CHAPTER TEN: SUMMARY OF KEY POINTS AND RECOMMENDATIONS
The key summary points and recommendations contained in each chapter are noted below:
Background on Electric Industry Competition and Restructuring
- Passage of the Energy Policy Act of 1992 and actions
by the Federal Energy Regulatory Commission have set the stage for a
transformation of the nation's electric industry.
- States with high electric rates have taken early
aggressive action in the belief that competition will reduce costs and rates
where regulation has failed. Low-cost states have expressed concern that their
costs may rise as a result of competition.
- Nebraska has long been recognized as having among the lowest-electric
rates in the nation.
- Although one may debate whether any change is
warranted for Nebraska, pressures make it prudent for the state to examine and
address the transformation taking place.
- In considering the future of Nebraska's electric
utilities, it is important for policy-makers and citizens to understand the
context and key issues concerning deregulation and restructuring of key
- Electric industry restructuring is being driven by large industrial and
commercial consumers, and competitive suppliers; and facilitated by advances
in technology, opportunities for lower prices, and the prevailing philosophy
to deregulate service key industries.
- Proponents of electric industry restructuring and competition believe that
costs can be reduced, new services provided, and technology advanced to
- Deregulation and restructuring of the electric industry is following
deregulation and restructuring of other infrastructure industries in the US.
- Deregulation in other industries has shown mixed results with some
industries showing lower costs and more choices for consumers, while other
markets show loss of service and higher rates.
- Deregulation and restructuring of the electric industry in other nations,
largely nationalized industries moving to private ownership, provide limited
lessons for the U.S.
- Proposed changes at the federal level to deregulate and restructure the
U.S. industry for competitive retail markets could include a mandate with a
fixed start date, in addition FERC and regional market pressures may encourage
change in Nebraska.
- Nebraska has an opportunity to develop a plan based on its own conditions
and experience to address pressures arising at the state, regional and federal
Electric Industry Restructuring in Other States
- All states are facing major changes in the electric
industry, even without state legislation or rules for competition being passed
- Nineteen states have enacted legislation to establish
retail competition; three states have issued comprehensive regulatory orders;
four states have pending legislative or commission orders; twenty-four states
and the District of Columbia are studying restructuring and formation of
competitive retail markets; five states have undertaken little preliminary
action to date.
- The states which had opened markets for retail
competition by June 1, 1999 showed opportunities for large customers, but
difficulty in creating market conditions that allow small commercial and
residential customers to be served. The market has also been characterized by
private deal-making and non-transparent pricing which prevent market forces
from functioning effectively.
- Early common problems in the open-market states indicate certain key
issues must be fully addressed and certain preconditions should be met before
undertaking retail competition aimed at benefiting all consumers.
- Major mergers and extensive structural change is occurring in the
industry, even in states which have not passed legislation or regulatory
- For Nebraska several major mergers in surrounding states could affect
wholesale markets and increase the pressure to initiate retail competition
- New business structures, alliances and multiple service providers are
under consideration or forming
- Electric utilities in Nebraska and neighboring states will all engage in
an expanded wholesale power supply market, but no determination has yet been
in Iowa, Kansas, South Dakota, Wyoming, or Colorado to establish retail
- While states are taking varied approaches, common problems are apparent
both in wholesale and retail markets. It is essential that preconditions be
met in structure and market conditions prior to Nebraska systems making a
transition to retail competition.These conditions include: a fully functioning
ISO and mature wholesale market, business transaction and consumer protection
rules, market pricing that indicates savings on power costs significant enough
to offset costs of the transition; a safety net in place to assure that no
consumers suffer net harm from the transition.
Retail Competition Customer Choice and Consumer Protection
- Conditions in Nebraska differ significantly from
those of other states that are moving to establish retail competition. a)
Retail competition offers an alternative to state regulation of energy pricing
for private utilities; Nebraska systems are locally-controlled, and deliver
electricity as a non-profit service at-cost. b) Nebraska's wholesale power
market delivers electricity to local electric systems at a cost lower than the
surrounding region, moving to a regional market could cause these power costs
to rise, not decline.
- Surveys of consumers indicate a certain amount of
interest in retail competition in Nebraska.
- The concept of "customer choice" and the freedom it
implies has substantial appeal to consumers, but due to practical matters of
high transaction costs and low profit margins "choice" and competitive access
for small consumers remains an unrealized goal. This would affect more than
700,000 of Nebraska's 835,000 metered electric consumers.
- Nationally, electric, natural gas, and
telecommunications utilities are moving rapidly to transform themselves into
delivery companies that offer customers a range of services in combination
with electric energy.
- Consumers appear to be most interested at this point
in their electric supplier's core business, and not additional, unrelated
- The market can be expected to move in advance of, and
in some cases pre-empt, policy-making. In view of this fact, a proper
structure is more important than behavioral rules to assure benefits of both
wholesale and retail competitive markets.
- For Nebraska, local utility boards have maintained
the role of developing and implementing consumer protection policies based
upon established principles of consumer-owned systems. Application of these
policies may vary among local systems.
- In a competitive retail market, statewide standards
and policies would be needed, including a uniform "Consumer Bill of Rights."
- Designation and development of a statewide regulatory
body to augment the functions of local government will be essential.
- Participation in retail competition should not be
mandated, but local systems should be able to opt in through a public process at the local level.
Three Models to Address Nebraska Key Issues and Potential Impacts
- The current structure of the industry is based on 170
entities providing wholesale and retail service through voluntary coordinating
bodies, associations, and contractual relationships: 121 municipal systems; 31
rural power districts; 15 rural cooperatives, 1 public power and irrigation
districts, 1 municipal joint action agency and 1 federal power agency.
- Potential impacts and changes for the industry can be
assessed by looking at three alternative models: a) a Modified Current
Structure; b) Limited Access for Competition; c) Open Access for Competition.
- The Modified Current Structure can enhance the
current structure to create greater efficiencies and prepare for pressures of
competition. Wholesale power supply level changes include a functioning ISO, a
Nebraska Power Tranaction Center, and Nebraska Generation Cooperative Company.
Retail level functions could remain largely unchanged, but retail structure
could face mergers, alliances, or divesture.
- The Limited Access Structure could also include the
wholesale level changes in the Modified Current Structure, but would allow
retail competition for a set of customers qualified by certain characteristics
or phasing of the market. Limited Access allows for a managed approach to
competition, but may only be a transitional step to Open Access.
- The Open Access Structure requires the most
significant change from the Current Structure. The same wholesale level
changes could apply, and at the retail level any customer could theoretically
have access to a competitive supplier. States utilizing an Open Access form have required divestiture of generating assets to assure fair competition. Open Access, as well as Limited Access would create a need for a statewide regulatory system, and would alter the principles of operation for the Nebraska systems, if they were to engage in the competitive retail market.
Changes and Impacts on Industry Structure and Operations
- A determining factor for the development of any
option, will be the extent to which Nebraska systems work together to achieve
efficiencies in generation, transmission and distribution. If they do not work
closely together, market pressures and attraction of alliances with other
entities could undermine the cooperative relationships and contracts under
which they currently operate.
- The overriding issues that face Nebraska systems are:
a) how best to accommodate expanded competition at the wholesale level to
benefit Nebraska consumers; b) whether extensive changes at the retail level
for competition would produce greater efficiencies, more reliable service,
reduced costs, and adequate protection for consumers; or minimal changes in
the existing structure will achieve the same or greater benefits.
- Both economic and non-economic criteria need to be
applied to evaluation of options. Economic criteria includes start-up and
on-going costs for new regulation and other functions. Non-economic criteria
includes risk, environmental, workforce, and equity issues.
