Exhibit 99.1
BEFORE THE PUBLIC SERVICE COMMISSION OF NEVADA
In re Application of NEVADA POWER )
COMPANY for authority to increase its )
annual revenue requirement for general )
rates charges to all classes of electric )
customers and for relief properly related )
thereto. ) PUCN Docket No. 01-10001
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)
In re Application of NEVADA POWER
COMPANY for approval of new )
revised depreciation rates. ) PUCN Docket No. 01-10002
)
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PETITION FOR RECONSIDERATION OF CERTAIN FINDINGS
COMES NOW, Nevada Power Company ("Nevada Power" or "Company"), and
pursuant to NAC ss.703.802(1) and N.R.C.P. 6(a), does seek reconsideration of
certain findings from the final order issued by the Public Utilities Commission
of Nevada ("Commission" or "PUCN") and effective on Friday, March 29, 2002.
Nevada Power is seeking reconsideration of six issues related to the following
matters:
o The treatment of revenues related to SO2 Allowances, in particular the
calculation of an annual amortization amount ($5.221 million), which
appears to be in error given that the total amount to be amortized is
$9.569 million, and amortization period has been established as three
years.
o The adjustment for "excess" capital investment related to common
facilities at the Harry Allen generating station, which treatment is
contrary to a prior stipulation and Commission Order regarding the
recovery of costs for common facilities related to phase one of the
construction of the Harry Allen facilities.
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o The treatment of depreciation expenses related to the Commission's
order in Docket No. 99-4005, which treatment is contrary to regulations
providing for implementation of revised depreciation rates within
twelve months of the issuance of a final order revising depreciation
rates.
o The determination that Nevada Power refile for recovery of merger costs
and to prove again its merger savings in its next general rate case,
without benefit of a carrying charge.
o The determination that Nevada Power has no need for and is entitled to
zero funds cash working capital, which finding is unreasonable and
erroneous under the record.
o The Commission's establishment of a 10.1 percent return on equity,
which rate is contrary to law, unreasonable, and erroneous under the
reliable, probative and substantial evidence of record.
In support of its Petition, Nevada Power describes below each portion
of the order challenged, the basis for the challenge, and citations to the
record, the law and, where appropriate, the Commission's rules and regulations
that support the challenge.
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INTRODUCTION
While not required by either NRS Chapter 233B or Chapter 703 in order
to seek judicial review of a final order of the Commission, the Commission's
regulations allow any party to a Commission proceeding seek reconsideration of
all or parts of a final order. Under NAC ss.703.801(1), a petition for
reconsideration must specifically: (a) identify each portion of the challenged
order which the petition deems to be unlawful, unreasonable or based on
erroneous conclusions of law or mistaken facts; and (b) cite to those portions
of the record, the law or the rules of the commission which support the
allegations in the petition. NAC ss.703.801(3) provides that a petition for
reconsideration of an order must be filed with the Commission and served on all
parties of record within 15 days after the effective date of the order. Nevada
Rule of Civil Procedure 6(a) provides that when computing time for purposes of
applying a statute or rule, if the last day of a period falls on a Saturday or
Sunday (or other non-judicial day), the period runs to the end of the next day
which is not a Saturday or Sunday (or other non-judicial day). The effective
date of the Commission's final order in this docket is, according to its terms
at Ordering Paragraph 5, was Friday, March 29, 2002. Thus this petition for
reconsideration is timely filed on or before close of business on Monday,
April 15, 2002.
SO2 ALLOWANCE ANNUAL AMORTIZATION AMOUNT
The Commission's calculation of the annual amortization amount for
revenues associated with the sale of SO2 Allowances appears to be based on
mistaken conclusions of fact. At paragraph 133, the Commission finds that the
SO2 Allowance balance of $9,569,000 is reasonable and approved, and that this
balance amount will be credited against rate base and amortized starting with
the effective date of the order (March 29, 2002). At
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paragraph 130 the Commission rejects the previously accepted amortization period
in favor of a three-year amortization period. A three year amortization period
of the $9,569,000 SO2 Allowance balance should result in an annual amortization
amount of $3,189,667. However, at paragraph 130, the Commission mistakenly
states the annual amortization amount as $5,221,000.
Nevada Power asks that the Commission reconsider the figure stated in
paragraph 130 for the annual amortization amount for revenues associated with
the sale of SO2 Allowances in light of its findings regarding the appropriate
balance ($9,569,000) and the appropriate amortization period (three years).
Nevada Power respectfully requests that after such review the Commission modify
its calculation of the annual amortization amount for SO2 Allowances from
$5,221,000 to $3,189,667.
HARRY ALLEN "EXCESS" COMMON FACILITIES
At paragraphs 226 through 230, the Commission finds that certain common
facilities at the Harry Allen generating station are "excess" and should be
excluded from rate base. This adjustment was proposed by the Staff, but was
neither joined in nor shared by the BCP. The Commission's finding that such
investment should be excluded from ratebase is contrary to the stipulation
executed on September 4, 1991 by and between Nevada Power, the Regulatory
Operations Staff ("Staff") and the Bureau of Consumer Protection ("BCP", then
OCA) in PUCN Docket No. 91-7001. The Commission's order accepting and
incorporating the Stipulation was referred to by both the Company and the Staff
in their direct and rebuttal cases, but for ease of reference has been attached
hereto in its entirety as Exhibit "A".
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At paragraph 3 of the Stipulation, the parties agreed that Nevada Power
"should be authorized to install up to 150 megawatts of combustion turbine
generating capacity at its Harry Allen site for commercial operation beginning
in 1994. The construction cost estimate for the combustion turbine generating
capacity is shown in Exhibit 2 of this Stipulation." Exhibit 2 of the
Stipulation (page 8), showed the construction cost estimates for the Harry Allen
CTs in 1991 dollars without AFUDC. Exhibit 2 contained the following note
(emphasis added):
The construction cost estimate for Harry Allen Combustion Turbines 1
and 2 covers the cost of certain common facilities. Those costs shall
be considered as costs properly recoverable in conjunction with other
costs attributable to Harry Allen Combustion Turbines 1 and 2 even if
additional combustion turbines are not installed at the site.
This stipulation was not only executed by Nevada Power, the Staff and
the BCP, it was accepted by the Commission and incorporated into its final order
in PUCN Docket No. 91-7001. This stipulation formed the contract pursuant to
which Nevada Power completed design and commenced construction of the Harry
Allen site. That the second combustion turbine unit was later cancelled, with
the Commission's advice and consent, does not alter the fact that in 1991, prior
to the commencement of the first phase of construction at the Harry Allen site,
this Commission, the Staff, the BCP and the Company all acknowledged and agreed
to the proper ratemaking treatment for common facilities installed during that
first phase.
All parties agreed that Nevada Power was to install common
infrastructure facilities during the first phase of the development that would
not be fully utilized until the
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completion of units 3 and 4. All parties expressly agreed that it was necessary
and appropriate for Nevada Power to make such investment in common facilities
during the first phase of the development of the site in order to minimize
overall site development costs and take advantage of anticipated economies of
scale. All parties expressly agreed that Nevada Power's investment in such
common facilities were to be considered as costs properly recoverable in
conjunction with other costs attributable to the first phase of construction at
the Harry Allen site, even if additional combustion turbines were not later
installed at the site.
The Staff's proposals and the Commission's adjustments in its March 29,
2002 order are contrary to the contract executed by the Staff and ratified by
the Commission in 1991 governing the first phase of construction at the Harry
Allen generating site. A Commission order in 2002 denying cost recovery for
common facilities constructed during phase one of the development at the Harry
Allen site is unlawful and unreasonable when the Commission agreed in 1991,
prior to the commencement of construction, that Nevada Power would be allowed to
recover in rates its investment in common facilities constructed during phase
one of the development at the Harry Allen site. Nevada Power requests that in
light of the stipulation in PUCN Docket No. 91-7001, which stipulation was
accepted by the Commission and incorporated into its final order in that docket,
the Commission reconsiders its acceptance of the Staff's proposed adjustment in
this case. Nevada Power respectfully requests that after such review the
Commission modify its findings at paragraphs 226 through 230, and reject the
Staff's adjustment for "excess" investment in common facilities at the Harry
Allen site.
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DEPRECIATION
At paragraph 119 the Commission accepts the Staff's proposal to adjust
accumulated depreciation by $6,672,000 to account for Nevada Power's failure to
implement revised depreciation rates for transmission, distribution and general
plant as a result of the Commission's Order in PUCN Docket No. 99-4005. As set
forth in paragraph 119, the Commission has accepted the Staff's proposal because
the order in PUCN Docket No. 99-4005 was unclear as to whether or how
depreciation rates for transmission, distribution and general plant were
affected by the Commission's order on reconsideration in that same docket issued
November 28, 2000.
The regulations governing the establishment and modification of
depreciation rates are set forth in NAC ss.703.2715 to ss.703.278, inclusive.
That body of regulation governs every aspect of the setting of depreciation
rates from the form and contents of an application to change depreciation rates
to the implementation of rates once approved.
Assuming, arguendo, that the Staff's application of the order on
reconsideration in PUCN Docket No. 99-4005 is correct/1/ and that the effect of
the order on reconsideration was to require the implementation of new or revised
depreciation rates for transmission, distribution and common facilities, the
Staff's calculation of the adjustment is contrary to the express provisions of
NAC ss.703.278. Where, as the Commission acknowledges was the case in its order
on reconsideration in PUCN Docket No. 99-4005, the Commission does not
specifically direct the Company to implement new or revised depreciation rates
on or by a certain date, those rates may be recorded beginning not later than
twelve months after the date of their approval.
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/1/ A matter on which Nevada Power continues to strenuously disagree.
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If the commission approves an application for new or revised
depreciation rates, the approved rates must be recorded in the books
and records of the utility not later than 12 months after the date of
approval unless otherwise directed by the commission...
Pursuant to NAC ss.703.278, absent an order in PUCN Docket No. 99-4005
to the contrary, Nevada Power had twelve months from the date of the order on
reconsideration of depreciation rates, or twelve months from November 28, 2000,
to implement and record revised depreciation rates for transmission,
distribution and common facilities. Thus the earliest date from which an
adjustment penalizing Nevada Power for its failure to implement revised
transmission, distribution and common facilities could be calculated is November
29, 2001. The test for this general rate case ended on May 31, 2001 and the
certification period ended September 30, 2001.
Pursuant to the Commission's regulations, Nevada Power was not
obligated to begin recording revised depreciation rates for transmission,
distribution and common facilities until November 29, 2001, well beyond the test
and certification period. Thus assuming, arguendo, that the Staff's position
regarding the effect of the Commission's order on reconsideration is correct,
its adjustment is contrary to regulation. Nevada Power requests that in light of
the provisions of NAC ss.703.278, the Commission reconsiders its acceptance of
the Staff's proposed adjustment in this case. Nevada Power respectfully requests
that after such review the Commission modify its findings at paragraph 119, and
reject the Staff's adjustment for accumulated deprecation expense implemented
pursuant to PUCN Docket No. 99-4005.
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MERGER COST RECOVERY
At paragraph 321 the Commission found that Nevada Power may file to
seek recovery of its merger costs in any future general rate with a test year on
or after December 31, 2002. The Commission's order in this regard appears to be
an explicit rejection of the positions advanced by Mr. Greedy for Staff and Mr.
Brosch for the BCP that merger costs should never be recovered because once two
entities merge, it is impossible to quantify or measure merger savings. However,
in order to avoid burdening Nevada Power's next general rate case with such
arguments, and in order to insure that Nevada Power collects and presents such
data and information as the Commission deems appropriate for proving merger
savings later, Nevada Power asks that the Commission provide some guidance as to
the methods or methodologies it favors for determining merger savings.
In this proceeding, Nevada Power used several different approaches to
demonstrate merger savings, which included Ms. May's "bottom-up" approach, Mr.
Flaherty's "top-down" approach, and Mr. Ruelle's common sense or scientific
method approach. If it is the Commission's desire to see Nevada Power develop
such a comprehensive record using multiple measurement techniques and methods
again in its next general rate case, Nevada Power will attempt to do so. If,
however, the Commission is able to state now which of these methodologies it
approves, and which it disfavors, Nevada Power will attempt to adjust its future
presentation of merger savings accordingly.
On a related matter, at paragraph 320 the Commission states that
because "merger savings exceed merger costs, a carrying charge on the balance of
this costs is not justified." Merger savings, which began to be experienced in
1998, are now fully embedded within and reflected in Nevada Power's historical
cost of service. With this general rate case, the Commission is setting rates
based on Nevada Power's historical cost of service. Thus the
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rates set in this proceeding reflect all merger savings achieved during the test
period but none of the costs incurred to achieve those savings. The effect of
this aspect of the Commission's order is to pass onto customers the entirety of
merger savings, without requiring customers to pay a single dime of the costs
actually spent in order to garner those merger savings.
Nevada Power has not only asserted but proven that merger savings
exceed merger costs by several orders of magnitude. However, despite this
showing, the Commission is delaying cost recovery of merger savings to a future
showing in a future rate case. Without allowing a carrying charge on deferred
merger costs, the Commission's 2002 treatment of merger savings and costs is
contrary to the Commission's 1998 order approving the merger in the first place,
pursuant to which Nevada Power would recover the costs of the merger only to the
extent it could demonstrate savings in excess of costs, and, as important,
customers would receive the benefits of the merger only to the extent they paid
for the costs. Unless the Commission allows Nevada Power to collect and record a
carrying charge on the deferred balance of merger costs, the effect of the
Commission's order here is unlawful and unreasonable. Nevada Power requests that
in light of its 1998 order approving the merger of Nevada Power and Sierra
Power, the Commission reconsiders its decision prohibiting the imposition of a
carrying charge on deferred merger costs. Nevada Power respectfully requests
that after such review the Commission modify its findings at paragraph 320, and
allow Nevada Power to collect a carrying charge on merger costs deferred to its
subsequent general rate case.
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CASH WORKING CAPITAL
At Paragraph 144 the Commission finds that because Nevada Power did not
support its cash working capital proposal with a Nevada Power-specific lead/lag
study, Nevada Power is entitled to no cash working capital in its rate base.
Cash working capital is a component of rate base. The purpose of the cash
working capital calculation is to measure the difference between the lag in the
collection of revenues from customers and the lag in payment of expenses
incurred to serve those customers in order to determine the Company's needs for
ongoing operating capital. There is no record supporting the conclusion that
Nevada Power's requirements for ongoing operating capital are zero.
Nevada Power proposed a methodology for estimating its cash working
capital requirement based on the Commission's last-approved methodology for
Nevada Power, using the Company's most up-to-date numbers. No other party
proposed the use of a different methodology (for example the 1/8th method used
for calculating cash working capital in proceedings before the FERC), but
instead took issue with some of the inputs to Nevada Power's cash working
capital estimate: the impact of wholesale revenues or electronic billing on the
calculation. If the Commission finds that these criticisms are persuasive, it
has a record with which to make an adjustment to the cash working capital
estimate. However, it has no record upon which to find that Nevada Power's cash
working capital requirements are zero.
Nevada Power requests that in light of the record, the Commission
reconsiders its decision setting Nevada Power's cash working capital at zero.
Nevada Power respectfully requests that after such review the Commission modify
its findings at paragraph 143 and 144, and allow Nevada Power to a reasonable
allowance for cash working capital sufficient to sustain its operations on a
going-forward basis.
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RETURN ON EQUITY
At paragraph 98 the Commission determines that Nevada Power's return on
equity is 10.1 percent. The Commission's finding in this regard is unlawful,
unreasonable. In Bluefield Water Works & Improvement Co. v. Public Service
Commission of West Virginia, 262 U.S. 679 (1923), the Supreme Court set the
standard against which just and reasonable rates of return are measured:
A public utility is entitled to such rates as will permit it
to earn a return on the value of the property which it employs
for the convenience of the public equal to that generally
being made at the same time and in the same general part of
the country on investments in other business undertakings
which are attended by corresponding risks and uncertainties...
The return should be reasonable, sufficient to assure
confidence in the financial soundness of the utility, and
should be adequate, under efficient and economical management,
to maintain and support its credit and enable it to raise
money necessary for the proper discharge of its public
duties." (emphasis added)
In Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 391
(1944), the Supreme Court expanded on the guidelines to be used to assess the
reasonableness of the allowed return. The Court reemphasized its statements in
the Bluefield case and recognized that revenues must cover "capital costs". The
Court stated:
From the investor or company point of view it is important
that there be enough revenue not only for operating expenses
but also for the capital costs of the business. These include
service on the debt and dividends on the stock...By that
standard the return to the equity owner should be commensurate
with returns on investments in other enterprises having
corresponding risks. That return, moreover, should be
sufficient to assure confidence in the financial integrity of
the enterprise, so as to maintain its credit and attract
capital. (emphasis added)
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The Supreme Court has reiterated these criteria in Federal Power
Commission v. Memphis Light, Gas & Water Division, 411 U.S. 458 (1973), in
Permian Basin Rate Cases, 390 U.S. 747 (1968), and most recently in Duquesne
Light Co. vs. Barasch, 488 U.S. 299 (1989). In Permian, infra, the Supreme Court
stressed that a regulatory agency's rate of return order should "reasonably be
expected to maintain financial integrity, attract necessary capital, and fairly
compensate investors for the risks they have assumed" In order to be sustained
by the Court, the end result of this Commission's decision in establishing an
return on equity must allow Nevada Power the opportunity to earn a return on
equity that is: (1) commensurate with returns on investments in other firms
having corresponding risks, (2) sufficient to assure confidence in the company's
financial integrity, and (3) sufficient to maintain the company's
creditworthiness and ability to attract capital on reasonable terms.
In making any factual determination the Commission must weigh the
reliable, probative and substantial evidence on the whole record. NRSss.703.373.
Kelly McClanahan v. Raley's Inc., 117 Nev.Adv.Op.No. 75, 34 P.3d 573 (2001),
citing Bally's Grand Hotel & Casino v. Reeves, 113 Nev. 926, 948 P.2d 1200
(1997). The Nevada Supreme Court has defined substantial evidence as "that
quantity and quality of evidence which a reasonable person could accept as
adequate to support a conclusion." Barrick Goldstrike Mine v. Peterson, 2 P.3d
850 (2000), citing State Employment Security v. Hilton Hotels, 102 Nev. 606, 729
P.2d 497 (1986).
Before weighing the evidence of record, then, the Commission must first
determine what evidence meets the threshold of reliability, probativity and
quality sufficient for a reasonable person to accept as adequate to support a
conclusion. In making its determination regarding return on equity, the
Commission erred in relying to any degree on
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the testimony of MGM/Mirage's witness Thornton. Mr. Thornton's analysis and
recommendations are so outside the range of reasonableness as to be laughable,
and should have been wholly disregarded by the Commission prior to the weighing
of the evidence of record. In addition, Mr. Knecht based his analysis on a
sample including all regulated utilities everywhere in the country. Mr. Knecht's
analysis is contrary to the tenants of Hope and Bluefield, which require
comparability between the sample and the target utility based on geographic
location, similar business undertakings and risks and uncertainties. Nevada
Power requests that in light of the law governing the establishment of an
adequate return on equity and the record in this proceeding, the Commission
reconsiders its decision setting Nevada Power's return on equity at just 10.1.
Nevada Power respectfully requests that after such review the Commission modify
its findings to reject Mr. Thornton's analysis as being outside the range of
reasonableness, and to reject Mr. Knecht eight-two company DCF sample as being
contrary to Hope and Bluefield, and reset Nevada Power's return on equity based
accordingly.
CONCLUSION
WHEREFORE, Nevada Power requests that the Commission reconsider its
March 29, 2002 final order in the above-docketed matter and issue an order on
reconsideration:
1) Correcting the calculation of the three-year amortization of the
balance of SO2 Allowances of $9,569 million from $5.221 million to $3,189,667.
2) Rejecting the adjustment for "excess" capital investment related to
common facilities at the Harry Allen generating station as being contrary to a
prior stipulation and Commission Orders regarding the recovery of costs incurred
in constructing phase one of the Harry Allen site.
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3) Rejecting the adjustment to accumulated depreciation reserves
related to the establishment of revised depreciation rates for transmission,
distribution and common facilities as being contrary to the regulation providing
for implementation of revised depreciation rates within twelve months of the
issuance of a final order revising depreciation rates.
4) Establishing the methodology or methodologies favored and disfavored
by the Commission that Nevada Power should employ in its future demonstration
that merger savings exceed merger costs, and allowing for the calculation of a
carrying charge on the deferred balance for merger costs in order to compensate
investors for the burden of paying for merger savings while ratepayers receive
all of the benefit of merger savings.
5) Establishing a level of cash working capital other than zero that
reflects Nevada Power's needs for cash working capital.
6) Rejecting the testimony of witness Thornton as being outside the
range of reasonableness and discounting the testimony of witness Knecht as being
contrary to the requirements of comparability demanded by the Supreme Court in
the Hope and Bluefield decisions, and establishing a return on equity consistent
with the law and the reliable, probative and substantial evidence of the whole
record.
Respectfully submitted this 15th day of April, 2002.
NEVADA POWER COMPANY
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Elizabeth Elliot
Associate General Counsel
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