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.
Consumers living in rural areas and the state's 542 incorporated cities and villages are served exclusively by consumer-owned electric systems that have entered into 395 electric service territory agreements. Map M4-1 shows the retail service areas in the state; ranging from the large geographic territories in central and western Nebraska, to the small geographic territories in the eastern part of the state. Retail electric service is provided to these service territories by three primary types of utilities: municipal electric systems, public power districts, and rural cooperatives. Additional entities provide wholesale power to these utilities and help to coordinate their operations. In total there are 170 entities providing retail or wholesale electric service in Nebraska:
The 170 entities serving Nebraska are organized under state statute, by voluntary coordinating bodies and associations, and by contractual relationships. Chart C4-1 shows the power flows and the interrelationships of the various systems. Nebraska's three largest utilities (Nebraska Public Power District, Omaha Public Power District, and the Lincoln Electric System) serve about 60 percent of the state's retail customers. The remaining 40 percent are served by a mix of smaller public power districts, municipal systems, and rural electric cooperatives.
The various power supply and transmission agencies are shown in Chart 4-1 on the upper-tier blocks and the various types of local distribution companies on the lower-tier blocks. Chart 4-1 also shows that some non-Nebraska agencies have power contract arrangements with Nebraska utilities that provide service at retail.
Chart 4-1 indicates the power flow relationships between the Nebraska systems as of June 1999. The Nebraska Public Power District serves most of the state's incorporated villages and towns with 207 at retail and 54 at wholesale. They also serve 24 rural systems and the Loup Public Power District at wholesale. However, NPPD has plans to reassign a group of NPPD towns served at retail to several rural systems. The purpose is to optimize retail operations and gain other efficiencies. Therefore, the supplying system identified for certain towns have begun to change. This process will result in about 36 NPPD towns reassigned to other systems in 1999 and another 92 towns reassigned later.
The Municipal Energy Agency of Nebraska supplies 31 wholesale towns. Omaha Public Power District serves 49 towns at retail, and 5 at wholesale. Rushmore G&T serve 2 rural systems at wholesale. Tri-State G&T serves 10 rural systems at wholesale. Lincoln Electric Systems service Lincoln and Waverly at retail. Eleven other cities with generation and supplemental supplies from NPPD and MEAN serve 30 towns at retail. The utilities that are members of the Mid-Continent Area Power Pool also have access to and make wholesale power transactions in the regional power market.
Efficiencies of operation of these systems is achieved through effective independent operations and cooperative and contractual relationships.
The three models to address competitive pressures focus on retail structure and assume that the pre-conditions at the wholesale level for a viable wholesale market, functioning ISO or transco, and wholesale prices competitive with Nebraska prices will be put in place. These models are indicated in charts, which outline the structural and operational elements of utility service. The Current Structure Model (Chart 4-2) is intended to describe the status quo. It translates the power flow relationships indicated in Chart 4-1 into a generic operational structure. The Modified Current Structure Model (Chart 4-3) shows certain changes that may be considered to enhance the Current Structure and address competitive pressures. The Limited Access Model (Chart 4-4) shows changes that would occur in an environment of retail competition for a limited group of customers. The Open Access Model (Chart 4-5) shows changes in operations and structure for retail competition for all customers.
The Current Structure model modifications are based on an assumption that changes in the existing structure would produce greater savings and protection for consumers than competition among power suppliers at the retail level. The Limited Access model assumes that competition at the retail level may be beneficial for only a limited set of customers qualified by certain characteristics. However, in view of the evolving market and the possibility of increasing pressure, a Limited Access model may be only a transitional structure to the Open Access Model. The Open Access Model assumes that greater benefits and protection for consumers can result from competition among suppliers for all customers. The Open Access and the Limited Access Models assume an end-state condition after a significant portion or all of the local utilities have implemented retail competition. (Chapter 5 discusses preconditions that would need to be met to establish retail competition.)
The basic structural differences between the existing Current Structure Model
(Chart 4-2) and relationships to those of the Modified Current Structure (Chart 4-3), Limited and Open Access Models (Chart 4-4 and Chart 4-5, respectively) may be noted by comparing elements, especially in the lower half of the charts.