- For the wholesale power supply level, the
Task Force recommends methods to retain low cost wholesale power including
examination of a Nebraska Power Transction Center, a Nebraska Generation
Cooperative Company, and mandatory participation in joint planning of
generation. Additionally, the Task Force recommends on-going examination of
the role of distributed generation and renewable energy resources.
- At the Transmission level, the Task Force recommends:
continued participation of transmission-owning systems in efforts to form a
regional ISO, and also examination of a Nebraska Transmission Organization,
and regional public power and consumer-owned ISO, as well as other methods to
create greater efficiency for Nebraska's transmission network.
- In terms of Regulation, the Task Force recommends
that initial legislation be developed that includes the Nebraska Power Review
Board as the initial regulatory body to coordinate work groups and hold
hearings regarding proposed rules, standards, protocols, studies, and other
preparatory work. The Power Review Board should also participate in national
dialogue (i.e. FERC and NARUC) on transmissin regulation. The Task Force also
recommends that the role of the ultimate statewide regulatory body to be
authorized in implementation legislation (not necessarily the Power Review
Board) augment the traditional roles of local boards overseeing delivery of
electric service to consumers.
- At the Distribution Level, the Task Force recommends
modification of the Current Structure to enhance system operations and to
prepare for the pressures of retail competition. Mergers and alliances should
be voluntary, but incentives and criteria should be developed by the state.
Divestiture should be assessed on a similar case-by case basis, using an
income-based valuation methodology and criteria established by the state.
Divestiture to another consumer-owned entity might be considered preferential
to retain consumer equity and consumer control of facilities. However, any
divestiture meeting necessary criteria should be allowed.
- With specific incentives and criteria in place, laws
and regulations could be changed to allow greater equity and latitude of
business relationships and services by local distribution systems. This would
allow all Nebraska consumers to receive benefits of multi-service packages
that include electricity.
- The Task Force recommends that a transition to retail
competition should be undertaken only when preconditions are in place, and
benefits offset transition and transaction costs. Each local system should be
allowed to make a determination on whether to opt-in through its own public
process. Competive retail systems may be required to functionally separate
distribution, transmission and generation operations.
- Provisions need to be made in any transition to
assure stability and security for Nebraska's utility workforce to assure
reliability and safety of the electric delivery systems.
- On-going attention is needed for technology research
and development. Distributed generation is a particularly important element.
The potential for distributed generation must be given thorough consideration in long-term plans for restructuring the electric industry in Nebraska.
Impacts on the Environment, Energy Efficiency, and Renewable Energy
- Changes to competitive retail market systems could
have impacts on the environment and energy efficiency and renewable energy
- A competitive retail market could also have possible
environmental impacts on air emissions, water quality and management of water
- Environmental impacts driven largely by economics of
generation and could be affected by shift to low-cost generation and
full-throttle operation of plants. Size and flexibility of units, capital
costs, financing costs and federal hydro power policies need to be considered.
- Several mechanisms for environmental protection: a)
Environmental externalities must be considered in a shift to competitive
market and could be addressed by emissions and fuel taxes; b) Portfolio
standards; c) Choice for Clean Energy and Green Pricing; d) Surcharges or
- Care needs to be taken in formulation of
environmental policies to address competitive issues with surrounding states:
a) possible adverse impacts of more stringent regulation/standards; b) impacts
on interstate economic competition
- Platte River issues need to be addressed including
possibility that value of power generated may no longer be sufficient to cover
total costs of providing environmental and other public benefits. One possible
solution is an increase in fees or new fees for benefits and services.
- In a highly competitive market some DSM programs may
decline due to cost, however, price volatility may create greater interest in
certain programs. Specific programs could be expanded as part of marketing
- The trend toward an increased number of identified
fixed costs components in utility bills may provide consumers with less
incentive to take energy efficiency actions.
