MINUTES OF THE SENATE COMMITTEE ON COMMERCE AND LABOR Sixty-eighth Session April 26, 1995 The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 8:00 a.m., on Wednesday, April 26, 1995, in Room 227 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Senator Randolph J. Townsend, Chairman Senator Ann O'Connell, Vice Chairman Senator Sue Lowden Senator Kathy M. Augustine Senator Raymond C. Shaffer Senator John B. (Jack) Regan Senator Joseph M. Neal, Jr. STAFF MEMBERS PRESENT: Scott Young, Senior Research Analyst Vance Hughey, Senior Research Analyst Molly Dondero, Committee Secretary OTHERS PRESENT: John Sande III, Lobbyist, Nevada Bankers Association Charles Lenzie, Chairman of the Board, Chief Executive Officer, Nevada Power Company James Holcomb, President, Chief Operating Officer, Nevada Power Company Walter M. Higgins, Chairman/President/Chief Executive Officer, Sierra Pacific Resources/Sierra Pacific Power Dan Kessler, President, Nevada Rural Electric, General Manager, Wells Rural Electric Company Louis R. Holvack, General Manager, Valley Electric Association, Inc. Delmar Leatham, Administrative Assistant, Overton Power District Jack Heaston, General Manager, Harney Electric Cooperative, Inc., Burns, Oregon Judy Sheldrew, Commissioner, Public Service Commission of Nevada Joyce Newman, Executive Director, Utility Shareholders Association of Nevada Robert L. Crowell, Utility Shareholder Fred Schmidt, Consumer Advocate, Office of Advocate for Customers of Public Utilities, Office of the Attorney General Ron Barr, President, Earth Power, Energy and Minerals, Inc., Tulsa Oklahoma Three bill draft requests (BDRs) were introduced. BILL DRAFT REQUEST 55-355: Makes various changes concerning banks and banking. John Sande III, Lobbyist, Nevada Bankers Association, explained the need for the bill. He stated the legislation will allow a bank to be a limited liablity company instead of a corporation. SENATOR NEAL MOVED TO INTRODUCE BDR 55-355. SENATOR SHAFFER SECONDED THE MOTION. THE MOTION CARRIED (SENATORS LOWDEN, O'CONNELL, AND TOWNSEND ABSTAINED FROM THE VOTE.) ***** BILL DRAFT REQUEST 54-865: Authorize closed meetings under certain circumstances. SENATOR REGAN MOVED TO INTRODUCE BDR 54-865. SENATOR O'CONNELL SECONDED THE MOTION. THE MOTION CARRIED. (SENATOR SHAFFER WAS ABSENT FOR THE VOTE.) ***** BILL DRAFT REQUEST 51-1340: Revise labeling requirements for re- refined motor oil. Mr. Sande explained the bill will define the labeling requirements for re-refined oil. He explained re-refined oil is the same to the consumer as virgin oil and the warning label required by statute is not necessary. SENATOR O'CONNELL MOVED TO INTRODUCE BDR 51-1340. SENATOR LOWDEN SECONDED THE MOTION. THE MOTION CARRIED. (SENATOR SHAFFER WAS ABSENT FOR THE VOTE.) ***** Charles Lenzie, Chairman of the Board, Chief Executive Officer, Nevada Power Company, spoke against retail wheeling. He explained the power companies have been regulated monopolies for the past 90 years. He expressed his concern that there will be disruptions to the utilities if they must enter into the competitive marketplace. He stated there are no states who have allowed retail wheeling. He stated they have canceled the plans for a new generator and they have not entered into any long-term supply agreements of electricity with third parties. He explained the rates in southern Nevada are low at 6 cents a kilowatt hour. He expressed his concern for the way the rates are collected by their customers. He stated the use of a subsidy will be a challenge if they must become competitive. He said there will be a 12 percent increase in the residential rate if retail wheeling comes into being. He asked who will be the supplier of last resort. He explained electricity cannot be stored. He expressed his concerns for the financial ramifications of retail wheeling. He explained his concerns for their first-mortgage bond rating which is BBB, and said it is one step above the junk-bond rating. Mr. Lenzie expressed his concerns for this rating. He stated in California when they announced they were considering allowing retail wheeling by 1996, there was a substantial drop in the market value of the California utilities. The utilities lost billions of dollars. He explained when a paper reported Nevada was going to pass retail wheeling, there was a $40 million drop in the stock price of their common stock. It recovered when there was an announcement that retail wheeling was only being studied. James Holcomb, President, Chief Operating Officer, Nevada Power Company, explained that Nevada Power purchases 50 percent of its power from other utilities. He commented that reliability is a major issue. Senator Shaffer asked about the purchasing power of the large utilities. He referred to Portland General Corporation which was discussed in the previous day's hearing. He asked if the purchasing power of the large utilities will put Nevada Power at a disadvantage competitively. Mr. Holcomb commented Nevada Power is not disadvantaged by the purchasing in the northwest. He explained they take advantage of the competitiveness of the different power suppliers. Senator Shaffer asked if there is a lot of hydroelectric power to purchase. Mr. Holcomb stated the owners of the hydroelectric facilities use that power first. He commented most of that power is in the northwest. Senator Lowden commented that earlier testimony during the week indicated the larger companies in Las Vegas are overpaying for power so that the consumer has reduced prices. Mr. Lenzie stated that the larger customers subsidize the smaller customers. He explained the philosophy is that the large customers can pass the rates on to the tourists. Senator Lowden explained the subsidizing is not as disproportionate in the north. She explained the southern Nevada large consumers look upon retail wheeling with favor to reduce their expenses. Mr. Lenzie commented there was a federal law passed in 1978 called the Federal Regulatory Policy Act (FRPA). It indicated that electricity shall be priced based on cost to serve the individual customers. He stated the subsidies have slowly been reduced. He stated they have been through an earnings investigation and have agreed to lower rates by $6.5 million annually. He stated all the reduction went to the larger customers, and commented he understands the interest the larger customers have in retail wheeling. Senator Neal referred to testimony given on April 25 and discussed a report contained within Exhibit C which was also presented on April 25. He discussed the page labeled Trends a reprint of "Public Utilities Fortnightly." Mr. Lenzie stated Portland General Corporation does not have a great deal of surplus power for sale and, apparently, they buy power to resell it. Senator Neal stated Nevada Power Company purchases 51 percent of its power. He commented they are engaging in retail wheeling. Mr. Lenzie stated it is wholesale wheeling. He explained they purchase power for all of their customers, not just a few customers, and all benefit. He explained the definition of retail wheeling is that individual customers receive the advantage of lower prices, rather than all of the customers. He explained they sell power to Needles, California. Mr. Holcomb stated they like to sell any excess power which they may generate and buy when they need it. He stated the financial community reacts negatively to the subject of retail wheeling. Senator Neal asked how the Federal Energy Regulatory Commission (FERC) will impact Nevada Power Company. Mr. Lenzie commented he feels it will be a benefit. He cautioned the proposed pricing could have a negative impact. Senator Neal commented Nevada should act because of Nevada's close proximity to California and the large power markets. Mr. Lenzie commented California has continued to delay the vote on retail wheeling in their legislature. Mr. Lenzie indicated he does not feel there is a disadvantage to Nevada by putting retail wheeling into a study committee. Senator Neal asked to assume that California does pass retail wheeling, how will it impact utilities in Nevada. Mr. Lenzie explained it will be a benefit to Nevada. He stated Nevada Power Company will be able to sell into the California market, and profits on sales outside the system go directly into reducing the customer rates. He commented the interim committee should be studying retail wheeling. He indicated there is no need for legislation to allow them to sell power to other utilities. He pointed out there is no surplus of power to sell during the summer months. Senator Neal asked why Mr. Lenzie is afraid of retail wheeling. Mr. Lenzie stated Nevada may be the first to implement it, and that frightens him. He stated if Nevada allows retail wheeling thus allowing the customers of Nevada to buy from other states' power companies, then other states will be able to sell power to customers in Nevada cheaper than Nevada power companies can sell to their own customers because of subsidies. He stated he has no disagreement with retail wheeling as long as other states adopt it, too. If California, Oregon, and Arizona do not allow reciprocity, then the impact upon Nevada will be negative. He stated he does not feel reciprocity is a possibility with the other states. He pointed out the need for reliability from the electricity suppliers. Senator Neal discussed "unbundling" and questioned how it will relate to FERC. Mr. Lenzie commented the FERC regulations are not yet established and litigation will increase because there will be many court challenges to FERC. Senator Shaffer discussed the Thousand Springs Project from 1985. He stated if the power is needed within the state, then it cannot be sold. He asked if the 1985 legislation will hinder retail wheeling. Mr. Lenzie commented he does