MINUTES OF THE
SENATE committee on Commerce and Labor
Seventy-First Session
February 6, 2001
The Senate Committee on Commerce and Laborwas called to order by Chairman Randolph J. Townsend, at 8:11 a.m., on Tuesday, February 6, 2001, in Room 2135 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Senator Randolph J. Townsend, Chairman
Senator Ann O’Connell, Vice Chairman
Senator Dean A. Rhoads
Senator Mark Amodei
Senator Raymond C. Shaffer
Senator Michael A. (Mike) Schneider
Senator Maggie Carlton
STAFF MEMBERS PRESENT:
Scott Young, Committee Policy Analyst
Lydia Lee, Committee Secretary
OTHERS PRESENT:
Walter M. Higgins, Chairman, President and Chief Executive Officer, SierraPacific Resources
Donald L. Soderberg, Chairman, Public Utilities Commission of Nevada
William E. Peterson, Senior Vice President, General Counsel and Corporate Secretary, Sierra Pacific Resources
Timothy Hay, Chief Deputy Attorney General, (Consumer’s Advocate) Bureau of Consumer Protection, Office of the Attorney General
Mark Russell, Vice President and General Counsel for the Mirage Hotel Casino, Gaming Industry Representative on the Nevada Electric Energy Policy Committee
Harvey Whittemore, Lobbyist, Nevada Resort Association
Chairman Townsend opened the meeting stating:
This is the time and place for the first of many meetings on a number of topics. This is the Senate Committee on Commerce and Labor. I want to welcome back every single member here. Not only do we have the same members, just as importantly, there are four us who have sat through this at least more than one session. First of all, committee, we have a couple of quick things we need to accomplish. You have in front of you the “Senate Committee on Commerce and Labor Committee Rules--Seventy-first Session” [Exhibit C]. I believe there are 13 of them. Will you take a moment to go over those and if you have any deletions or changes, now is the time to bring them up, before we adopt them. There have not been any changes since last year. I believe Senator Carlton wanted to address something. Please do that now.
Senator Carlton asked:
Thank you Mr. Chairman, the one thing that I did want to bring up and make very clear is standing rule 11 [Exhibit C]. Although witnesses are presumed to be under oath while testifying, we would like to make that very clear to everyone who speaks to us so that we get as much information as possible, so that we can make the best decisions. If they do not know the answer to just let us know they do not know the answer and come back to us. Would it be possible to have this either placed on the testimony table or at the sign-in register so that halfway through the session, when we start to forget things, it is a constant reminder?
Chairman Townsend asked, “Do we have that on one of those little signs? We
do have that, so they know they are under oath when they testify?”
SENATOR O’CONNELL MOVED TO ADOPT THE STANDING RULES OF THE SENATE COMMITTEE ON COMMERCE AND LABOR.
SENATOR SHAFFER SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
* * * * *
Chairman Townsend continued:
I am passing around the subcommittee sheet. This committee has jurisdiction over seven different [Nevada Revised Statutes] titles. So there’s no presumption of inappropriate manipulation, we simply create subcommittees for seven titles with three members on each at the beginning of the session. Then whatever title the bill possesses is sent to that subcommittee already. There is, on everyone’s desk and posted on the wall, the current 120-day calendar so that you all know exactly what dates are appropriate for our business. The deadlines are extremely important and without changes by leadership they will remain in place.
Chairman Townsend introduced the committee staff, committee secretaries, and the committee manager. He also thanked the committee members for their ongoing work.
Chairman Townsend continued:
We will go ahead and get started. Today is the day we have set to establish the history of the electrical environment in the state of Nevada. The way this morning will go is in the following manner:
(A) I will give a brief overview, and it will be extremely brief, of the utility environment nationwide and in this state. (B) Then we are going to have Mr. Higgins, who is the Chairman of Sierra Pacific [Power Company], . . .outline for us what the company faces relative to the needs of our consuming public. (C) We will, at that point go into the last issue of the morning, the Nevada settlement [“Agreement and Stipulation”, dated, Final 07/27/00 (Exhibit D.).
Ladies and gentlemen, I think that you all know how seriously this committee takes these issues as our colleagues on the other side also do. I want to give a brief background and this will only take a moment. The history of this is extremely laborious and dry and I will do the best I can to make it as simple as possible. Somehow, there are individuals that actually think that all this activity that has gone on, started here. That is not exactly the case. There are a couple of key points that I think should be made this morning with regard to the electric utility industry and the basic timelines. For those of you who have absolutely nothing to do at night and stay awake thinking about this stuff, so much of this started with the FPA, Federal Power Act of 1920. If you briefly go through it, you see how it structured itself. It got us the regulated mechanism that we have known through most of our lives. In 1935, following up on that, was PUHCA, the Public Utility Holding Company Act of 1935. In that, a number of things occurred that affect what we do. Following, on the heels of that, in 1978, was PURPA, the Public Utility Regulatory Policies Act of 1978.
So many of these things directly affect what has come here. The most recent, of course, is the federal Energy Policy Act of 1992. That is the one that probably started us in the direction of many of the things that you have read about, seen, and heard. The 1978 act, PURPA, was a response to the energy crisis. I am looking at a lot of young faces out there, you probably do not remember that, but it did occur. We had an energy crisis that was rather significant. There were lines to get gasoline.
Chairman Townsend continued with opening remarks:
My friend, Max Jones, remembers my testimony in front of the PSC [Public Service Commission of Nevada] in 1978 about certain issues. It was also the first thing that developed the QF (qualifying facility) issue. Those qualifying facilities were obviously able to be built and produce electricity, where we had not had them before. Every single element in every one of these things I have mentioned, start us down a certain path. It has been the start of that, in 1978, where many utilities, because someone else was building plants, many utilities were not in a position to build additional plants. There was debate over how they should be fueled. There was debate amongst the environmental community with regard to coal. There were all kinds of debates that went on and there are struggles this committee will face.
In the Energy Policy Act [EPAct] of 1992 there was a very clear intent. The Energy Policy Act, is not what we did, that is what the federal government did. The industry was obviously intended to move towards a fully competitive market, with FERC [Federal Energy Regulatory Commission] responsible for most of the implementation. That means this body and our colleagues in the other House cannot really do a lot of things that many people think we can, and we are not responsible for a lot of things, which many people thought we would be. I think it is important to know that, so that you can understand this committee’s goal is to find out what the problem is that is facing us, relative to reliability and stability and more importantly do what we can, and to not promise things that we cannot do. We are looking at a new administration with a new U.S. Department of Energy Secretary. Things are changing dramatically.
We know our colleagues in California are facing some of the toughest decisions they have ever had to face. The situation that we found ourselves in 4 years ago resulted in our colleagues in the other House starting a bill called A.B. [Assembly Bill] 366 of the Sixty-ninth Session. For those of you who did not exactly live with that bill, copies are available to you. I noticed this morning, one of the interesting things, A.B. 366 of the Sixty-ninth Session is substantially thicker than S.B. [Senate Bill] 438 of the Seventieth Session. Does that tell you any difference between the Houses? I do not know, but I thought I would bring that up; A.B. 366 of the Sixty-ninth Session was the foundation of a long-term concern about trying to find the most competitive elements of electrical restructuring.
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)
SENATE BILL 438 OF THE SEVENTIETH SESSION: Makes various changes related to electric restructuring. (BDR 58-861)
Chairman Townsend continued:
Fortunately, Mr. Higgins was here in 1997 and participated with the Public Utilities Commission of Nevada, and the Consumer’s Advocate, Speaker Dini, and a number of people to send us a bill that we could work with and was ultimately signed into law. He will address that in a minute. Dramatic things changed between the passage of A.B. 366 of the Sixty-ninth Session and the next Legislative Session. As a result, S.B. 438 of the Seventieth Session was crafted by this committee [Senate Committee on Commerce and Labor] to address many of the concerns and changes that occurred in the industry. The one that directly affected us most in Nevada was the merger of our two investor-owned utilities. We responded to those changes by analyzing and spending more time than any of us wanted to do, but was necessitated by the complexity of the issue.
All of us who have sat here and dealt with workers’ compensation [issues] for the last 20 years, thought that was the hardest thing we ever did. Now we understand there is a more complex issue out there; S.B. 438 of the Seventieth Session was passed and signed into law, and as a result we are looking at what needs to be done to deal with our consumers in the state of Nevada, given the tremendous problems they face in California. To close off and bring Mr. Higgins up, the Western Area Governors’ Association, which met in Portland last Friday, without question, concluded a couple of key issues. “This just is not a regional problem any more, this is a national problem.” More importantly, it is a problem that may affect us more intently because, and we are going to discuss this, anything that impacts our region with costs will, in fact, directly impact Nevada because of the nature of our economic base.
I would like to read you one thing, and when I close, we will have Mr. Higgins come up. This is from the Senate Budget Committee [U.S. Senate Committee on the Budget] hearing [January 24, 2001] in Washington, “Evolving Fiscal Challenges,” and the witness was Alan Greenspan, Chairman of the Federal Reserve Board. It took me a couple of weeks, number one, to understand what he said. I do not know if anyone follows Alan Greenspan, but he is a little tough . . . to understand some of the key things. I think, since he is a gentleman who is highly respected by almost everyone, that we should perhaps glean some of these things from his testimony.
Chairman Townsend continued:
This is Mr. Greenspan’s response to a question from Senator Christopher [Kit] Bond of Missouri. “I think, Senator, we have to go back a few years, and ask where the whole so-called deregulation process came from. My recollection is, in years past, when we had the standard regulatory electric power systems, [they] usually had a buffer of about 15 percent over- peak load, largely because you could not forecast the peak loads and you could not tell what shortfalls might conceivably occur within your operating system. The result was that you had a fairly substantial amount of excess capital on which the rate of return was guaranteed. And when you do that, you obviously create a higher cost level per kilowatt-hour because you are paying, in part, for the excess capital (the excess capacity which you do not really use). There was a general view that if you deregulated, meaning split apart the system and force the purchase in the spot market, you would have to buy at the marginal rate. That meant, excluding the cost of facilities and . . . in that sense, the so-called stranded-cost [embedded cost that exceeds the amount that can be recovered through the asset's sale] would be eliminated. The problem was that because you then eliminated the guarantee of capital investment, it started to disappear. Coupled with the environmental and site problems in California, which a number of economists have indicated are important, capital investment essentially came to a halt. Concurrently, you had a very dramatic increase in Silicon Valley’s related power demand for air-conditioning and a number of other related energy uses which were associated with that. The 15 percent disappeared, and you ended up with 1.5 percent, which induces the crisis management beginning.”
Chairman Townsend interrupted the quote saying, “The only way to resolve the issue, and I repeat this, this may be the most important thing in this entire document, . . .”
Chairman Townsend continued to read Mr. Greenspan’s quote:
“The only way to resolve this issue is to get more capacity in place. Within a couple of years, presuming that all the projects are currently viable and will ultimately be put in place, a rebalancing will occur in electric power use within California.”
Chairman Townsend concluded his initial statements:
Reiterating, the only way to resolve the issue is to get more capacity into place. We are using more than we have and I believe that whatever the power of the Legislature and the Governor has to help with that problem will be a tremendous focus here today, as well as in the weeks to come. That is a brief overview. Mr. Higgins, we are glad to have you back in Nevada. I am not sure it has been the warmest welcome, but summer is coming and we will see what happens. Please come on up. Mr. Higgins is going to give us some insight with regard to the problem that we currently face in terms of supply and demand. That issue may be the single most important issue we deal with in this committee. Mr. Higgins, you have been here before, we welcome you back and please proceed.
Walter M. Higgins, Chairman, President and Chief Executive Officer, Sierra Pacific Resources, began his testimony:
Thank you, Mr. Chairman and distinguished Senators, it is a privilege and honor to be here today. I sincerely wish that the first item on the agenda for the Nevada Legislature this year were not the electric industry again, but that is where we are. What I would like to do is spend a few minutes today and answer any questions you have at the conclusion of that, discussing the timeline of the things that have happened and continue to go on. What the future loads and expected resources are that we think will be available to serve Nevada. What customers are likely to be asking to have, what the current western power market situation is. What sorts of actions are needed to ensure that the current out-of-control situation in the West is brought under control, hopefully, insofar as Nevada is concerned.
Mr. Higgins continued his testimony:
I do not intend to repeat the Senator’s historical perspective, but let me just kind of build a timeline and I think you will appreciate why that is important. Restructuring did, in fact, start in Nevada with an investigation that the Legislature commissioned in 1995. It resulted in an advancement of the competition agenda in 1997, when A.B. 366 of the Sixty-ninth Session was passed, with an expectation that the electric power markets would be open to competition on December 31, 1999. The Legislature also directed the Public Utilities Commission [of Nevada (PUCN)], through the legislation, to begin rulemaking to implement competition in Nevada. The companies [Sierra Pacific Power Company and Nevada Power Company] and the commission [PUCN] worked very closely together along with a number of interested parties to make sure that rules were being developed that would make competition work. I left, as you know, and that’s not an historically important fact, but to put in perspective, I left in early 1998 to go to Georgia to participate in the first full-competition undertaking of any utility in the United States. In 1998, Sierra Pacific [Power Company] and Nevada Power [Company] announced that they intended to merge their companies, if approved by the competent regulatory authority, and they also proposed as a part of that merger that they would divest the power plants, in furtherance largely of the policy that Senator Townsend pointed out, which was brought forward in the national Energy Policy Act of 1992.
In 1999, the Legislature supplemented A.B. 366 of the Sixty-ninth Session with the passage of S.B. 438 of the Seventieth Session, which did several important things. It eliminated deferred energy as a method of operating utility fuel and purchased power accounting. It permitted one final filing by Nevada Power [Company] to get its fuel and purchased power rate cases right. In other words, it [the company] had to file cases so that it would get the fuel costs right. It [S.B. 438 of the Seventieth Session] authorized the Governor to take charge of the date the competition would start. In the summer of 1999, Nevada Power [Company] filed its final cases that were an attempt to get the prices right for power in its portfolio. As many of you remember, a major dispute occurred following that over the interpretation of how S.B. 438 of the Seventieth Session was to have been implemented. A few months later, the company got what it viewed to be a disastrous outcome for the fuel and purchased power cases that had been filed. They requested a judicial review. In February 2000, Governor Guinn, citing the state’s [Nevada’s] lack of preparedness on a variety of issues for competition, delayed as you had given him authority to, the start of competition. Although the start date was delayed, the activity appropriately continued to set the rules and the regulations it would apply to competition.
Mr. Higgins continued his presentation:
As you know (and you will hear more about that from the next panel, I understand), a settlement [“Agreement and Stipulation,” dated, Final 07/27/00 (Exhibit D.)] to that legal dispute that I mentioned earlier, was negotiated in the summer of the year 2000. I will say a few words about that global settlement [Exhibit D] that the next panel will address. It was an effort by a number of parties to find a reasonable way to deal with some very, very serious problems, which existed. It was a collaborative effort led by the consumer[‘s] advocate, who represents the interests of small customers, led by the Public Utilities Commission of Nevada staff, with participation by many large customers and their representatives, the utility shareholders and of course, the companies [Nevada Power Company and Sierra Pacific Power Company].
The settlement [Exhibit D] did something very important, which was recognize the reality of a marketplace in which fuel and power costs were rising rapidly, not just in Nevada, but in general; [and] the fact that if the utilities were unable to recover those costs, they were going to be unable to continue to buy fuel and power, and that would lead to something [not] good. The settlement [Exhibit D] did not, however, contemplate the unprecedented almost astronomical increases in prices for fuel and purchased power that we are now experiencing in the West and in Nevada. In fact, the cost increases provided by that global settlement [Exhibit D] were based on, I think in general, a very real expectation that the problem being faced would begin to abate as the fall and winter months of the year 2000 came, when California’s high peak summer loads began to go away. However, as we now know all too sadly, autumn and winter prices did not drop in California, in fact, the power markets [and] the fuel markets have greatly overrun all assumptions based on which that settlement occurred. When the settlement [Exhibit D] was signed in the summer of 2000, peak wholesale energy to be purchased for the summer of 2001, in other words, a purchase, a contract to purchase power for the following summer, was priced at $165 per megawatt-hour, and I will put these numbers in perspective in a minute. Today, that same power, the exact same product, would cost $400 per megawatt-hour. The cost for peak power in northern Nevada, and that was a southern Nevada number I gave you, has increased 300 percent since the time of last summer. At the time last summer when the settlement [Exhibit D] was reached, power for 2001 summer at peak was $120 per megawatt-hour. Today, it would be $370 per megawatt-hour. To put that in perspective, in the summer of 1998, on-peak power would have cost $42. It has gone from $42 in the summer of 1998 to, in southern Nevada, $165. If bought last summer to today, that same power for this coming summer would be $400, from $42 to $400. Nevada Power [Company] and Sierra Pacific [Power Company] have already contracted for their 2001 energy needs.
Mr. Higgins continued his testimony:
The average cost of the power we have purchased in anticipation of meeting our customers needs this summer, is about twice the amount of money that is included in the rates we charge customers, twice the amount. I have some charts [Exhibit E] that Doug Ponn will pass out to committee members. They look like this, and I am going to walk through them briefly with you. These charts [Exhibit E] are the charts that were prepared in accordance with our statutory obligation to project both loads and the method of meeting those loads, how we would meet customer needs through a combination of resource additions [like] transmission lines, power purchases, and so forth. The charts [Exhibit E] will show you both cases in which no actions were taken, in other words, if nothing were done. It shows you what our projected loads will be, and it shows you what sorts of things are either planned or should be planned in order to meet the needs of the customers. This is what is called resource planning. And resources are all the things a utility does in order to meet the needs of its customers.
Chairman Townsend interjected a question on the quantity of charts [Exhibit E] available to be sure there would be enough distributed for all who would need them.
Mr. Higgins resumed his testimony:
Thank you Mr. Chairman. You should have four pages in front of you, and I am going to briefly walk you through how to understand these documents [Exhibit E]. The first two pages are about Nevada Power [Company] and the second two pages are about Sierra Pacific [Power Company]. There is a legend at the bottom of each page that shows what the various histograms mean. Since some of these things are changing or, at least under current regulation in order, are expected to change, some of the blocks change meaning as time goes on. The solid blue line on every chart represents our expectation of what the customers are going to demand from us based on our best expectations about economic growth, both in northern and southern Nevada. That blue line includes what we call an operational reserve, or in other words, to the point the chairman made in his opening remarks, there is not only the expected actual load the customers would demand, but about 7 percent more built into that line to account for the fact that things don’t work exactly the way you want them to, such as: a power plant is not there, the customer loads grow faster than you thought, the weather is a little hotter than you thought, or something [else occurs] that is outside the bounds of the predicted or expected case. The blue line represents a conservative, but not real conservative, a modestly conservative expectation of what the customers would want. For each year, 2000 through 2001, are either actual or expected ways those loads are met. And just to read one of these for southern Nevada, let’s look at the year 2003, because it has a little bit of everything. You see the lowest part of the bar includes something called “generation available to new owners,” which in the year 2000 was generation owned by Nevada Power [Company]. Under current regulatory order, that generation is to be sold during 2001 and 2002; it would be bought back under contract and in 2003, under the legislation as it exists today, it would be available to be purchased from the people that own the power plants. The next blue bar is the “Nevada Power [Company] Hoover Dam Entitlement,” which is passed directly through with no markup to the customers of southern Nevada. It is the long-held Hoover Dam Entitlement, which comes out of the federal system and is shared among the many states in the southwest. This is the part that goes directly to Nevada Power [Company] customers.
The next part of meeting the customer needs is the orange bar, which is “power that is expected to be bought off the transmission system from the wholesale markets.” You can see, in Nevada Power’s [Nevada Power Company] case as well as in Sierra Pacific’s [Sierra Pacific Power Company’s] case, by the policy of many, many years in Nevada, a great deal of the power to supply customer needs has been bought off the wholesale power markets. That has been, for many, many years, by far the cheapest way to serve the needs of customers. The next bar, the short, cross-hatched orange bar, is “new transmission that is planned to be built and expected to come on-line in the year 2003,” and on top of that would be new generation that we expect to have come on the line not owned by the company, but to come on the line to meet the needs of southern Nevada in 2003.
Mr. Higgins continued his testimony:
As you can see in years beyond 2003, more and more new generation is expected to come on-line. It is not necessarily already contracted. In fact, it is not generally contracted to be sold, necessarily, to southern Nevada customers, but it would be in southern Nevada and available under the current laws that exist in which competition would be under way. If you look at the expected case, you can see that there should be enough power available in southern Nevada, through the combination of transmission, the existing power plants, the Hoover entitlement and new power plants to satisfy the needs in southern Nevada and, in fact, more than satisfy those needs above the expected load plus that modestly conservative operating margin of 7 percent. You go to the next page [Exhibit E]. It says “no new generation,” “no new transmission.” You can see, if you will, a microcosm of the state of California here, where in essence, that is the strategy that California has followed for many years. Little or no new generation, little or no new transmission; or put differently, this is the case if nothing were done in anticipation of meeting the needs of southern Nevada customers. The same explanation applies in northern Nevada, that is the third page, where Sierra Pacific’s [Sierra Pacific Power Company’s] loads in expected resources are, in fact, portrayed. [There is] a slight difference here, as you can see, at the bottom of the page. You can see the QFs/NUGs [qualifying facilities/non-utility generators], and one is not marked. It may be the Sierra hydro [hydro-electric generation capacity] in the bottom of the 2001 through 2005 charts. The Sierra hydro [is] not expected, currently, to go out of the system. So the same thing can be said between the third chart and the fourth, which is: with no action, the loads in northern Nevada, even with a modest allowance for reserve, would outgrow the existing facilities. And, the expected additions, to both transmission and new power plants, coming on-line should more than meet the expected loads that would exist in northern Nevada. Because competition is coming, none of this is contracted for, at this point, beyond 2003.
Senator Rhoads inquired, “I have a question. Walt [Mr. Higgins], would you like to speculate as to where the planned new generation might be in the north?”
Mr. Higgins answered the question:
There are several power plants that are expected to occur. There is a power plant under construction not far from Tracy, right now, which is a peaking plant that some private investors, and I think in the Nevada Electric Energy Policy Committee there was a report, by the owner or [a] representative of the owner, of that plant coming on-line very soon, near the Tracy Plant. Duke Energy Corporation has announced a major power plant in the Wadsworth area, of several hundred megawatts. Those are two examples of the kinds of plants that are expected to come on- line. Others are being talked about. This does not include the power plant that has been talked about widely, that might be accompanied by a pipeline in northeastern Nevada.
Mr. Higgins continued:
In southern Nevada, . . . there are proposals for approximately 10,000 megawatts of new power plants. They are certainly not all going to happen, but we have received requests for transmission service to serve 10,000 new megawatts. If you were to add the loads that are included on the first page [Exhibit E] to the loads included on the third page [Exhibit E], you would see that the entire state of Nevada, even in 2005, is some 6500 plus 2000 or 8500 [megawatts], and that is the area load. There is a bit more power that is not within these two control areas. So, let us say the entire load of the state of Nevada, in the year 2005 is expected to be about 8500-9000 megawatts, and there exists today proposals to build more than 10,000 more megawatts in southern Nevada. So there is a great deal of power that is being proposed to be built. It certainly won’t all be built.
Let me now talk, . . . about the current energy market. Few people could have predicted the events of the last few months. Wholesale energy prices have absolutely skyrocketed, at a time when they used to fall. This pattern has been caused by a confluence of a number of short-term and long-term events. While the United States’ economy has been growing for the last 10 years, and Nevada in particular has outpaced the United States, the price of natural gas, even in that robust economy, remains so low that producers of natural gas could not afford to develop new supplies. Candidly, therefore, they did not.
Mr. Higgins continued to testify:
For all practical purposes, during the same period of time, utilities, as Senator Townsend pointed out, were either prohibited from building new power plants or strongly discouraged from doing it. The parent company of Sierra Pacific [Power Company] and Nevada Power [Company] was strongly discouraged from being in the power business. Uncertainty about when the Nevada market would open and under what conditions it would open made it very hard for any current utility customer to make an arrangement with a new supplier, other than Sierra Pacific [Resources], to buy power from a proposed new power plant or some other source. There was no way you could sign a contract if you were thinking you would like to shop with a power marketer [because] you did not know when you might be able to execute that contract. We now know that natural gas and electric generators, as they exist, natural gas supplies and electric generators, are insufficient to meet the demand in the West. The energy shortage that we have in the West has been made even worse by the fact that, in the Pacific Northwest, they are having a dangerously low hydro [water] year. It is so low it may be the lowest in recorded history. They are now predicting 63 percent of normal water in the Pacific Northwest. Statistics I read in last Friday’s California newspapers, suggest that the snow pack in the Sierra, which supplies a great deal of California’s energy, is at 50 percent of normal for this time of year. That does not bode well for hydro run-off from the Sierra in the spring and fall, which bodes even worse for California’s power situation for next summer. Very little hydro [water] comes into Nevada directly, but California depends on hydro to supply its needs, and it will be in the market again if there is no hydro. The primary reason for the crisis in western energy markets, electric markets, is the lack of supply. There is an opportunity, however, to look at the California crisis to try to see what has been learned there, or what we can learn to avoid making any of the same mistakes. I would say, you can boil down the crisis in California to several things. I am repeating something that has been said before, but I would like to say it again, for the record and for the committee.
Mr. Higgins continued with further testimony:
Number one, they had a really bad deregulation scheme in California. It did not let the customer see the price of the product, in fact, it shielded the customer from the price of the product. That is not the way competition works. They created a couple of new bureaucracies, and those bureaucracies were required to be used. You had no choice but to go to this power exchange or this ISO [Independent System Operator], and you had to buy power, not way in advance but the next day. There was a terrible unexpected rise in natural gas prices, which is about the only thing you can fuel a new power plant with these days other than alternative energy forms, such as solar or wind; but for normal traditional large-scale power plants, it is natural gas or it is nothing these days. We had the added problem, as I mentioned before, that the Pacific Northwest is dangerously short of hydro [water] power and that added to California’s problem. In a meeting I had with the former administrator of the Bonneville Power Administration 2 weeks ago, we opined, (roughly estimating that the Pacific Northwest hydro [water] situation takes some 5000-7000 average megawatts out of the electric system in the West), that is something like 8 percent or 9 percent of the West, [which] all by itself, would eat up any margin that might have still existed in the power markets. When the Pacific Northwest cannot send hydropower to California, California has got an immediate problem. There have been two very hot summers and those summers have not only increased the demand on the system, but they have caused power plants to have to run at times when maybe they would not normally have been running, they would have been in maintenance. When power plants are pushed too hard, then they are not available to supply power when you need them, in particular peak times. That has been a problem in California, as well. The California transmission system is not as good as it needs to be. There has not been sufficient investment in the transmission system. They really cannot move power north and south in California, so that we have situations where the north might be having blackouts and the south is not. There might be power in the north but it cannot be moved to the south.
Mr. Higgins continued to testify:
Finally, and perhaps most importantly, we have more or less, in California, and to some extent in the West, disregarded a very important reality. If your economy, and this mirrors Chairman Greenspan’s remarks, is going to be the fastest-growing on the earth, you are going to have a robust economy that grows in 10 years by 50 percent, [then] you have to have power plants and transmission to feed that economy. You just cannot have it both ways. In the end, that means that somebody’s backyard is going to have a power plant and/or transmission line in it. California’s restructuring and their competition mess did not create the western energy crisis, period. It did make it a lot worse. The western energy crisis was really created by the unwillingness, in particular of California, to build new power plants to satisfy its needs. That situation is why we have such a severe shortage of electric power in the West. California, however, also caused further problems by: 1) Putting a rate cap on for customers that misled them into thinking nothing is wrong. In fact the average Californian, in some surveys, still thinks the whole thing is a game. 2) It gives them no incentive to conserve energy. As Governor Guinn said yesterday, “You know you just have to conserve when there is not enough of it, or when the price of whatever you are buying is too expensive.” By hiding the price of power, nobody had any incentive to conserve. Finally, the California crisis has made power suppliers unwilling or unable to sell to the utilities, because they do not know if they will ever get paid. The utilities are so financially strapped that they are essentially not creditworthy any more, and nobody wants to sell them power. The crisis is continuing to escalate in California and utilities are defaulting on their payments. Some independent power producers are now running out of money because they are not getting paid. They may not have big balance sheets on their own to be able to survive a crisis like this and they can’t operate their generators anymore. It has been reported in the newspapers that some are going to have to shut down. They simply, if they are burning garbage, let us say, they can’t pay for the garbage any more.
Things are, in fact, getting much worse. These independent power producers in California do produce a substantial amount of the power that is used there. The result of all this has been rolling blackouts. The only way they can meet the load of their customers is to reduce the load by turning customers off. Some people say, “Well, that’s California,” but in fact, it is a threat to every single state in the western United States. The power grid, electric power, does not realize there is a political border between Nevada and California. In fact, the electric grid is completely integrated in the western United States. Nevada is not only not immune to, but is particularly importantly affected by what is going on in California, the state (California) where the only response to the crisis, really at first, was, after a great deal of grunting and groaning, to put a 10 percent increase on the price of power to their customers. Late last week, the California Legislature passed a new law allowing the State to issue revenue bonds, so that the State could purchase power to be resold to customers through the utilities.
Mr. Higgins’ testimony continued:
Almost everybody who knows anything about this situation is saying, “This is not going to solve the problem.” It is, at best, a Band-Aid that pushes it off for a year or two. You’ve got to change what is going on in California. . . . Utilities in other states nearby . . . that are short now on hydro are in dire straights. Idaho Power [Company], one of the lowest-priced companies in the United States, [is] saying it probably needs a 24 percent rate increase in May. Bonneville Power Administration is forecasting a 90 percent rate increase by the end of this year. Tacoma Power and Municipal Utility in Tacoma [Washington], depends heavily on its own hydro, buys from Bonneville [Power Administration], is going to run out of cash soon, and has already implemented a 50 percent surcharge on its rates. PacificCorp Utah Power and Light Company, 19 percent increase. Seattle City Light, another municipal utility that both makes its own hydro [water] and buys in the market to make up for that, has already put in a 10 percent increase, is asking for another 18 percent, and says another one is coming. In Oregon, PacificCorp is asking for 11 percent.
Mr. Higgins continued to testify:
California’s emergency is everybody’s emergency, now. In fact, it’s time for rapid and dramatic action to make sure that this financial and operational crisis in California does not spread further. Some of you may have worried that Nevada would end up in the same place as California if restructuring moved forward. I think it is a legitimate thing to think about. Fortunately, the Governor [Guinn] made the decision that you empowered him to make and said, “Let us stop, step back and reassess the situation.” We can avoid the crisis that California is seeing. It will require tough decisions and it will require leadership. One of the first things that has to happen is, the true cost of power has to be paid by the customers. They will consume, they will consume more if it costs more, and they will consume less if it costs less. We need to help them with that and we will. They have to know what the cost of power is, and furthermore, we have to be able to pay for the power we buy, because we can only last so long if we cannot pay for the power. Right now, as I mentioned a few paragraphs back, we are charging half of what the power costs us. We cannot last very long that way. We cannot continue to bleed, and we are bleeding. When we announce our earnings in the next few days, they will be red. We will have earned nothing for the entire year. In fact, we will have lost money. If you want us to have the capital that it takes to hook up new customers and build new transmission lines, even enter into power contracts, we have to be financially solvent.
Mr. Higgins continued:
Any hope to avoid repeating California here has to have certain principles in mind. We must have a reliable, strong supply of power. We must have prices in line with real costs. We must encourage conservation. We must make sure the utility remains sound so it can buy power and pay for it, and keep the state’s [Nevada’s] economy supplied with infrastructure. We must ensure that low-income customers get help, because they particularly will be hurt by changes in the power price. Everybody needs help [with] trying to figure out how to manage a power bill that is likely to go up. We need to accelerate the development of power plants and transmission lines that we build to supply our own energy infrastructure. I should say, that is not to complain about Nevada’s process, in fact, we heard in the [Nevada] Electric Energy Policy Committee, from some builders of power plants from outside the state, that Nevada is a good place to build power plants. It is a reasonable place, the rules are reasonable, the processes are reasonable, government is reasonable. It is not quite so easy to build a transmission line. That may be one of the hardest things to do in America today, build a transmission line. We have to have both, no power plant ever connected directly to the grid without a transmission line to do it, so we must have both if we are to have energy infrastructure.
The largest auditing firm in the United States concluded recently that one of the main reasons for California’s crisis going as far and as badly as it has, was that the utilities failed to anticipate what was happening and warn the state of the pending cash-flow crisis. Our recently proposed “Comprehensive Emergency Energy Plan” addresses that issue and it addresses a lot more. Now consumer watchdogs and the auditing firms in California are reporting that the problem was worse there because the utilities were effectively prohibited from entering into long-term contracts for power. Sierra Pacific [Power Company] and Nevada Power [Company] have developed and proposed a solution that addresses all the principles I outlined above: long-term contracts, tiered price increases, low-income assistance, conservation programs, and encouragement of power plants and transmission additions to stabilize the energy markets in our state. Let me summarize them quickly and give you the reason for each. We are seeking permission to enter into long-term contracts so we have a more secure, more predictable, more price-stable source of power and natural gas to supply that power into the future. A balanced portfolio will provide diversity of supply and it will provide contract terms so we know what the prices are going to be into the future. These steps will also have the effect of encouraging new generating resources to come to the state because, as we go out to the market and buy long-term power, we will be contracting with somebody who will build a new power plant that will be dedicated to serving Nevada customers. We are seeking an emergency price increase, in the form of a rider, a surcharge, if you will, indexed to the actual cost of fuel and purchased power. The increase will average 17 percent, more for larger customers, and if you are a low-income customer that uses very little power, as little as nothing, [there will be] no increase for those who can least afford to pay it. If approved by the Public Utilities Commission of Nevada, this change, this rider, would take place on March 1, 2001 and would be reviewed 1 year later and lowered if it is not needed. These rates that we are proposing are very painful, we make no mistake about that. They are going to affect everybody in the state of Nevada. It is very painful. There is no escaping the fact that the consequences of inaction are much more severe to the residents, the businesses, to the economy of Nevada, as the clear experience in California now shows.
Mr. Higgins continued:
That is what the future looks like if we don’t do something. Even with this increase, rates in Nevada will still be below those in California. By taking this action now, we will avoid more serious consequences in the future. As a part of the plan, we are proposing strengthening programs to help low-income customers, and programs in general to help residents and businesses manage their total energy bills. You’ll see some things from us in the next couple of weeks on new conservation programs or, in some cases rejuvenated conservation programs. We are also proposing a $5 million fund for additional low-income energy assistance to help people who can least afford to pay it. Finally, we are calling on the state and its citizens to work with us to accelerate power plant and transmission line construction, so we can protect ourselves in the future. Our plan to enter into long-term contracts will directly help with new power plant development. We also need both the government and citizens to be prepared to help us get the necessary approvals so that the facilities can be sited and built. At a time when we are poised to be a very attractive location for business, people are noting what is going on in California and many big companies, Intel [Corporation] and Cisco [Systems, Inc.], to name two, are saying “We are not going to do anything more in California. It is not okay here.” Nevada is poised to reap the benefit of that, if we remain an attractive location. We must offer them some confidence that the California experience will not happen here.
Mr. Higgins continued to testify:
As long as we are financially able to do it, we will create the transmission and distribution networks necessary to deliver the power to Nevada [consumers] that they want from power plants, wherever they are. If we do not put some plan in place, like the one we have proposed, it is going to impact everybody. A failure to act will soon financially cripple the utilities, and ultimately cripple Nevada’s economy. If we can’t recover the cost of fuel and purchase power, we will be unable to buy fuel and purchase power or/and unable to get the capital it takes to pay for the new facilities that are needed to hook up customers, whether it is electric, or electric and gas in the north, electric in the south, or build transmission and distribution networks. The implications of not being able to obtain new financing or meet the requirements of current financing are extremely serious. Some of you have been asking, . . . “What about this plan to sell the power plants?” I think this issue should be, and no doubt will be, considered during this session of the Legislature. I want to give you a status [report] on that. First, the companies were explicitly ordered to divest the generating plants by both the Public Utilities Commission of Nevada and the Federal Energy Regulatory Commission. That divestiture was part of what we proposed in order to merge the two companies. It was in conformance with the Energy Policy Act of 1992, passed by the Congress. The process of divesting is not like putting your car in the newspaper and selling it, it is thousands and thousands of hours of work. It is very complex and it involves dozens of companies, many law firms, consulting organizations, regulatory agencies, the representatives of many of our largest customers, the consumer advocate’s office [sic], and of course the employees of our companies.
Mr. Higgins’ testimony continued:
At one point, someone even petitioned the Public Utilities Commission of Nevada to sanction us for going too slow, too slowly, on selling the power plants. They said we were delaying it. We have been diligently pursuing the ordered divestiture of our power plants and we have now signed agreements to sell seven of nine of them. This is a two-edged sword at this point. The sale of the plants will yield significant benefits for Nevada customers, because we were required [to sell] by the Public Utilities Commission of Nevada, and in agreement with the idea that those power plants should be sold with buyback contracts. Furthermore, the buyback contracts were indexed to 1998 power prices. Recall that I said power in 1998, at peak, was $42. Today in southern Nevada it is $400. Buying back at 1998 prices is a good deal for Nevada. In fact, the power purchase contracts . . . when those plants are sold (sales which are expected to close in the second quarter, perhaps a little bit into the third quarter of this year) represent, as of today, $875 million of additional value to Nevada customers.
That is the difference . . . between what the fuel price was when we sold the plants and entered into the contracts, and what the fuel price would be today if we had to go buy the fuel, because we did not sell the plants, $875 million, or about $40 million a month of benefits that flow directly to Nevada customers. If they are not sold, in addition to the likelihood of litigation against the state and the companies, the $875 million is lost. Another benefit of selling the power plants to companies that are in the business of developing power plants is that they intend to use those sites to add more power plants to Nevada. Example: Pinnacle West [Capital Corporation], which is the parent company of Arizona Public Service, has a stated goal of being a power generation company. They are buying the Harry Allen Plant in southern Nevada. They have already ordered 500 megawatts of new generating equipment. They expect that [new equipment] to come on-line in the summer of 2002. They might be able to still do it, in partnership with us if they don’t buy the plant, but they might also look somewhere else.
I have described to you today what I think are the reasons for the California crisis. I think the good intentions of the Nevada Legislature and the Public Utilities Commission of Nevada, in putting together both the law and the rules for electric competition, could not have foreseen the craziness that exists in wholesale energy markets today. Market forces way beyond anybody’s ability to predict or control in Nevada have occurred. We have supported, and we do continue to support, introducing competition to the electric industry in an intelligent way. We especially support introducing choice for large customers, not very politically popular, but in fact, they have the sophistication to buy their own power, and it would help the power supply situation if large customers were able to go out and sign contracts to buy power. That would represent new power coming into Nevada.
Mr. Higgins continued to testify:
We urge you to think about that. Other customers, those who are not sophisticated buyers of energy, should probably be phased in in a much more methodical way, when the energy supply situation is in balance, which is going to take a number of years. To that end, we are committed to bringing long-term contracts to the table that will assure that necessary generating resources are built and dedicated to Nevada. There was an article in the Sunday [February 4, 2001] issue of the San Francisco Chronicle that documents the dangers of delay and inaction, as they played out in California. I think it has been made available to the committee. I commend it to you. Even months after the crisis began in California, which was last May, the rules still effectively prevented the companies from getting into long-term contracts. Ironically now, in order to supply power to the state, the state is going to enter into the exact same contracts, except at a much higher price, that could have been entered into months and months earlier. Many California legislators, university economists, [and] Wall Street analysts, all agree that the failure to get into long-term contracts [in order] to predict and manage the future has been one of the biggest mistakes: Start out with no supply and then do not do something about it. We cannot afford to let that happen, it is time for action. I am happy to take your questions. Thank you for inviting me today.
Senator Shaffer asked, “Thank you, where’s Joe Gremban?” [former president and chief executive officer of Sierra Pacific Power Company]
Mr. Higgins responded, “Where’s Thousand Springs, when you need it? I’m sure Joe is sitting there reading the paper saying ‘I told you so.’”
Senator Shaffer asked, “Getting to the long-term contracts you are talking about, I can remember, when we stumbled through this deregulation process over the last 4 or 5 years, that there were a lot of long-term contracts out there that were very, very high, and they created problems for us during our process. What are you talking about in years? Long-term?”
Mr. Higgins responded:
Let me address two things, Senator, one would be the contracts of which you speak. A certain portion of the requirements, the power requirements, the power supply, for both Nevada Power [Company] and Sierra Pacific [Power Company] are from power plants which were built under some of the laws that Chairman Townsend talked about, the Public Utility Regulatory Policy Act [of 1978]. Those contracts were from geothermal plants qualifying facilities, some of them were at good prices, some of them were at not very (then) competitive-looking prices. They were for fairly long duration and there was a concern that if the market cleared at a much lower price in that market they would look bad. Now they look very good, as a matter of fact, in general, and perhaps we should be lucky we are in those contracts today, or feel lucky. We are talking about, in terms of long-term contracts, contracts that go for 3, 4, 5, or perhaps as much as 10 years. Of course the Nevada Electric Energy Policy Committee mentioned that, as a policy, Nevada would want to encourage geothermal and things like that, which we were told generally require 20-year contracts in order for there to be adequate financing to build a geothermal plant. As you would look at some combination of the kind of power plant contracts, or contracts that traditional power suppliers would want, you can get good contracts in the 3-, 4-, 5-, or 10-year time frame. If you want to get into alternative energy, which is the recommendation of the Nevada Electric Energy Policy Committee, then you would want to look at 20-year contracts in some cases. It would probably be a lot of the former and some of the latter [that] would be the kinds of things we would be looking at.
Senator Shaffer stated:
I would think that if you had a lot of long-term contracts out there, and you want to encourage new plant development, they will take a look at how long you are obligated for the long-term contracts and probably would think twice about coming in to build power plants and say, “What are we going to do, these people are locked up for the next 10 years.”
Mr. Higgins responded:
A well made point, Senator, and that is why we propose a portfolio of contracts, not entering into multiple 20-year contracts, and [to] have that be the only supply. The idea here is to have a portfolio of contracts: some of them [for] 2 or 3 years, which is about as fast as any power plant can be developed; some of 4 to 5 years [in length]; some of up to 10 years, in terms of traditional contracts. That gives an adequacy and assurance of supply while, at the same time, making it very possible that you would not renew some of those 3-, 4-, and 5- year contracts. As those were replaced, maybe with customers who said under a competition model, “I have now made a contract, I am no longer going to be a utility customer,” then you could let that 5-year contract, which is only 2 years from expiring, lapse as another customer went. By having a portfolio approach, you have a great opportunity to let the market respond and take out the intermediate-term contracts and not be renewed.
Senator O’Connell inquired:
Walt [Mr. Higgins], tell me, with the 17 percent increase that you are looking at in March, how much of that goes to pay the debt, and is it [the increase] adequate to cover that? We understand that it is extremely important that you be able to make up [your losses]. Right now, the claim is that you are only able to pay half the cost of what it is actually costing us. Built into the increases that you are asking for, is it adequate to take care of any of the debt that is currently owed?
Mr. Higgins responded:
The question is both a good question and a complex one, and I would like to try to answer it without giving you a 20-minute speech about utility finance, and I apologize if it looks like I am going that way. The global settlement [Exhibit D], which imagined that the prices were high and there needed to be room for (maybe) them [prices] to go higher, but that they would eventually abate. The global settlement [Exhibit D] started increasing the prices in the summer at Nevada Power [Company] and a little later at Sierra Pacific [Power Company]. It was hoped that would cover the additional cost of power. It has not only not covered it, but things have gotten considerably worse. The idea of the emergency rate increase, that is included in the Comprehensive Energy Plan, is to make up the difference, if at all possible; and that is assuming . . . that the markets do not get even worse than they are today. It [Exhibit D] imagines that the power plants might not be sold. As I mentioned, there [are] 875 million more dollars of fuel costs that will have to be incurred if the power plants are not sold. The global settlement [Exhibit D] takes care of part of the cost and the 17 percent average rider is designed to account for the rest of the cost, unless the worst of the worst happens, which is not what anybody expects. I say that knowing that people said that last summer. It is hard to imagine how the price can get much worse than it already is. We are in the situation. We have not accumulated any undue or extra debt the way the California companies have accrued it, because we have been eating the extra cost of power, as opposed to accumulating that extra cost. That is one of the differences. Here, the owners of the company are paying the extra cost of power today. In California, it has just been accumulated as debt to be collected from the customers.
Senator Schneider asked:
Walt [Mr. Higgins], I think that in southern Nevada, a lot of us are concerned about the actual shortage of electricity coming in. We are concerned about selling off the generation plants and you are producing half of our electricity already. There is no long-term guarantee we will have that if you dump the plants, so we have that concern. Also, on that, you have done a good job on supplying us [with] power (and the whole West Coast has the shortage) why not add on to your generation plants right now? Keep them, add on, or build new ones? For 90 years, you have done an awfully good job of that. Why not go in that direction, and provide us a lot of generation? It seems to me like it is very low risk at this time. It seems like anybody would give you a loan to build more generation because the whole West Coast needs it. It is a very low-risk loan for you to build generation, and you can sell all you could build at this point. Why not go in that direction? I guess that is what is really puzzling me.
Mr. Higgins responded:
Senator, that is a superb question and you know, in a way, I wish we had asked that question in 1995 instead of in 2001. You know the situation was not as good for some customers, . . . as they wanted it to be. They wanted choice, and I respect the fact that perhaps choice would have given them lower prices for power. For whatever reason, we changed the system, and we did not change it in a vacuum; we changed it along with national policy changing to where today, even though it is a little murkier now than it used to be, the national policy is pretty much that the utilities, over time, should be splitting up their generation from their transmission [and] from their distribution. While I do not [agree], I can see the good economic reasons for that, and there are people that believe even today (and I do, too) that competition in a market that is adequately supplied will result in lower prices. So there are good reasons why we set out on this road toward competition, and some would argue that the mistake here was [in] not making sure (and I do not mean in Nevada, I mean in general in the United States) . . . there was an adequate supply when you started competition. There was a lot of hope, I think especially in California, and I have heard the former president of the California [Public Utilities] commission say, “You know, they had a bit of the, ‘if you build it, they will come,’ attitude.” If you create a structure in which competition exists, people will rush in there and build power plants. That is not necessarily the way things have happened. In California in particular, it did not happen because they would not let them build the power plants. Maybe if they could have built them, they would have built them, but they did [could] not, so they did not.
Mr. Higgins continued to speak:
On the one hand, I agree with the sentiment that maybe the best thing to do is to just keep the power plants. There is the little problem of $875 million, which is going to be paid by somebody. The utilities cannot pay it because they will go bankrupt long before that is all paid. There is $875 million because natural gas prices, in particular, have gotten so much worse just since last fall. Perhaps the other way of looking at the sale of the power plants is this, that is, if I am allowed (and I have asked the Public Utilities Commission [of Nevada] to give me permission to do it, and they are considering that) to go out and engage in long-term contracts, you can have all the benefits of ownership of a power plant if you engage in a long-term contract with the owner. The only volatility or unpredictability being what is the price of fuel, which is something we already have as a risk today. Under the traditional utility regulation, the price of fuel was passed through over a period of time. So, an equally good solution to holding the power plants is to let the power plants be sold, reap the benefits of the $875 million, and demand that I go out and engage those power plants in long-term contracts to supply power to Nevada.
Mr. Higgins continued:
The problem today is, nobody knows what is supposed to happen on March 1, 2003. Nobody is designated to be the supplier of power. You do not necessarily want me to be the supplier of power, maybe you want competition to do [determine] that, but I can be sure those power plants will still be here if I am authorized to enter into long-term contracts, on behalf of Nevada customers, to supply that power. The thing that would then be unknown would be, what is the price of fuel? Most suppliers would either want to lock the price of fuel in today, and that might be a bit high. Natural gas today is higher than it has historically been. Future prices for natural gas show some return to normalcy, but not return to 1998 prices. [The prices may] return to about twice 1998 prices, but we could enter into contracts to lock it in or we could enter into contracts that have index fuel prices, and whatever the fuel markets do (and the expectation by people much more learned than I, is that the price of natural gas will stabilize at about twice the 1998 price), we could get power plant contracts locked in at those kinds of index prices that would supply power on an equally reliable basis to that which exists with the utilities owning the plants today. I have asked the commission for permission to do that and I know they are studying it. It is certainly one alternative.
Senator Schneider continued:
If I buy your power plants for $875 million, and then go into a long-term contract with you, I will want to make a reasonable profit on my $875 million, and a reasonable profit on the electricity I am going to sell you, the generation part. If you keep the plants, would the consumers of Nevada get a lower price because you own those plants free and clear?
Mr. Higgins responded:
No, we do not own the plants free and clear. They are today owned by the shareholders of the company [which represents] who have invested, debt, in other words, borrowed money. The plants have a book value (in other words, an un-depreciated value) of about a billion dollars. We are selling the plants for about a billion seven [$1.7 billion]. The plants’ sale prices are then reduced by the buy-back contract values as they existed on the day they were sold. What I am saying is, if you did the same exact deal today, instead of selling the plants for $1.7 billion, you would sell them for $2.575 billion. The value of the plants has gone up by another $875 million, in essence, or to get the same exact deal we got back in the fall of this year. Today, the investors and the people who have loaned money expect to be paid for the use of their money, just like the new owner of a power plant would expect to be paid. An argument can be made that somebody who is a new owner of power plants (who concentrates on power plant ownership and operation and who operates in a much larger energy market [and] buys fuel at maybe lower prices than we can, [and has] has enhanced maintenance systems or whatever) might be able to operate the power plants better, when they have thousands and thousands of megawatts, than a relatively small utility like either Sierra Pacific [Power Company] or Nevada Power [Company] did.
Mr. Higgins continued his testimony:
One of the arguments about a competitive market is: People that are concentrating in the generating business, in theory, ought to be able to be better at it than people who are not concentrating in it. So there is some argument to be made that the price of power should be lower, over time, if there is a more competitive, robust market. That is one of the arguments for competition. I would say that, financially, I do not know what the returns required of the owner of a hypothetical power plant in southern Nevada would be, but they will not be vastly different from the returns of Nevada Power [Company] or Sierra Pacific [Power Company] for the same investment in the same power plant. I think many people that are buying those power plants would like to be able to have the flexibility to be able to not only sell to Nevada customers, but also use excess power and sell into whatever market might exist. No doubt, and you could ask them (I think some of them are actually going to testify), “Why are you buying these power plants?” We have been approached by several power plant developers and asked if we would be willing to sign long-term contracts with them. People that are putting massive capital investments in place generally would like to have more assurance about the recovery of their investment, especially if you thought that 6 years from now there were going to be a lot of power plants here and the prices of power were going to go back down to where they used to be. That is one possible scenario. The more long-term contracts you had, the better. So there is a market out there for people willing to sell. In fact, that market has recently been probed in serious depth by California. The answer is that $10 billion bond bill they passed and negotiations going on, even now, to buy long-term power for California at about $70 per megawatt-hour, long-term firm power. That is about what our portfolio looks like for next summer, $70 or $80 per megawatt-hour. The only thing I would like to leave you with (thinking about these power plant sales) is, it is a two-edged sword. On the one hand, it is very appealing to have that asset and control that part of it. The fuel prices are out of our control in any event other than through long-term fuel buying and hedging and so forth. You can, if you can, enter into a contract to effectively provide the same thing that may have every bit as much advantage for the customers of Nevada. I urge that you think carefully about that, as you make your decisions.
Senator Schneider made these comments:
I spent a lot of time in San Diego over the summer and I noticed the comment from the head of an Arizona utility who said, “In deregulation there are winners and there are losers.” The Arizona utility was a big winner last summer for selling (dumping) excess electricity into San Diego, to the tune of hundreds of millions of dollars. They were making excess each week, San Diego had no more generation left, I mean they sold all their plants. I would sure hate for July to hit in Las Vegas and those 118o temperatures to start peaking and [find] we have no more generation and . . . are forced to go on the open market and buy at whatever price. Then we are in the same position the people in San Diego were in.
Mr. Higgins responded:
You are absolutely right about that. The big difference is, and I urge you to blame the right thing, it was not that they sold the power plants. It was that they had no contracts to buy power. They were required to just buy it in the market every day, whatever tomorrow’s price was, and pass that cost right through to the customers [with] no prior planning, no long-term contracts, no hedges, no nothing, and that is what you get. So, the real problem in San Diego was a terrible California deregulation scheme, not selling the power plants. If you [San Diego] had sold the power plants and bought back contracts for power, San Diego would have had natural gas volatility (because if the plants were supplied by gas or oil that went from $11 to $30 a barrel, you would have that volatility in the power price) but you would not have any of what was going on because you would have created a long-term power supply. The difference lies in that, not in the fact that they sold the power plants.
Senator Rhoads asked: “I have two questions along the same line. Are there any generation plants that are either on the table or actually being built today in the West?”
Mr. Higgins responded, “Yes sir, there are a number of generating plants being built in the West, all over the West. There are even a few in California.”
Senator Rhoads continued, “The second question is, “What can we do, legislatively-wise, to encourage generation companies to come and build in Nevada?”
Mr. Higgins answered:
I do not have a complete answer to that, Senator, and I think it is a good question. The [Nevada] Electric Energy Policy Committee made a detailed report on that very subject and included the words of the developers. My remarks earlier alluded to the idea that developers of power plants say that Nevada is a good place to build a power plant, relative to the other choices. It is not necessarily better than in Arizona or Utah, but it is a good place to build. It is a whole lot better than California. The most important thing to a power plant developer is that there is a fair process and it is predictable. They know . . . if they follow the rules and . . . meet the environmental and land-use and water requirements, that they will get a permit at the end of the day. In California, you cannot predict whether or not you will ever get a permit or how long it will take. Predictability; rules that are fair; rules that encourage the development to the extent that developers, when they come talk to this committee, say, “This would help, this would help.”
From the transmission point of view, I would say we have to do something, and it [“something”] is working with both the federal government and the state agencies in Nevada. And they are not a problem about the transmission line development, but as I mentioned, nobody wants a transmission line near them. The fights over transmission lines are bitter, bitter fights. At some point there has to be a “greater good” argument made, or else we can spend the kind of time it took to build the Alturas [Intertie Project] line in the north [Reno area], which raised the price by tens of millions of dollars and added years to the process. That is, perhaps, one of the few major, long, interstate transmission lines built in a long time. There are transmission lines being built in southern Nevada as well. Some of them are in contentious areas, but we have to have a lot more transmission in order to both hook up these power plants and keep the economy capable of growing at the 7 percent or so it has been. Transmission is the place where public good and [a] state policy that says, “Yes, we are going to build it,” could help a lot. We have the feds [federal agencies] to work on with that too, since so much Nevada land is, in fact, in their hands.
Chairman Townsend called for further questions and hearing none, noted that the global settlement (Exhibit D) would be the next subject to be examined at today’s hearing. He said subsequent hearings would deal with energy costs and their impacts on the state budget; the second hearing would examine recent filings with the Public Utilities Commission of Nevada; and the last hearing of the week would take testimony on the concerns of independent power producers and would also include discussion on alternative energy sources.
Chairman Townsend continued:
If we could now get the individuals who participated in the global settlement [Exhibit D] to the testifying table at once, I would appreciate it very much. We have a special guest here [that] I just noticed in the back, today. You cannot leave yet, Governor. [Former] Governor List, [Robert List, Governor of Nevada 1979-1982], who knows a little about this subject, thank you for joining us, and you are welcome anytime. Before we go to that, the handout [Exhibit E] that Mr. Higgins handed [out], did everybody who wanted a copy, get a copy of that? That is such an important visual for this state, and we need to make sure we have that. Gentlemen, we are now going back to our normal process, which would be that the first time you speak, please state your name for the record and who you represent. We have three new ladies with us, if you could just repeat your name, when you do speak, because they [may] have a hard time picking it up in a couple of days from now, if they are not familiar with your voice. Towards the end of the session [Legislative Session] . . . I believe the committee was handed copies of the agreement and stipulation [“Agreement and Stipulation,” dated, Final, 07/27/00 (Exhibit D.)]. This [Exhibit D], I believe, is the final document that was filed. With us today, is Mr. Doug Ponn, for [Sierra Pacific] Resources, is that correct?
Representatives of [parties to] the global settlement agreement introduced themselves to the committee.
Chairman Townsend proceeded:
. . . When we passed S.B. 438 of the Seventieth Session from this legislative body, . . . there were a couple of key components that I believe were testified to in both Houses and were . . . believed by the members of the Legislature to be not only what was written, but [included] the intent of the bill. The first one was the elimination of deferred energy, and I believe the reason was very simple: After 4 years of debate, we did not think it was an efficient means of encouraging utilities to find the best way to operate, so we wanted to eliminate that. That was finally agreed to. The second one [component] was a rate cap in there. Let me be very specific, and I am not asking anyone on this panel to go anywhere they are not comfortable or that they legally cannot, that is not why we are here, I am just expressing our feelings so that when you respond to the stipulation [Exhibit D], you can give us your best insight. There was a rate cap put into the bill on the following conditions. At the time Sierra Pacific Power [Company] had entered into a 3-year agreement in which deferred energy had been put aside and there was going to be shared earnings over and above [the] allowable rate of return. One of the reasons deferred energy was put into the bill as repealed was that there was a success going on with the power company in the north that both consumers and the company were benefiting from at the time. There . . . however, had not been a rate case in considerable time, for Nevada Power [Company], and . . . under A.B. 366 of the Sixty-ninth Session, there was a mandated rate case and that would establish a rate by which the consumers would know where they would be during that rate cap period. That cap was put in place for the purposes of transition, so that . . . could be implemented. We could review what was going on in the marketplace. We could see what was going on with capital markets and costs of energy. When we left here, that was our general understanding of what we believed was in the bill. There were some hearings at which the result was either regulation or a determination by the commission that the company objected to. Litigation followed. Subsequently, negotiations started and the result is the agreement and stipulation [Exhibit D] in front of us. The reason you are here today is to provide your insight into what you think, number one, is in this stipulation [Exhibit D], [and] what your thinking was with regard to this, so we are brought currently up to speed (and we will have to get up there quickly, since tomorrow we are going to try to deal with the next filing). . . . I know these things happen very quickly and they are very complex, and there are hundreds of people working on them because of their complexity. As you speak, if you could generally make reference to that portion of the document [Exhibit D] we have, whether it is page 1 or paragraph 16, please make reference to it. I do not know if any of you have decided who is going to start this, but Mr. Chairman [Donald Soderberg], as the Chairman of the Public Utilities Commission [of Nevada], feel free and we will try to follow you. We are down to the true minutia of utility regulation and it is pretty complex. . . .
The committee members and parties of the global settlement (Exhibit D) engaged in conversation about the various parts of the stipulation. All parties were made aware that several individual sections are included in the stipulation document (Exhibit D).
Chairman Townsend continued:
If you would like to proceed, I am not sure we want to do the .0001 mills [mill assessment], but I think we need to get the general position and I know this is not going to be easy for the company [Sierra Pacific Resources], because you already have another filing with the commission. So remember, we are everyday people, and if you are speaking about your other filing, you might make reference to that, as opposed to this one. If you do not want to reference that until tomorrow, that is fine, too. Go ahead, please.
Donald Soderberg, Chairman, Public Utilities Commission of Nevada, presented his opening statements:
Thank you, Mr. Chairman and members of the committee, I am Don Soderberg, Chairman of the Public Utilities Commission [of Nevada]. I have been asked by Senator Townsend to give a short overview of what led up to where we were, and why the parties entered into the global settlement [Exhibit D]. As Senator Townsend referenced, in 1997 there was a rather large and extensive bill that set the stage for retail competition in the electricity markets in Nevada. That bill and the thought that we needed to do that was premised on a number of factors that were going on at the time. First of all, there was a surplus of energy in the West. That led to very low, dramatically low purchase power prices. Secondly, the cost of natural gas, which was quickly becoming the fuel of choice for power generation, was very low, I think artificially low. Thirdly, because traditional rate of return regulation incited utilities to essentially build as much as they could build, there was a consensus among regulators across the country that utilities were run inefficiently. The solution to that inefficiency was to move to competition. That would allow customers to take advantage or take better advantage of these low gas prices and these low purchase power prices. So, in 1997, the Legislature created A.B. 366 of the Sixty-ninth Session, which was a rather extensive bill and did a number of things, but essentially left most of the details to the newly reorganized Public Utilities Commission [of Nevada]. From 1997 through 1999, the Public Utilities Commission [of Nevada] went very extensively and painstakingly through a number of detailed items, as you would say, minutia. The prevailing economic theories at the time, and I should say, theoretical economic theories at the time, indicated that the nation needed to move towards competition rapidly and needed to do many artificial economic things to spur competition quickly. If we did not do this in a very short transition, then somehow it would not work. Many of the people who testified before the Public Utilities Commission [of Nevada] and commissions across the country, quite frankly, were very ‘think tank’ economists who did not have a lot of practical knowledge and had not worked in either the utility business or utility regulatory business. What came out of that was a mechanism that I think could be simply described as: “If you dismantle the existing utility, that will allow other competitors to come in to compete freely,” and we need to be worried about the market power of the “big cat” on the block. Prior to the 1999 Legislative Session, I think there was a slow realization that quite frankly, maybe not only in Nevada but across the country, we had gone a little too far with that. I think there was some dissatisfaction with some of the decisions that had been made by the Public Utilities Commission [of Nevada], and there was a desire to reexamine some of these things.
Mr. Soderberg continued his testimony:
At the same time, I sensed a desire on some that there was growing public sentiment that this transition period to competition might be rocky. How do we eliminate some of that uncertainty? I think the product of that was S.B. 438 of the Seventieth Session, which in my mind did three key things. It reversed some of the PUC’s [Public Utilities Commission of Nevada’s] rulemaking. It eliminated the mechanism known as deferred energy by which utilities were able to essentially log in their cost for fuel and purchased power and, at appropriate times, come and ask to either be compensated for that or, in times when those costs would be going down, [to] refund that to customers. It instituted a rate cap on general rates. During that period of time, we were operating under the assumptions that one, we were pretty certain that competition would be coming in soon. I think that bill delayed the start of competition for only 3 months. Although we were seeing some increases in fuel and purchased power prices, [an assumption was] that things would remain relatively stable. This was not planned, but I am flipping the page, but historically this is a big turning point. The very summer after your last session, things started to change dramatically in ways that, depending on who you talked to, we should have known a little about or we had no way of predicting. Either way, within a month . . . of the last Legislative Session ending, the world changed very quickly. Pursuant to your statute [S.B. 438 of the Seventieth Session], there was the mechanism set up by which the southern division of Sierra Pacific [Resources], Nevada Power [Company], would make one last deferred energy filing. Things changed so rapidly that that filing was made, it was amended, it was repudiated on the stand and, quite frankly, Mr. Higgins referred to it as a disastrous decision for the company. It probably should be described as a disastrous time period in the history of the company. Not only Mr. Higgins, but the prior management of the company, has assured me that the company will never bring forward a case on that matter again. The result was a decision that, based on a very poor record, did not accurately reflect what was going on with the company’s cost at the time, and did not predict what would happen after the decision.
Mr. Soderberg continued:
As we were dealing with the last rate case and how it was being processed and all its flaws, the situation around us was deteriorating rapidly. It seemed to be exponential. I said within a month of your last Legislative Session, things changed rapidly. That fall, things exponentially were changing on us. That spring, again things were exponentially changing on us, to the point that in May of last year, when California was having August weather at the beginning of May, their grid was going down. Nobody in California predicted it and nobody in Nevada predicted it, . . . on the regulatory side or the company side. Clearly, about that time my people at the utilities commission [Public Utilities Commission of Nevada] were expressing to me concern about the company’s financial decision. They had even gone as far as saying, “If this agency [Public Utilities Commission of Nevada] had given the company everything it had asked for in its second amended filing, they would still be in a very bad position.” That realization (and I believe that [in] the Bureau of Consumer Protection that realization was hitting as well), spurred our staff, the Bureau of Consumer Protection and the company to have preliminary talks about “How do we get out of this mess?” Two things, I think, worked to our advantage. I have never wanted to say that bringing judicial review and suing the commission [Public Utilities Commission of Nevada] is something that turned out to be a good thing, but in that instance, the utility had filed a number of cases that I, as a lawyer, felt were fairly weak. They gave us a vehicle, quite frankly, to change some things that we did not have the flexibility to do by law. Secondly, through the luck of the draw, there was a statute that probably should have been repealed in the 1980s that was left on the books . . . known as the “Old Fuels Clause,” which prior to deferred energy, utilities were allowed to make filings every 30 days to adjust their fuel and purchased power costs. Our review of the legislative history is not very in-depth, but from what we can see, when we came up with deferred energy (and this was prior to my time), that was the solution to doing things every 30 days. Somehow that statute [Old Fuels Clause] got left on the books in the 1980s and that statute got left on the books when you passed S.B. 438 of the Seventieth Session. That gave us a vehicle to attempt to adjust some of the imbalances that were going on, and cure the company’s financial situation, [and] at the same time give some stability to ratepayers.
Mr. Soderberg continued his testimony:
I will let other members of the panel and Mr. Dimmick and Mr. Parker talk in detail about what was going on and the nuts and bolts of the settlement [Exhibit D]. I will say that the projections I was looking at, as an individual commissioner in August and the end of July, when I was one of three commissioners that voted to approve the global settlement [Exhibit D], indicated that things today would be much better. They indicated that gas prices would be coming down in the fall. They [the projections] indicated that purchased power prices would be coming down in the fall. That has not necessarily occurred. What we find ourselves in now is . . . the western region is paying for knee-jerk reactions to what happened last summer. Last summer, we had a power shortage in the West that was exacerbated by the theoretical economic items that were instituted in California. That was a theory called “managed competition.” I think now we can call it “mismanaged competition.” Throughout the fall and into the winter, we had rolling blackouts in California that were not due to a shortage, but due to a financial crisis with two of the three investor-owned utilities in California. Quite frankly, Southern California Edison [Company] and Pacific Gas and Electric [Company] could not pay their bills. To that point, nobody wanted to sell to them. Power was available during January’s rolling blackouts that was not being sold. . . . In December we were jumping up and down that Nevada Power [Company] was able to sell some of its surplus into California. That was going to offset some of the fuel and purchased power, rider-rate increases we were experiencing.
Mr. Soderberg continued to speak:
In January, people in our agency [Public Utilities Commission of Nevada] were on the phone with the company [Sierra Pacific Power Company] every day, making sure they knew that if they made a bad sale to somebody who could not pay them, they were going to “eat it.” We were very concerned that they would be selling to somebody [a company] who was not credit-worthy. Senator Schneider has left the room, and I think it is very interesting to point out that he spent some time in San Diego last summer. Last summer, what we heard about was the skyrocketing rates in San Diego. We did not hear anything about Pacific Gas and Electric [Company]. We did not hear anything about Southern California Edison. As an emergency measure, a rate cap was instituted for San Diego Gas and Electric. The unheralded feature of that rate cap is they were allowed to defer their losses. Now we are here in the beginning of February, we are hearing of financial crisis with Southern California Edison, we are hearing about financial crisis with Pacific Gas and Electric [Company]. We never hear about San Diego any more. Although San Diego is experiencing losses, they have been able to defer these losses and they have a regulatory asset that they can borrow against. The other two investor-owned utilities [Pacific Gas and Electric Company and Southern California Edison] in California cannot do that, and that is why they are experiencing what they are experiencing. I would have no problem with the Nevada utilities selling into the San Diego market because I know they are going to get it, or selling over to any other user whether it be a muni [municipal] or a co-op [cooperative], because I know they are going to get paid. I shudder to think that we are sending power over to Pacific Gas and Electric [Company] and Southern California Edison with no guarantee that we will ever be paid for it. That is where we find ourselves.
Mr. Soderberg continued his testimony:
Now, the global settlement [Exhibit D] is something that is very important to go through. It happened in between your sessions and it clearly was something that received a great deal of attention. Because it has a feature that we deal with every month at the commission, it comes up in the news every month. You can see how, in the beginning, it was the most misunderstood piece of work that I think any regulatory agency had done. Over time we can see that there is a greater understanding of what was done and why it was done, and we can debate all day the features of it. I could say as a commissioner that I am happy I voted to approve that settlement [Exhibit D]. In August I did not think that California would have rolling blackouts. I clearly did not think that California would have rolling blackouts because of the financial situation of California utilities. I believe if we had not adopted the global settlement [Exhibit D], we would have had rolling blackouts in this state [Nevada] before California. Nobody is going to sell to a utility if they [the utility] cannot pay their bills. That is simple economics. I would not do it and nobody in this room would do it. I do not want to get too far into the future, because that is a filing that is before me. As chairman [of the Public Utilities Commission of Nevada], I need to be open with you. As a commissioner, I cannot really discuss cases until I vote on them, and I really cannot hear what people’s viewpoints are, except at an open hearing [that is] on the record. I do not want to get too much in the future. I think what you will be hearing, from the perspective of the people at this table today, is that this is something that we had to do. It was something that was hard to do and it took a lot of creative minds to come up with a mechanism, based on the information that we had last summer, to solve a problem and protect customers from the full brunt of what was going on. With that, Senator Townsend, I do not know if you want to have questions with me or if you want to go from right to left or how we want to do this?
Senator O’Connell asked:
I do not know if it is really a question or if it will pertain to this, but you said something just a minute ago that . . . is not on the table yet. You talked about natural gas and how you thought that was going to be a much better situation than it has turned out to be. Is the commission looking at anything or any of the utilities, that you are aware of? When we are talking about new generation, we are talking about also the fuel that is required for them to run. Is there anything on the table, are we doing anything as far as enlarging or building new gas lines?
Mr. Soderberg responded:
I would let the various companies address that, because they own them. I do know that there is expansion planned on a number of our gas pipelines. With that, Mr. Chairman, how would you like to proceed, from your left to right, or how would you like to do this?
Chairman Townsend answered, “I do not think you will get paid any differently, if you go first or last.”
William E. Peterson, Senior Vice President, General Counsel and Corporate Secretary, Sierra Pacific Resources, began his testimony stating:
Several years ago a federal judge, in front of my client after ruling against me, said it was one of the worst tried cases he had ever seen. I hope never to be so denigrated again, and I am just hoping Mr. Higgins was not here to hear Mr. Soderberg say that that was just a terrible case that we filed. I am certain it will not be the last case that I lose, but it certainly was the most painful one. I would like to start on a conceptual basis, Senator. I think it goes to the theme of what you originally expressed and it is a theme I picked up originally, when I appeared before the Legislative Commission, I believe Senator O’Connell was there. Speaking on behalf of the company [Sierra Pacific Power Company] then, I think you were there in the audience. I believe that the company was, there was a feeling among all the legislators up there, that the company had basically breached a promise. There had been a clear understanding on behalf of the Legislature when they enacted S.B. 438 of the Seventieth Session, that there was going to be one final, there was going to be a rate freeze. That rate freeze was going to be essentially of 1998 electric rates, . . . at least with respect to Nevada Power [Company], which as you pointed out, was on deferred energy and had been accumulating a large balance.
Mr. Peterson continued:
There would be one last deferred case and that the rate freeze as fixed by the commission [PUCN] would then be adjusted by that last deferred case. One important thing that happened in the course of events, and I want to separate the litigation strategy from what may have been understood by one or more legislators, and I would like to emphasize that particular point . . . and that is: Not all legislators, when they enact a bill, are of one mind. They do not always think it means the same thing, so that is why, for instance, when you go into court, even affidavits from legislators are not admissible because the judges always say, “That is just one legislator, how do we know what the other 60 of them were thinking at that time?” So, from a litigation posture, I was looking at the legislative history, what went on before you all, when you enacted S.B. 438 of the Seventieth Session. There were two critical and very important things that leaped out to me. One was, whether you realized it or not, the rate freeze was not to go into effect until such time as the market opened. In other words, until the market opened the company was free to assert any and all rights it had under the existing legislation to file rate cases. In fact, the company could have filed a general rate case if it had wanted to. The other important thing was, and I think the chairman alluded to this [and] ascribed it perhaps to an oversight (which I do not agree with), and that is that the Legislature left in the law, in fact, actually renumbered the statute that the Chairman referred to, and that being the “Old Fuels Clause.” In checking the legislative history, there actually was a discussion of that fuels clause. There was actually, Senator Townsend, I am sure you do not remember, but there was an exchange between you and Mr. [Frederick] Schmidt about that very clause. Mr. Schmidt remarked that it was possible, under this particular provision [Nevada Revised Statutes (NRS)] 704.110 subsection 7, which is renumbered [subsection] 6 by 438 [Senate Bill (S.B.) 438 of the Seventieth Session], that the company could file fuel clauses in the event that the commission enacted regulations implementing that particular provision, which they had never done.
Mr. Peterson continued his testimony:
When we examined our remedies, our alternatives when we got this, what we considered to be a very disastrous decision, whether it resulted from “mad trial” tactics or whatever from the commission, we had to do something because, in reality, the decision was a death sentence for the company if it did not get some relief. Although it was not clear that death was certain until the energy market started to creep away from us, beginning in the summer of 1999. The way deferred energy works is that you set your rates based upon historical fuel costs, and so when we had the last deferred case, it ended in May of 1999. The going-forward rates were based upon a 12-month average, from May 1998 basically to May 1999. That is when the energy prices really got way out of line. Over that summer the company accumulated huge financial deficits, and it looked as though the situation was not going to remedy itself in the short term. The company would be put in such [a] poor position [for the] same reason we are now. . . . That is, we are recovering far less in our rates than we are actually paying out for the energy that we must buy and the fuel we must buy. We would eventually go bankrupt. So from a lawyer’s perspective and looking at our remedies, I have realized there was no rate freeze in effect: number one, because the markets had not opened; and number two, the fuel clause was available to us, whether it was a loophole or not, it was there and the company had a right to file it. Furthermore, under existing regulations before the PUCN, there is a scheme as to how you go off deferred energy. The reason why there is a scheme for going off deferred energy is because you cannot cut it off on a certain day because it could be you would be over-recovering on your rates.
Mr. Peterson continued to testify:
Then when the commission finally gives you an order, you may have accumulated a surplus, a windfall. In order to prevent that, what the regulations basically said was, “You go off deferred energy only when the commission issues an order allowing you to go off deferred energy.” In the meantime, you accumulate the balances. If we could accumulate the balances, that meant we were accumulating over that summer of 1999. The statute also specifically said we could file deferred cases. If you want to describe that as a loophole, I do not know what is in the minds of the Legislature. The rates were to be adjusted by deferred energy cases so long as they were filed before October 1, 1999. We updated our filing in September of 1999. We called it either an amendment or a supplement and we included those accumulated balances over the summer of 1999. It is that order that really inflicted the disaster upon us, the order that Chairman Soderberg is referring to, because he did not allow us, the whole commission voted, but they voted to disallow that supplemental filing. That meant that our rates going forward in the indefinite future were basically historically [sic] fuel and purchased power cost rates from May 1998 to May 1999. It would have been just a matter of time before we [the company] died. When we were able to file our court cases challenging that decision, we did. We did it, I think, within 2 days of the time we were permitted to file it, because you have to wait for the final decision and the final decision did not come until March 30, 1999, or thereabouts. We filed on April 2, 1999. We filed right here in Carson City, in front of Judge Griffin [District Judge Michael R. Griffin, First Judicial District Court]. What we asked Judge Griffin to do for us was, basically, to reverse the commission [Public Utilities Commission of Nevada] and order them to allow us to collect in our rates, and [to] reset the rates, based upon the higher fuel and purchase power costs that we had experienced in May of 1999, which, even by then, were continuing to get worse. We also, in order to protect all of our rights, filed a case in the United States District Court in front of Judge Hagen [U.S. District Judge David W. Hagen], who sent it over to Judge Reed [Senior U.S. District Judge Edward C. Reed]. What we did there was to challenge the entire constitutionality of S.B. 438 of the Seventieth Session, on a very simple basis: We challenged it on the basis that a rate freeze, per se, especially one that goes on for 3 years, without giving the utilities the ability to come in for rate relief, was unconstitutional. You may be thinking, “Well what about your fuel clause?” Once the market opened, the fuel clause would no longer be available to us. We would be stuck with that 3-year frozen rate. The legal theory was quite simple, that is unconstitutional.
Mr. Peterson continued with his testimony:
I do not know how long you all have been sitting, but some of you may recall we had an insurance crisis back in the late 1980s, and a similar rate freeze was imposed upon the insurance companies . . ., although I think it was only a year or 2-year rate freeze. At that time, the insurance companies took the state to the same United States . . . District Court, saying a rate freeze is unconstitutional unless there is an ability to get an adjustment of relief from that rate, in the event that the rates are confiscatory. They do not have to be confiscatory, just in the event they are. We filed that case as well. We also had pending about four or five other pieces of litigation, as the chairman alluded to. He calls them weak cases; I consider them fairly strong cases in deferred energy that had been disallowed in previous years.
Mr. Peterson continued with his statements:
We had three pieces of litigation at that time, ongoing, on deferred energy, not counting the one that was the subject matter of the March decision. We also had a case in Washoe County challenging various aspects of the commission’s [PUCN] decision-making on implementing electric restructuring. The commission, as the Chairman pointed out, felt it was an ideal opportunity to enter into what has been renamed the “Nevada Settlement,” which we all called the global settlement [Exhibit D]. I think there was an appreciation among all the parties here, all of whom I commend, they worked extremely hard on this [global settlement]. We worked almost every day for 45 days or more, working into the nights, and it was very excruciating, very painful and very emotional. I think all the parties came to a realization that, for the benefit of all the citizens of this state, something had to be done to save the utilities because if we lost all the cases, we would simply go bankrupt.
Mr. Peterson continued:
Something had to be done. There was a legal basis for doing so. That legal basis for doing so was the existing statute, S.B. 438 of the Seventieth Session, that allowed one final adjustment of the fuel and purchased power rates for Nevada Power [Company]. What we came up with was a theme, a concept that would allow Nevada Power [Company] to adjust its rates, and would adjust it on the basis that it was a settlement of the last deferred case. All of the parties were cognizant and very sensitive to the rate impact on consumers, especially the small consumers. The thought was to let us allow the utility to gradually raise their [small consumers’] rates to make themselves [the utility companies] whole over time. The gradual, incremental rise in rates will eventually make them healthy because it was thought, at the time by all the parties, that the energy markets would stabilize. In other words, . . . the costs were going like this and the rates were underneath it, but it was thought that the rates would come down and we would still . . . incrementally increase our rates until, at some point, those two lines would cross and we would be made whole going forward. We would still lose a lot of money, but we would still be able to survive [and] the ratepayers would not be inflicted with any substantial rate shock.
Mr. Peterson continued to testify:
In addition to that, the parties thought that this was a marvelous opportunity to settle all the huge battles that had been going on in front of the commission, on various restructuring issues. The principal one being the stranded-cost issue. The parties took it upon themselves to enter into the global stipulation [Exhibit D], to get rid of all the deferred cases, get rid of that Washoe County litigation, and then fix some of the restructuring issues, which would enable competition to come sooner. One of the impediments to the market’s opening was the uncertainty with respect to the stranded cost. Most people who wanted to go into the market or who would think about it, without knowing what their stranded-cost charge was going to be, would be paralyzed. They would not be able to make an intelligent decision, so they would do nothing. Among the things we all agreed to do was to settle that issue, once and for all. We agreed to give up all of our stranded costs; actually Mr. Hay came up with that idea. We did give up all our stranded costs, we resisted that very strongly, but eventually conceded. In exchange for that [concession], we did get a certain assurance that out of the sale of some of the generating proceeds, we would be made whole for some of those costs. We also agreed to dismiss the federal litigation on the unconstitutionality of the statute, of course. . . . The process worked for a while, but again, the underlying assumption was always that the energy markets would stabilize over time. . . . That has not occurred, which is why Mr. Higgins was here today, to explain why we have filed this supplemental case, seeking at least enough revenues to make us whole, so we can go forth and provide the necessary infrastructure to the state and to give us enough money so we can buy the energy in order to provide it to the consumers. In summary, . . . there were many, many competing interests at stake here. Everybody came to the table and gave up something. Everybody, in particular, Mr. Hay [Chief Deputy Attorney General, Bureau of Consumer Protection, Office of the Attorney General] and Mr. Parker [Commission General Counsel, PUCN] on behalf of the PUCN, were particularly cognizant for the protections for the consumers and exacted what has unfortunately turned out to be limitations on rate increases, which are simply not sufficient at the present time. Everyone made a tremendous effort and everybody gave up something and I think it was a fair and reasonable accommodation for all the ratepayers. It was perfectly legal, albeit, and understandably so, it did contravene the expectations of some of the legislators when they enacted A.B. 366 of the Sixty-ninth Session. The bench just got away from us, as Mr. Soderberg commented . . . no one anticipated it.
Timothy Hay, Chief Deputy Attorney General, Bureau of Consumer Protection, Office of the Attorney General, began his testimony:
. . . Mr. Peterson, I think, pretty accurately described the history and the legislative and legal parameters under which we were trying to resolve this issue. As just a small point of background, I became Consumer Advocate in April of 2000. As the Chairman noted, May was really when the crisis started in California with unexpectedly warm weather. We fairly rapidly realized that there were issues that were going to need to be resolved and [would be] coming into the arena from a different perspective. We had some very preliminary discussions with the company [Sierra Pacific Resources].
One of our conditions was that if we did enter into negotiations, that we [Bureau of Consumer Protection] needed to be comprehensive and settle as many outstanding issues as they [Sierra Pacific Power Company and Nevada Power Company] could [bring forward], and that obviously, the result needed to protect the interests of the small residential and commercial consumers. I think we accomplished that in the settlement [Exhibit D] that was reached. One thing I would like to point out though, which has not been discussed, is that the rate relief that was understood in the agreement and stipulation [Exhibit D] and attached documents that you have before you, the caps in that agreement [Exhibit D] escalate over time. We have only been into the second phase of the escalation and we are still not certain that if you project out over the entire period of the agreement [Exhibit D] to March of 2003, that the company [Sierra Pacific Resources] will not, in the long run, be made whole. I think there is a short-term, potentially, a short-term crisis or cause for concern at least, on what their cash flow looks like currently. Our economic analysis, I think, will differ considerably from the company’s [Sierra Pacific Resources] economic analysis. I am not in a position to get into that in a great deal of detail at the moment.
Mr. Hay continued:
The major parameter that I had was, obviously, as a member of the attorney general’s office, we would not endorse or sign on to any agreement that we thought had any legal defects whatsoever. . . . [It] took a while for our legal analysis to become refined to the point that we were really comfortable that what we were doing was both consistent with the statutes as well as legally supportable. I might note that although there was a lot of controversy, at the time the agreement [Exhibit D] was entered into, it has not been challenged by any parties to the agreement [Exhibit D] or parties who were not part of the agreement. From that standpoint, I think it has proven to be a legally effective document [Exhibit D], and I think it addressed a crisis that would have occurred late this past summer, as [PUCN] Chairman Soderberg noted, where we could have seen a situation where Nevada Power [Company], particularly, would have been unable to go out to the market and procure power. Obviously, that would have not only devastating effects on our consumers, but on the Nevada economy. So for a number of reasons, my office and my staff, who worked very hard on this, came to the belief that this was an appropriate resolution of many long-standing issues, as well as [a means of] addressing an impending crisis. Obviously, the first thing that a new consumer advocate wants to do is not to endorse an agreement that effectively amounts to a negotiated rate increase, but we decided that was the most responsible course of action we could take. The legal parameters of the deal, we fully believe, are consistent with existing Nevada law. The agreement and stipulation [Exhibit D] did contemplate some minor amendments that would need to be made in this [Legislative] Session in order to fully effectuate it. I do not think that issue has been brought up. In light of current circumstances and the recent filings, we are not actually certain what the status of the existing agreement [Exhibit D] is on a going-forward basis, whether or not it has been effectively repudiated or, at least to some substantial extent, vitiated by the company’s [Sierra Pacific Power Company’s] recent filing. We still believe that as the caps increase over time, . . . the long-term prospect for the company under the existing agreement [Exhibit D] is, not as dismal as it has been described. I did also want to take this opportunity to distribute a packet of background information [“Electric Utility Deregulation in Nevada” (Exhibit F. Original is on file in the Research Library.)] to the committee today. I do not want to go through it [Exhibit F] in detail, but it includes a fairly comprehensive analysis of the California situation, which if you have time to read it [Exhibit F], I would highly commend it. It stresses our office’s [Bureau of Consumer Protection’s] priorities, which are on a going-forward basis, certainly, assuring that we have got reliable electric service in this state, because that is critical to all of us, no matter whether we are business owners, small consumers or large consumers. Our economy is very energy-dependent.
Mr. Hay continued:
I would like to talk in more detail about some of the materials we have in there [Exhibit F], at a convenient point in the committee’s schedule. I do want to address one issue that Mr. Higgins responded to: Senator Schneider’s question on relative divestiture. We have made a distinction in our analysis on divestiture of the coal-fired assets versus the gas-fired assets. I think there is a valid economic distinction that can be made there. Coal prices are stable. All indications are that they will remain stable, and there are long-term coal contracts in place for many of the plants. That is really the lowest-cost resource that Nevada’s consumers are going to have on a going-forward basis, probably, in perpetuity, because the likelihood of much new coal-fired generation being built is not a high one. We are certainly going to encourage the committee, as well as your colleagues in the other body [Assembly], to very carefully consider the divestiture issue. We believe there are probably some linkages between the divestiture and the planned acquisition of Portland General Electric [Company], which is another subject that probably will consume some of the committee’s resources in time going forward, but in general to keep my comments brief, the agreement [Exhibit D], at the time it was entered into, was appropriate, it was legal and it was a tough decision for all of us. There were some very tough trade-offs. The formula to adjust the rates, we still believe, over the term of the agreement would fully compensate the company (or at least very nearly fully compensate the company, depending on the assumptions you make on prices going forward). Obviously, with a new filing in place, we will have to consider our litigation position in discussing that in detail before you, but I appreciate the opportunity to be here and am happy to respond to any questions.
Senator Schneider asked, “What percentage of that generation Nevada Power [Company] has right now, . . . is [from] coal?”
Mr. Hay answered, “The company [Sierra Pacific Resources] would confirm this, I think, but it is very close to 50/50, if you look at it in the aggregate on a statewide basis.”
Senator Schneider continued, “We have approximately 25 percent of our generation [fuel] is coal, in Nevada? And that is the cheapest generation we have?”
Mr. Hay answered, “Yes, it is.”
Chairman Townsend commented, “By the way, do not let the lack of questions lull you into any false sense of security. It is just the information you have provided is so overwhelming that we need to digest it. We will wait maybe 24 hours before we ask all the questions. Mr. Russell, welcome.”
Mark Russell, Vice President and General Counsel, Mirage Hotel Casino; and Gaming Industry Representative, Nevada Electric Energy Policy Committee, began his testimony:
Thank you, Mr. Chairman. I appreciate the opportunity to address this committee. In my comments, I am going to try, and it is difficult as time passes, to address the issue of how we got to the global settlement [Exhibit D], from the natural sequence of events, from the past forward. Quite frankly, as opposed to what I believe to be comments today, which are a little bit of hindsight so far from the present crisis, backwards. My personal involvement, . . . dates back before the merger order was involved, when the Mirage [Hotel Casino] was considering constructing a cogeneration plant. We came very close to constructing our own cogeneration plant, and we analyzed the financial viability of that, and we worked closely with Nevada Power [Company] at the time, and they helped us a lot. That resulted in some rate adjustments and we backed away from the construction of the cogeneration plant. The next significant involvement was at the merger order, which was an interim, another interim docket item for the PUCN, after the 1997, A.B. 366 of the Sixty-ninth Session, and of course before the 1999 S.B. 438 of the Seventieth Session. There were certain issues that were contested at the time of the merger which found their way into S.B. 438 of the Seventieth Session. The reason I bring up the merger is because that, of course, is the docket where (while the power companies [Sierra Pacific Power Company and Nevada Power Company] have said they volunteered to divest themselves of their power plants), . . . an actual order was issued ordering them to divest of the power plants.
Mr. Russell continued:
The point of contention in my recollection is not so much whether there would be a divestiture of the power plants, but what would happen with the proceeds of the divestiture of the power plants. [Debating] as to whether or not the company (and through the company to its shareholders) would receive the lion’s share of the over-book value of the plants, or whether there would be some allocation between ratepayers and the company. In addition, there were issues regarding stranded cost and QF [qualifying facility] contracts. . . . Again, tell me because I do not always understand it accurately, the QFs and stranded [costs] were issues or terms used as “over-market.” In other words, you had contracts that were entered [into] to have long term, that if the power companies were going to get out of the business of generation, they had these long-term contracts that legally were enforceable and there was a financial value to those contracts. At the time, given the prices in the market, they were over- market, so the power company was paying more than the value of the power at the time. They, of course, had legal obligations to the QF developers and they simply could not walk away. We understood that, so there had to be a mechanism to protect the individuals who built the power plants based on a long-term arrangement with the power company; and there had to be a mechanism to protect the power company. Of course, they were getting out of the generating business, so there would not be a loss and they could be a healthy wires company.
Mr. Russell continued to testify:
So, part of the merger order was the PUCN evaluated the evidence and issued its order as to how the proceeds from the divestiture would be handled to cover the stranded costs and the spread in the QF [qualifying facility]. That then became one of the large issues before this body [Senate Committee on Commerce and Labor] and the Assembly and the entire Legislature, when S.B. 438 [of the Seventieth Session] was drafted to address modifications in A.B. 366 [of the Sixty-ninth Session]. It was my opinion then and it remains my opinion today, . . . that rates, in and of themselves, were not the major issue before the Legislature at that time. There was significant conversation about how the residential consumer would be protected after March 1, 2003. There was a lot of time spent on that. That, in itself, was a very significant issue. But [in discussions of] the issue of rates from the point of the Legislature in 1999 until March of 2003, [in] my recollection (and our [casino industry] view as the large users was not a major issue, because a cap was put into the bill), there seemed to be certainty as to what the rates would be on a going-forward basis, subject only to one final, deferred energy docket being filed by Nevada Power [Company]. I do not recall, at any time, any objection being interposed by the power companies [Sierra Pacific Power Company and Nevada Power Company] to that rate cap. We did not know what would happen after 2003, but let us focus just on the time period we are now [in]. The issue would be to have allowed them to file a deferred energy case because, of course, that was an accounting mechanism that had been in place, and again, in fairness to the power company [Sierra Pacific Resources] and fairness to the ratepayers and fairness to the shareholders, you simply could not eliminate it in its entirety.
Mr. Russell continued:
They had been anticipating this certain method of setting their rates and a certain method of recouping their investments and getting their rate of return. Part of that was the deferred energy process, which essentially said that if the prior rate making did not properly compensate the company, they could demonstrate that and the PUCN would enter an order and that would effectively become a DEAA [Deferred Energy Adjustment Agreement] rider, so that on your future bill[s], your rates would go up, if necessary, to compensate for the “under recovery” of the power company. In fact, there was time before I ever became involved with this, where the deferred energy docket action resulted in a decrease in rates, but that is, I guess, ancient history. Our perspective, going from the merger into our participation from the Legislature in 1999, was more focused on the deferred energy issue of eliminating deferred energy, of figuring out a fair mechanism to handle stranded cost and QF cost to honor the integrity of the contracts, and to set up a mechanism where there would be a level playing field as we move forward to deregulation, which again, that is not necessarily the issue. We need to remember, in the back of our minds, that these bills were designed to establish a framework in which we could move to deregulation, because that was the theory that was now adopted . . . at the federal level, as has been pointed out clearly today, and passed down through the states. We did not invent it, but it was the direction the company wanted to go. There were numerous issues regarding how [or] whether metering was a competitive service, whether billing was a competitive service, how all these services were handled on a going-forward basis, and the rule making that would have to go forward in front of the PUCN. Again, I will reemphasize that of all the issues, save and except the scary
thing of what would happen after 2003, the actual rate going forward until 2003 did not appear to our sense, to be a major issue.
Mr. Russell continued further:
Then we moved forward into the process. The process is that the company was required to file a deferred energy docket and in addition, there would be another key docket opened, as required by and created by A.B. 366 [of the Sixty-ninth Session] and S.B. 438 [of the Seventieth Session], which would be the unbundling docket. That had two parts to it. One part was to establish the revenue requirements for the power companies on a going-forward basis and an appropriate rate of return because, of course, they were going to be a wires company. The second aspect of that was to establish, as close as is possible, the cost of service for each category or each component (excuse me) of our overall energy cost, and to establish rates on a going-forward basis so that we would know the distribution rates and the transmission rates. Although, of course, the transmission rate, in the end, is set by FERC [Federal Energy Regulatory Commission] at the federal level and the rate applicable to generation, so that as we move forward again into a deregulated environment, a large user, and eventually the consumers, would know when they would request bids from energy-producing companies; and they said, “Well, we will sell you the energy, x and y, or whatever it happened to be.” We could not accept those bids in a vacuum because we needed to know what our wires charges were going to be. We were always going to have to pay the power company the distribution fees and the transmission fees, because, of course, they were going to be in that business.
Mr. Russell continued with testimony:
So again, it was more than just the deferred docket as we went in. After the Legislature closed in 1999, you went through the summer of 1999, through the winter of 1999, and it is true that the power company was severely disappointed with the decision in the deferred energy docket. They were disappointed, first, that their amended filing was rejected and that the decision of the marriage [merger] was going to be on their original filing, which was, I believe, some approximately $44 million, as opposed to the $110 million amended filing, although our analyst said that the $110 million filing was actually $151 million over 3 years. They [Sierra Pacific Power Company and Nevada Power Company] had an opportunity to present their case to the PUCN; and the intervener’s had an opportunity, and the consumer advocate[s] had the opportunity to present their case to the PUCN. The PUCN issued its decision. The PUCN also issued its decision, first in the revenue requirement aspect of the unbundling docket, and [then in] the setting of the actual distribution rates . . . that . . . came at a later date. It was only then, after the Public Utilities Commission [of Nevada] issued its order, in our recollection, that the power companies [Sierra Pacific Power Company and Nevada Power Company] ever decided that the way to resolve this was to go to court, [saying] that: We do not like the deferred energy decision, therefore, we are going to sue in state court; and we are going to request a judge to overturn the case; and oh, by the way, we are not real keen on the unbundling decision either; [and] the method really to attack that and to bring focus back to our concerns is, we will attack the entire bill; we will move to set aside and have declared unconstitutional S.B. 438 [of the Seventieth Session], (a bill in which, as we did participate, so did the utilities have the opportunity to participate). It was not until after the decisions started coming out and moving towards deregulation, that the power company started to take, which it had an absolute right to do, I am not saying they did not have the right to do that, they decided that people were interpreting the law incorrectly, and that the decisions were improperly made, but that our only remedy now was to go to court. So, they exercised their right to go to court. It was in that context that we then started to negotiate the global settlement [Exhibit D].
Mr. Russell continued with testimony:
What Mr. Peterson said about everyone working extremely hard, I agree with 100 percent. I will also say another thing. It was then brought to our attention that, because of the decision in the deferred case, and because of the rate case, the power company [Sierra Pacific Power Company] was suffering severe financial difficulties. We believed and still believe today that that was the case. That is why we went to the table. That is why now, instead of all the other issues, we are honing in and focusing only on the rate, and the increase in the rates, and the pain that we are now, frankly, sharing with the power company [Sierra Pacific Power Company], because of circumstances partially, although I do not think entirely, beyond all of our control. We certainly believe that the power company [Sierra Pacific Power Company] was in crisis situation, that we needed to find a legal mechanism to assist them so they could, in fact, address their fuel and purchased power needs. We entered into negotiations, and I believe we did enter into a good-faith settlement. One aside, again on the rate (this is where I do get a little out of my depth, and I am not suggesting to this body what questions you should ask and what answers you should seek), but it has always struck the large ratepayers that I represent as somewhat puzzling as to why the power companies [Sierra Pacific Power Company and Nevada Power Company] did not go out and enter into, if not long-term contracts, at least short-term contracts to supply . . . but a significant proportion of all the [consumers] energy requirements through at least March of 2003.
Mr. Russell continued to testify:
We have heard testimony from Mr. Higgins earlier today that says they have gone out and secured their requirements for most all of 2001, I believe was the testimony, and some of 2002. If you could do that, why couldn’t you go out and secure your power requirements through 2003. . . . Under almost any scenario, the power company [Sierra Pacific Resources] would, . . . as the PLR (Provider of Last Resort) or as just the provider, [you] were going to be responsible for providing energy for the entire state. . . . The goal at the global settlement [Exhibit D] and the goal going forward is to make sure we have a viable, healthy power company because we will be in a fix that we will never be able to recover from if our power companies have to declare bankruptcy or have to get out of the business. It is something we cannot even contemplate. What happens if the power company [Sierra Pacific Resources] gets out of the business? The concern we have is that those of us who participated, but have no role in the energy business, who . . . could not go out and hedge our power, . . . could not go out and enter into long-term contracts, we, in effect, once again for the third or fourth time, are now being . . .[told], “We could not anticipate market conditions, we could not anticipate the problem in California, and we have ourselves in a jam, and the entire Western United States has itself in a jam.” Yet, let us flip that with one of the things that you will be looking at over the next couple of days, and the PUCN is going to have to look at, is that, in fact, the power company [Sierra Pacific Resources] is putting forth a portfolio proposal that has short-term, mid-range and long-term proposals in it. It would seem that they would have had, if they have the legal right and ability to do that today, they would have had the legal ability to do that when S.B. 438 [of the Seventieth Session] was approved and the framework . . . going forward was known. We have ourselves in a jam. I am not suggesting by any stretch of the imagination that the fault lies only at the feet of the power companies, by no means am I suggesting that. I do think that some questions need to be asked, as to what portion of the going-forward cost that we are all going to experience could have been handled in a more efficient and a better manner. There is one aspect of the global settlement [Exhibit D] that hopefully will address that, although I am not sure, in practice, it is going to address what the intention was, and that is the audit provision. . . .
Mr. Russell continued:
Again, and this is something that I believe was appropriate and should have been included . . . to demonstrate to everybody that what we really were trying to do is develop a stable energy environment for the community, and that there would be an audit function that would actually come in and evaluate whether or not, not only the cost[s] are being passed through in an accurate fashion, but in the stipulation [Exhibit D] and in the audit document, it says, “whether or not the purchasing practices of the power companies were undertaken in a prudent manner.” While that may not be an objective analysis, and it may be subjective, that at least it would, hopefully, give us a snapshot of whether there were or were not some alternatives; and it would allow the PUCN then to evaluate whether there were or were not some other appropriate steps that could be taken. To that extent, the PUCN, through the global settlement, I believe would have had the authority to reject some of the requests of the power company as being, if you will, imprudent. Then the power company would only be able to pass through a portion of its costs.
Mr. Russell concluded his remarks:
So again, unfortunately I have taken more time than I should have, and more time than you would have hoped I would. When you look at the settlement, you have to go back to the conditions as we move forward, and not just look at where we are today and then say, “Was the settlement a good idea or a bad idea looking at where we were today.” Again, look at the settlement because it does address a number of issues. It does give to the power company [Sierra Pacific Resources] $15 million for their deferred energy. It does give them a stepped-up access to the over-the-divestiture proceeds to take care of the QFs, [qualifying facilities] to take care of the stranded costs, and some other umbrella protections. We should not just focus on the rates. Thank you for your time.
Chairman Townsend addressed the committee members:
Committee, let us hold our questions. This stipulation [Exhibit D] is much deeper than just a cursory overview that we have seen today, albeit a very good one. This would be a nice segue into the latest filing. Is there someone on the panel who cannot be here tomorrow?
Harvey Whittemore, Lobbyist, Nevada Resort Association, responded:
. . . I will be available to again supplement Mark’s [Mr. Russell’s] comments and answer questions that would be directed. As you know, we basically led the discussions with respect to the settlement on behalf of the three companies, so I will be available. I would like to supplement, if I might for 60 seconds.
Chairman Townsend interjected:
Hold on one second, because we need to be on the [Senate] floor and . . . It is important that we understand a couple of things. First of all, as you know, Mr. Comeaux [John P. Comeaux, Director, Department of Administration] or his designee will be here tomorrow to talk about the cost of the budget. Then I would like to go back into this discussion to go over the history of this, and have you explain the specifics, particularly with the audit provision, because there is something in that audit provision that I do not understand. I would like to go over those and then segue into why we are back with another filing. I think that is an important part. Mr. Chairman [Don Soderberg], I know you cannot participate in any of the things that are currently in front of you, so you would probably prefer not to be part of the discussion with regard to the latest filing. I will leave it in your hands on how best to handle that.
Mr. Soderberg answered:
That is correct. If we are going to come back this afternoon, what I would plan to do is come back with my staff to discuss the global settlement [Exhibit D]. If we could have some sort of a clean break and then I would leave, I know there has been some discussion of the filing already. I was a little disappointed to hear so much about it this morning. It was my understanding that we would not be [hearing that] today. But I think if we could have a clean break, it would be important for me to be here to assist the committee, I guess, in the first part of our discussion this afternoon and [then] I would just excuse myself and let Mr. Dimmick speak on behalf of regulatory operations staff.
Chairman Townsend concluded the meeting by asking if there were others who wished to testify, hearing none, he adjourned the meeting at 10:51a.m.
RESPECTFULLY SUBMITTED:
Lydia Lee,
Committee Secretary
APPROVED BY:
Senator Randolph J. Townsend, Chairman
DATE: