The nation is entering a major transition for electric utilities from a monopoly market to a partially deregulated competitive market. The change marks a shift in the national philosophy of utility regulation is spurring extensive restructuring of the industry into generating, marketing, transmission and distribution companies. Decisions at the federal level have set the stage for this transition and determinations on the timing and form of competitive markets have initially been left to the states.

Restructuring and establishment of new competitive markets at the federal level and in many states has been driven by a range of factors including dissatisfaction with the ability of state regulators to control costs, demands of large customers for price reductions, opportunities and potential benefits of new technologies, and the emergence of new suppliers and competitors.

In 1996, the Nebraska Legislature referred Legislative Resolution 455 to the Natural Resources Committee. It outlined a two-phase study to examine issues related to competition and restructure of the electric utility industry and the possible effects on the state. The Natural Resources Committee established a ten-member Task Force and engaged a project manager to direct research and a facilitator to oversee a public process. The Natural Resources Committee also established a 41-member Advisory Group made up of individuals representing a wide range of interests in the state including consumer advocates, environmentalists, labor and business representatives, electric industry leaders, and legislators. The Task Force met monthly to coordinate its efforts and to discuss details of its research with the Advisory Group and to solicit their suggestions and recommendations.

Phase I of the study, which was completed in December 1997, produced a report that examines the history and current status of Nebraska's electric industry. It provides a comprehensive overview of the structure, governance, operations, financing and comparative effectiveness and efficiency of Nebraska's consumer-owned systems.

Phase II of the study examines the transition taking place in the industry nationwide and events at the federal level and in other states related to possible impacts and options for Nebraska's electric industry.

The purpose of Phase II as outlined by the Legislature is: To provide a comprehensive overview of the completed and anticipated developments in wholesale and retail electric competition, including FERC activity, utility mergers, PUC and legislative activities in other states, federal regulatory and congressional initiatives; and an evaluation of the potential effects of these developments on the consumer-owned electric industry in Nebraska.

The Task Force conducted policy research and data collection and analysis for Phase II concerning events and conditions in other states, within the region, and in Nebraska. The Task Force also worked extensively with the Advisory Group. In addition to monthly meetings, the Advisory Group divided into seven topic groups coordinated by Task Force members. During a 10 month period these topic groups engaged in Critical Path discussions on key questions related to competition and restructuring of the electric industry in Nebraska and reported back to the Advisory Group. The information and perspectives shared in this process have helped to establish a firm base among major stakeholders for future policy discussions and determinations.

The Phase II Draft Report includes the research, findings and recommendations of the Task Force, as well as the positions and perspectives of the Advisory Group. While it represents a general consensus of the Task Force, it contains varying positions on specific issues.

The primary finding is that Nebraska faces a very different situation than most other states. While many other states engaged in electric industry restructuring are attempting to reduce high power costs, Nebraska faces a challenge of how to maintain its low power costs. And while other states are revamping state regulation of the industry and private utilities, Nebraska's electric systems are locally-directed, consumer-owned operations providing service at cost in a comparatively efficient manner.

Proponents of retail competition and industry restructuring reason that competitive forces could spark innovation in services, technology, and savings for consumers. However, economic benefits remain the bottom line, and for a low-cost state such as Nebraska a transition to retail competition could raise, rather than reduce power costs.

Each state must evaluate the costs and benefits of a transition to a competitive retail market based upon its own unique conditions, and establish plans based upon those conditions.

For Nebraska, expanded wholesale competition and changes in transmission networks may be accommodated by the current structure. Modification of the distribution systems may also take place to enhance efficiencies. However, to establish retail competition, the structure, principles, and operations of Nebraska's consumer-owned systems would have to be altered significantly to move from non-profit, cost-based delivery of services to a selective transactional market with market-based pricing. Economic benefits would need to be assured to justify a transition.

The report recognizes that the industry, technology, and markets will continue to evolve and that current low-cost conditions may change. Pressures to implement a transition could arise from other utilities in the region that Nebraska's electric systems are interconnected with through a regional power grid; changes in federal requirements; changes in regional markets; and the desire of some customer segments and competitive suppliers in Nebraska. The possibility of changing conditions requires that the state examine and address the transformation taking place. Proposed federal legislation would require all states to restructure their electric utilities and establish retail competition by a date certain, unless the state has developed its own plan through a public process.

Based on these recognitions, the draft report provides a planning framework for Nebraska centered on a "condition certain" approach to retail competition. This approach requires that specific preconditions in structure and the market be in place when, and if, a

transition to retail competition is to be made for Nebraska's electric industry. The planning framework also acknowledges the importance of local control and allows each individual electric system to choose whether or not to participate once the general conditions have been met.

Chapter One

Chapter One introduces background on electric industry competition and restructuring. It looks at the experience of deregulation of other industries such as natural gas, airlines and telecommunications in Nebraska. It reviews electric industry restructuring in other nations and proposals to restructure the industry in the U.S. The chapter notes that Nebraska has an opportunity to develop a plan to address competition and restructuring based on its own unique conditions.

Chapter Two

This chapter reviews activity to establish wholesale and retail competition in other states. It looks at experience in states that have established retail markets and at preconditions for market and key issues being addressed by other states. The chapter also examines market transformation that is occurring with a focus on merger activity of significance to Nebraska. It concludes with a review of the pressures that may face Nebraska from neighboring states, regional agencies, and federal agencies.

Chapter Three

Chapter Three addresses fundamental issues of retail competition, consumer choice and consumer protections specific to conditions in Nebraska. It examines wholesale supply pricing and other preconditions for retail competition. It outlines the interest of Nebraska consumers in "customer choice" and the regulatory structure and rules needed for consumer education and protection. It also offers the views and recommendations of the Advisory Group and the Task Force. In summary, the chapter outlines consumer-related elements that need to be in place if retail competition is to be established in the state.

Chapter Four

This chapter introduces the three structural models utilized in this study to examine the possible scope of change and the relative benefits or impacts associated with introducing retail competition and undertaking restructure of Nebraska's electric industry. The three models are modified Current Structure, Limited Access, and Open Access. The chapter examines the distribution, transmission, and generation functions of each model and the key questions that arise from each model. It also outlines potential impacts related to each model. These are discussed in greater depth in later chapters.

Chapter Five

This chapter examines the impacts of electric industry restructuring and formation of competitive markets on existing utility structure and operations in Nebraska. It outlines the key issues and options related to structure and operations. It provides an assessment of the types of changes that would be required in Nebraska for variations in the industry structure and its operations. This chapter addresses a broad range of restructuring and competition issues related to structure and operations, and takes up divestiture of generating plants and distribution systems as one of the possible elements of restructuring. Other studies could focus on divestiture alone, however, this report addresses it only as one option in the general context of restructuring and competition. The chapter closes with a description of Advisory Group positions on key issues and options and recommendations of the Task Force.

Chapter Six

Chapter Six provides context for the consideration of issues related to the environment, energy efficiency and renewable energy. Specifically, it discusses: the key environmental issues resulting from electric utility operations; the likely impact of electric utility restructuring on the economics that drive utility generating plant decisions; and mechanisms considered in other states to maintain and advance environmental protection, energy efficiency and renewable energy development. It includes recommendations on the mechanisms to be considered for Nebraska.

Chapter Seven

Chapter Seven focuses on changes in Nebraska's framework of law, governance, regulation and taxation related to retail competition. It contains an examination of the different ownership and governance constructs for Nebraska consumer-owned systems and electric utilities operating in other states. It includes a discussion of the state constitutional provisions and statutes relating to power suppliers in Nebraska and changes that would be needed if the state's policy-makers decided to proceed with retail competition and restructuring of the industry. It also includes an extensive discussion of tax law and methods to preserve tax revenue streams.

Nebraska's current law, governance, regulation and taxation provide a framework for consumer-owned systems to operate as non-profit monopolies. Accommodation of an expanded wholesale power supply market and transmission reorganization in the region can occur with relatively few changes. Establishment of retail competition, however, would require a comprehensive revision of this framework.

Chapter Eight

Chapter Eight examines issues related to the existing costs and benefits of the current structure of Nebraska's electric industry, and the potential costs and benefits for restructuring of the industry to establish retail competition. While a precise comparison of costs and benefits is

beyond the scope of this study, it is possible to illustrate the types and the relative magnitude of comparative costs and benefits to provide perspective for policy determinations.

The chapter begins with an examination of wholesale power costs and an illustration of the comparative costs and benefits of Nebraska's current utility system. It then provides an extensive examination of transition costs. It is significant to note that while there is a potential for stranded cost on two generating plants, on a statewide basis Nebraska has no net stranded cost; a measure of the efficiency of the state's consumer-owned systems. The chapter also includes discussion of tax revenues and methods of collection in a system of retail competition. It concludes with a summary of recommendations.

Chapter Nine

Chapter Nine summarizes recommendations contained in preceding chapters and offers a planning framework for Nebraska. It reviews the public policy issues that have been raised and options for addressing those issues. It outlines the public process utilized in other states to make determinations and offers recommendations on public process for Nebraska. The chapter then describes a three-part "condition-certain" framework as an alternative to "date-certain" plans that have presented problems in other states. The "condition-certain" framework does not mandate retail competition, but prepares for state and local implementation of retail competition if preconditions are in place and benefits of a competitive retail market are assured. The "condition-certain" framework is recommended to be developed through two pieces of legislation: 1) Initial Legislation that would establish necessary planning authority and resources and prepare rules, standards and protocols; 2) Implementation Legislation that would establish a structure for retail competition once preconditions have been met and functional rules and structure are prepared. In recognizing the significance of local control, each municipal system, public power district, or rural electric cooperative would have the opportunity to opt into the competitive retail market through its own public process.

Chapter Ten

This chapter contains a summary of the key points and recommendations from each chapter.

The Draft Report also includes a Glossary of terms related to electric industry restructuring and competitive markets.