn’t disagree with Mr. Ponn.  We just want to make sure they have an opportunity, as soon as possible, to get in and make their case.  Mr. Lampley, it is really you, it is not Mr. Hay arguing with Mr. Ponn.  I guess the vice chairman’s position is not necessarily that we are going to commit to them and going to do something, but [is] What are you guys going to do?  Are you going to allow them to come in?  If the Governor signs this thing, can they file the next day and say, “Hey, we want to make our case, and would you hear it expeditiously?”  I do not know what kind of case they can make.  It is up to all the parties involved. 

 

Mr. Lampley answered, “I am sure the commission is going to look at whatever comes out of the Legislature.  I can’t say much more about what the commission may or may not do, I am sorry.”

 

Senator Townsend said:

 

I think you need to go back quickly, for Mr. Ponn’s sake, and you need to get an answer from the commission, [if] the Governor signs a bill, whether it is this bill or the Assembly bill does not matter, suspending the sale of these plants, what is the commission’s position about them coming in and making their case?  That is the real issue.  Can you find out for us as soon as possible? 

 

Mr. Lampley affirmed, “Yes sir.”  Senator Townsend clarified, “We do not need it this afternoon.  Mr. Ponn and Mr. Hay need it this afternoon.  We would hold it off if you could bring it to us on Monday.”

 

Mr. Lampley replied:

 

I would say this, Senator.  The chairman and I have spoken with our general counsel, and with respect to the Mohave issue, we don’t believe the commission can do anything at this point.  If the Legislature feels it is in the best interest of the public to go forward and delay or stop divestiture, it [is] expeditious for me.

 

Senator Townsend responded, “Well, I am confused.  I thought Mr. Hay had filed a motion for you to change your position.  You have already determined you are not going to?  Is that what you are saying?  Have you just ruled on Mr. Hay’s motion?”  Mr. Lampley answered, “I hope not.”  Senator Townsend said, “Well, I mean that is what I am hearing.  I do not want to put you on the spot, but I mean, I would not want you to do that to Mr. Ponn either, or Mr. Schmidt, or Mr. Ernaut.”  Mr. Lampley replied, “Maybe if Mr. Hay would respond, then I will respond.”  Senator Townsend continued, “Are you telling me, the chairman [of the PUCN] told you he is not going to let it happen?”  Mr. Lampley answered, “If Mr. Hay could just clarify what his application says, then I will respond.”

 

Mr. Hay responded:

 

There are actually two issues here in the procedural order the commission issued yesterday, or the day before, on both our petition to delay divestiture and to approve the Harry Allen [Substation] transaction.  They also requested comments on whether or not they would be able to do anything with the Mohave transaction.  Those comments are due on March 28, as I recall.  The commission has put the issue on the table.  Independent of that, we are considering filing a motion before then to set aside the earlier order, which approved the Mohave transaction.  That is, procedurally, all I can say about it.

 

Peter G. Ernaut, Lobbyist, Reliant Energy and WPS Power Development Incorporated, testified:

 

Thank you, Mr. Chairman.  Just as we discussed the issue of any remuneration if the state, in essence, changes its mind, I think it is also important to say there are those companies out there that entered into these negotiations in good faith, also need to be made whole, that have no standing.  Sierra Pacific Resources may have standing in front of the commission to recoup some of the cost they incurred to enter into these negotiations, but those buyers out there do not, unless you give it to them.  They entered into these negotiations, and I don’t mean to speak for all of them, but I can’t imagine we do not all agree on this point . . . because Nevada asked them to.  They did it in good faith and they prevailed with good faith negotiations and now, in essence, if Nevada changes its mind, I think, in the spirit of fairness and the spirit of good business, those folks [should] be made whole. I also think it would go a long way to mitigate at least part of the exposure to litigation, in the sense, obviously anything they are out-of-pocket would be, I would imagine, the first area they would want to recoup.  I put it on the record, Mr. Chairman, for you just to know Sierra [Pacific Resources] is in a different position than the buyer companies.  They [Sierra Pacific Resource] do have standing with the commission, and the buyer companies really do not, unless this body gives it to them.

 

Senator Townsend said, “Mr. Hay, I do not think I will be surprised by your response.”

 

Mr. Hay answered:

 

Thank you for the opportunity, Mr. Chairman.  I believe the contracts all provided for regulatory-out provisions in case, if a transaction was not consummated, the buyer and the seller would walk away and bear their own costs.  I think it is a risk everybody entered into willingly.  As Mr. Schmidt indicated earlier, there are probably some mitigating economic factors, and the potential buyers may have acquired fuel portfolios at the time they entered into the contracts, which are now more valuable than they were [then].  Those portfolios can be liquidated, in essence, and many of the buyers may actually walk away from the table in a better financial position than they were when they entered into the contract.  I believe the termination provisions, if the transactions are not consummated, already have provided the appropriate remedy, which is you walk away with the expense you incurred in the process, a risk you took on the front end. 

 

Senator Townsend replied:

 

[This] is part of the issue for Mr. Ponn, to be brought up either in a follow-up hearing or a follow-up bill, to make sure it’s clear on what the public policy is going to be, because [now] is a little soon to make that public policy decision, because we just thought about it when you brought it up.  I think it is fair, I don’t think you would want our initial response.  I think you would want us to think about it.

