MINUTES OF THE
SENATE Committee on Commerce and Labor
Seventy-First Session
February 7, 2001
The Senate Committee on Commerce and Laborwas called to order by Chairman Randolph J. Townsend, at 8:05 a.m., on Wednesday, February 7, 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
Gayle Nadeau, Committee Secretary
OTHERS PRESENT:
John P. Comeaux, Director, Department of Administration
Neill Dimmick, Director of Regulatory Operations, Public Utilities Commission of Nevada
Harvey Whittemore, Lobbyist, Nevada Resort Association
William E. Peterson, General Counsel, Sierra Pacific Power Company, and Nevada Power Company
Timothy Hay, Chief Deputy Attorney General, Bureau of Consumer Protection, Office of the Attorney General
Jeff Parker, Commission General Counsel, Public Utilities Commission of Nevada
Douglas R. Ponn, Lobbyist, Sierra Pacific Power Company, and Nevada Power Company
C. E. Edwin Fend, Lobbyist, AARP
Chairman Townsend introduced John P. Comeaux, Director, Department of Administration, saying that Mr. Comeaux would testify on the effects of the rising costs of energy on the state budget. Senator Townsend continued:
Thank you [Mr. Comeaux] for doing this. We know that you have responsibilities in two other committees that are substantial, but given the magnitude of the situation with which we find ourselves, it is important that the public can, and particularly this committee, have an understanding of what you are facing relative to state rising energy cost issues, how they affect the budget, how they have impacted the budget and, of course, what your plans are, et cetera. Welcome to your first time here, and we are glad to have you aboard. Go ahead, please.
Mr. Comeaux began:
Thank you, Mr. Chairman. In an attempt to put together some information for the committee, I looked at the last 3 months of calendar [year] 1999 (October, November, and December) to compare our energy bills with the same 3 months of 2000 (October, November, and December). I really do not have enough information to draw any firm conclusions because, depending on which agencies we look at, the results are different. But, I think I can give you some idea. We looked at large energy users in state government: our Buildings and Grounds Division, our two universities, and the Department of Prisons.
In the Department of Prisons, natural gas bills increased for the last 3 months of 2000, over the same 3 months of 1999, for northern institutions, by 21 percent, and for the southern institutions [by] 26 percent. Our electric power bills for the same comparative periods increased 11.2 percent in the north and 13.9 percent in the south. For the universities, UNR [University of Nevada, Reno], natural gas bills increased 48.5 percent for that three-month period of time. The reason why you cannot really draw any firm conclusions from this is because they did add some additional space, and we have not been able to ferret that out. But, obviously, a large part of that has to do with rate increases.
Their electricity bills have increased 30.4 percent over that same period of time. For UNLV [University of Nevada, Las Vegas] the electricity increase amounts to 24.7 percent and the gas increase, 29.7 percent. With buildings and grounds, the picture is entirely different. Electricity has only increased 2.2 percent and natural gas 7.1 percent. . . . So far, we have gotten requests and included them in the budget for supplemental appropriations for added utility costs. There are three or four of them, mainly in [the Department of] Museums, Library and Arts for their museum facilities. They are very, very small. The year is not over, though, and the agencies have just been hit with these larger bills over the last few months.
Obviously, we are going to keep an eye on that, and we very well could end up with some additional supplemental appropriational request to finish out this year. In terms of the Executive Budget for the next biennium, based on information that the administration received from the consumer advocate [Consumer’s Advocate, Bureau of Consumer Protection, Office of the Attorney General] last summer and verified again with the consumer advocate as late as two months ago, we have built in 16 percent a year increases for electricity and 15 percent a year for natural gas. That amounts, for electricity, [to] about $22.7 million in additional costs that we built into the budget and around $4 million for natural gas. The governor was concerned that the increases could end up being . . . much higher than that. We really did not have anything to base a higher percentage increase in the budget on.
Mr. Comeaux continued:
What we did, though, was propose a legislative change that would affect access to our rainy day fund. The way the law reads right now is that [the] rainy day fund can be accessed if our revenues come in at least 5 percent lower than we forecast, but it can also be accessed if the Legislature and the Governor agree that a fiscal emergency exists. So, we proposed a change that would allow interim finance [Interim Finance Committee] to interact with the Governor, if the Legislature is not in session, to access that fund if rate increases are significantly higher than we provided for and we cannot take care of them within the existing budget.
So, [the] bottom line is we are anticipating having to use a significant piece of our additional resources to pay for increased energy costs in the next biennium.
Senator Townsend asked if the other committee members had any more questions, and then continued:
Based on the information that we have heard over the last few weeks, do you feel that that new mechanism will provide you [with] an opportunity to cover those costs without additional revenues even if this rising fuel and purchased power cost does not start to level off, or do you have a solid projection that you are sticking with? I think I heard that you said that if it goes below a certain level you will tap into the, I guess, ending fund balance if you have to, with concurrence of [the] IFC [Interim Finance Committee].
Mr. Comeaux replied:
Mr. Chairman, the state, in addition to our normal ending fund balance, which is anywhere between 5 and 10 percent of appropriations (closer to 5 percent), that is basically just our working capital balance. The state has a fund that statutorily is called the “Fund to Stabilize Operation of State Government” [Nevada Revised Statutes (NRS) 353.288]. It is a rainy day fund, that is what it is commonly known as, and we have about $134 million in that fund. The main purpose of the fund is to smooth out the hills and valleys in our revenue collections because of the way our particular economy works. That was the main purpose for creating that fund, but it is also available, according to the statute, if a fiscal emergency exists and if the Governor and the Legislature agree.
So, the 16 percent-a-year electricity increase that we provided for and the 15 percent-a-year natural gas increase that we provided for seemed . . . very adequate when we did it; but as time goes by, I think the administration probably has less confidence that that will be adequate. So again, we did propose a change in the statute that would allow access to that rainy day fund during the interim in case rates do go through the roof and we simply cannot handle them out of our existing budget.
Senator Townsend asked, “Do you have a general figure on what the state spent last year on electricity and natural gas?”
Mr. Comeaux replied:
. . . No, sir, but I could get you that. I can tell you that 16 percent of it would be about $7.2 million, but I lost the ability a long time ago to do that kind of math in my head, so I do not know what 100 percent of that is.
Senator Townsend stated:
If you could give that to us . . . because if we go in there and try to extrapolate it, it could be difficult, and we do not want to be erroneous. But, we would need to know what we spent last year on electricity and gas and then what our projections for the biennium would be. That would be helpful to all of us because it is an indication of what large [and] small businesses, as well as residential customers, may be facing and that might help us with some of our deliberations.
Mr. Comeaux replied, “Be glad to do that . . . sir.”
Senator Townsend went on:
What we are concerned about is to stay as close as we can as we all work together on public policy for this arena . . . in working with the administration, not only on what is the overall policy for the state, but its effect of your budget. We do not want to get anywhere near to the reactionary issues that are faced by our neighbors. California seems to have become the Vietnam of domestic policy, and they do not seem to know how to extract themselves. And, as a result, we watch them very closely because in 1995 when they passed their bill, we all agreed that was something we did not want to do, and we saw that then.
So, we want to make sure that there is a good line of communication between the Assembly and Senate and you so that we can be helpful if we can. I think that is the best way to move through the next 120 days, so they do not have this [on the] front page of the paper: “the Assembly did this and then the Senate does this and the Governor announced this, and they do not bother to pick up the phone and call each other and figure out what is best for the state.” So, anything we can do to work with you, I am sure all of our colleagues will be glad to do that.
Mr. Comeaux replied, “Be glad to do that, Senator.”
Senator Townsend stated:
We are back here with regard to the global settlement [“Agreementand Stipulation”, dated, Final 07/27/00 (Exhibit C. Original submitted as Exhibit D in Senate Committee on Commerce and Labor minutes, dated February 6, 2001. Original is on file in the Research Library.)]. We have not gotten a number of things relative to that and that is the specifics of: the date it started, the date it is supposed to continue to, what the specific monthly issues are . . . We know the course of action was taken based on the testimony yesterday [February 6, 2001], but if you can give us some clarification as to the specifics and the intent of the specifics, that would be helpful.
Senator Townsend then asked:
Does everybody have a copy of the stipulation [Exhibit C]? I believe they were handed out yesterday [February 6, 2001]. The good news is that we never run out of things to read in this committee.
Senator Townsend continued:
Mr. Dimmick, if you would like to start, it would be helpful as we go through this [Exhibit C]. We do not have to go through it line by line . . . but if you could get to the most important parts, which are what this is going to cost the consumers based on what was negotiated, we would appreciate it. I do not know whether you want to talk about page 5, sub[section] 10, where you start with Retail Open Access or [if] you want to go back further than that; whatever you want to do, just kind of give us an overview. I would appreciate it.
Neill Dimmick, Director of Regulatory Operations, Public Utilities Commission of Nevada, testified:
There is a series of issues that are woven through this particular stipulation [Exhibit C]. I thought what I would try to do is summarize and then go back and give you some specifics. First of all, it resolved a series of various issues regarding not only cases involving these lawsuits, but parallel cases which were also settled at the same time. We had outstanding cases relative to certain rule makings. We had outstanding cases related to unbundling dockets to establish the unbundled rates to facilitate the implementation of competition, and we had pending cases relative to sharings case, earnings cases, from our mechanism that we put in place several years ago with Sierra Pacific Power [Company]. All those issues became settled, or this proposed the framework to allow them to be settled.
Senator Townsend asked, “Is that where the term ‘global’ came from? You were trying to wrap a number of contentious issues?”
Mr. Dimmick responded:
I cannot tell you the number of dockets, the number of court cases that ended up being, as a result of this or in parallel with it, closed, but it is substantial. Commission Counsel Parker [Jeff Parker, Commission General Counsel, Public Utilities Commission of Nevada] indicates that it is at least six. So, there were more aspects that may have not gotten into the stipulation [Exhibit C], but did result in being resolved in a manner that cleared the deck, so to speak, to allow competition to begin if, in fact, we could phase it in. The second thing is that it resolved some very contentious issues relative for energy. It solved them in a manner which did not burden ratepayers for substantial claims by the company from past deferred energy cases.
For example, the company (as a result of these actions was in parallel with them) wrote off some $80 million, which they were contending was due and payable but was not recognized. There are a series of intertwining things I think we will focus [on] first. Clearly, the company came to us [noting]: the world had changed, prices are going up, gas prices are going up, market place in California, the mechanics we are now much more familiar with, driving the purchase power prices up. We looked at their financials. We understood the situation. We brought the parties together. [We] worked long and arduously to try and figure out some ways to get them some relief without overly burdening ratepayers.
The structure that we ended up with was some initial increase to base their energy rates [on]. Those went into effect in August [2000]. Subsequent to that, we established a mechanism to allow for monthly adjustments. [There were] several interesting aspects to that. We did not want to use estimates or projections because we did not feel that those would be reliable. It could bounce all over the place, and we changed from day to day. So, we set on a course of making sure that we had reliable and verifiable information. What that requires is, you have to lag your information because you do not have it. We set up a period that would try to smooth out bumps and highs and lows of a particular time period.
Mr. Dimmick continued to testify:
So, we selected a 12-year period. We take the 12-month trailing average from 1 period. We will compare it to 1 month up. Take the difference and then we will look to see how much that is. If it is more than what we have outlined in our agreement, we have essentially capped any increase in any 1 month. This way, customers get stability. They know this is the maximum they can expect in the next month. We thought those were very good. They were appropriate and they provided stability. The same mechanism was incorporated in working with Sierra Pacific Power [Company (SPPC)]. We, again, went with an additional adjustment. That adjustment did not go in until November of 2000. It, too, is working in the same manner.
We structured these adjustments to smooth them out and allow for . . . a rising amount of adjustment every 6 months. We allowed for some mechanics in taking into consideration some of [the] changes in a particular period that did not get recognized because of the capping mechanism we put in. In that regard, we think there were several things that were good. It was an incentive to the company: 1) They were not going to be allowed to recognize all their costs; 2) Because of the lag, we always knew we were behind whatever their forward cost curve was; and 3) This should give them a tremendous incentive because we have no deferred accounting. And, as the chairman of the company said yesterday [February 6, 2001], to the extent that an item is not recognized in rates, they have to expense it. There is no piling up of billions of dollars, as in California.
