NEBRASKA'S ELECTRIC UTILITY INDUSTRY Final Report Nebraska Legislature L.R. 455 Phase II Study December 1999 RIDLEY & ASSOCIATES, INC.

TRANSMITTAL LETTER L.R. 455 TASK FORCE CONTENTS

December 28, 1999

Senator Ed Schrock
Natural Resources Committee
Nebraska Legislature
District 38 P.O. Box 94604
Lincoln, Nebraska 68509-4604

Dear Senator Schrock:

It is with great pleasure that the L.R. 455 Task Force submits the Final Report of the Phase II Study to the Natural Resources Committee.

As requested by the Legislature, the report provides a comprehensive overview of the completed and anticipated developments in wholesale and retail electric competition. It includes reviews of Federal Energy Regulatory Commission activity, utility mergers, state regulatory and state legislative activities, and congressional initiatives. It offers an evaluation of the potential effects of these developments on the consumer-owned electric industry in Nebraska.

The primary findings show the nation is entering a major transition for electric utilities from a monopoly market to a partially deregulated competitive market. 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.

Each state must evaluate the costs and benefits of a transition to a competitive retail market based upon its own unique conditions. Nebraska faces a very different situation than other states in view of its low-cost power and non-profit service from locally-controlled, consumer-owned electric systems.

While states with high electric costs have taken the most aggressive action, Nebraska. s challenge is how to maintain its low power costs. A transition to retail competition without price justification or certain preconditions in place could raise, rather than reduce power costs.

The report finds that 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.

The report also finds that markets and technology will continue to evolve, and that current low-cost conditions may change. Pressures to implement a transition could arise at the federal and regional levels, as well as within the state.

The report offers recommendations and a policy framework to address issues of competition and electric industry restructuring. It outlines methods to retain low wholesale power costs, assure low-cost transmission access for all Nebraska electric

systems, and improve the operations of distribution systems. It also outlines the conditions necessary for consumers to benefit from retail competition and a process to prepare for and assess those conditions as the market and the industry evolve.

The report recommends a two-part legislative process. The first part would allow enhancement of the Nebraska systems and prepare for competition, and the second part would undertake a transition, if and when conditions warrant such a change. Should this transition be undertaken, consistent with the philosophy of local control, each individual consumer-owned electric system would have the ability to conduct a public process to determine whether or not to participate.

This "condition-certain" framework would constitute Nebraska. s unique plan to meet the changing conditions of the industry and provide flexibility and security for consumers.

We thank the Natural Resources Committee and the Legislature for its support and initiative in this effort and express our thanks to those who have contributed to the Phase II research and analysis.

On behalf of the Task Force,

Scott Ridley
Project Manager

Tim Anderson
Central Nebraska Public Power & Irrigation District

Jay Holmquist
Nebraska Rural Electric Association

Clint Johannes
Nebraska Electric Generation & Transmission Cooperative

Philip Euler
Lincoln Electric System

Chris Dibbern
Nebraska Municipal Power Pool

John McClure
Nebraska Public Power District

Ron Mortensen
Omaha Public Power District

Harry M. Trebing, Project Consultant
Charles Pallesen, Project Facilitator

Cline, Williams, Wright, Johnson & Oldfather
Scott Ridley, Project Manager
Ridley & Associates

Individuals who made significant contributions to the Phase II Report: Kate Allen, Scott Andrews, Mike Foley, Charlie Pape and Rich Kosch. Also of substantial assistance were the Nebraska Power Association Joint Planning Committee, Rates Committee, and Lawyers. Committee.

Written comments or questions regarding the Phase II Report should be submitted to: Charles Pallesen, Esq./ Cline Williams/ 1900 US Bank Building/ Lincoln, Nebraska/ 68508

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CONTENTS

• Introduction
• Background on Electric Industry Restructuring in the U.S.
• Deregulation of Other Infrastructure Industries in the U.S. 
• Restructuring of the Electric Industry in Other Nations
• Proposed Changes to Restructure the U.S. Electric Utility Industry

• Introduction
• Overview of Activity at the State Level
• Market Transformation and Mergers
• Pressures on Nebraska from Neighboring States, Regional Agencies, and Federal Agencies
• Summary

• Introduction
• Retail Competition
• Consumer Interest in Retail Competition and "Customer Choice" in Nebraska
• Combined or Multi-Services
• Realities of Retail Competition and Customer Choice for Electricity
• Designation and Development of a State Regulatory Body to Augment Local Control
• Advisory Group and Task Force Positions on Key Issues
• Summary of Key Points and Recommendations