 

 

Mr. Ernaut said:

 

Thank you, Mr. Chairman.  I was just going to say there are those who did not purchase gas contracts, and they are in a very different position than those who did.  I would agree with the consumer advocate, there are other economic conditions which may allow them to actually, in essence, profit from that, but there are those in different situations.  I think, out of abject fairness, we don’t get into this discussion where we ask people to enter into good faith negotiations and say, “Well, sorry, we changed our minds and now you have to bear the cost.”  Now, maybe that is what it says, but I cannot imagine anybody entered into this process, whether it is you elected officials or the State government, saying that is fair.  I guess we will have that discussion another time.

 

Senator Townsend affirmed:

 

It will be next week, immediately.  I think it is called a “force majeure.”  The force was California.  If they could get anything wrong, we missed it all.  Is there anything else we discussed this morning that should go into this potential draft?  I am going to have to look at this schedule.  I believe Wednesday is as soon as we can take this up again. 

 

Scott Young, Committee Policy Analyst, Research Division, Legislative Counsel Bureau, said, “Senator?  I think we have bills scheduled on Wednesday.  We had discussed returning to utilities on Thursday.”  Senator Townsend said, “We discussed it and we changed it because we are going to have to deal with this.  This is far more important as an emergency issue, I believe . . . .   Do we have a hearing scheduled on Monday?  At what time?”  Mr. Young answered, “Yes, we have a Senate bill at 9:30.”  Senator Townsend questioned, “And Mr. Powers, when do you think you could get this draft back?”

 

Mr. Powers replied:

 

I would prefer Thursday.  Monday, I could produce something.  I will have a draft bright and early Monday morning.  Just one other thing, in that draft, will I be including a transitory provision dealing with the recovery of expenses incurred by the utilities relating to divestiture?

 

Senator Townsend continued:

 

The only way I think it is possible is if Mr. Schmidt, Mr. Hay, and Mr. Ponn can find some simple language to accommodate the issue.  If they can’t agree on it by this afternoon, then we will just take it up again, and I will promise Mr. Ponn we will bring it up at another hearing . . . .   Now, what are we hearing Monday, Scott [Mr. Young]?

 

Mr. Young answered, “Senator, it is Senate Bill 281, it is Senator Shaffer’s bill dealing with embalmers and funeral directors.”

 

SENATE BILL 281:  Revises provisions governing embalmers and funeral directors.  (BDR 54-1238)

 

Senator Townsend asked, “Can we just put it [off] until Wednesday?”  Senator Shaffer affirmed, “Sure.”

 

Senator Townsend indicated:

 

We will move until Wednesday.  We had so much fun with Senator Schneider and Senator O’Connell on construction defects yesterday that we want to pick it up again next Thursday and spend 6 or 7 hours on it.  I think it is more important to deal with this particular section of this entire issue of energy for two reasons.  Number one is the immediate [nature of the] public policy decision that not only this committee is considering, but certainly the majority leader in the Assembly, as well as the Governor, and acting on it immediately.  The other thing is to make a determination so those people who are out there every day working on our behalf can know and have some certainty about what is their future.  I think we owe it to them and we owe it to everyone.  So, I want to bring this back on Monday morning and we will deal with it at 9:30 a.m.

 

 

Mr. Hay, you and Mr. Ponn have a chance to spend a little time together and help Mr. Powers out.  Mr. Powers, I do not know how you want to proceed.  You might want to sit with them for a minute and then tell them where you can be reached.

 

Mr. Powers replied:

 

With regards to format, would you like the amendment drafted as the amendment would be introduced on the floor, or do you want a version where we can see what the sections would look like as changed by the proposed amendments?

 

Senator Townsend answered, “I would like them both, please.”  Mr. Powers agreed, “Okay.”

 

Senator Carlton interjected:

 

Mr. Chairman?  During this discussion, I’ve been doing a little “side barring” with a couple members of the committee on some of my concerns, to make sure I was on the right track.  I still have concerns on page 2 at the top, lining out those three particular items where it comes in with the particular contracts in progress, and I would like to get some more information, then discuss it with you later, and the members of the committee later, if possible.

 

Senator Townsend responded:

 

I believe, Mr. Hay, you had recommended the language come out.  Mr. Ponn, if you could wait a second, let Mr. Hay discuss those sections with Senator Carlton.  It would be helpful to her and again, committee, I am not asking you to agree with any of these provisions, but I think it is important we get this stuff on paper and get it back in front of us.  Then we can make a decision on the various sections in the entire issue. 

 

 

 

 

 

Senator Townsend asked, “Anything else, gentlemen?  Thank you.  Committee, 9:30 on Monday morning.  Thank you for all of your help and your patience.  The meeting is adjourned at 9:50 a.m.”

 

 

RESPECTFULLY SUBMITTED:

 

 

 

Heather Miller,

Committee Secretary

 

 

APPROVED BY:

 

 

 

                       

Senator Randolph J. Townsend, Chairman

 

 

DATE: