|CHAPTER NINE: PUBLIC PROCESS AND TIMING
This chapter summarizes recommendations contained in preceding chapters and offers a planning framework for Nebraska. It reviews the public policy issues that have been raised and options for addressing those issues. It outlines the public process utilized in other states to make determinations and offers recommendations on public process for Nebraska. The chapter then describes a three-part "condition-certain" framework as an alternative to "date-certain" plans that have presented problems in other states. The "condition-certain" framework does not mandate retail competition, but prepares for state and local implementation of retail competition if preconditions are in place and benefits of a competitive retail market are assured. The "condition-certain" framework, if adopted, is recommended to be developed through two pieces of legislation: 1) Initial Legislation that would establish necessary planning authority and resources and prepare rules, standards and protocols; 2) Implementation Legislation that would establish a structure for retail competition once preconditions have been met and functional rules and structure are prepared. In recognizing the significance of local control, each municipal electric system, public power district, or rural electric cooperative would have the choice to participate, or not to participate, in the competitive retail market through its own public process.
Every state must address how it will accommodate expansion of wholesale markets and changes in transmission organizations. Every state must also evaluate the costs and benefits of a transition to retail competition based upon its own unique conditions. As noted in earlier chapters, conditions in Nebraska differ significantly from those in other states. Nebraska's issues are shaped by the low-cost wholesale power supply the state enjoys, and the structure of law, governance, regulation, and taxation that supports the non-profit consumer-owned systems. While expansion of the wholesale market and changes in transmission may be accommodated with little change in existing law and structure, a transition to retail competition would require extensive change in structure, governance, operations and principles. Such a transition would need to be justified by assured economic benefits for Nebraska consumers based on a definitive and sustained shift in regional market prices.
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.
Within the "condition-certain" framework, there are several key policy questions and options for Nebraska to address. These have been discussed in preceding chapters and are outlined below.
9.1.1 Accommodation of National and Regional Changes
First, there is a need to accommodate changes occurring nationally and in the region for generation and transmission. There are two key questions and options to consider:
contract-based (i.e. provisions in wholesale contracts that
commit to long-term, low-cost pricing)
participation in regional ISO/RTO
9.1.2 Improvement of Nebraska Systems
Second, to improve system efficiencies and prepare for retail competition, minimize operating costs and maximize opportunities for delivery of electricity or other services:
ability for all consumer-owned systems to engage
in multi-service delivery
9.1.3 Preparation for Retail Competition
Third, to prepare for possible retail competition:
statewide threshold analysis
consumer protection rules and standards (including Consumer Bill of
unbundling of charges on consumer bill
confirmation of safety standards
minimum portfolio standards
9.1.4 Additional Policy Considerations
In addition to the key state level policy questions noted above, there are local and federal issues to be considered. At the local level:
assure adequate and accessible public process is
in place at the local level
At the federal level, there are issues being taken up within Congress and federal agencies that could have far-reaching impacts on Nebraska, as well as other low-cost states. It is important that local and state government have clearly articulated and consistent policy positions on these issues:
Public Utility Holding Company Act
Rules Regarding Formation of ISOs/RTOs/Transcos
Nebraska faces the same three choices on how to proceed now confronting other states: 1) develop no policy-do nothing and allow market forces to advance and possibly limit future policy options; 2) develop policies within a planning framework that includes a phased approach based on preconditions for action; 3) undertake immediate comprehensive policy changes to establish retail competition.
Other states are utilizing one of these three approaches, with relative urgency of action depending in large part upon whether the state is facing high or low electric costs. As noted in Chapter Two, 21 states have passed legislation to restructure their electric industry, three states have utilized comprehensive orders from their regulatory commissions, and 24 states and the District of Columbia have active legislative and/or regulatory processes underway to study the issue. Four states have undertaken relatively little action, and among them, Florida and South Dakota do not anticipate any effort toward retail competition soon.
In states where definitive legislative or regulatory action has taken place, development of consensus has included "stakeholder" discussions and committees, as well as "settlement" agreements among utilities and various stakeholder parties. These agreements have typically attempted to include some benefit for all parties. Commonly, private utilities, which are the primary target of restructuring, have been allowed transition costs and securitization of debt that in some cases has provided windfalls for stockholders. Consumers have been offered mandatory rate reductions or rate caps. Competitive suppliers have been offered niche markets of large consumers and opportunities to purchase generating plants and other assets being divested. Consumer-owned systems in those states have commonly been offered an opportunity to maintain their current operations or opt-in to the competitive retail market.
For Nebraska, development of a public process will take preparation. The Unicameral is the only body that is in a position to address the issues of restructuring. But as in other states which have undertaken legislative action first, a statewide regulatory body is needed to promulgate rules, standards, and to oversee detailed examination of specific issues outlined in the legislation. Any extensive involvement by a regulatory body in Nebraska will require: 1) designation of such regulatory body; 2) possible increased statutory authority for the regulatory body as well as allocation of adequate resources.
The "settlement" efforts of other states generally do not apply to Nebraska. There are no issues to resolve between the interests of stockholders and consumers; consumers are the stockholders. Because Nebraska utilities are non-profit and operate at cost-of service with consumer-owned facilities, there are no windfalls to offer. Because of low electric costs, there are no mandatory rate reductions, or rate caps to offer. Therefore, retail competition will have to provide attractive benefits on its own terms, rather than through incentives offered various parties to agree to a transition. And consistent with other states, and the tradition of local control in Nebraska, municipal systems, public power districts, and rural cooperatives should be able to determine whether or not to opt-in to a competitive retail market through their own public process.
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.
In view of this experience, Nebraska's should consider retail competition based upon a "condition-certain" framework that requires certain preconditions that would support effective functioning of a market system.
As described briefly in the discussion of public policy issues, the first part of this "condition-certain" approach is to preserve Nebraska's position in the electric energy market and undertake efforts to maintain low wholesale power costs and enhance transmission access. The second part is to undertake efforts to enhance the efficiencies and operations of the local systems. The third part is to prepare for retail competition.
Experience in other states has clearly demonstrated the need to have certain market, structure, and regulatory conditions met prior to establishing a competitive retail market. These general preconditions can be identified in five areas: 1) viable wholesale market; 2) functioning ISO/RTO and adequate transmission; 3) competitive market pricing with savings adequate to offset transition and transaction costs; 4) regulatory rules, standards, protocols, consumer protections and detailed examinations; 5) statewide regulatory body designated to enforce rules and oversee market.
9.3.1 Viable Wholesale Market
A viable wholesale market requires an operational regional "market hub" through which transactions may take place. It requires sufficient buyers and sellers to make an active market. It requires clear and equitable trading rules. While judgment of what level of these requirements are sufficient may be considered subjective, viability should be reflected in stable or predictable pricing patterns.
9.3.2 Functioning ISO/RTO and Adequate Transmission
Equitable access to low cost transmission is essential to a competitive retail market.This requires a FERC approved organization with fully functional rules and tariff, and transmission facilities adequate to support the transactions within the region and state.
9.3.3 Competitive Market Pricing
Wholesale market pricing in the region must be competitive with Nebraska wholesale power costs to an extent that transition and transaction costs of retail competition will be offset by savings and threshold analyses is required to assess potential benefits. As described later, the threshold analyses should indicate a sustainable and conclusive shift in pricing has occurred. Judgments should also be made that there are a sufficient number of competitive power suppliers who meet the threshold to create a viable retail market.
9.3.4 Regulatory Rules, Standards, Protocols, Consumer Protections
The rules, standards, protocols and protections outlined in Section 9.1.3 should be fully developed through a public regulatory process prior to establishing retail competition. The Task Force has recommended that work groups be organized to develop these elements under the coordination of the Nebraska Power Review Board which has historically maintained jurisdiction over the Nebraska electric systems. The work groups would include representation from a diverse range of parties including consumer, labor, utility, and environmental organizations. The rules, standards, protocols proposed by these groups should be subject to public hearings and formal adoption. The legislature would have the option of authorizing the Power Review Board to adopt these rules, standards, and protocols, or incorporating them in proposed Implementation Legislation.
9.3.5 Statewide Regulatory Body
Retail competition requires a statewide regulatory body to augment the regulatory function that has been traditionally resided at the local level. As demonstrated in the experience of other states, it is essential that a statewide regulatory body first work with stakeholders to develop adequate rules, standards, and protocols as described briefly in 9.3.4. Second, a statewide regulatory body, needs to be designated to oversee and enforce those rules, standards, and protocols.
The process by which Nebraska might undertake this "condition-certain" phased approach has seven parts: 1) Initial Legislation; 2) Work Groups conducting follow-up studies with the NPRB; 3) Work groups developing Rules, Standards, Protocols, Protections with the NPRB; 4) Monitoring of the Wholesale Market; 5) Threshold Examination of Benefits of Retail Competition (if a significant and sustained shift in wholesale prices has been shown); 6) Implementation Legislation (if the Threshold Examination determines benefits for retail competition); 7) Opt-In By Local Systems.
Chart 9-1 provides a graphic illustration of the timing of the process outlined for the seven parts of the condition-certain phased approach.
9.4.1 Initial Legislation
Initial Legislation would address the policy questions and options outlined in Section 9.1. It would formally adopt the "condition-certain" approach. It would authorize the formation of work groups and coordination to be undertaken by the Nebraska Power Review Board and allocate necessary resources. In regard to that work, it would outline the rules, standards, and protocols to be developed. It would outline the consumer protections and education plans to be developed. It would outline the environmental and workforce protections to be enacted. And it would authorize the follow-on examinations to be undertaken. It may or may not include final designation of what statewide regulatory body would ultimately oversee and enforce market rules.
The Initial Legislation would also provide policy direction regarding maintenance of low cost wholesale power supplies, and access to low-cost transmission access for all Nebraska systems. It would provide instruction regarding mergers, alliances and divestiture, including possible incentives for merger studies, and criteria for divestiture. It could also include changes in current law to allow greater latitude for the Nebraska systems to provide delivery of a range of "wires" and "energy" services, and greater ability for consumer-owned systems to engage in public-to-public and public-to-private business relationships.
The Initial Legislation would authorize the development of Statewide Threshold Analysis and Local Opt-In Threshold Analysis and provide instruction on the application of the statewide analysis by the Power Review Board. It would list the preconditions to be met prior to establishment of retail competition.
The Initial Legislation would also provide instruction for the drafting of proposed Implementation Legislation. It would require administrative unbundling of the charges on a consumer bill. It would also require notification by local systems to all consumers that the "condition-certain" policy framework has been adopted and what it implies.
9.4.2 Work Groups and Nebraska Power Review Board
The Nebraska Power Review Board would coordinate and oversee the development of the proposed rules, standards, protocols, protections, and follow-on examinations outlined in the Initial Legislation. This would include the development of Threshold Analyses. The NPRB would also assist in drafting proposed Implementation Legislation. As noted in section 9.3.4 these work group would include representation from a diverse range of parties designated to represent all Nebraska stakeholders in the process. Their work products would be subject to public hearing and comment.
9.4.3 Monitoring and Threshold Examination
Examination of benefits would take place when regional wholesale market prices and Nebraska wholesale prices indicate the potential for consumer savings. There are two distinct Threshold Examinations. one statewide, and one local. The statewide examination would determine if: 1) a sustainable and conclusive shift has occurred in the comparison of state and regional wholesale power supply prices; 2) the shift is sufficient to offset transition and transaction costs of a competitive retail market and create savings for all consumers. In undertaking this examination, the statewide Threshold Analysis would identify and quantify not only current and projected wholesale power supply costs, but also identify and quantify all transition and transaction costs.
The statewide Threshold Analysis would also certify that all necessary preconditions have been met, and that a sufficient number of competitive suppliers meet the threshold measure to make a viable retail market.
The findings and recommendation of the Statewide Threshold Analysis would be subject to comment at a public hearing, prior to being submitted to the Legislature. Considerations might include whether a sufficient number of electric systems would have interest in participation, and if not, how costs of transition might be allocated.
The local system Threshold Analysis would be undertaken at the discretion of the local system as part of its public process. It would look specifically at its own specific wholesale power supply costs, and specific transition and transaction costs, as well as other local elements of primary consideration. This analysis would be utilized if there were positive findings by the statewide Threshold Analysis and subsequent passage of Implementation Legislation to establish retail competition.
9.4.4 Implementation Legislation
Implementation Legislation drafted as a requirement of the Initial Legislation would be submitted upon a positive recommendation of the statewide Threshold Analysis and certification that the preconditions are in place. It would include the comprehensive changes in law and regulation required to make a transition to retail competition. This would include changes in existing law, as well as new authorities, regulations, and protections.
9.4.5 Opt-In By Local Systems
Local systems would opt-in based on the findings of their own specific Threshold Analysis. The form of public process by which determination regarding opt-in might take place would be determined at the local level consistent with the requirements of state and local law.
The "condition-certain" framework utilizes an alternative to calendar dates established without regard to market conditions and necessary preconditions of structure. Drafting and enactment of Initial Legislation could be undertaken in the immediate future to assure timely guidance for evolving issues. Once authorized, development of rules, standards, protocols, consumer protection, and follow-on examinations could take place during a 12-18 month period following passage of Initial Legislation. Given the policy development in many of these areas already undertaken by other states, facilitated development of policy for Nebraska should be possible.
Preconditions for a viable wholesale market and functioning ISO/RTO would be expected to evolve while this work is being conducted. Also, development of efforts to maintain low wholesale power costs and to assure low-cost transmission access could be concurrent with the progress of the work groups and the NPRB. Statewide Threshold Analysis would, clearly, not be undertaken until the rules, standards, protocols, etc. have been developed and monitoring of the wholesale market indicates a substantial and sustained shift in comparative wholesale power prices that would offset transition and transaction costs and provide savings to small consumers.
The timing for application of the statewide Threshold Analysis would depend upon market conditions and the status of structural preconditions. Thus, no firm date can be given for Implementation Legislation, or subsequent decisions by local systems to opt-in.
For general purposes of initiating this two-part legislative approach, 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.
The Public Policy and Timing topic group of the LR455 Advisory Group offered the following recommendations. The Advisory Group discussed the overview of the "condition certain" policy framework, but did not address these issues specifically. Many of these points reflect policy considerations of statements made by other Advisory Group subcommittees. As with the recommendations of the other Topic Groups, the Task Force considered these subcommittee recommendations, but did not agree with all recommendations offered.