Each of the charts has four separate zones. The circle in the lowest zone indicates the state's 835,905 customers. A solid line indicates the power flow to customers. Data and contractual relationships for metering, billing, and payment information are indicated by dashed lines. These lines run from the customers up to the local distribution companies and the metering, billing and collection functions in the second zone.
Also in the second zone are the Energy Service Companies (which provide competitive retail service to customers) and the transmission line owners. The possible changes and options here are described later in this chapter and in Chapter 5.
In the third zone are the wholesale power supply functions, the Nebraska generators, the power marketers, the ISO or regional transmission group, and options in this set of functions including the concepts for a Nebraska Power Transaction Center, and a Nebraska Generation Cooperative. Consistent common assumptions for the wholesale level, each of the three alternative structure charts combine the generation owners into a single oval but also identify with separate ovals other power supply functions provided by existing fully integrated entities, (including wholesale power marketing, control area, scheduling coordination, regional transmission and ancillary services).
The top zone indicates the utility control areas and scheduling coordinators that maintain an important role in assuring reliability and quality of service in the state's power flows. In a retail market, power supply is the competitive commodity. The customer must either directly or through an agency arrange for Transmission and Ancillary services for the delivery of power to their Local Distribution Company (LDC). In the three alternative structure charts these service areas agreements are included as one of the functions of the LDCs along with the Metering, Billing and Collection (MBC) services provided to customers.
As noted above, the Current Structure Model (Chart 4-2) is based on the existing structure of the industry in Nebraska. It assumes competition in wholesale power supply, but no competition among suppliers at the retail level. Service is purchased under bundled cost-of-service rates set for each class of customers by local utility boards. Each segment of the industry's current operations is described below and questions related to these operations are discussed at greater length in Chapter 5.
4.3.1 Current Structure Generation
Nebraska's electric facilities are individually-owned or jointly-owned by groups of the 170 wholesale and retail entities operating within the state. As the largest systems in the state, NPPD, OPPD and LES own many of the major generating plants. In 1995, Nebraska systems owned a total of 5,512 megawatts of accredited or demonstrated generating capability. In addition to these facilities, Nebraska systems purchased 1,031 megawatts of firm capacity and an addition 84 megawatts of non-firm capacity (without reserves). The 26 major generating resources are listed on Table 4-1.
The Current Structure of the industry in Chart 4-2 includes all sources of generation within and outside the state. It shows the general ownership of generation by wholesale power marketers, Nebraska generators and others. It also implies a range of voluntary alliances, bilateral contracts and inter-local arrangements among the various generation suppliers, transmission owners and distribution companies. The dashed lines on Chart 4-2 indicate these arrangements. Generation expansion planning is conducted on a voluntary basis. Individual utilities are responsible for wholesale power marketing, however increasing out-source arrangements are likely. There are also questions concerning whether Nebraska consumer-owned systems or out-of-state entities would construct new generating plants in the state to meet growth in demand. Additional questions have also been raised concerning possible divestiture of generating plants to out-of-state entities.
Nebraska's Current Structure will face continuing pressures from the changing market, surrounding states. determinations on retail competition, and from the potential for a federal mandate to modify the industry structure to allow retail access to multiple competitive suppliers.
4.3.1 Current Structure Transmission and Sub-transmission
The major owners of transmission in the state are WAPA, NPPD, OPPD, LES, and Tri-State Generation and Transmission Company. All of these companies except Tri-State are members of the MAPP. The existing high voltage (345kV, 230kV, 161kV and 115kV) transmission network in Nebraska (see Map M5-1 in Chapter 5) consists of more than 6,200 miles of transmission lines with an investment cost of about $597,050,000. These transmission facilities are interconnected with regional facilities in surrounding states for purposes of reliability and transfer of power and energy. The Nebraska high voltage transmission network is split into two distinct regions, the eastern region and the western region. Presently, the split between these two regions involves the transmission systems on either side of the Grand Island/Hastings area. The eastern Nebraska region is inherently secure and stable because typically 80 percent of the entire state's load resides in the eastern region. (Stability increases when load or demand and generation is well matched.) The western Nebraska region is on the western edge of the Eastern Interconnected System of the United States and exhibits completely different operational characteristics. Sparse population results in low demand and a large generation/load mismatch in this area. There is also a heavy reliance on the bulk transmission system for delivery of generation from this area to the state's load centers in eastern Nebraska.
As may be noted on Map M4-2 (Mid-Continent Area Power Pool), Nebraska is interconnected with three of the nine North American Electric Reliability Council regions. Interconnections exist with MAPP thorough Iowa and South Dakota and allow transactions with the 70 MAPP members; Western Nebraska interconnections link the state through Wyoming to the Western Systems Coordinating Council grid; and interconnections through Kansas and Missouri link the Nebraska systems to the Southwest Power Pool.
Geographical relationships between load and generation and the transactions of regional energy markets will impact future transmission limitations or "bottlenecks" in Nebraska. Six critical transmission interfaces have been identified in Nebraska representing constrained paths: Gerald Gentleman Station (GCS) Eastflow Stability Interface; W. Nebraska. W. Kansas Transmission Interface; Grand Island. Lincoln Area Transmission Interface; Cooper Southflow Transmission Interface; Fort Calhoun. West Omaha Transmission Interface; Sub 3459. Sub 3456 Transmission Interface (Omaha area). The regional utilities have developed operating procedures and curtailment procedures to address high utilization of these constrained paths. Increases in firm transmission capacity usage on these interfaces may require the addition of new high voltage facilities. Future power flows through these paths must be monitored closely.
The existing (34.5kV and 69kV) subtransmission facilities in Nebraska consist of more than 6,600 miles of lines with an investment cost of about $201,475,000. (See Map M5-2 in Chapter 5 outlining the subtransmission network.) The subtransmission system is normally a direct step down from the 161kV and 115kV high voltage transmission systems. Since the 1960s, state law has required open access to transmission above 34.5kV to support competition at the wholesale level.
The construction of the transmission and subtransmission systems is expected to continue on an individual basis as new and existing customers increase load demands and facilities are rebuilt to maintain or enhance reliability. An increase in competitive power purchases could also increase the need to undertake additional transmission and subtransmission construction. Even if Nebraska systems do not engage in retail competition, open access to transmission mandated by the Federal Energy Regulatory Commission could place additional stresses on the state's transmission network.
4.3.2 Current Structure Distribution
Distribution facilities are that part of the electrical system that delivers power and energy directly to the ultimate customer. They include: distribution substations, distribution lines, associated equipment, points of transformation to utilization voltages, and meters.
Distribution substations step down the voltage from transmission or subtransmission levels to voltage levels suitable for distribution. The distribution lines that carry energy from the distribution substations to local load areas are called "main" or "primary" feeders and generally operate in Nebraska between 2.4 kilovolt and 25.0 kilovolt levels, depending upon design requirements. Numerous taps or lateral lines are attached to main feeder lines as required to distribute electricity throughout the service area. "Tie lines" are often constructed between feeder lines to provide backup energy sources for load areas in the event of damage to a feeder line due to severe weather or other incidents.
Voltage is usually stepped down one more times from the distribution level to the utilization level by line transformers installed near customer load points. Utilization voltages vary considerably in level and configuration. Common household service is provided at 120/240 volts, single phase. Many small commercial consumers and some farms take service at 120/208, 120/240, or 277/480 volts, three phase. Larger commercial or industrial customers sometimes take delivery at 2,400 to 15,000 volts, three phase.
Nebraska utilities have reported more than 85,000 pole/circuit miles of primary distribution lines in operation in 1995, and over $1.5 billion in investment. As might be expected, more than 75 percent of the distribution line miles in operation are in rural areas of Nebraska.
NPPD is currently undertaking a program to transfer selected rural distribution systems to public power districts to increase efficiencies. Other voluntary mergers may be undertaken. In addition, some of Nebraska's Local Distribution Companies could be affected by proposals for divestiture (privatization). These changes would affect maintenance and expansion of distribution lines and metering, billing and collection functions.
The current structure has metering, billing and payment collection under the control of the LDC. In addition to poles and wires, the LDC's own and operate the meter and read and check it for accuracy. The meter is the primary billing input device and service regulations protect it from obstruction and tampering.
Some LDCs contract for all or parts of their MBC functions. It is likely that more will opt for outsourcing with or without retail choice. Contracting-out is done as a cost- saving measure and also offers an opportunity to increase metering and billing flexibility and capability. It may offer the ability to bill time-of-use rates and print multiple line items on electric bills for new services offered or for consolidated billings.
Under the Modified Current Structure (Chart 4-3) operational functions related to the LDC and its metering and billing operations would remain unchanged. Although mergers or divestiture of distribution systems could take place, or MBC functions could be out-sourced, there would be no competition for customers at the retail level. However, there are several possibilities where the current structure could be modified or reorganized to gain potential operational and other efficiencies in transmission, generation, and the wholesale market.
These changes may be undertaken while preconditions for competition are evolving in the region. Much of how they might evolve centers on the question of how the Nebraska systems may work together to improve the current industry structure, or go separate ways in alliances and business relationships with private entities that may undermine the current cooperation with which the Nebraska systems function. The sections below discuss concepts for the modification of generation and transmission. These are discussed at greater length in Chapter 5. Distribution system enhancements are discussed in Chapter 7.
4.4.1 Regional Independent System Operator (ISO)
The establishment of a MAPP ISO or other Regional Transmission Organization (RTO) to operate and or own transmission is one possibility shown on the Modified Current Structure Chart 4-3. A proposed MAPP Independent System Operator (ISO) and tariff was not approved by the membership in late 1998. However, a proposed regional tariff administered by MAPP was approved by the membership of the MAPP RTC in May 1999 and is filed with FERC for approval. The tariff could be implemented in early 2000.
The FERC generally requires any utility with substantial transmission facilities requesting merger to join an FERC approved ISO or other independent operating entity that would then have control of the merging utilities' transmission. Some MAPP members involved in mergers and under such requirements have joined the Midwest ISO or the Southwest Power Pool ISO to satisfy the FERC requirement. Some transmission owning companies have proposed forming a regionally operating and separate Transmission Company (TransCo) by spinning off their transmission facilities. MAPP committees are investigating several options to enter into agreements with regional transmission organizations to operate their facilities as a FERC qualifying ISO/RTO. It is likely that some form of ISO/RTO will evolve in the MAPP region with in the next couple years. A Nebraska-only ISO is regarded as too small to be a viable player in the region. There is potential for the current MAPP Security Center to be contracted to perform ISO functions under a merger with the Midwest ISO or an all-publicly owned transmission company comprised of other public systems in the region. A discussion of the ISO and RTO functions and structure is included in Chapter 5.
4.4.2 Nebraska Power Optimization Center
Another potential change illustrated on the Modified Current Structure Model is the concept of a Nebraska Power Optimization Center (NPOC). This concept may allow Nebraska surplus wholesale generation to be bought and sold among Nebraska systems as cost effectively as possible.
The NPOC would be an administrative facility designed to enhance the ability to purchase and sell Nebraska public power resources at cost plus an administrative fee by establishing a bidding forum among Nebraska buyers and sellers. The purpose would be to ensure that the primary benefits of public power wholesale resources that are not already committed are routinely available to all Nebraska utilities. The target would be to keep wholesale costs as low as possible. The concept requires study to determine feasibility and general operating parameters. Levels of commitment to the administrative process from buyers and sellers would need to be examined. Rules and procedures may be necessary to minimize the seller's potential revenue loss, to control the reselling of NPOC purchases at wholesale, or to retain the buyer's other wholesale purchase options.
4.4.3 Nebraska Generating Organization
Another concept illustrated in the Modified Current Structure Model is a joint generation ownership organization. This could be undertaken in addition to NPOC, or developed on its own. This is a structural approach of combining current or future generation of the consumer-owned systems to retain low-cost power resources in the state and maintain low wholesale power prices. Chart 4-3 shows a single Nebraska Generating Organization (NGO). Under this scenario the NGO could operate under central dispatch similar to a closed or tight power pool or independently as a member of the MAPP or other regional wholesale power pool. In one form, a comprehensive NGO could include future generation and assignment of existing generation with proper credits for generation owners and accommodation for current out-of-state sales to avoid negative rate impacts. Such assignments of existing generation could also be phased in over time. A more limited form of NGO, or n initial phase, might include only joint development and ownership of new generating resources.
Other changes in the structure of generation could include divestiture of plants, construction of new merchant plants by private companies, or coordination of generation expansion by the Nebraska systems. Generation expansion under the Current Structure has individual utilities determine their own need for future resources and is voluntarily coordinated by the NPA in a statewide report to the NPRB. A statewide generation expansion plan could be made mandatory under restructuring legislation.
These concepts are discussed in greater detail in Chapter 5.
4.4.4 Power Supply Coordination Scheduling Coordinator
Noted at the top of each chart are the Utility Control Area and Scheduling Coordinator functions. Currently the utility control area balances generation with load.
In a competitive retail market, not all loads will be served by the incumbent utility generators. There will need to be changes in how power and energy transactions are processed, booked and billed to maintain continuity of service. A potential changing role in providing customer choice and opening up retail markets is that of Power Supply Coordination (PSC). Such PSC would evolve as transaction volume increased and a separate coordination entity was needed.
Two primary power supply coordination functions will be energy scheduling and financial settlement. These functions will make it possible to provide power delivery services to Electric Services Companies (ESC) on behalf of contracted retail customers they serve.
This changed role is one of many transitions in operation that would be required by Limited Access or Open Access.
At the wholesale level, the Limited Access structure may include the ISO, Nebraska Power Transaction Center, or the Nebraska Generation Cooperative described above. It may also contain a Regional Power Exchange (PX) that would be a regional transaction center for wholesale power sales. However, the most significant difference between this structure and the Current Structure models is the entrance of Energy Service Companies (ESCo. s) to provide competitive power supply and other services at the retail level.
The Limited Access model assumes that retail competition only occurs for a set of customers qualified by certain characteristics or by events. These customers are shown in Chart 4-4 in a separate oval as "Selected Customers". This could be a class of customers qualified by size of load (i.e. 1 megawatt or greater) or type of customer (residential or governmental accounts). It is assumed that to avoid duplication of services, the metering, billing and collection services for these customers would continue through the Local Distribution Company.
There are several different ways to structure Limited Access. It may be part of a phased approach to allow a gradual opening of access to all customers on a scheduled basis. It may be used as a mechanism in a state in which most consumers face difficult access issues to protect those consumers and prevent cost shifting from those who acquire a competitive supplier. Or it may be structured as a "buy-through" or price reduction for customers who acquire a competitive supplier, with the LDC as a partner in the transaction.
Limited Access presents a number of problems. In a phased approach, the resulting disaggregation of load can create difficulties in obtaining desirable contracts and higher costs for consumers who are eventually left behind by suppliers seeking customers who meet an optimum profile. Proper access pricing for a limited group may be too costly. Even though access may be limited to a small portion of the customers in the state there are substantial setup and dispatch and control center expansion costs that would occur. A certain portion of these costs such as setting up procedures and communication links for daily operation and billing are fixed regardless the number of customers involved in retail choice. And "buy-through" programs may create dissatisfaction with required customer qualifications and create hidden cost shifts. Limited Access would also require certain regulatory standards and protections to be in place, as well as a statewide regulatory body as discussed in Chapter 3.
Possible benefits and costs of a Limited Access structure must be weighed in terms of both the Current Modified Structure and the Open Access Model.
The Open Access Model Chart 4-5 requires the most significant change from the Current Structure. Under Open Access, all functions move to the competitive arena except for transmission and distribution services, and in some states metering, billing and collection are also being considered for the competitive market (as indicated by the separation of metering, billing and collection in Chart 4-5). Open Access in Nebraska could occur without changes to the current service area structure or the ownership of existing generation. The wholesale supply options would be the same as those described for Modified Current Access or Limited Access. The major change would take place at the customer level.