So, we think that the mechanism that we put in place was going to work, however, events have overtaken us and that is obviously why the company is back before us for another filing.
Harvey Whittemore, Lobbyist, Nevada Resort Association, interjected:
If I might interrupt. I think Neill [Mr. Dimmick] is right; I think events may have overtaken us in terms of a functional look at what is happening in terms of the prices continuing to increase. But, I want to make it clear on the record that the parties still believe that the stipulation [Exhibit C] and the settlement, which is in place, may limit the company’s ability to do what they are proposing to do. I just want to make sure that that is on the record because, clearly, one of the most contentious and difficult periods in putting this stipulation [Exhibit C] together was to negotiate the very specific monthly caps and the periods and the length of time that they were allowed to recover these excess costs.
While there was a continuing expectation and, indeed, it has to be and it was expected by the companies to continue to go up because the period that was negotiated was: “is it going to be for 18 months, 24 months, 36 months, 48 months?” How is that mechanism going to be implemented in the stipulation [Exhibit C], and then what the monthly percentage was, because again, it was in everybody’s perspective from the user perspective both from the consumer advocate’s [Consumer’s Advocate, Bureau of Consumer Protection, Office of the Attorney General] perspective and the large users that we were very concerned about what the monthly impact would be on the users of electricity.
So, again, I think Neill [Mr. Dimmick] has done a great job of explaining what the expectation of the parties were, but I want to make sure that it is clear on the record that we believe that the caps, which are reflected in this stipulation [Exhibit C], are those which the company must move from only pursuant to either agreement, legislative direction, or as Bill [William E. Peterson, General Counsel, Sierra Pacific Power Company, and Nevada Power Company] is likely to say (a litigation strategy), “Hey, listen, we need to do more.” We are prepared and, again, I want to put this also on the record, we are prepared to continue to engage in those discussions as I think the rest of the parties are if, in fact, the case can be made that somehow the company did not expect these caps to be sufficient for purposes of reaching resolution.
But, we have to remember that those caps and our willingness to pay those increased rates was in return for the accommodations that the company made with respect to a number of other issues. The company was walking away from what they perceived to be an $80 million, I think, Bill . . . $85 [million], I thought was the number. [At this time, someone confirmed Mr. Whittemore’s reference to the $85 million amount.] Yes, $85 million, and they walked away. So, again, the parties really negotiated on each and every one of those issues.
Senator Townsend asked the testifiers:
Let me ask this question, and take whatever time all of you need to answer it because it is crucial for the public to understand your answer. Were deferred energy to have been in place when this stipulation [Exhibit C] was agreed to, would the rates have been substantially higher, a little bit higher . . . than what the stipulation [Exhibit C] agrees to?
Mr. Whittemore responded, “I cannot give you the amount; I can tell you it would be substantially higher. They can give you the amount.”
Senator Townsend stated, “OK, the Resort Association [Nevada Resort Association] says, substantially higher. Go ahead, Mr. Peterson.”
William E. Peterson, General Counsel, Sierra Pacific Power Company, and Nevada Power Company, responded:
We actually run those calculations, Senator, almost every month. We do file a fuel and purchased power rider [F&PP] every month for both companies. The calculation we have is that for Nevada Power, had we been on deferred energy instead of being limited to what we are limited to under the stipulation [Exhibit C], we would have recovered another $101 million at Nevada Power [Company] and, although this number looks low to me . . . [it is] only $4.4 million at Sierra Pacific Power [Company].”
Senator Townsend questioned:
But, it would have been . . . is that fair to say, Mr. Hay, that under deferred energy (which was the prior regulatory mechanism to recover fuel and purchased power costs) [it] would have been substantially higher to the consumer than under the stipulation [Exhibit C]?
Timothy Hay, Chief Deputy Attorney General, Bureau of Consumer Protection, Office of the Attorney General, answered:
I think that is true, Senator. There are a couple of other things we should point out, though. I think, as Mr. Whittemore noted, during the negotiations it was clear to the parties at the table, I believe, that the company, under the capping mechanism, would under recover somewhat in the early periods as the caps rose over time, [and] that they would probably, essentially, over recover under the assumptions that we were making at the time, at the end of the adjustment period.
The deferred energy calculations, I think, have to be viewed from the standpoint that when we entered into the global settlement, the reasonable assumption to make would be that the company would procure, prudently, power for the period of time that the settlement covered. I am not sure it is exactly [an] apples-to-apples comparison to say that just looking at the expenses that have been incurred by the company since then, that necessarily all of those would have been covered under deferred energy as being prudent expenditures.
Senator Townsend interjected:
So, it may be a little of apples to oranges? There might be a slight difference, but I think the general public wants to know as this mechanism was entered into to accommodate rising fuel and purchased power costs that the old mechanism would have put them at a significantly greater risk than the current mechanism under this stipulation [Exhibit C].
Mr. Peterson replied, “Undoubtedly, Senator, the numbers I gave you did not include the $85 million that had been accumulated.”
Senator Townsend asked:
May I ask about that, because it goes to some of the things you stated yesterday, Mr. Peterson? I am not going to speak for the whole committee. Number one, they are probably all substantially brighter than I am and can speak for themselves, but I was very concerned about Nevada Power [Company’s] position.
When we left here last session I believed, and you and I can spend a lot of time debating on what the bills said and did not say, (and I know Mr. Hay and Mr. Schmidt [Frederick Schmidt, former Chief Deputy Attorney General, (Consumer’s Advocate) Bureau of Consumer Protection, Office of the Attorney General] and I might debate what it said, and since the three of you guys are a lot smarter than I am, I probably have to give in) but I really believed that what the bill said was that they are mandated, in Southern Nevada, one more general rate case, and that there was a deferred energy account that had been accumulating for a substantial amount of time, which had not been cleared. And, I believe that was the $85 million that was in debate.
So, it was my understanding that before rates were set, because they were already in place in Reno, we had a 3-year cap in which the company was sharing the over earnings with the consumer. Deferred energy had been agreed to be set aside, and that was working for Sierra Pacific Power [Company]. In the south, that agreement had not occurred and there was a substantial amount of money on the table, $85 million, and that there was mandated in 366 [Assembly Bill (A.B.) 366 of the Sixty-ninth Session] one more general rate case for you to deal with the deferred energy, deal with the general rates, and then that rate would be set and that is what Southern Nevadans would live with for 3 years. So, that was my understanding, that there would be one more case to establish what, in fact, your revenue needed to be.
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)
Senator Townsend continued:
Now, am I to understand that this stipulation [Exhibit C] took in a great many of those issues to try to put them to bed and come to an agreement, given the tremendous changes that had occurred since we left here? To accommodate them under this (I do not know how you want to call it, it is like a stair-step method every month) is this future test year, with a cap on a monthly basis, is that what this is, Neill [Mr. Dimmick]?
I am trying to figure out what to call this without calling it “deferred energy.” I know that under our law, you have a right to come in every 30 days under that provision you made reference to yesterday [February 6, 2001] but, is that what this was about? Instead of dealing with the mechanism that we thought we had in this bill, we took the crisis that was being faced [and] we put all of these things together and tried to accommodate all the parties? Is that the fair way to assess it?
Mr. Dimmick responded, “First of all, let me address the issue. It is not a future test year because all the numbers that we are using to drive the changes are historical numbers. They are trailing averages.”
Senator Townsend interjected, “I just want to make sure we have that on the record.”
Mr. Dimmick continued:
To the second point, I believe that . . . S.B. 438 [Senate Bill (S.B.) 438 of the Seventieth Session], and obviously other parties here were closer to it, essentially changed some of the outline of A.B. 366 [of the Sixty-ninth Session] to the point that . . . they said there would be one final deferred energy case for Nevada Power as opposed to a general rate case. The general rate case or the establishment of rates going into a rate freeze, which was part of A.B. 366 [of the Sixty-ninth Session], was (I believe) altered by S.B. 438 [of the Seventieth Session] and the way it was structured, that essentially the rates would be supposedly frozen as they were pending this one final deferred energy case.
SENATE BILL 438 OF THE SEVENTIETH SESSION: Makes various changes related to electric restructuring. (BDR 58-861)
So, the option to unbundle and restrike a price instead of rates was essentially precluded by the amendments as the parties addressed that. And they addressed that in our unbundling docket, which was where we were going to do those two pieces. We were going to do unbundling, and we were also going to get new strike prices for total rates. That part, as I understand it from the arguments as I heard them, essentially was that that issue was abandoned by the commission in light of the legislation that was inviting this, S.B. 438 [of the Seventieth Session].
Mr. Whittemore said:
For the record. One of the other components that I think it is important to realize is that we receive legislative direction as participants in this process to try to resolve a number of issues. And, I do want to say that there are so many things in the stipulation [Exhibit C], which basically allow the parties to go forward in a competitive environment should the market forces allow that decision to be made. And the only reason why we are not moving towards a competitive environment is the lack of generation capacity. But, as that capacity comes on-line, there are a number of things in the stipulation [Exhibit C] that have been resolved to preclude future disputes delaying competition to take place when it is appropriate to do so.
For example, the unbundling decisions and the rates you can take a look at in the stipulation [Exhibit C] with respect to each class of customer and . . . with respect to a particular class of customer you can say, “Here is my transmission rate, here is my distribution rate, and I negotiate my energy rate. I can simply calculate what I am going to be paying in the market for that process.” That is a very important component, which drove, again from our perspective, our willingness to say that we were going to allow this F&PP rider to be implemented in such a way as to resolve the financial difficulties, which the company was clearly facing.
The points I would like to make are as follows: When you last left us with S.B. 438 [of the Seventieth Session], everybody had a view of the world which was much different as a result of activities which took place immediately, within 60 days of the negotiations which had resulted in S.B. 438 [of the Seventieth Session]. And those [activities] were that the natural gas prices and the fuel costs associated with the company were skyrocketing. There is no dispute about that. There is no dispute about the company’s tenuous financial position at the time that these negotiations took place.
The company was in the process of negotiating certain loan commitments and, I think, a number of things which had to do with the relative stability of the company, which mandated that something at least [be] attempted to be accomplished because, in the environment that they were operating in, if they had gone forward with a lawsuit they would not have received a decision very quickly. It would have been appealed, all the parties would have been pursuing different directions, and therefore, that uncertainty would have dramatically impacted the companies’ operations in the state.
One of the overriding issues, therefore, was do not look at yourself and do not look at your power bills, but [ask] how important is it to have a company that is a stable provider of electricity in Nevada in terms of its [Nevada’s] economic fortunes.
Let us answer that question one year later. Very important. Ask California. In July [2000], in the 45 days that all of us participated [in] from June until the end of August when this was done, [we] understood that . . . there was an overriding issue, that we did not think it was appropriate, just as a participant in the process, that you necessarily create a disaster for the state of Nevada simply to pursue your own parochial agenda (i.e., having the lowest rate possible). If that were the case, we would not have agreed with Tim Hay’s office to have a rate design, which in effect continued, from our perspective, a subsidization component from the large users to the smaller users.
Mr. Whittemore continued:
Now, Tim [Mr. Hay] is going to say that was as a result of his good negotiating skills, and it was. The simple fact of the matter is that nobody wanted to have a rate increase, let alone one that you negotiate. But, more importantly, no one on our side wanted (necessarily) to pay under a rate design that, again, further penalized the large users. So, if you take all those components together and you get back and you say at the end of the day, “Were the disputes between the parties resolved?” The answer is yes. Did the company say that S.B. 438 [of the Seventieth Session] was ultimately constitutional? Yes. They withdrew with prejudice those actions, which basically said A.B. 366 [of the Sixty-ninth Session] and S.B. 438 [of the Seventieth Session] were unconstitutional.
So, we got something for that. And, did we set out a structure consistent with legislative direction, a plan to implement competition consistent with the bill allowing the governor to determine exactly when competition was going to take place? The answer is also yes. So, in terms of the policy reasons why it was done, we cannot come up with any to suggest why it was inappropriate. In hindsight, it looks like we were a lot smarter than we were when we were doing this because all of a sudden these monthly surcharges were being talked about all across the nation as a mechanism to help resolve this crisis. California looked at it, [and] all of these other people are saying, “Well, gee-whiz, why did that happen?”
Mr. Whittemore continued:
The bottom line is it happened out of necessity; you look back now and you say, “Are there any reasons why it should not have happened?” The answer is no. Was it legal? We believe it was; it has not been challenged. We believe that through the wisdom, and I do not believe it was by happenstance that the fuels clause in 704 [chapter 704 of Nevada Revised Statutes (NRS)] was retained because specifically, Chairman Townsend, you will recall the specific discussions that you had with Mr. Schmidt and myself the last day on that panel asking, “Will this allow the company to come forward?” And the answer was, “Well, we thought so.” It was on that basis that Mr. Peterson’s office and Mr. Parker and the rest of the crew said, “Well, I think we have enough here to hang our hat on and get the thing done.”
Now, where are we today and what does it mean in terms of the settlement today? I think it is clear that there is still an open issue as to whether or not the company can proceed to ask for additional relief. Those are discussions that we will have with Mr. Peterson. And I think that, again not speaking for the PUCN [Public Utilities Commission of Nevada], I know they are going to and I know that Mr. Hay’s office is going to have those discussions. So, that is where we are, but I think that if you go through the stipulation, and we can go through line by line and point out that one paragraph specifically resolves that one problem, SO2 [sulfur dioxide] emissions. Is it in there? Yes. How is it going to be handled? It is going to be handled in the following fashion: Every single one of these paragraphs took hours or days, depending on how mean Bill [Mr. Peterson] was to me, you know, but it resolved more than six dockets. It resolved 60 or 600 separate issues.
So, again, that is why it was the global settlement; that is why it took so long. What happens now is going to be something that in the stipulation [Exhibit C] it compels the parties to the stipulation to ask for certain things, legislatively. I imagine that the parties will continue to do that. We have not resolved that mechanism, yet, but I am sure we will be coming forward in the next couple of weeks.
Senator Townsend asked:
Let me ask this then. Since it has been stated, at least by one party, that the parties to the stipulation [Exhibit C] believe it is legal, there may be other parties out there that do not have that same view and, therefore, they could go to court without this being part of a legislative action. In other words, we would have to codify what effect you did. What is your feeling there?
Jeff Parker, Commission General Counsel, Public Utilities Commission of Nevada, responded:
First of all, administratively, we think the time for other parties to challenge this thing [Exhibit C] has expired. As of the commission’s decision, which I think the initial one was July 20 of 2000 [July 20, 2000] with a subsequent amendment on, I believe it was August 3 of 2000 [August 3, 2000], there are specific provisions in our statute in 233B [chapter 233B of NRS] for judicial review. Initially, there may be some extraordinary relief that someone could seek, but we think anyone to challenge the settlement itself had 90 days to file for that. And, just one more comment, not to beat a dead horse on the legality of this thing, but 438 [S.B. 438 of the Seventieth Session] on its face in light of the circumstances may have been unconstitutional. That is what the company was saying in its federal lawsuit. And the reason I say, “in light of the circumstances” [is] it depends on what the market conditions are.
If a company is forced to do business so that it does not recover even its costs, then that is confiscatory, that is a takings and that is the basis of their challenge to 438 [S.B. 438 of the Seventieth Session]. I think everyone here viewed the global settlement as a way to interpret 438 [S.B. 438 of the Seventieth Session] as constitutional.
Everything else being equal to proceed where a company cannot recover its costs and I think, frankly, the LCB [Legislative Counsel Bureau] shared this opinion, 438 [S.B. 438 of the Seventieth Session] would have been unconstitutional.
So, while it took some creative lawyering to structure this in a way that we thought it was sound legally, the section 6 of 704.110 [NRS 704.110 subsection 6] did remain in place. That was a vehicle by which the company could make these filings pursuant to the stipulation. But, just let me emphasize that this global settlement [Exhibit C] was a way to make 438 [S.B. 438 of the Seventieth Session] constitutional in light of the circumstances.
Senator Townsend commented, “I am going to come back to you, Mr. Parker, if you do not mind.”
Senator Carlton questioned:
There were a number of things in here that I really did not understand. To be honest with you, I am not a lawyer. I tried to read this. I asked other people to explain it to me, and they had a hard time explaining it to me, also. So, if it is possible for someone to make an English synopsis of this so that I can understand exactly what I am looking at, I would greatly appreciate it because I am the one who is going to have to answer the questions about it when I go back home.
Senator Carlton then referred a question to Mr. Whittemore stating:
When you were speaking earlier, you said something that confused me just a bit, and I just want to make it perfectly clear. You alluded that the stipulation [Exhibit C] and/or settlement, whatever we are calling it right now, might allow large users to jump into competition if the market was reliable. Did I misunderstand you?
Mr. Whittemore answered:
There might be a little bit misunderstanding. For the record, I suggested that the stipulation [Exhibit C] was designed to allow all classes of customers to basically pursue competitive choice when those markets were opened. And this was framework to allow that to happen. This did not unilaterally just simply say “large industrial users get to go out regardless of the Governor saying yes or no.” So, that was the framework to allow them to be able to utilize S.B. 438 [of the Seventieth Session] when, and if, competition is allowed in the state of Nevada.
Senator Carlton asked, “So, that would be for everyone, not just for the more sophisticated users as we have heard?”
Mr. Whittemore replied, “Yes. It would be for everybody.”
Senator Carlton interjected, “I just wanted to make that perfectly clear so that we understood.”
Mr. Whittemore reiterated, “Yes. In this document there was a framework to allow everybody to have the same choices.”
Senator Carlton went on:
And, I am not sure about this question, but what I just heard from the gentleman in the middle makes me a little more concerned. In any way does this agreement override anything that was done in S.B. 438 [of the Seventieth Session], or is it considered a supplement to S.B. 438 [of the Seventieth Session]? And, I cannot understand how an agreement that the legislature did not vote upon or really participate in can have a lot to do with something that we passed 18 months ago. So, I would like you to make that clear, please.
Mr. Parker responded, “This does not override 438 [S.B. 438] [of the Seventieth Session]. This is an implementation of it, given particular circumstances.”
Mr. Whittemore interjected:
For the record. I think that Jeff’s [Mr. Parker’s] comments about people’s perceptions about the unconstitutionality of S.B. 438 [of the Seventieth Session] are those. There was never a determination as to whether S.B. 438 [of the Seventieth Session] was going to be constitutional or unconstitutional. That is what the lawsuit was going to be all about. We did not need to go there because the parties stipulated to withdraw that, the company stipulated to withdraw with prejudice the filings challenging the constitutionality of that. Again, that decision, though, was incumbent upon the implementation of the stipulation to resolve all of those issues. And, as Mr. Parker suggested . . . this mechanism, which was approved by the PUCN, was a way to create the circumstances necessary for the company to make a decision to not go forward challenging the constitutionality of S.B. 438 [of the Seventieth Session].
It allowed them to do that because they felt that, “Hey, wait a second, we resolved many of the issues, the takings issue”. I think the company needs to speak for itself with respect to that, but I do not want to leave the committee with any sense that if we had not done this particular settlement that, necessarily, S.B. 438 [of the Seventieth Session] was going to be determined to be unconstitutional, because I do not believe it would have been. My judgment is that we would have ultimately prevailed because the PUCN was given the authority, and the company would have had to pursue other mechanisms.
Let me explain. This document allowed the immediate implementation of a F&PP mechanism, which created the stability for the company to know where financial resources were going to come in. The company would have taken the position, and we would have said as participants in that process, “S.B. 438 [of the Seventieth Session] is constitutional; it has not resulted in unconstitutional takings because the company still has the same mechanism on an every-30-days basis to do exactly that which the stipulation calls for.”
And, it was on that basis that I believe that Mr. Hay’s office said, “OK, they are going to ultimately come in and do this on a repetitive basis. Let us see if we can negotiate something that gives the company immediate relief, at the same time protects the customers.” So, while I agree with Jeff’s [Mr. Parker] articulation as to the reasons why the company felt that S.B. 438 [of the Seventieth Session] was unconstitutional, it does not mean that the rest of the participants were in any way suggesting that because you had an opinion that there was a potential unconstitutionality if it was read one way and there was improper takings, that that would have necessarily been the result in court.
Mr. Peterson said:
Senator Townsend, at some point I would like to have the company speak for itself, at some appropriate moment. A lot of things are being imputed to us, beliefs and statements. They are about 85 percent accurate. At some time, if we have an opportunity, I would like to correct some of the statements.
Senator Townsend recognized Senator O'Connell at this time.
Senator O'Connell asked, “Thank you, Mr. Chairman. I just want to ask if you [Mr. Peterson] would explain to us exactly how you are using the term “with prejudice” when they withdraw “with prejudice.” What does that mean to you?”
Mr. Peterson answered:
This is something I think the company should speak [to] since we are the ones who dismissed with prejudice. It is a legal term, Senator O'Connell. . . . It sounds a little inconsistent because when you are dismissing something with prejudice that means you are dismissing it forever, and you can never raise the issues again. If you dismiss without prejudice, it means you can come back later and raise that claim. You are letting it go today, but you are reserving your right to fight that battle tomorrow. With prejudice means you can never come back into the ring, that is what it means.
Senator O'Connell responded, “That is what I was afraid it meant.”
Mr. Peterson went on:
Well, that is one of the points upon which I wanted to make a correction. Again, I do not want to put myself in a litigation posture here, but there were two lawsuits going on. One had to do with the deferred case itself. This was the dismissal, basically, of the supplemental deferred filing that we had made that the commission threw out. That was in front of Judge Griffin [Michael R. Griffin, District Judge, First Judicial District Court]. That is the $85 million, by the way. In addition, we were asking for more than that. We wanted the rates to be higher than what the commission had allowed us for the rate freeze going forward.
So, we were challenging that. We dismissed that matter with prejudice, but it was dismissed with prejudice subject to a condition subsequent. In other words, it was dismissed on the condition that certain things happen. And if those things did not happen, then we reserved the right to come back. And one of the things that we reserved in that case was that if the stipulation [Exhibit C] was not enforced, [if] it did not go forward precisely in accordance with the terms that everybody expected them to be enforced, then we could come back to the court. The stipulation, or the order that the judge entered dismissing with prejudice, was based on that stipulation, which had that condition subsequent. And, by the way, the stipulation has been enforced in accordance to [sic] its terms, so we do not have any issues there.
The federal case that we filed in Reno was a challenge to all of 438 [S.B. 438 of the Seventieth Session], and it was not, as had been represented, based solely on the fact that we felt that the rate relief that we had gotten from the commission was confiscatory. In other words, it was taking; it did not allow us a fair, reasonable rate of return. In fact, it did not even allow us to have our cost. It was not just that. It was also that the very concept of a rate freeze itself, not withstanding what happened in the hallways of the Legislature in the spring of 1999, [was unconstitutional]. Not withstanding all that, the company’s position is now, was then, at least its legal position was, rate freezes are unconstitutional. And the reason they are unconstitutional is because, by their very nature, what you are doing is you are imposing on somebody an obligation to perform a service without guaranteeing to that person that he can recover back his costs.
Mr. Peterson continued:
And, if a statute fails to have within it a mechanism whereby that person who is obligated to provide the service, in other words pay for the service (give it to people), if it does not provide an opportunity for that person to get a fair recovery, then it is unconstitutional. And that is the basis of our federal case. That case is not yet dismissed with prejudice. There is a slight misunderstanding among the parties. In fact, that case is currently pending in the United States District Court in Reno. And there is, in fact, a status conference called by the judge (I believe it is for February 25) [2001] in order to find out what is happening.
What we agreed to do was: If the implementation of the global settlement goes forward and all the time available for legal challenges has expired and all the time for an appeal of any adverse ruling on those legal challenges has expired, then we will dismiss that federal case with prejudice. That has not occurred, yet, and that will not occur for . . . many months. In addition to that, there is, as Senator Townsend anticipated, some other parties out there that may come in. And there is, in fact, another party and that is the geothermal industry, and they are represented independently in that case. They are parties to that case and they have not agreed to dismiss . . . with prejudice.
Although I have every reason to believe that should this go forward, they will do so since they are not being harmed since they are being paid. But in any event, that is the current status of the legal situation. The one case is dismissed with prejudice; the other case is currently pending a dismissal with prejudice assuming that the global settlement goes forward in its terms. At that point (and I am going to stop after I make this statement because I do want to take issue with what Mr. Whittemore said), I know it is a fight we will have later, but I do need to make the record very clear that it is the company’s legal position that our most recent filing does not violate the global stipulation [Exhibit C] because, in the global stipulation what we agreed to do was reserve all of our rights and remedies and claims of whatsoever kind or nature that we did not specifically give up in the global settlement.
Mr. Peterson continued to testify:
One of the things that all you Senators enacted back in 1999 for 438 [S.B. 438 of the Seventieth Session], in anticipation that maybe things would not work out as you anticipated back then, was a provision that said, “In the event that the commission determines that there is insufficient capacity in the state, then the commission has the legal right, (which you delegated to them) to remedy that situation.” And, among the remedies that you gave the commission was the remedy to ensure that there will be sufficient capacity in the state. And in order to do that, to create what you have called equitable obligations on the part of almost anybody who is a participant in the industry.
So, we have made this filing on the basis that, pursuant to 438 [S.B. 438 of the Seventieth Session], we have asked the commission clearly there is insufficient capacity in the state at reasonable prices. You have the right, the legal right as delegated by this legislature in 438 [S.B. 438 of the Seventieth Session], to create equitable obligations. We are asking you to create those obligations on the part of customers, in order to allow the company to procure sufficient capacity at reasonable prices. And that is a right that we believe that we preserved in the global settlement, because it is a right that we did not waive in the global settlement. I just wanted to make that clear as to what we are doing. I am not asking anybody to agree with that, by the way.
Mr. Whittemore interjected, “We are not going to agree.”
Senator Shaffer commented, “I do not think we would . . . pass a law . . . like you are reciting. . . . That is pretty vague, reasonable rates; you say that wording is in the statute, reasonable rates?”
Mr. Peterson answered:
Well, yes, it is actually. It may alarm you, but that really is fairly common throughout the United States. I mean, “just and reasonable rates” has been in the statues since whenever it was first enacted in 1900. It is very difficult to legislate a specific rate. I mean, you can image how long you would sit here conducting hearings as to what a reasonable rate is. We would have to examine all of our operations or plants. That is why you delegated that to the commission . . . because they have expertise in the area, and they have a staff available that is expert in the area in order to determine what is a reasonable rate. It should not alarm you; it is fairly typical everywhere.
Senator Townsend said:
Let us go back to a couple of statements that were made that should be addressed. The federal suit is now to be understood “not dismissed with prejudice” until all of the activities that were encompassed and dealt with in the stipulation have come to fruition, which would be all of the parties have a chance to leave, or how do we find that in here? I do not sit around at night worrying about whether you are in a C-4 class or a C-5 class. So, forgive me for not having the minutia available to the commission.
Mr. Parker responded, “That is . . . I am not sure what page it is on.” [Someone interjected: “Page 1, paragraph 2.”]
Mr. Whittemore interjected, “We agree with that.”
Mr. Parker continued:
And the standard is [Mr. Parker read, in part, from the stipulation (Exhibit C), page 1, paragraph 2]: “Immediately upon entry by the Utilities Commission of Nevada of final, unappealed and unappealable orders approving the first filed monthly application Sierra, et al., will dismiss with prejudice the federal case.” What that means is this: while the first application rate went into effect, the agreement provided for a 6-month audit and, pending the results of that audit, a final commission order will come down. That could be any day.
Senator Townsend asked, “Which could be any day?”
Mr. Parker answered, “A final commission order approving the results of the 6-month audit.”
Senator Townsend said, “OK.”
Mr. Parker commented, “That provision in there was a compromise.”
Senator Townsend said, “I do not care. OK? I want to know a date. When are we going to know whether he [U.S. District Judge Edward C. Reed] is obligated to dismiss with prejudice, or he is not?”
Mr. Parker answered, “It could be any day. That is pending before the commission right now. I think we all anticipated it would be about 6 months from the first rider.”
Senator Townsend stated:
OK. So, it will occur. My concern is the flip date (I cannot see the “eye chart” over there), but whenever we have an obligation to turn all the bills over to the Assembly and they turn theirs to us, is it going to be done before then? And that is April 16 [2001]. Will it be done by then?
Mr. Parker answered, “I believe it will. I am almost certain it will.”
Senator Townsend remarked, “OK.”
Mr. Parker stated, “I think everyone at this table believes that it will be done by then. We thought it would be this month.”
Senator Townsend said:
So, that way the committee will know whether, in fact, that proceeding will be back in federal court, or, in fact, this comes to resolution on that portion of the stipulation. The stipulation, though, continues to run on a monthly basis under what conditions and for how long?
Mr. Whittemore stated:
It runs pursuant to the stipulation until February 28, 2003, by its own terms as to the F&PP rider mechanism. It imposes upon the parties obligations that would have an effect after March 1, 2003 (i.e., the final rate case, which would establish what those rates would be, would then be in effect after March 1, 2003). So, it has a continuing effect; I think Mr. Peterson would agree with me on that.
Senator Townsend asked:
Is there [a provision] somewhere in the stipulation that were the two companies to acquire long-term contracts that become available to them, those adjustments also are available to go down if, in fact, that is the case? This is not a ratcheting only one way, is it?
Mr. Peterson responded:
No, it ratchets down, Senator. I would like to address that point because it is also something I wanted to correct, and it was something that Mr. Russell [Mr. Mark Russell, Vice President and General Counsel for the Mirage Hotel Casino, Gaming Industry Representative on the Nevada Electric Energy Committee] stated yesterday, and actually Mr. Hay alluded to it, although I think in a more kindly manner.
That is, he suggested that we would not be able to recover, perhaps, all of the deferred energy [costs] we had been accumulating had this stipulation not existed and deferred energy gone on, because there is a prudence challenge, of course, which goes to that reasonable issue that I was talking to Senator Shaffer about. That is, if we are not prudent in our purchases then, of course, they are disallowed. Now, prudence has a concept in it and that is, Mr. Higgins [Walter M. Higgins, Chairman, President and Chief Executive Officer of Sierra Pacific Resources] was saying yesterday, “Got short-term, long-term and intermediate-term.” You should have a broad portfolio to protect yourself in the volatility of the market, because it can operate in different ways.
Mr. Peterson continued:
So, we should do that. I mean, a mixed portfolio is the appropriate thing to do. The difficulty [of] the position that the company was in terms of procuring [energy] long-term (and, by the way, it is the same difficulty that California utilities have and there is a huge debate, very acrimonious, between Chairman Lynch [Loretta Lynch, President, California Public Utilities Commission] over there and the [California] governor’s office and the utilities about why did you not procure long-term portfolio utilities. The utilities said, “We could not.” And, then Pat [sic] Lynch comes back and says, “Yes you could. I said you could back in August.” And, the utilities said, “Well, legally, you said we could, but we could not get it approved through the commission.”) . . . is that the utilities cannot procure long-term energy from people who will sell it to us unless we can demonstrate to them that we can pay for it.
And, so one of the questions they are going to ask is how are you going to pay for this power 5 years from now? What we ordinarily say is, “Well, we are going to get it [costs] recovered in rates, because it has been approved by the commission. They have approved our right to procure this long-term power, and as a consequence of that there is usually an explicit statement saying you can recover. But, if it is not explicit at least it is implicit that if they say, “Go buy it,” that they are going to give you the right to recover it [costs].
And, of course, they have legal remedies in the event that they do not. What happened here, and right from the beginning of 438 [S.B. 438 of the Seventieth Session], it was contemplated. And, by the way, it was implemented in a . . . very vigorous way by the former chairman of the PUCN, Commissioner [Judy] Sheldrew, who had specific vision about 438 [S.B. 438 of the Seventieth Session], and the specific vision which she implemented with a vengeance on the company was that we would not be in this business: “Make no mistake about this, you are not in the energy business, you will not have customers.” And, therefore, under 366 [A.B. 366 of the Sixty-ninth Session], it was originally contemplated we would be out of the energy business on December 31, 1999. That was changed in 438 [S.B. 438 of the Seventieth Session] to March 1, 2000; we would be out of the energy business altogether.
If you own a gas station and you are pumping fuel for customers, and you [legislators] are telling the owner of the gas station, “I want you to buy long-term gas in order to stabilize the price, but, by the way, we cannot tell you are going to have customers a year from now.” What are you going to do with your long-term supplies? I mean, maybe you bought it at a price that Mr. Hay looked back later, or somebody with 20/20 hindsight says, “You never should have bought that. You were not going to have customers, why would you buy that? So, we are not going to let you recover the cost of that.”
Mr. Peterson continued to testify:
So, first it was December, we are out of the business. Then it is March, we are out of the business; and even now, today, it is July of 2001, we are out of the business. That is what the statute currently says. The global stipulation had a similar thing in it. If you look on page 5 of the stipulation [Exhibit C], page 5 has people leaving the companies beginning on November 1, 2000, which is just 2 months after we entered into this agreement. All of these people who fall into these categories could leave during that period of time. If you turn to the next page [page 6] that deals with customers of Sierra Pacific [Power Company], you will see a similar phased-in ability of those customers to leave. So, even under these circumstances, we would have great difficulty in procuring a long-term supply of power because we did not know who was going to be our customer at that particular point in time.
Senator Townsend said:
Let us go back to two things that have been said that give rise to some questions. Mr. Peterson, you had stated that you think that there is a constitutional question. I am not asking you to give away any of your litigation strategy because you still have an option to go to federal court.
Mr. Peterson interjected, “I am happy to talk about it; I have nothing to hide.”
Senator Townsend continued:
And you say that, based on the experience you said yesterday of the insurance rates that were challenged in federal court, “and, we were denied that opportunity to fix those rates.” The question I have is multifold. First of all, one of the strong feelings that the committee had, ultimately the Legislature, was that if you were taking a risk to give us a rate cap, that you should have some kind of benefit for which you would negotiate. And that was the benefit of efficiency. And, section 16 of the bill that [S.B. 438 of the Seventieth Session] basically says the PUCN, the OCA [office of consumer advocate] will not be allowed to review any of your revenues during that cap period. So, that if things went your way, you would have the opportunity to reap a very large reward. Everyone seems to have forgotten that.
Now, when you go into one of Mr. Whittemore’s client’s places you have red or black. You take your chance, but where you do not have to play the point is you make it sound, well I am hearing you say, “that the only thing in this bill was something that was negative to the company.” I do not believe that because there are 63 [the combined members of the Senate and the Assembly] of us here, and if it was that confiscatory, we would not have passed something. That portion of the bill was negotiated as were a lot of other options. That is number one. I think that is something that is easy to say, “Well it did not work out that way.” Well, I do not think one negotiates with our consumers on the benefit that, “Well, if I get lucky, I get a benefit; if I do not get lucky, I go back to the commission [and] I still get a deal.” I have a very hard time with that.
You made a second statement that concerns me and that is, as the lawyer what you see on the page and what is law is different than what was “negotiated” in the hallways of the Legislature. I think that is extremely disturbing because it means that anything that is said to my colleagues in this hearing room does not carry any weight. I do not think that is what you want to say. Otherwise, why would any of us take your testimony or meet with any of you if we do not think it has value until it is printed on the page and the Governor signs it? I mean, I do not think you wanted to say that, unless you want to clear it up and say you did.
Mr. Peterson replied:
You have made a statement, Senator, in which I have a great deal of sympathy. And, I do not have a good answer for that, and I have had to answer this question before. In fact, I have had this crammed down my throat by everyone at this table and other intervenors in that very deferred case. Let me make no secret about it, there were certain representations made to certain legislators in the spring of 1999. There was a lot of give and take on 438 [S.B. 438 of the Seventieth Session] and that we were okay with a rate freeze, subject to us getting other things.
Mr. Peterson continued:
I think, again, as I stated yesterday, I do not know, and nobody can know, what is in the minds of all legislators when they enact a statute. I do know that this was in some of their minds. And I do know that it got into their minds because of certain statements made by representatives of the company. However, in our defense, what I would like to say is, again, there was a quid pro quo there, things that we were supposed to get. But among the things you just mentioned was we were supposed to get a rate at a certain level going forward, and we had an opportunity for an upside there and just because we did not get what we wanted, it does not give us an equitable right to come back to you. But, we did not get some of that stuff.
First of all, I want to make that very clear. You said it, actually twice, Senator Townsend, and that is they were not supposed to mess around with our revenues when, in fact, the commission did mess around with our revenues. The unbundling case, among the things we dismissed here [in the stipulation], was a case (and I think some of you may remember this) we were supposed to have what “rate geeks” call a revenue requirement, which is basically how much money do we get. We were supposed to get the same amount of money. What the commission did, and again, I am going to attribute a lot of this to leadership of the commission at that time (which has changed), but what happened there was we filed that case, we pointed that out: 438 [S.B. 438 in the Seventieth Session] says you are not supposed to change our revenues, but the revenues were changed in several different ways.
Mr. Peterson continued to testify:
One way was, “Well, your revenues are not supposed to change for your PLR [provider of last resort] function, but the total revenue requirement for your non-PLR function” (meaning our transmission and our wires), the Legislature did not say that we could not change a revenue requirement for that. You know, one of the elements of how much money you get is the interest rate on your plant. They call it return on equity. The commission said, “Well, we are going to give you X percent of return on equity on your PLR function because that is more risky, but on your other function, meaning our wires end of the business” . . . Let us say Mr. Whittemore’s client wants to leave, gets power from some other power provider, we charge him a rate to go through our wires. They said, “You have to charge a different rate for that function than for the wires function in your PLR rate.
And then, in addition, they changed our depreciation rates on our plant. When you change your depreciation rates, as some of you know when you file your tax returns, it affects your bottom line. And they increased it. So when they increase your depreciation rate, it reduces our earnings. So, a substantial amount of what was promised us in 438 [S.B. 438 of the Seventieth Session] we did not get by virtue of implementation by the commission.
Senator Townsend asked, “May I ask you a specific [question] about that, because I think it is important. Did you not amend your filing on the deferred energy account docket in order to include additional months?”
Mr. Peterson answered:
Yes, here is the debate on that, and it also goes to your point (and I think it is in the minds of lots of legislators) that we breached an agreement, that we reneged on a promise and a commitment that we were going to make one filing and one filing only. Well, as I said partly yesterday, and I think not very clearly, the company, Nevada Power, was required to make that filing by virtue of its history. It had to make it manually, and only once manually. We made it on July 15 [1999] for the historical period to end May 1999. There was a slight run-up in prices over that period of time. This was premerger of Sierra Pacific [Power Company] and Nevada Power [Company] just by a matter of weeks. A lot of what happened is attributed to change in management at Nevada Power, [and] a lot adversely attributed to me.
Well, under the deferred everyone filed. The company is going to get one more crack at deferred energy. And what you enacted, what the statute says was: you can adjust the rate for . . . any deferred cases that are going to be filed before October 1 [1999]. We filed one in July of 1999. There was an existing regulation on how you go off deferred energy, that had been [in] effect for many years, in front of the commission. And that existing regulation said, “If you want to go off deferred energy, here is the procedure and the process that you must follow.” Well, the procedure and the process that you must follow stated, “You stay on deferred energy. You keep accumulating those balances until such time as you get an order from the commission saying you go off of it.”
And, again, I think the reason why they had that regulation is because it goes either way. It could go up or down. The company could be accumulating deferred balances that gave it a benefit. There is a way the company could benefit from that, which is why they had this regulation that stops it at a certain date. I looked at the regulation. I had my lawyers look at the regulation, and we concluded under existing 438 [S.B. 438 of the Seventieth Session], under existing regulation, (remember 438 said cases filed before October 1) we are going to supplement this filing. We are going to accumulate, or add back in, all of those deferred energy balances that occurred after May of 1999. We are not cutting it off in May of 1999; we are going to continue it until we get an order from the commission saying we can go off of it.
The difficulty that we had was you also repealed deferred energy. You enacted a rate freeze, and you repealed deferred energy. You repealed it affective October 1. That is when the Legislature said, “No more deferred energy; that statute is gone on October 1.” So, we accumulated these balances up to October 1 of 1999, and at that point in time we stopped accumulating deferred balances. So, what we felt we were doing (a lot of people said it is a trick, you know, it is a lawyer’s trick) was consistent with the existing regulation and it was all part of that last deferred filing. It was updating one last deferred filing up until the time you said we could not have it anymore. That is the $85 million, by the way. The amount we accumulated over the summer was $85 million.
Senator Townsend acknowledged and then asked, “Yes. What was the amount?”
Mr. Peterson replied:
Forty-four. The number in your mind, I am sure it is 44. It was sent to the Legislature many times by Mr. Rigazio [Steve Rigazio, President, Nevada Power Company] who said in April of 1999 (and nobody knew precisely what that number was because the period had not even ended, yet), “it looks like it is going to be around $44 million.” And, it was pretty close to that, actually, as of May of 1999.
Senator Townsend asked:
Was there a reason you or any of the parties decided when you went in for the $85 million, which you felt you had a strong legal case for, was there a reason you guys just did not find an accommodation with one another for another figure that everyone could have lived with, so some of this stuff could have been moved on?
Mr. Peterson replied, “Are you asking in the context, Senator, of the global settlement, or something during the time the deferred case was being litigated?”
Senator Townsend responded, “Yes. During the time the deferred case was being litigated, was there discussion to find a way to get rid of it and get whatever monies the parties could agree to?
Mr. Peterson answered:
The company came under extreme criticism. I think maybe some of it was in the paper, actually. Probably should not have been; but, yes, we received an offer. I believe it came from . . . a party that offered us more than what we eventually got from the commission. But in the company’s defense and, really [in the] lawyer’s defense, clearly it is talking about settlement offers, but it was not enough, it was more than what we got, but it was not enough to help us through what we knew was going to be a hard time going forward. We said, “No.” And it was withdrawn, by the way, eventually withdrawn.
Senator Townsend said:
Let us see if we can recap some of the key parts of what we have in here. Number one, there are going to be monthly calculations. We are now waiting for the commission to make up a final ruling. Upon that final ruling, do you perceive under paragraph 2 [Exhibit C] that no matter what they say, you have to dismiss this case with prejudice, or how do you perceive this?
Mr. Peterson responded:
You are asking me some real hard questions, Senator Townsend. I am going to answer them straightforward. If I had an attorney here he would advise me not to, but what I am going to tell you, (and again this is not to be hard-nosed but part of the economic deal, and make no bones about it, the economic deal we struck here is not adequate) we are going to die with this. But apart from that, part of it, of our expectations going forward in terms of our fuel and purchased power costs and what we felt we would be able to do, was based on the buy-back contracts that we were going to get from these generators that we were going to sell.
By the way, a lot of the stipulation has to do with selling those plants and how the proceeds are going to be. But, very important in our mind was when we sell those plants, even at this time with the FERC [Federal Energy Regulatory Commission] we had filed proposed contracts, we would buy out 100 percent of the output of that plant. . . . Well, if those plants do not get sold, then we do not get the benefit of those lower fuel costs. And we do not have fuel contracts going forward because we did not think we were going to have these plants if we are going to be buying it at a lot more.
So, even the expectations that we had here, which are far less than what came about, would not be fulfilled. So, what I am going to be examining as a lawyer (and I am telling the world right now) is, I am not sure, depending on what comes out here in the short-term, that I can (in my mind) condemn my company to death by saying, “We are going to stick with this deal.” Because, again, part of this deal contemplated lower prices that we may not get. I am not saying we are going to do that either, that evaluation still has not occurred to me. I do not want anyone to be upset. I do not want you to be upset when I say to the judge on February 25 [2001], “I am not dismissing it at this time, for various reasons.”
Senator Townsend said:
OK, I am trying to recap, because I asked him a question. I do not want a debate here; I just want to recap. . . . We will continue with these monthly adjustments, even after this accounting comes forward. Is that correct? That is what we have. They will be adjusted in a manner that would be less than where we would have a normal deferred energy issue. There is also your filing (which we will get to in a minute) which is separate and independent from this.
Mr. Peterson interjected, “Although, it does have a lot of bearing on what the company will do legally, going forward.”
Senator Townsend continued, “OK. There are a number of things in there that have nothing to do with a fuel and purchased power contract. Is that a fair assessment?”
Mr. Peterson replied, “Yes, there is.”
Senator O'Connell asked, “I am almost afraid for you to answer this question, but I think it is important for us to know. If the agreement is not okayed by the commission, what does that do to your stock?”
Mr. Peterson asked, “Which agreement? You mean the filing we just made?”
Senator O'Connell answered, “Yes, the filing, and if the sale does not go through?”
Mr. Peterson replied:
I think that our stock will go in the tank. If you saw the paper today, our stock is trading now at, I believe, an all-time low of $12.25. Which, by the way, I think is 66 percent of our book value. Which means if we sold our assets, we would get a whole lot more than if somebody just came in and bought all of our stock. I believe, in terms of price earnings ratio and in terms of company price to book [value], I believe we are the lowest in the United States. If not, we are in the bottom three.
Senator O'Connell responded, “So, that means that you simply lock your doors?”
Mr. Peterson said:
We are desperate; we need some help. This is where we were last time, we were in the death house looking for a pardon. And, by the way, despite all the things that I have said [that] the company might be going forward to protect its rights, I want to make it very clear, I think everybody at this table is a hero. If they had not helped us out, and a lot of what they did was not in the interest of their very constituents, we would not be here today. I mean, I certainly would not be here today. I do not think the company would be here today. They [the Legislature] saved us.
Senator O'Connell stated:
I think this is . . . very important for people to try and understand the gravity of this issue. Our neighbors in Utah have been purchased by an out-of-country [company] (the Scottish electric people [Scottish Power PLC]). We have a business group who moved their operation from Nevada to Utah. They, because of what they were able to do with the contract that they thought was very solid for the next 10 years, have now had a 900 (900!) percent increase in their rates.
So, if we think we have problems with rates right now, we have not seen anything, yet. This is a grave issue that we keep as whole as we can, the power company here. At least we can sit down at the table and deal with [all of] you. This is not something that we would be able to do with the takeover and the problems that they have in Utah. I just cannot underline or find words to express my concern about this. I think it is very important that everybody who is in this room, and within hearing distance, understands the gravity of this problem.
Mr. Peterson interjected, “You just made my hero list.”
Senator O'Connell continued, “Is there a comment or question before we continue on with this? OK, did you want to continue, Mr. Peterson, with any more testimony?”
Mr. Peterson responded:
Let me just review my notes, quickly. I think that is all. And, again, if you are going to move on to the filing we made, that would be Mr. Ruelle [Mark Ruelle, Senior Vice President and Chief Financial Officer, Sierra Pacific Resources], he is the brains of our company.
Senator O'Connell asked, “Is there anyone else at the table who wants to make any comment?”
Mr. Whittemore responded, “I am looking to Mr. Hay to see if he wants to make some comments because if he does not, I will, with respect to a particular issue.”
Mr. Hay stated:
I just wanted to make a couple of notes here. This issue of long-term contracting has come up from time to time. The company always has had the authority under 704.320 [NRS 704.320] to engage in long-term contracts. Mr. Peterson made the statement that because of this agreement, in fact, the customers would be leaving [and] that would act as an impairment to doing that. At the time that the settlement was negotiated and entered into, no one assumed that on the dates that are set forth, therein, that all customers in the various classes would leave on those dates. So, I think that leaves an impression that the company could not have planned for the future when, in fact, that was not the case.
And, just briefly on two other issues, Mr. Whittemore and I may have a difference of opinion on this and Mr. Parker and I may, but we believe under the terms of the agreement and stipulation [Exhibit C] that the federal lawsuit should already have been dismissed. There was not discussion that I recollect specifically as [to] that paragraph, as negotiated, that we would [have to] wait until after the audit results were in, but only until after an unappealed and unappealable order approving the first-filed rate increase occurred. We think, as a matter of good faith, the company should have dismissed the federal lawsuit by now. There are now some procedural issues relative to a party that was added late in the fall, but I think that issue is one that we are certainly not in agreement on.
And on the rate-cap issue, I think it is important to remember that under the S.B. 438 [of the Seventieth Session] negotiations, which I did not participate in, but I think others here did, there was a mechanism built-in there for the company to recover, from the gains, any deficit that they incurred during that rate-cap period. So, I think there are a lot of legal nuances here that have kind of been glossed over, which is probably not important to discuss further in front of the committee. But, there is certainly more than one difference of opinion that has been expressed here today. I think we all need to move on. My predecessor was involved, I think, in the discussions and negotiations of 438 [S.B. 438 of the Seventieth Session] and could address that much more specifically than I could, but I do not think the picture that has been presented here relative to the status of the agreement and stipulation and associated documents is totally accurate. If anyone has any other comments, I would appreciate them.
Mr. Whittemore responded:
I would like to close with the following comments. Number one, Senator O'Connell’s expression as to the gravity of this situation cannot be overemphasized. Nor can, though, the responsibility of the company to respond with alacrity and good faith with respect to the issues, which they are now facing on some of these issues. For example, it is clear that we are not going to have competition before, at a minimum, September 1, 2001. By the Governor’s own statements and by, I think, the events which have overtaken this state as a result of everything that is happened in the marketplace, I think we can rest assured that that decision will not be any earlier than September 1, 2001.
Based upon the press reports and other statements the Governor has made subsequent to his first announcement, you could certainly assume the move to competition will potentially be delayed beyond that date, or until there is a real, live, approved project going forward in Southern Nevada to create additional capacity that results in this body’s judgment that a competitive environment will exist at a point in the future and, therefore, competition can start to be phased in.
So, I think it is incumbent upon everyone in the process (I know that the company is doing this, I am not suggesting that they are not), that everybody look at what needs to be done in terms of tying up long-term power contracts, and that we work with them to try to come up with a way which benefits everybody, regardless of the class of customers that you exist in, regardless of the circumstances of whether you are from the north or the south, regardless of whether you are Republican or Democrat. You are going to need to be in a position where you participate in this process and we try to address these things. We are prepared to do that.
With respect to the bill and the position with respect to the dismissal of the lawsuit (it was always our intent), it said, “immediately upon the issuance of a final, unappealable order of the commission with respect to the acceptance of the first monthly F&PP,” that the lawsuit would be dismissed. I can come up with no reasons or rationales to suggest that there should be any further delay with respect to that. Therefore, while I accept the chairman’s suggestion that you get the final decision approving the audit, it was not contemplated in our mind that somehow it would have been conditioned, as it is suggested this morning. Because, indeed, every single sentence was gone through over and over and over again, and the mere mention that you wanted it to wait until you had the first 6-month audit (it would have been here on page 1, paragraph 2) and it would have been stated as such.
Mr. Whittemore continued:
Now, that is our position. So what? The point is that we need to put all those arguments aside, work together, come back to this committee with issues and respond to things and suggestions that you have and present to you what we believe is in the best interests of Nevadans, because that is what we are talking about right now. You are talking about the economic, financial viability of this entire state, both north and south. It is not unique to one region; it is not unique to one industry. We know that there is a significant, serious problem. We have offered, as recently as yesterday, again, to engage in the process of attempting to negotiate with the company solutions that we could then present to this committee and to this Legislature and for the review by the commission of these remaining issues.
I, for one, am upset that we spent so much time “saving the company,” in Mr. Peterson’s words knowing that, at this point, we are right back to where we were in terms of having to address the serious financial issues, which the company is facing with respect to power. Because we agreed to caps, and the company said, “Look, we are willing to do this, and we are willing to do that.” Again, I would like to state for the record: We are prepared to engage in those discussions again, and see what we could do to come back. We know it is important to you, and we pledge our cooperation to you.
Mr. Peterson interjected:
First, with respect to this dismissal with prejudice, apart from the technicalities, I am detecting rising acrimony and indignation that we have not done this. But, you have heard from different lawyers the interpretation on that, including Mr. Parker, who apparently agrees with my interpretation. I do not think you need to be a lawyer to understand that it is a final, unappealable order from the first filing. That filing is not closed. It is still pending. We have not filed the audit, yet, to confirm the first filing. I am not sure we filed it, yet, but if we have we just did file it, and people have an opportunity, as Mr. Russell [Mr. Mark Russell, Vice President and General Counsel for the Mirage Hotel Casino, Gaming Industry Representative on the Nevada Electric Energy Committee] said yesterday, to look at the audit and determine whether we did something wrong. Then they can challenge that first filing or certain aspects of it.
So, that first filing is not even closed yet. There is no order approving that first filing. The rates are in effect subject to being reviewed by the audit. That docket is still open. The second thing I wanted to say was, Mr. Whittemore actually made that offer to me yesterday, and I told him we had considered it going back to the global stipulation. I would like to remind the Senators that (some of you may not know this) the company was severely chastised by the Legislative Commission by doing what they had called the “backroom deals,” although, it was all the parties involved. And I believe they even passed a motion while I was sitting there saying, “Stop it. Do not do that; do not go around us, come to us. Do not make these backroom deals.” So, it is in that spirit that we are asking you; that is why we made our filing from the commission. We want it to be out in the open with the sunshine.
Senator Townsend said:
Thank you for your insights. We have an issue that, obviously, is debatable on when, or when you cannot, dismiss with prejudice. We do have an ongoing (through, I want to say, July 2003) stair-step mechanism. [Several testifiers interjected here, “February 28, 2003.] Now, let us go back through a couple of key things that are important, because they are going to set the stage for our discussion on your filing. Mr. Peterson, as much as we would like to have all the information, obviously, you have a client. We respect, that as we do with Mr. Whittemore and, certainly, Mr. Parker and Mr. Hay and anyone who appears here in a capacity as a legal representative.
So, please understand that we are not trying to extract stuff from you that is not appropriate. We are just trying to get as much information so the committee can move on into decisions. Part of the problem this committee and our colleagues have from all the parties (so that this is an across-the-board statement) is a consistent message, so that we can take a position based on that. Unfortunately for your company, you have had a substantial change in management.
Mr. Peterson interjected, “Unfortunately.”
Senator Townsend continued:
That is the bad news, but the good news is the person with whom we worked on A.B. 366 [of the Sixty-ninth Session] has now returned. We believe strongly that his ability to articulate the company’s position has been a positive one so that we know what the company is looking for from this body. Mr. Hay’s unfortunate situation was being thrown into the toughest conceivable advocate position possible having to look at substantially rising energy costs the day he took his position. It put him in a tough position. The smartest guy here is Mr. Schmidt who bailed out, went into the private sector, and is now one of those high-paid, blue-badge guys, you know, that we all talk about.
Mr. Peterson commented, “I will only agree with half of that statement, Senator.”
Senator Townsend continued:
Mr. Dimmick has had to wrestle with these numbers in the bowels of those opulent PUCN offices over there on William [Street]. And, the last person who has been here throughout this is Mr. Whittemore. But, his client base are publicly-traded companies who have different shareholder issues, as you do. So, he has to craft a message as you do. So, this is not easy. We can all agree this state needs capacity; I do not think anyone in this building is going to disagree with that. When you buy 50 percent of your power on the open market and that market is skyrocketing, that is a huge debate.
So, this committee is going to spend a huge amount of time, starting tomorrow [February 8, 2001], on generation issues. What do we need to do? What is out there? What is available? What is in the pipeline? [Do] we have all the documentation? [Do] we have everything that is in the pipeline? [Do we know] who the players are, what they are proposing, where they are going to be? How much water they are going to use, et cetera? We are going to do the best we can to understand that. And we need to concentrate on the things we can agree on. So, we are going to concentrate on that.
Now, having said that with perspicacity, the real question for this committee (because we could argue all of these things all day long) is, “Who is going to provide power to customers?” That is fundamental to this debate. And, whether it is established to be the company; whether it is established to be a number of entities out there; whether we know them or we do not know them, or they are aggregators; that is going to be the biggest thing we wrestle with. That is my opinion. And, we have to decide with our colleagues in the House [Assembly] and the Governor, how we are going to do that, because that is the group that is going to go out and buy these long-term contracts. That is the one that is going to give us stability.
Senator Townsend continued:
The problem we have had is (Mr. Peterson, because you have lived through it) in the beginning, the company did not necessarily want to be [provider of last resort], but agreed not to be [provider of last resort] (that was in 1997) as soon as we left here, the two companies merged. And that is OK; I mean that is your business. But you merged. Then, all kinds of things happened. Then we came back here in 1999, and the company was ambivalent and, yet, wanted to have the PLR [provider of last resort] function. So, we did not get a truly consistent message. [It is] nobody’s fault, just a message that we were having a hard time struggling with.
The issue before this committee is going to be twofold. It is going to be: How do we accelerate permitting for generation? Because somebody has got to build this stuff, quickly; and, what are we going to do about who is going to provide it? Who is the person that is going to go out and either buy contracts, have generation, build generation, [have] partnership with generation? So, I would ask all of you to think long and hard about this over the next 10 days, because when we come back here a week from Monday and start this debate, it is going to be about that issue. It is important for us to have consistency. In all fairness, my colleagues and I do not do this full-time. We all go back to our lives that are all varied and try to wrestle with these issues.
So, the more consistent the message can be with regard to these issues, the easier it is for us to deal with this. Those two things, I think, are paramount. Senator O'Connell’s points are incredibly cogent. There is not anyone in this state that wants foreign ownership of any of the assets in this state. I do not even want them buying a casino here. I mean nothing personal with those guys, but we do it better than anybody.
Mr. Peterson commented:
I want to get this message across and that is in terms of who is going to be the long-term provider of energy, that is a very important policy question about which reasonable minds can differ. I do not profess to be an expert on them, but it has as much to do with philosophy and politics, I think, as economics. But I have a very firm opinion on the short term. And, the short term is, let’s face it, we are going to be the power provider in the short term. When I am talking about the short term, I am talking about a year, maybe 2 years. These long-term contracts have to be procured now, right now.
And the reason I say right now is because, not withstanding what everyone says about the natural gas markets (those of you who are familiar with it and maybe nobody is, I am somewhat familiar with it), the production in December was less than the production in November. The projections in December and November were less than they were last year [1999]. There are lots of people out drilling for gas, but it is not coming in the short term. Lots of people have come to the realization, “We better procure long-term supplies here and stabilize the market.” And, they are out there now. And the reason they are out there now is because they know that gas is not going to be here in the short term, and that is driving the prices up.
Mr. Peterson continued:
That is what is wrong with the stipulation [Exhibit C]. We thought the prices were going to go down; they are going up. Even now, today, we thought that the long-term power purchases we could procure in the year 2003. We thought they would be coming down in anticipation of the market thinking, “Well, there is going to be more gas.” It is not happening. Those prices are starting to rise in 2003. Governor [Gray] Davis [of California] was on television last night being grilled by reporters on what a wonderful job he did in procuring, for the state of California, long-term contracts. The same long-term contracts, by the way, which the utilities were precluded in California from buying, or they would not be in this fix today. So, he did it on behalf of the state. What did he get? Finally, at the end of the day how much is it? Five thousand five hundred megawatts. Well, their consumption is 44,000 megawatts. I mean it is nothing.
However, somebody has got to be out there right now on behalf of the state of Nevada to get those long-term supplies. As we said in our filing, and Mr. Ruelle [Mr. Mark Ruelle, Senior Vice President and Chief Financial Officer, Sierra Pacific Resources] will explain it better than I can, we are in the best position to do that. We are in the business; we buy and sell power every day. We can do it, but we can’t do it unless we can demonstrate to the people who are going to sell it to us that we can pay for it, which means that we have got to have permission from somebody like the commission to say, “Please go out and buy this power. Don’t worry about [if] we are going to pay you; you will get paid.”
Senator Townsend responded:
I think your point is well-taken, whether it is you or some other entity. I think the real issue is this committee needs to work with our colleagues and decide what is in the best interest, particularly, of the people that Mr. Hay represents. Mr. Whittemore’s clients are very knowledgeable, possess great expertise in a lot of areas and can probably find ways to protect their interests.
But, the residential customer has Mr. Hay and his very small staff, and we are going to have to find an answer to that. I do not know what it is, or I would be glad to share it with you, I really would. But, I think all of us working together will find the right answer for our customers in the very short term [and] that gives us the benefit of the long term, whatever that happens to be in terms of those contracts.
Mr. Whittemore commented:
I think that the statement that Mr. Peterson has made with respect to reaching resolution quickly, I think there is some component of this that I will be happy to take back to a meeting of our association on Friday morning, as to the committee’s desire that we come up with some ideas to help potentially resolve some of these issues.
Including the fact that if we can convince some of the large users to leave and not rely on the existing lower rates which are present, and free that capacity up for other classes of customers, that that is a possibility that could remove exposure from the company and help out other consumers of electricity. I know that we have had those discussions, and we just need to figure out the best way to proceed.
Senator Townsend responded:
I would venture to guess that the most important thing these two committees can do is be flexible, be open-minded and be creative, because these are tough times and it is going to require tough decisions. I think those are more easily made if we are creative rather than fall into the standard patterns of thinking that are easy to do, particularly, in the historical perspective of a regulated industry. Every one of us represents all types of customers (all the customer classes) in our districts. But, obviously, the people who can defend themselves the least are the residential customers.
So, we have to be extremely sensitive to that issue. I think Mr. Hay and his staff are very capable, but everybody has the same 24 hours. And, we have 120 days to put our stamp on whatever we are going to do. So, I would hope the lines of communication will remain open for all the parties. With our colleagues in the other house, I think all of us can solve this together. But if we start, “it is my way or the highway” or “I am the only one with an answer,” I do not think we are going to get anywhere. So, I would ask your availability on that. Let me get to a technical question. Go ahead, Mr. Hay, and then I have a technical question for the commission staff and Mr. Hay.
Mr. Hay said:
I just wanted to make one brief point before we left this subject. On May 25, 2000, our office recommended that the commission open a docket to look at reliability issues. The commission later did that and the entire subject of long-term power acquisition was on the table. The commission entered an order [PUCN Compliance Order (Exhibit D)] on November 22, 2000, and I will just quote from one paragraph [see paragraph 73 of Exhibit D]. It says, “In consideration of the above, the Commission concludes that Nevada Power Company’s purchase power strategy is inadequate since it does not consider long-term agreements. Therefore, NPC’s [Nevada Power Company] supply side plan is found to be inadequate.”
Now, Mr. Peterson is giving the impression that all of a sudden, today, we have to make this decision and allow them to go out and purchase these contracts at very high prices. But, to be perfectly fair to the consumers, the issue has been on the table at least since May 25 [2000], shortly after I assumed this office. So, I think this rush towards hysteria needs to be put a little bit in context, too. I think the explanation of their current filing, obviously this is not the forum to litigate that, but we will be making arguments from the commission on those sorts of issues.
Senator Townsend said:
The context in which that is received, Tim [Mr. Hay], is vitally important. However, I believe that this committee is going to work forward because we are not always abreast of things that go on at the commission level. They are nice enough to send us those things on a regular basis, but we cannot stay on top of that. So, I appreciate you bringing that up, but, we want to go from today forward, and if today they want to be interested in long-term contracts, then I think that we need to come back here a week from Monday and say, “OK, you have shown an interest and some of us want to look into that and some of us want to look at other options, and go from there.”
I think your point is extremely well-taken. I guess I understand the reluctance. At the same time, I really understand yours [reluctance] because we have got to get to this quickly, so that California does not pick off 5000 [megawatts] when we should be picking it off at a better rate than perhaps they should.
Senator O'Connell asked, “I just would like to understand, in your mind, what a long-term contract is. Is it 2 years? Is it 20 years? Is it somewhere in between?”
Mr. Hay responded:
Thank you for the question, Senator. From a regulatory standpoint, which I think is one of the issues, it requires PUCN approval if a contract exceeds, I believe, 3 years. Mr. Parker can confirm that for me. What we proposed was a balanced portfolio of contracts beginning in 2001 and extending through 2005 or 2007. Obviously, that is not for the entire load, but to pick up a component of the load for a longer period of time in order to lower the average price. Particularly, for the peak period that will be experienced next summer and the summer after that. So, there is not a standard definition as far as what a long-term contract is other than what we have in our regulations, adopted by the PUCN.
Senator O'Connell responded, “So it would be anything over 3 years?”
Mr. Hay answered:
From a regulatory standpoint, yes. You can certainly put a contract together that covers a 1- to 10-year period with different increments over that period of time. So, it is kind of a flexible definition, but it is certainly a longer period than 1 year and could be as long as 20 years, certainly.
Senator O'Connell stated:
Well, I guess we just need to understand very clearly in our minds when we are talking about (as the chairman just said, “Who is going to provide the power for the state and the conditions upon which you can buy or purchase a long-term contract?”) the stability of the company. Then, in our minds, we have to understand if we are going to encourage somebody to get into long-term contracts, then we need to know (they need to know) they are going to be in place using that power. Or, can you, when you commit to that, can you transfer that power to somebody else if, indeed, they would no longer be in the business, which, evidently, is up in the air?
Mr. Peterson interjected, “That is part of our proposal, to make it assignable.”
Senator Townsend said:
Let us do this for a moment. I want to be fair to you, Mr. Peterson, as well as the commission staff. Is it possible, without putting any of the parties in a bad position relative to this filing, to get a two or three page summary? Mr. Ponn [Douglas R. Ponn, Lobbyist, Sierra Pacific Power Company, and Nevada Power Company], you were kind enough to drop the filing off at my office, and it almost tipped my desk over on one side. It is pretty thick, and so is it possible to get [a summary] so we can start asking questions about which [of] the policies would [apply], because I think there are things in there besides cost issues that are policy issues, long-term contract issues, assignability issues, [and] some of the other things that I think are policy issues for us.
Mr. Ponn responded, “We will certainly provide a summary.”
Senator Townsend began:
Let me ask a technical question of Mr. Dimmick, as well as Mr. Hay. As you know, our mill tax [NRS 704.033 annual utility assessment] is based on costs. I want to make sure that we are not accumulating an overabundance of mill tax in your accounts that are not going to be appropriately used. We are not going to strip you of your effectiveness, but you don’t need to have a lot of money laying around that, in fact, belongs to customers. Has that gotten out of hand, or where are we with that issue?
Mr. Dimmick responded:
Senator Townsend, with respect to the budget, I cannot remember the number, but I believe for our next 2-year biennium we looked at increased revenues and reduced our mill tax consistent with our budget. This is a two-edged sword for the commission because if, for example, customers start to leave all of a sudden, our base revenues will decline. . . . A substantial portion of the revenues that get taxed will drop out of our assessment process. Therefore, we will lose mill tax. Now . . . I believe Jeff Parker has been working with the commission to clarify some rules about alternative sellers and their taxability. Again, if that works out, we will still be taxing all the revenues, but we have put into the budget a reduced mill assessment.
Senator Townsend responded, “I cannot remember what we talked about, whether you were going to try to do that or you needed the extra money.”
Mr. Hay responded:
Yes, Mr. Chairman, we actually have reduced for the upcoming biennium, as well. We also have the ability to adjust in the second year of the biennium. As you know, the mill tax levy is set on an annual basis. The other thing that Mr. Dimmick did not mention was, for instance, if the sale of Sierra’s [Sierra Pacific Power Company] water division to the municipalities in the Reno area goes forward, that chunk of revenue also would not be subject to the mill tax at that point. So, there are a lot of variables out there, and I believe at least one of your colleagues has talked about using some mill tax revenues to do some low-income assistance weatherization promotion of conservation renewables.
So, those other issues are out there but, certainly, from a budgetary standpoint, we have not proposed any increases based on the increased revenues, and we have the ability to reduce those on a going-forward basis. And, obviously, things that are not spent will end up reverting to the General Fund at the end of bienniums.
Senator Townsend said:
Well, let us try not to do that. I don’t think ratepayers want to subsidize the General Fund, with all due respect to our colleagues in finance. Let us keep an eye on that if we can. It is important to not have those reversions. We have that in a number of other budgets that actually come in front of this committee, and it is kind of a thorn in all our sides because it encourages you to go out and spend money if you do not have to and that is not right. I will get back to you, Mr. Peterson. Is it possible to provide the committee tomorrow (and we are not asking you to come back and testify, because I am sure you have a few things on your plate) [with] a document that gives us the basic overview and then a copy of the filings that we can all go through?
Mr. Peterson answered, “We have one, actually, that we can give you today.”
Senator Townsend responded, “Oh, would that be OK?”
Mr. Ponn said:
Mr. Chairman, we dropped off, as you said, a copy of the total filing [“Before the Public Utilities Commission of Nevada, Comprehensive Energy Plan, Proposal to Assure a Reliable Energy Supply at a Reasonable Cost for the Citizens of the State of Nevada” (Exhibit E. Original on file in the Research Library.)]. We have copies here today, for each of the committee members, of the total filing. Within that filing there is an executive summary section, which I think will serve as a starting point for what you want. We can get more specific if you do not think that satisfies you.”
Senator Townsend replied:
That is fine, and I apologize for not picking up on that when you dropped it off. I was in the midst of moving my office down here and it got put in box somewhere and I will get it unpacked very soon, believe me, and I appreciate what you have done.
Gentlemen, tomorrow, we will start with the independent power producers. We are going to have a focus on some of the things that we think are important in the context of renewables, in the contexts of aggregators, power providers, all of the options so that we do not get pigeonholed, and we hear from a lot of people that generates some good creative thinking. You are welcome back, or any of your representatives. We are going to just line up the groups and let them talk to us about: Who are they [independent power producers]? What is their background? How many megawatts do they have planned? What type of fuel they use? Where its location is? When will they be on-line?
In our packets, committee, I believe dropped off in your offices are copies of the proposals and the actual visual sense of where some of these places are, so we are not just using these terms in some oblivious context. That should generate enough material so that, mentally, we will be ready to get back into this a week from Monday. We will get our other bills out of the way, and we can really start to debate the key issues with regard to the things we have discussed here. And, when I say, generation, believe me I am also discussing transmission, because that is just so crucial to the state.
Mr. Hay, you may have made reference to this, we need to get the appropriate person from BLM, [U.S.] Forest Service, whomever, we need to get them here to testify so we can find out what the federal problems are with siting of transmission, besides the “not in my backyard” issue. But, what are the environmental concerns, et cetera. We need to know those issues; those are crucial. If we could give that assignment to you [Mr. Hay], I figure you might be able to know those.
Committee, I have put in a request to [U.S.] Senator Reid’s office, as you know he will be addressing the legislative body on Friday, and I have asked him if he had any time to come to the committee and address the wind issues that are so important to him. He has placed a bill in (believe it was yesterday) to extend the tax credits to all renewables. Is that your understanding, Mr. Hay?
Mr. Hay answered, “That is my understanding. It expands existing wind-tax credit to the other sorts of renewables, which is useful.”
Senator Townsend continued:
The headline [Las Vegas Review-Journal, Wednesday, February 7, 2001, issue (Exhibit F)] is: “Reid bill would give permanent tax credit for renewable energy.” It goes on to walk through it, and I think it might be nice as long as the senior senator is coming home, that we might get a little more insight into what is going on in the Senate [U.S.] relative to these key issues. At that point, obviously, I think all of us can encourage him to be sensitive to the needs of sitings and locations and easements and permitting and how long it takes for something to sit on somebody’s desk as opposed to taking action on it. I do not know if he has time; we have not heard.
Senator O'Connell said:
Before all of you leave the table, on the subject of renewables, I need to know how much of your portfolio consists of renewables and is there guidance from the PUCN or a requirement that requires you to carry so much renewable energy?
Mr. Ponn responded:
The last time I checked, it was approximately 11 percent of our total portfolio was renewable at Sierra Pacific [Power Company]. I do not know the exact number for Nevada Power [Company]; I will have to get that for you.