• Introduction
• Current Structure of Nebraska's Electric Industry
• Overview of the Three Models
• Current Structure Model
• Modified Current Structure
• Limited Access Model
• Open Access Model
• Assessing Key Impacts or Issues under Each Model
• Summary

• Introduction
• Changes in Nebraska's Electric Industry
• Key Issues and Criteria for Evaluating Options
• Wholesale Power Supply Market
• Transmission
• Regulatory Changes and New Structure
• Distribution
• Distribution Options in a Competitive Retail Market
• General Structural Issues
• Conclusions and Recommendations of Topic Group and Advisory Group
• Summary of Key Points and Task Force Recommendations

• Introduction
• Potential Changes and Impacts on the Environment
• Potential Changes and Impacts on Energy Efficiency
• Potential Changes and Impacts on Renewable Energy
• Advisory Group and Task Force Positions
• Summary of Key Points and Recommendations

Chapter Seven: Changes and Impacts on Law, Governance, Regulation and Taxation

• Introduction
• Electric Industry Ownership and Control in Nebraska
• Existing Governance and Potential Changes Under Each of the Three Models
• Existing Regulation and Potential Changes
• Existing Law and Potential Changes
• Tax Law
• Advisory Group and Topic Group Summary
• Summary of Key Points and Recommendations

Chapter Eight: Cost/Benefit Considerations

• Introduction
• Baseline Costs and Benefits of Nebraska's Present Electric Industry
• Anticipated Wholesale Power Costs in Nebraska and the MAPP Region
• Cost/Benefit Illustration
• Transition Cost Overview
• Stranded Costs
• Tax Issues and Methods of Tax Collection
• Summary of Key Points and Recommendations

Chapter Nine: Public Process and Timing Considerations

• Introduction
• Public Policy Issues
• Public Process for Addressing Policy Issues
• Condition-Certain Policy Framework
• Nebraska's Public Process
• Timing
• Advisory Topic Group Recommendations
• Summary

Chapter Ten: Summary of Chapter Key Points and Recommendations

• Summary of Key Points and Recommendations

Glossary of Terms

Charts
Chart 1-1 Changes in Enplanements 1998-1996
Chart 1-2 Telephone Complaints in Nebraska 1987-1998
Chart 1-3 Local Telephone Rate Changes 1996-1998
Chart 3-1 Sample Unbundled Electric Bill
Chart 4-1 Nebraska Power Flows 1999
Chart 4-2 Current Structure Model
Chart 4-3 Modified Current Structure Model
Chart 4-4 Limited Access Model
Chart 4-5 Open Access Model
Chart 5-1 Wholesale Power Price Projections
Chart 6-1 Sample Consumer Disclosure Label
Chart 8-1 Comparative Transfer Payments
Chart 9-1 Steps for Condition-Certain Phasing

Tables
Table 2-1 Utility Mergers and Acquisitions in North Central U.S.
Table 2-2 Restructuring Activity in States Adjacent to Nebraska
Table 3-1 Nebraska Retail Customers
Table 3-2 Comparative Average Energy Costs
Table 3-3 State Low-Income Consumer Provisions
Table 3-4 Sample Nebraska Electric Consumer Bill of Rights
Table 5-1 Sample Cost/Benefit Economic Criteria
Table 5-2 Sample Non-Economic Criteria
Table 5-3 Power Plant Production Cost
Table 5-4 Cost Per Kilowatt Hour Purchased At Wholesale
Table 5-5 Survey of Resale Service
Table 5-6 Reserve Margins
Table 5-7 Retail Service and Rate Requirements
Table 5-8 Range of Authority to Conduct Business
Table 5-9 Nebraska Utility Consumer Services
Table 5-10 OSHA Incident Rates Per 100 Employees
Table 7-1 Entities and Range of Tax Payments Under Three Models
Table 8-1 Comparative Average Electric Costs
Table 8-2 Variance in Estimated Impacts Of Retail Competition on Nebraska
Table 8-3 Transition Costs
Table 8-4 Summary of State Transition Cost Provisions
Table 8-5 Nebraska Generation Plant Value
Table 8-6 Decommissioning Costs
Table 8-7 Types of Transition Costs Under Each Model
Table 8-8 Types of Stranded Costs Under Each Model
Table 8-9 Issues Related to Quantification of Transition Costs
Table 8-10 Methods of Transition Cost Mitigation
Table 8-11 Participants to Pay Transition Costs
Table 8-12 Forms of Transition Cost Collection
Table 8-13 Payments to Local and State Government, 1995
Table 8-14 Tax Collection Points and Requirements