As shown in Chart 4-5, all customers would have access, in theory, to competitive suppliers. Existing and new generation suppliers and Competitive Power Suppliers acting as power marketers would have access to consumers in the participating retail service areas. If allowed, Competitive Power Suppliers are likely to offer a wide variety of services including real-time and time-of-use pricing, load control systems, load profiling service, bill paying insurance, multiple utility account bill consolidation, security and outage detection services, appliance maintenance, Internet and telephone services. State standards and rules for supplier certification would be required, as would consumer protection, consumer education, business transaction protocols and other rules to guide the competitive market. This would necessitate full development of a state regulatory agency to promulgate, oversee, and enforce standard rules to augment the efforts of regulation by local boards. It would imply a major shift from local control and cost-of-service electric supply. Start-up, transaction and transition costs would need to be offset by the benefits of lower power costs.
In addition to changes at the customer level, Chart 4-5 indicates that power marketers would contract with the generation providers to schedule power and Ancillary Services over the Transmission System. A Regional Transmission Organization (RTO) acts as the Independent System Operator in coordination with the local Control Areas (CA). The RTO administers a regional wide FERC approved tariff. There are a variety of transmissions related services necessary for each power transaction to ensure proper scheduling and delivery of energy to the LDC. All Coordination and Scheduling functions are the responsibility today of the Control Area. It is likely that third party Scheduling Coordinators will evolve to help take care some of these scheduling and coordination functions. Competitive Power Suppliers would work through Control Area operators to handle the large volume transactions generated by retail competition and multiple suppliers entering the market. Control Areas may be combined to realize operating efficiencies or the ISO could assume some of their functions. The details are discussed in Chapter 5.
As noted in Chapter Two, establishment of competitive retail markets and associated changes in structure is taking place in 24 other states. Six have comprehensive plans underway.
The changes in structure for generation common among the states that have restructured to retail competition are to require some form of divestiture of generation resources, either in part or in total. Some of the reasons relate to identifying stranded cost of generation and how to recover it from ratepayers and or stockholders. In some states a power pool or exchange were formed or expanded to offer a shared resource pool available to all at a market clearing price.
There are often mandated retail rate decreases or freezes that may come in part from the margins on generation as well as transmission and distribution revenues. California has mandated that retail choice will be allowed only through newly formed Energy Service Providers that have no connection with the local wires company. The Task Force views such a mandate as duplication of services and unnecessarily removes the benefit that consumer owned LDCs currently provide. Nebraska LDCs are not-for-profit and thus would continue to offer service at cost on a non-discriminatory basis rates that are set in a public form.
The changes in structure for transmission and distribution common among the early acting retail choice states are the formation of a regional transmission operating entity such as a non-profit Independent System Operator (ISO). Transmission and distribution rates may be capped or regulated under performance based measures. The establishment of computer based transaction centers and consumer education programs required on statewide or regional basis will have significant impact on current day operations. These are required to accommodate the large increase in number of sellers and buyers of transmission services and the cost will be significant to start and operate. This includes the settlement process to support the billing of power that was scheduled against what was delivered. There are changes necessary to continue to fund and operate demand side management and environmental programs both current and future.
In addition to structural changes, developments in other states show new operational changes are required to make either limited or open access market forms possible. These operational changes include:
In summary, these models should be viewed as a starting point to assess possible impacts of wholesale and retail competition on Nebraska's electric systems.
Expanded wholesale competition in the region, and changes in transmission organizations and structure, will need to be accommodated by the Nebraska systems. It is preferable for the changes to be accommodated in a manner that retains Nebraska's low costs.
In terms of retail competition, modification of the Current Structure at the distribution level offers opportunities to enhance operational efficiencies and prepare for the pressures of competition.
Limited Access would allow a managed approach to retail competition by allowing only a specific group of customers to have access, or access to be timed. Limited Access is seen only as a transitional stage to Open Access.
Open Access, allowing all customers to have access to a competitive supplier, would require substantial changes to the structure, operations, and principles of the Nebraska distribution systems.
The following chapter provides an examination of structural and operational issues of the various models and options for Nebraska.