Senator O'Connell asked, “And do we know, is that a requirement that so much of your portfolio be renewables?”
Mr. Ponn replied:
A.B. 366 [of the Sixty-ninth Session], Senator, had a requirement subject to some condition which escalates the amount of renewables. So, we are currently, at Sierra Pacific [Power Company] at least, well within those requirements, but I think with Nevada Power [Company] that is not the case.
Senator O'Connell said, “I was hoping you would remember that so we could get it on the record, but you do not remember what it is?
Mr. Ponn responded to Senator O'Connell’s question about the amount of renewables Nevada Power [Company] has in their portfolio stating that Nevada Power has less than 11 percent. Mr. Peterson concurred with Mr. Ponn’s answer to Senator O'Connell.
Senator O'Connell asked, “Is that pretty much standard across the country for renewables?”
Mr. Ponn answered, “No. Sierra Pacific [Power Company], I think, is well beyond the average utility. [They] may be the highest percentage of any utility in the country.”
Senator O'Connell said, “And, does cost and production, I know that cost has had something to do with it in the past, but is production also a key issue?”
Mr. Ponn answered:
This has been an ongoing issue for a long time and, of course, a lot of folks have changed sides along the way, including us. But, initially, the cost of those renewable resources was well in excess of what the average cost of production was for the utility. Of course, right now (today) we are very glad to have the renewables, north and south. Not only because they are, though, above our average cost of some of our other resources, they are well below market. But, also, the reliability, they have been reliable resources for us, both north and south.
Senator O'Connell stated, “I just wanted that as part of the record for this stage of us talking for renewables. So, thanks, Doug [Mr. Ponn].”
Senator O'Connell said, “Committee, anything else for these folks?”
Senator Carlton said:
If I might remind them, I would like to have that synopsis as soon as possible, and if you could agree on what it says, that would be really great. That way we are all working from one page. Does anyone in particular want to take responsibility for that right now, or would you like to get back to me later on that?
Mr. Ponn replied, “We will take the first draft of that and circulate it to the other parties.”
Senator Carlton responded, “Thank you very much, Mr. Ponn. I appreciate it.”
Mr. Peterson interjected, “Senator, you were talking about the filing or the global settlement?”
Senator Carlton stated, “Let us make it clear, I was talking about the global settlement that I had mentioned earlier. The English, or let us say, the lay person’s version.”
Senator Townsend commented, “Anything else? Gentlemen, thank you. Is there anyone else who would like to address the committee on this issue?”
At this time Senator Townsend welcomed Mr. Fend [C. E. Edwin Fend, Lobbyist, AARP, and Capital City Task Force Member] to the table to testify.
Mr. Fend began:
I can’t say that I represent AARP, totally, on this particular thing, because they have not approved this, and I will give you all a copy of this draft. But, I have been involved in this since 366 [A.B. 366 of the Sixty-ninth Session], as you remember, and particularly with the last bill with my last testimony before the committee voted, I said, “I do not agree with this; it will damage the residential customer. And, it has.”
Senator Townsend asked, “Did not agree with what?”
Mr. Fend answered, “The bill that we put out, 438 [S.B. 438 of the Seventieth Session].”
Senator Townsend replied, “What portions of the bill do you think damaged residential customers?”
Mr. Fend answered:
We did not have enough protection for the senior citizens, whom I was concerned about, and the low-income working families. In the interim period, the little protection that we had in that bill has been destroyed one way or another by regulations and by changes being made by other people. I am still very much concerned [about] where we are going to go. We had a column in the newspaper on the opinion page of the Gazette-Journal [Reno Gazette-Journal] the other day, produced by a young lady who said, “The environmentalists did not cause this shortage, we have not caused the problem of putting in generating plants in this state or in California.” Well, that is a joke. It was funny and, unfortunately, I am sure she believed what she was writing.
We have the opportunity in Nevada, because of our peculiar situation with people and areas and water availability and things such as that, to invite people to come in and build plants here and provide us with enough power within the state to solve a lot of our problems. Not all of them, because the other thing we kind of left in the mind of people when we passed 438 [S.B. 438 of the Seventieth Session] was that, we are going to reduce your rates. No we were not; we were going to try to control the increase in the rates. And that is the significance of what we should be doing. The deregulation, as is required by the federal government, now provides for the commercial people, the industrial people, and the residential people’s monies to be in a specific, individual pot. There is no more mixing of monies.
In other words, we can’t help ourselves to a little bit of the mining companies’ monies or the casinos’ monies to help pay for our residential customers. The federal deregulation stopped that; it said, “No, you cannot; there is no more mixing of funds.” So, where do we go? What do we do?
Senator O'Connell, you made the statement that Utah has Scottish people. Well, the Scottish people have bought up all kinds of power plants in New York City, all kinds of plants in New Jersey, all up and down the East Coast, to include Czechoslovakia and places like that that are buying up these power plants and then charging the money.
We have to be very careful for this because we have to watch and see, even if we bring in additional power plants, we have to watch very closely to see who comes in and purchases them to make charges on our system. And, I think it is extremely desirable for us to have at least 90 percent of the power we need in this state. We are never going to get 100 percent because we are growing too fast. And that has been one of our problems, our rate of growth, just like California. In 10 years we grew from, what? I do not know; 43 percent I believe, or something like that. We did not put one new power plant in this state, and I really have to couch my word on that a little bit because we did build the geothermal plant down here.
Senator Townsend asked, “Do you understand the reason, Mr. Fend, why that took place?”
Mr. Fend replied, “No, I do not. Do you?”
Senator Townsend answered:
Yes. It is very simple. It is called the Integrated Utility Resource Planning Act. Which means, the utility, which was vertically integrated at the time, would come in and provide for the regulatory mechanism [a description of] how they are going to provide energy to consumers. Whether they were going to build, or whether they were going to buy, what source of fuel, et cetera.
Mr. Fend interjected, “I remember when we discussed that earlier.”
Senator Townsend said:
Let me finish. So, it means for the last 15 to almost 20 years it was required that they [the utility companies] provide the cheapest alternative. As fuel prices dropped, the cheapest alternative was to buy. We would all love to sit here and look back and say that the possibility in Senator Rhoads’ district that Mr. Joe Gremban [former Chief Executive Officer of Sierra Pacific Power Company] was right, and we should have built 10,000 megawatts, was the genius idea of all time. Well, what we would have paid for that under the regulatory mechanism in place at that time would have cost all the consumers for 15 or 20 years.
There is always a tradeoff. We have had a remarkably stable and low-cost energy situation in Nevada for many years. The reliability and the access are catching up to us. The costs are starting to go skyrocketing. We understand that, but for the last 15 to 20 years, as much as we do not want to admit it, we got a benefit because of that resource planning act, which is looked to nationwide as still one of the leading areas of utilities. So, I want to make sure that you fully understand that there was not any conspiracy theory on why people did not want to build power plants. That was what was presented to us, and the cheapest alternative was to purchase.
Mr. Fend replied:
All right. I moved here from Idaho Falls, where we had our own power plant. We had two French turbines in the river, and we generated all the power for the city that we needed. What happened is, and I agree we had cheap power and things worked to a certain way and if we build generating plants we have to amortize the generating plant over probably 20 years. But, the point is that if we are going to continue to grow, if we are going to invite industry in to participate in our state, then we must provide adequate power for the people to come in and have it.
Right now, with the new unit coming on-line out at Tracy, which will provide an additional 352 megawatts of power in the northern area and will provide power to our industrial areas in both the one going north towards Fernley and the one south of Reno, where they have all the industrial parks in, we can benefit from that because there are people moving out of the Silicon Valley now. And I know that for a fact because I have a daughter that works over there. We had three companies move here already. And these companies not only moved, they brought their people with them. It was not a question of, “Do we have enough workers?”
Their people came and they are so happy to live in Reno because it only takes them 20 minutes to get to work, and they could afford to purchase a house. We have this going for us. We can do something if we will move on producing and establishing means of getting the power to the various people. In other words, we must produce power lines, as well. And, here you mentioned talking to the BLM because the majority of our state, unfortunately, is owned by the federal government. But, I give you the Alturas power line going north. That power was essential for Northern Nevada, but we could not get anybody to agree.
Not through my back yard, not here, not there and, you know, I am getting so tired of hearing people do that. I am very tired of watching people climb a tree in California and spend a year there. You know, most of these people that belong to the Sierra Club or the Green Club or whatever, their families have made a fortune previously by utilizing some of the assets that they are now trying to say, “Well, nobody else can have these.” Otherwise, they would not have the time to go out and demonstrate if they did not have money. My feeling is that we need to do something about this. We need to make people recognize that when you go out and break the law, when you go out and tell people that you do not want progress in you area or your town, that you need to be taken care of, such as put in jail and fined significantly to solve the problem.
Now, in addition to that, you asked the question about, “How are we doing on alternative power?” We are doing extremely well. We are the second highest producer of geothermal energy in the 50 states. Only California produces more. And, California produces 225 megawatts; we produce 200 megawatts of geothermal power. We are starting to get close to cost levels on our wind power. I talked to Rose McKinney-James [former Lobbyist for Corporation for Solar Technology and Renewable Resources (CSTRR)] a little bit and asked her how the people down south (when she gave everything to the university) are doing, and they are doing fine.
But, we have to look at that type of energy and solar power. Solar power would be wonderful for homes, but you can’t run a major industry with solar power. You have to have backup power to make it work. Wind power, similarly, but wind power has more capabilities. In addition to that, I would like to mention (and that is where I am going to get in trouble with AARP) [that] the state of Maryland has just relicensed a nuclear power plant, the first one in the states, because of the power problems that they are having back there. We must start developing areas of power, and we must start providing the lines to get the power to get to different places.
Senator Townsend asked, “Will you help us with that? Will you come to BLM hearings and PUCN hearings and testify when we do need those? Because it is going to be tough.”
Mr. Fend replied, “Absolutely. Let me tell you a little secret. My son is a BLM worker out of Washington, D.C., who holds a fairly high position in the agency.”
Senator O'Connell interjected, “We are going to need all the connections we can get.”
Mr. Fend responded:
I would be happy to work on that, but really, the biggest thing that upset me all along is that we worked very hard on the bills, and we have basically been excluded all summer long from debating and talking to the Governor’s program. And the other thing is that in all the testimony we heard, I hardly ever heard people talk about low-income families and senior citizens. How are we going to protect them? And the one thing that everybody talks about is insulating houses. No, that is not going to work; we tried that once, as you all should know. We tried it once.
Seniors citizens are not going to live in the type of houses, the poor ones anyway, that you can reinsulate and be functional. You need to pay part of their bill. You need to take and ensure that the $5 million being spent for low-income housing in Las Vegas, that the building codes on those houses, are providing insulation for the doors and windows of those new places. That is the way we will save money. Any questions?
Senator Amodei asked:
Ed [Mr. Fend], I agree with 95 percent of what you said, and I will let you speculate as to what that 95 [percent] included or did not include. But, when you start out with, “I was opposed to 438 [S.B. 438 of the Seventieth Session] and see where we are,” I just want to ask you one question. Are you aware that the provisions in 366 and 438 [A.B. 366 of the Sixty-ninth Session and S.B. 438 of the Seventieth Session] have not been activated? So, where we are at now, Ed, has nothing to do with 366 and 438 [A.B. 366 of the Sixty-ninth Session and S.B. 438 of the Seventieth Session].
Mr. Fend replied, “Well, you are absolutely right, but I was very disappointed when some of the provisions we put in that the Governor has not activated, the bill was wonderful. And, if we activate it before 2003, it would blow my mind away.”
Mr. Fend submitted written comments related to his testimony on utility deregulation (Exhibit G).
Senator Townsend asked, “Anyone else like to testify with regard to the issues we discussed today? OK, 8:00 a.m. tomorrow morning. Thank you for your patience.“
There being no further business, the meeting was adjourned at 10:38 a.m.
RESPECTFULLY SUBMITTED:
Gayle Nadeau,
Committee Secretary
APPROVED BY:
Senator Randolph J. Townsend, Chairman
DATE: