III. Sierra's Initial Application

In its initial application, Sierra explains that it is in the process of divesting all of its electric generating facilities located in the State of Nevada as a result of a series of orders from the PUCN. In a 1998 order, the PUCN conditioned its approval of the merger of Sierra Pacific Resources (Sierra's parent company) and NPC on the divestiture of the companies' generation assets, as specified in a plan of divestiture filed with the PUCN.³ In a February 2000 order, the PUCN approved a generation divestiture plan that among other things, prevents Sierra, its parent or NPC, and any of their affiliates from participating as potential buyers in the divestiture process.⁴

Sierra states that it is divesting its electric generation assets through an auction process, similar to the auctions performed by the three large electric utilities in California. Sierra will auction nine separate fossil fuel facilities that consist of 1076 megawatts (MW) of generating capacity. All the plants are located in the State of Nevada. The auction is designed to: (i) maximize the total value of the asset bundles offered for sale, (ii) enable and enhance competition in the generation market in Nevada, (iii) ensure the sale process is unbiased, timely and efficient, (iv) ensure fair treatment of affected employees, (v) maintain electric system reliability, and (vi) maintain provider of last resort service through various "transition power purchase contracts," as explained further in Section V below.

Sierra states that its affiliates will not be participating in the auction. The auction is already underway and once the appropriate approvals are obtained, Sierra anticipates closing any transactions and transferring plant ownership in the fourth quarter of 2000 through June 2001. Finally, Sierra proposes that the Commission review the accounting for the proceeds from the auction in a separate ratemaking proceeding once the divestiture is complete.

The application notes that Sierra owns two diesel generating stations located in California, which together produce approximately 5 MW of load. Sierra will retain these units to support the reliability of its distribution system. In addition, Sierra's four hydroelectric plants, with a total output of approximately 10 MW, are not included in the proposed auction but will be reallocated to Sierra's Water Department.

Sierra requests that the Commission exempt the auction and divestiture transactions from the provisions of Section 851 pursuant to its authority under Section 853(b) on the basis that the public interest does not necessitate application of Section 851.⁵ Sierra bases its exemption request on five arguments. First, Sierra notes that it operates primarily in Nevada, that less that 6% of the company's revenues are derived from California electric operations, and it is fully regulated by the PUCN. California operations, consisting of approximately 112 MW of load, are almost exclusively confined to the California side of Lake Tahoe.

Second, Sierra states that electric restructuring in Nevada, including divestiture of generating facilities, is proceeding under comprehensive 1997 legislation and the oversight of the PUCN and the Federal Energy Regulatory Commission (FERC). Sierra reminds the Commission of statements in a recent Commission order expressing a preference for relying on the regulatory approach adopted in a utility's dominant state for establishing market values for generation assets.⁶ The application points out that Nevada electric restructuring legislation deems generation a "potentially competitive service" thereby precluding Sierra from providing generation except through an affiliate once customers are allowed to obtain potentially competitive services from alternative sellers.⁷

Third, Sierra points out that the Commission has on at least two occasions exempted certain of Sierra's out-of-state generating facilities from regulatory scrutiny,⁸ although the Commission has allocated a portion of these plant investments to California rate base.

Fourth, Sierra states that because the company's California service area is served by a Nevada-based network and control area, what happens to customers in northern Nevada necessarily will happen to California customers. Sierra argues that since the PUCN and FERC will guard the interests of Nevada customers, the interests of Sierra's California customers will thereby be protected as well.

Fifth, Sierra argues that granting an exemption from Section 851 will not impinge on the Commission's ability to protect California ratepayers or implement AB 1890. Sierra posits that the Commission can protect California ratepayers through its authority to regulate Sierra's rates. Further, Sierra notes the requirements of AB 1890 which added Sections 362 and 363(a) to the Public Utilities Code⁹ and states that these obligations will be fulfilled through PUCN oversight and FERC approval of certain generation tariffs and "transition power purchase contracts" filed at FERC by Sierra. According to Sierra, a substantial portion of its generating plants are categorized as "must run" because they maintain transmission equipment within acceptable voltage limits and they protect against emergency overloads and system instability or collapse. To assure the availability of these power plants after divestiture, Sierra has proposed at FERC that these plants be subject to "must run" contracts and tariffs. Sierra contends that if FERC approves the must run contracts and tariffs, Section 362 will be satisfied. Moreover, Sierra claims that Section 363(a) is met since the auction requires the successful bidder to assume all obligations under applicable collective bargaining agreements.