not think it will hinder, because it is geared toward specific power plants. He pointed out the main responsibility is to the service area of the utility. Senator Shaffer referred to the last page of Exhibit C. He discussed the third summary point. Mr. Lenzie indicated he does not agree with that point. He stated any profits go to the customers by way of reduction in rates, not to the shareholders. Senator Shaffer pointed out the last point listed on the last page of Exhibit C. Mr. Holcomb commented there is a subsidy of about $40 million for the small ratepayers. He stated the majority of cost is in generation of energy. Mr. Lenzie pointed out if there is a fee tacked onto retail wheelers, then why would someone retail wheel. Senator Regan stated the proposed legislation only addresses the industrial customer. Mr. Lenzie agreed, and it will be phased in over several years. Senator Townsend asked if Mr. Lenzie feels the industry can move quickly if the need arises. He commented the time is coming when the industry will change from service based, to commodity based. Mr. Lenzie responded Nevada Power Company is a small company compared to many others in the west. He stated that is a benefit because it does allow the company to react to changes quickly. He commented when telephone companies were deregulated, his home service increased 30 percent. He expressed his concern that the same will happen to the electric companies, causing an increase to the consumer. He said some companies have considered splitting up into separate business units. Senator Townsend returned to the issue of reciprocity. He stated a bill which will have reciprocity will say the retail wheeling of electricity from outside the state borders can only be done under certain conditions. He suggested the following conditions might apply; if that jurisdiction allows Nevada utilities to wheel into their jurisdiction, how much can be charged, and what the Public Service Commission of Nevada (PSC) authority is. Mr. Lenzie stated the suggestions should be part of a study community. He indicated if the PSC has the authority to set the rules he will be comfortable with their decision. Walter M. Higgins, Chairman/President/Chief Executive Officer, Sierra Pacific Resources/Sierra Pacific Power, discussed retail wheeling. He stated he feels there is a potential for change...it is coming and needs to be recognized. He pointed out if the change is handled incorrectly, then the small, electric customers in Nevada will be big losers. He stated the shareholders could be losers as well if the changes are not handled correctly. He emphasized Sierra Pacific Power supports retail wheeling. He stated it is an inevitable, appropriate evolution of the electric markets, and will further develop desirable competition in the electric generating markets and will provide pressure which will result in lower prices for all customers. He stressed it is not essential to hurry to be the first to do it. He commented that is an illogical approach. Mr. Higgins stated when he was president of Louisville Gas and Electric, they were among the first utilities in the United States to file for open transmission access to increase the flow of electricity through the transmission grids so that more competitive prices could be obtained. He explained the eastern transmission markets are very aggressive. He stated the problem is very complex. He indicated some of the testimony from the previous day was overly simplified. Mr. Higgins stated the FERC order does not foster or encourage municipalization. He stated the FERC order has made clear municipalization will no longer be a free escape from the cost of doing business in a state. He pointed out the FERC believes that open transmission access is very important to increase competitiveness between the markets. He indicated the FERC believes retail wheeling is an inevitable outcome of an increasingly competitive market. He stated the FERC will make certain the stranded assets are properly collected. Mr. Higgins commented Sierra Pacific Power Company is working hard to be a progressive, competitive utility. He explained, currently, the power company "bundles" its services. It is a collection of many things at one price. He said "bundling" consists of transmission, distribution, generation, and load tracking. He stated there are questions on jurisdiction, reciprocity, stranded investment, obligation to serve, and reliability. He stated system reliability is an extremely complex issue with many factors entering into it. He said they will not allow reliability to falter simply because of retail wheeling. He emphasized there will be a great deal of work required to assure quality. He stated there are franchise taxes, mill taxes, and property taxes paid by the utilities and asked if they will be collected from someone who retail wheels. He said if retail wheeling is a way to avoid paying taxes that are currently levied in some way in the basic rate, but not physically attached to the distribution system, then the argument comes about that one set of taxpayers in Nevada will benefit at the expense of another set of taxpayers. He suggested it is proper to continue to move the electric industry in the direction of competition. He stated Sierra Pacific Power Company is ready for retail wheeling. Senator Shaffer asked if it is necessary to enter into an agreement with California for them to do business in the California market they service. Mr. Higgins explained the California customers are served under California regulations. He stated most states have laws outlining how service territories are allocated. He commented the PSC in each state regulates which utility serves where. He stated Sierra Pacific Power Company cannot move into other territories other than the ones granted to them. Senator Neal asked about the merger of Sierra Pacific Power Company with Washington Water Power Company. Mr. Higgins stated the major reason for the merger is to make the prices more competitive over time. He indicated Washington Water Power Company has a great deal of power to share and will help keep the cost of power down. Mr. Higgins explained the term "wheeling." He explained: Retail wheeling occurs when an end-use customer, a casino on the strip, chooses to buy directly from a generator somewhere, and asks the local utility, and, perhaps, other intervening utilities to move the power. Senator Neal asked if it is the fear that large industries within Nevada will go outside the state to purchase the power. Mr. Higgins stated the fear is that in a poorly thought out transition, some customers, who have market power to buy in large quantity, will disappear from a system which is designed to benefit all customers evenly, and leave behind cost in the changing market which will be borne by the remaining customers. Senator Neal pointed out retail wheeling is the elimination of the "right to serve." A presentation was made by the representatives of the rural electric companies. Dan Kessler, President, Nevada Rural Electric Association, General Manager, Wells Rural Electric Company, presented Exhibit D and read his testimony (Exhibit E). Louis R. Holvack, General Manager, Valley Electric Association, Inc., read his testimony (Exhibit F). Delmar Leatham, Administrative Assistant, Overton Power District, expressed his concerns about retail wheeling. He stated retail wheeling might strand utility customers in areas where it is difficult to serve with high-cost resources. He expressed his concern that an increase in cost to the rural customer will adversely impact growth in the outlying areas. Jack Heaston, General Manager, Harney Electric Cooperative, Inc., Burns Oregon, explained his company's opposition to retail wheeling. He expressed his concerns retail wheeling will have on small cooperative utilities and submitted Exhibit G. He explained they have 3,000 accounts spread over 20,000 square miles. Judy Sheldrew, Commissioner, Public Service Commission of Nevada, presented Exhibit H an outline of her testimony cautioning against retail wheeling. She posed several questions through her testimony contained in the following exhibits. She presented Exhibit I, two charts showing cost averages, Exhibit J, implied debt rating, Exhibit K, a discussion of the FERC proposals, Exhibit L, an article about stranded utilities, and Exhibit M, (Original is on file in the Research Library.) a book by the National Regulatory Research Institute. Ms. Sheldrew disagreed with several statements made in the prior hearing of April 25. She used Exhibit I as support for her comments on rate differences. She explained Exhibit I contradicts many of the comments in Exhibit C originally submitted on April 25. She disagreed that bottlenecks usually happen in local distribution systems. She pointed out someone has to pay for the building of new facilities. She emphasized the issue has been oversimplified. Ms. Sheldrew explained that FERC deals with wholesale issues only. She disagreed with the formula on page 16 of Exhibit J of April 25. She stated it does not address retail wheeling, stranded investment. She pointed out this exhibit is discussing stranded investment in regard to wholesale wheeling. She referred to page 2 of Exhibit I and explained there is not enough 2-cent power available. She summed up her testimony asking the committee to exercise caution when thinking about retail wheeling. Senator Townsend recessed the hearing at 11:00 a.m. to reconvene at 5:00 p.m. this evening. The hearing on retail wheeling resumed at 5:00 p.m. with Senator Regan absent from this portion of the hearing. Joyce Newman, Executive Director, Utility Shareholders Association of Nevada, presented her testimony (Exhibit N). Senator O'Connell asked if the vulnerability of Nevada Power Company is due to the commitment it has to the growth in southern Nevada. Ms. Newman responded they are vulnerable because they rely heavily on one industry, the gaming industry, for that growth. She explained a decline in value of 20 percent will mean a loss of over $60 million to the shareholders. Ms. Newman read excerpts from a testimony presented last summer by Dr. Peseau. The testimony indicated there would be large increases to the residential customer, should retail wheeling occur. Ms. Newman read from an article entitled, "The Joint Declaration on the Electric Utility Industry," signed by many consumer groups. She read: We see in such a system, that is retail wheeling, many losers and relatively few winners. Retail wheeling does not move electricity, but it does move dollars and changes incentives. Among the losers, would be those who consume relatively small quantities of electricity, most of us, and those with a stake in improved environmental quality, all of us. Ms. Newman stated the Office of Advocate for Customers of Public Utilities has signed onto the above mentioned document. Robert L. Crowell, Utility Shareholder, stated utility rates are set on a rate of return on the investment basis. He explained retail wheeling will deregulate the generation side of utility rendition of service. He commented if the utility is deregulated the generation investment is moved out of the rate- based mix. He cautioned against this and stated the traditional rate of return investment remains a viable method of establishing utility rates. Fred Schmidt, Consumer Advocate, Office of Advocate for Customers of Public Utilities, Office of the Attorney General, commented he agrees with 99 percent of what Mr. Higgins stated in his testimony. He said he disagrees with most of what everyone else said and with Mr. Reeder's comments from the April 25 testimony which overstates the impact of the FERC. Mr. Schmidt recommended studying the issue for at least 2 years. He suggested the bill discussed during the last session with a narrow definition of what type of customer could engage in retail wheeling did not work as expected. He cautioned against the legislation being used in California which discriminates in its approach against the small customer and in favor of the single, large industrial customer. He stated he does not think retail wheeling will happen within the next 2 years, but he feels it is inevitable. He pointed out his position has moderated since he signed onto the paper read by Ms. Newman. Mr. Schmidt identified a few areas previously not discussed during testimony. He discussed the environmental and conservation aspects of the issue. He expressed his opinion that these issues will be at the bottom of the priority list for companies. He stated it is unclear how resource planning will work in a competitive market. He stated there will be little for the PSC to do in the competitive market. He explained the PSC is needed when there are monopolies. If there is competition, there is little or no need for regulation. Mr. Schmidt discussed deregulation and explained it is a difficult process. He explained that the Public Regulatory Policies Act (PRPA) has led to more competition in the generation industry, but there is legislation which has been introduced into Congress this month which will repeal the major provision of PRPA which has led to proliferation of alternative generation projects and more competition in the generation industry. He cautioned against thwarting competition by overreacting. Mr. Schmidt stated he feels Nevada Power Company is in significant danger if it believes that opening up the California market will be a benefit to it. He explained Nevada Power Company buys 51 percent of their power. He commented they are in jeopardy if the California market opens. He stated the prices will change quickly. He pointed out the prices will go up and down and there is no way of foretelling the future. He said there is some subsidization, but it cannot be depended on in the future. He referred to Exhibit I. He said service to residential customers during peak-load time is a difficulty for Nevada Power Company. He explained hydroelectric power handles the peak-load problem at this time, which helps to keep the residential power prices consistent. Senator Townsend asked if gaming is listed under commercial in Exhibit I. Mr. Schmidt explained the large casino properties are under industrial, the small are under commercial. Senator Townsend pointed out there is little difference between the industrial and commercial tariffs. Senator Townsend asked if the subsidy which is being talked about between the heavy industrial user and the residential person is reflected in the figures. Mr. Schmidt stated the heavy industrial usage is reflected in the figures. He explained if they had not received the hydroelectric power, the industrial rates would not have gone down, and the residential rates would have been a great deal higher. Mr. Schmidt explained the problem with the deferred energy fuel process. He stated Nevada Power Company has added substantial, new base-load power costs into the deferred energy rates. He pointed out the largest casino and industrial accounts' rates have increased substantially. He commented Exhibit I shows under the cost analysis column that Sierra Pacific Power Company and Nevada Power Company have above average fuel costs compared to other western utilities. He explained the reason for that as being the inefficient, anti-competitive fuel adjustment clause mechanism in Nevada. He stated industrial customers are penalized because it does not work as a tool to make utilities to lower and keep low the fuel costs. He explained there is a guarantee of a dollar-for-dollar recovery with carrying charges on whatever they incur. He explained that last year Sierra Pacific Power Company was removed from the process and they are lowering the rates. He stressed retail wheeling is not about rate design. Mr. Schmidt explained there must be open access on the transmission network before retail wheeling can be done effectively. He explained there are no transmission lines which run through Nevada, instead, they run around the state. He stated FERC will not implement this within the next year. FERC is specifically prohibited from mandating retail wheeling by federal law. Mr. Schmidt explained cooperatives are not realistic because they need to have the authority of franchises issued to them under current statutes by the PSC. He explained there are statutes which limit the ability of an entity to serve another entity in another service territory. He addressed the issue of municipal services and cautioned against politicizing delivery of essential services. He stated the trend is toward privatization rather than municipal control over services. Mr. Schmidt suggested reciprocity raises significant constitutional commerce-clause arguments. He stated he feels no state legislature will give Nevada reciprocity if they think their utilities will be hurt by it unless they know they can beat Nevada's prices. He suggested the idea sounds fair, but it is not good for Nevada. He stated if reciprocity is adopted, it should be done so throughout the west by federal law to assure equality for all states participating. Senator Neal asked if the study suggested by Mr. Schmidt, should require all the states to participate at the same time. Mr. Schmidt stated no. He suggested if retail wheeling is right for Nevada, whether other states have done it or not, then it should be done. He suggested there is no harm in providing authority for the PSC to act during the next 2 years. Senator Neal asked what Mr. Schmidt's role will be if retail wheeling comes about. Mr. Schmidt explained it is to keep retail customers from bearing the burden of cost increases if the large consumers leave the system. He expressed his concern that Nevada Power Company is dismantling its residential conservation programs and there is talk that other entities are looking at taking over the residential service system. He commented a utility should protect all of its customers, not just a select few, and he pointed out good business practices and good customer relations are important to the healthy survival of a utility. He explained if moving to competition causes excessive costs, then there could be a raise in rates. If the transition is done carefully, there should not be increases. He expressed great concern that Nevada Power Company feels the opening of the California market will be beneficial to Nevada Power Company. He doubted the wisdom of that position for Nevada Power Company. He stated they do not have enough low-cost generation in their system mix to market to California. Mr. Schmidt explained the three areas which are not competitive. He stated, generation has become more competitive, but there is not an open market yet. He pointed out transmission is not competitive because the FERC has not acted. He stated no federal law has interfered in retail competition in the distribution sector and retail competition cannot exist without open transmission lines. Senator Shaffer asked about acceleration of depreciation rates. Mr. Schmidt stated if the depreciation is accelerated they must receive approval by the PSC. Accelerating depreciation causes rate increases. Mr. Schmidt pointed out the distribution services should continue to be a monopoly. To change would be inefficient. Ron Barr, President, Earth Power, Energy and Mineral, Inc., Tulsa, Oklahoma, submitted Exhibit O. Senator Townsend closed the hearing on retail wheeling at 6:45 p.m. RESPECTFULLY SUBMITTED: Molly Dondero, Committee Secretary APPROVED BY: Senator Randolph J. Townsend, Chairman DATE: Senate Committee on Commerce and Labor April 26, 1995 Page