- Legislative solutions rather than individual LDC
solutions are needed
- The Task Force recommends that these items be
considered: a) minimum portfolio standards; b) green pricing to support choice
of clean energy and green energy; c) consumer contribution programs for renewable energy projects; d) standards should be set to define green power and green pricing; e) a consumer charge to cover public benefits programs; f) consumer disclosure (label); g) net billing.
Changes and Impacts on Law, Governance, Regulation and
- Electricity is provided at retail in Nebraska by
three distinct entities: municipal electric systems, public power districts,
and rural electric cooperatives. While the organizational control of these
entities is locally based, all are subject to the statutory authority of the
- With the exception of service territory issues and
construction of major generation and transmission facilities, state regulation
has a limited role in Nebraska's electric industry.
- Public power districts and municipal systems are
subject to strict statutory mandates regarding open meetings and maintenance
of public records. Such requirements do not apply to investor-owned electric
- In a competitive retail market, the differences
between consumer-owned and investor-owned electric systems would need to be
addressed to prevent investor-owned utilities from gaining competitive
advantages. To avoid the appearance of conflict of interest, public officials
who serve on elected statewide regulatory bodies would need to be prohibited
from accepting political contributions of any kind from the entities subject
to the jurisdiction of the agency on which they seek to serve or from the
employees or directors of such entities.
- Modification of the Current Structure, including
mergers, divestiture, or establishment of new cooperative or public power
entities, would need to examine governance issues to assure adequate consumer
representation, access and input to decision-making. Statutory changes should
be made to facilitate mergers and consolidations, conversions of power
districts to cooperatives, and to allow more public/private partnerships.
Changes are also needed to allow transfer of the generation assets of public
power districts and municipalities to a generating cooperative and to allow
the sale of power district property to private companies in a manner similar
to that applying to municipal and cooperative systems.
- Public power entities in Nebraska are considered
"non-jurisdictional" under strict reading of federal definitions. They are not
by definition "public utilities" subject to the jurisdiction of the Federal
Energy Regulatory Commission (FERC) although legislation pending in Congress
would expand FERC's authority to cover all transmission-owning entities.
Changes in state statutes are needed to allow the state's transmission-owning
utilities to join RTOs or turn operation of their systems to some sort of
independent system operator.
- In the event that an open access competitive model is
implemented in Nebraska, the state will need to enhance the role of a
statewide regulatory agency to oversee and enforce market rules. This agency
will need additional staff and resources to perform its functions. During the
interim period, the Power Review Board should be the lead agency to coordinate
development of necessary rules, standards, protocols, consumer protection, and
- Public power districts and municipal systems are
subject to "Dillon's Rule" . which is a rule of statutory construction that
generally provides that political subdivisions of the state are functionally
limited to those activities expressly specified in their enabling statutes.
Investor owned electric utilities are not subject to this rule and may engage
in any lawful business consistent with its corporate articles. Statutory
changes are needed to achieve more parity in products and services that can be
provided by the state's power suppliers under the existing structure, at least
between municipal systems, power districts, and chapter 70 cooperatives. In
addition, a constitutional amendment is needed to give public power districts
the ability to provide economic development assistance on a par with
municipalities and cooperatives.
- Current law generally provides that public power
entities must have retail rates that are, "fair, reasonable, and
non-discriminatory." Concern has been raised that that an open access
competitive model would result in discriminatory pricing practices in
violation of this mandate.
- Certain advertising efforts by public power entities
are potentially controversial while investor-owned utilities may spend
virtually any sum deemed appropriate by management.
- Electric utilities represent a major source of
revenue to federal, state and local governments. Many of today's tax laws were
enacted under the assumption that electricity would be provided primarily by
utilities operating on a monopoly basis with price set by cost of service rate
- Competition and nontraditional regulation ultimately
may preclude the simple pass-through to ratepayers of a utility's tax burden.
Consequently, these changes bring pressure upon regulators, legislative bodies
and electric utilities to evaluate tax costs.
- State laws would need to be revised in a manner
consistent with federal law that preserves existing tax revenues while not
giving any competitive advantage to any group of electric energy providers.
- The Task Force recommends that Nebraska adopt
revenue-neutral impacts as a minimum policy guideline.
- The Task Force recommends discussions with
neighboring state governments and state government associations to develop
alternatives that avoid interstate conflicts.
- The Task Force recommends facilitated resolution of
the private use issue.
- Nebraska's current law, governance, regulation and
taxation currently 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.
- Just as Nebraska' s framework for law, governance,
regulation and taxation support a monopoly structure of consumer-owned
systems, the economic underpinning of the Nebraska systems is aimed at
non-profit delivery of electricity. While a range of benefits that include
local control, consumer equity, stability in pricing and costs, and
integration with local planning may be considered among the benefits of
consumer-owned systems, the bottom line is the price of service delivery.
- Nebraska's electric systems currently provide among the lowest electric rates in the nation. As discussed in Chapter 3, the state's comparative position in terms of electric prices remained the same from 1995 though 1997. The average retail price for Nebraska's commercial consumers was the 6th lowest in the nation (5.46 cents/kilowatt hour); industrial consumers were the 7th lowest (3.61 cents/kilowatt hour); residential consumers were the 9th lowest (6.38 cents per
- Proponents of competitive retail markets reason that
competition can bring about cost reductions and innovation in technology and
services. While this reasoning may apply effectively to high-cost states, it
does not address Nebraska's current low-cost situation.
- The policy conclusion that may be drawn from an
initial cost/benefit illustration is that retail competition cannot assure
savings for the majority of Nebraska consumers until a substantial and
decisive shift has occurred in the relative wholesale power costs of Nebraska
and the region.
- As recommended in Chapter 5, efforts should be
undertaken by the Nebraska systems to maintain low wholesale power costs.
Current and anticipated wholesale power costs compared to those of the region
should be monitored on a regular basis. If efforts to maintain low wholesale
power costs fail and cost differentials are evident for an extended period of
time, resulting in necessary offsets and potential benefits from retail
competition, implementation of retail competition might be undertaken. If
retail competition is to be implemented, detailed cost/benefit analyses
weighing both economic and non-economic criteria would need to be assessed to
allow a local system determination of whether or not to participate.
- The cost/benefit or "threshold" analyses would need
to be conducted with an examination of all transition and transaction costs.
This requires understanding of the methods of valuation and recovery of
transition costs and tax revenues in a manner that would protect Nebraska.
Transition costs are comprised of stranded costs, start-up costs and on-going
- There is a potential for stranded costs on Nebraska.
s two nuclear generating units. If stranded costs are calculated on a
system-wide basis, the benefits of lower cost generation will help offset
higher cost generation.
- Time is an important factor in mitigating stranded
- In order to honor the debt obligations of Nebraska's
consumer-owned electric utilities, any stranded costs on nuclear facilities
should be recovered through the end of the plant's current operating license.
- Transmission assets associated with stranded
generation assets should have stranded cost recovery to the extent those
assets cannot be re-utilized elsewhere in the transmission and delivery
- Purchased power contracts existing at the effective
date of retail choice legislation in Nebraska should be honored for the life
of the contract.
- The costs of any stranded fuel and/or fuel
transportation contracts should be handled in the same manner as the
associated generation. Start-up and on-going costs are incremental to current
costs and should be recovered from consumers in a choice environment.
- The primary policy principle for Nebraska would need
to be assured, equitable gains for all consumers, and revenue-neutral or
net-neutral impacts from the costs of a transition. This principle would need
to be applied to the range of potential impacts that may include wholesale
power costs, impact on Nebraska utility revenue, tax impacts on local and
state government and other related areas.
- Nebraska should use a bottom-up, ex ante (before the
fact) administrative approach to initially quantify and collect stranded
costs. Actual stranded costs should be based on the bottom-up, ex post (after
the fact) administrative approach using actual competitive market conditions
and a true-up mechanism to reconcile the amounts previously collected under
the ex ante estimate.Nebraska's utilities should mitigate stranded costs to
the extent possible before retail competition begins.
- Certain existing benefits will be stranded as a
result of retail choice. These benefits will have to be recovered through user
or access fees.
- Stranded costs should be analyzed on a
system-by-system basis and considered for unit- by-unit analysis if other
states are implementing such cost recovery. This would involve a quantitative
study, which would include estimates of market price of energy, the date when
retail competition would begin, discount rates and numerous other factors. The
Task Force recommends that such a quantitative study be conducted under the
auspices of the Nebraska Legislature and Nebraska Power Review Board as part
- Stranded costs, start-up costs, and on-going costs
should be recovered from all consumers in a retail competition environment.
- Transition cost recovery should be made with
non-bypassable access or user fees as appropriate.
- Tax policy problems are especially difficult for
local governments, which have relied heavily on tax revenues from electric
utilities located within their jurisdictions, because these governments have
only limited sources of other revenue available to them. It is possible that
targeted state aid may be the only effective means of assisting certain local
governments with especially severe exposure to tax revenue losses.
- The general consensus is that state laws would need
to be revised to preserve existing tax revenues while not giving any
competitive advantage to any group of electric energy providers.
- Nebraska's general tax policy should result in
revenue neutral impacts to taxing entities in a retail choice environment.
- An estimate of total costs for transition to retail
choice in Nebraska should be made and compared to experience of other states
to determine the credibility of energy price changes published in recent national studies.
Public Process and Timing Considerations
- In view of the fact that technology, market
conditions, and policy will continue to evolve, and the federal government may
issue some form of mandate for competition, the Task Force has recommended
that Nebraska's public policy framework be developed first around a priority
to maintain low wholesale power costs; second to enhance the operation of the
Nebraska systems; and third, to prepare for retail competition on a
conditional basis. This approach provides both flexibility and security for
- Other states have undertaken efforts with a
"date-certain" approach. This has resulted in the competitive market opening
prior to functioning ISOs being in place, prior to adequate transaction rules
being in place, and prior to market pricing at levels at which all consumers
might benefit. The result has been the formation of niche markets for large
customers, while all consumers must pay the costs of the transition.
Disaggregation of local loads through niche markets and "cherry-picking" could
delay the opportunity for all consumers to participate.
- The recommended condition-certain policy framework
allows Nebraska to address its own unique conditions. It does not mandate
retail competition, but provides a step-by-step public process to assess and
adopt retail competition should that market form offer assured benefits and
protections for all Nebraska consumers.
- The "condition-certain" framework requires that a definitive and sustained shift in regional market prices have taken place to provide an offset to transition and transaction costs for Nebraska consumers. It also requires several market and structural preconditions:
- Regional ISO/Transco in place;
- Viable Wholesale Market in place;
- Retail Rates Unbundled;
- Statewide Regulatory Agency in place (including
several subpoints for rules for certification of suppliers, rules and
electronic business systems for transactions, consumer protection rules,
consumer education, green power standards, public benefits rules and
standards, determinations on methodologies for stranded cost quantification
and recovery, rules for access pricing;
- Legislative provisions and processes for
revenue-neutral impacts on state and local tax revenues in place;
- Follow-on studies completed (Generation Cooperative,
Transmission Efficiencies, Threshold Benefits Study)
- Opt-In by Local Systems.
- While timing of the Initial Legislation is at the discretion of the Unicameral, consideration should be given to the opportunity that currently exists prior to a possible federal mandate, and in view of the competitive markets forming for other "wires" and energy-related services in the state. Consideration may also be given to the possibility that early action could assist with modification and enhancement of the current structure of the industry and assure that Nebraskans continue to enjoy low-cost power resources.