CHAPTER TEN: SUMMARY OF KEY POINTS AND RECOMMENDATIONS
The key summary points and
recommendations contained in each chapter are noted below:
CHAPTER ONE: 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 infrastructure industries.
- 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 benefit consumers.
- Deregulation and restructuring of the electric industry is following
deregulation and restructuring of other infrastructure industries in the
- 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 levels.
CHAPTER TWO: 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 or
- Twenty-one states have enacted legislation to establish retail
competition; three states have issued comprehensive regulatory orders;
twenty-four states and the District of Columbia are studying
restructuring and formation of competitive retail markets; two 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
- 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 competition.
- 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.
CHAPTER THREE: 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
CHAPTER FOUR: 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 district, 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 Optimization Center, and Nebraska Generation
Organization. Retail level functions could remain largely unchanged, but
retail structure could face mergers, alliances, or divestiture.
- 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
CHAPTER FIVE: 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 Otpimization Center, a Nebraska
Generation Organization, 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
- 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
- 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 transmission regulation.
The Task Force also recommends that the role of the ultimate statewide
regulatory body to be authorized in implementation legislation 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
- 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
CHAPTER SIX: 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
- 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 a 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 Access
- 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
- 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 Demand Side Management (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 strategy.
- 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
- 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.
CHAPTER SEVEN: Changes and Impacts on Law,
Governance, Regulation and Taxation
- 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 Nebraska legislature.
- 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 utilities.
- 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 may also be needed to
allow transfer of the generation assets of public power districts and
municipalities to another generation organization 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" pursuant to 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 may be 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 follow-on studies.
- Public power districts and many 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. An investor-owned electric utility is not
subject to this rule and may engage in any lawful business consistent
with its corporate articles. Statutory changes may be needed to achieve
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 may be 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 open access
competitive models would involve differential pricing practices that
would conflict with this requirement
- 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 regulation.
- 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
- State laws would need to be revised in a manner
consistent with federal law that preserves existing tax revenues.
- The Task Force recommends that Nebraska adopt
tax 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 via enactment of the principles contained in the Gorton-Kerrey legislation now
pending in the 106th Congress (S.386).
- Nebraska's current law, governance, regulation and taxation
currently provide a framework for consumer-owned systems to operate as
non-profit monopolies at the retail level. 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
CHAPTER EIGHT: Cost/Benefit
- 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 kilowatt hour).
- 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
- 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 costs.
- There is a potential for stranded costs on Nebraska's two nuclear
generating units, as well as certain fossil-fueled and hydro facilities.
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 costs
- 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 network.
- Purchased power contracts existing at the effective date of retail
choice legislation in Nebraska should be honored for the life of the
- 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
- 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
- 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 of follow-on studies.
- 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 potential cost/benefit benchmarks to be utilized for threshold
CHAPTER NINE: Public Process and Timing
- In view of the fact that technology, market
conditions, and policy will continue to evolve, and that direct or
indirect pressures for retail competition may result from federal
actions, the Task Force has recommended that Nebraska's public policy
framework be developed first around a priority to maintain low wholesale
power costs (which are the cornerstone of low retail 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 Nebraska consumers.
- 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 as well as 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
- Legislative provisions and processes for revenue-neutral impacts on
state and local tax revenues in place;
- Follow-on studies completed (Nebraska Generation Organization,
Nebraska Power Optimization Center, Transmission Efficiencies, Threshold
- 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