CHAPTER ONE

Background on Electric Industry Competition and Restructuring

1.0 Introduction

Passage of federal Energy Policy Act in 1992 set the stage for a transformation of the nation's electric industry from a regulated monopoly to a competitive market system.

The core of that transformation would expand competition among generating companies at the wholesale level through greater transmission access and participation of new suppliers. It would also create competition for customers at the retail level through an opening of the distribution systems to power marketers. For many of the nation's electric utilities the shift to competition implies a corporate and operational restructuring into separate distribution, transmission, and generation functions.

Following passage of the Energy Policy Act, the Federal Energy Regulatory Commission established rules to enhance competition at the wholesale level and encouraged states to establish laws and rules that would facilitate competition at the retail level. Twenty-four states have undertaken such action to establish retail competition. Another 24 states are studying the issue to determine possible impacts and options. States with high-cost electricity have taken early and aggressive action in the belief that competition may succeed in reducing costs and rates where regulation has failed to do so. Low-cost states, however, have expressed concern that their costs may rise as a result of establishing competitive retail markets for electric power.

Nebraska has long been recognized to have some of the lowest electric rates in the nation. In 1997 Nebraska was 6th lowest in the nation for commercial consumers; 7 th lowest for industrial consumers; and 9th lowest for residential consumers. Due to the weighting of various customer mixes, Nebraska was 11th lowest for an average of all customer classes. (See Map M1-1 on page 12 for the average for all customer classes.)

Nebraska is also recognized as the only state in which all consumers are served by consumer-owned municipal systems, public power districts and rural cooperatives whose core principle is delivering electricity as a non-profit service.

Although one may debate whether any change is warranted, the state's electric systems are interconnected with other utilities in the region through regional power grids. the Mid-Continent Area Power Pool and the Western Systems Coordinating Council. Changes in federal requirements, changes in the regional markets, and changes in utilities with whom the Nebraska systems conduct business, as well as the desire of some customer segments, require that the state examine and address the transformation taking place.

While expansion of wholesale markets is underway, Congress has currently left the issue of retail competition up to the states to determine. Proposed federal legislation would allow any state to develop its own plan to prepare for competition in the electric industry. Nebraska has an opportunity to develop a plan to address its unique situation. As Nebraska citizens and policy-makers consider a plan for the future of their electric utilities, it is important to understand the context and key issues concerning deregulation and restructuring of infrastructure industries.

For the purpose of providing a broad context, Chapter One examines the background of restructuring of the electric utility industry; deregulation of other infrastructure industries in the United States, including impacts on Nebraska; electric utility industry restructuring in other nations; and proposed changes at the federal level to restructure the U.S. electric utility industry.

Subsequent chapters provide an overview of completed and anticipated developments in wholesale and retail electric competition and possible impacts and alternatives for Nebraska's consumer-owned electric systems. The result is a proposed framework for development of Nebraska's plan to address electric utility competition and restructuring.

1.1 Background on Electric Industry Restructuring

For the last 60 years, the electric utility industry in the United States has consisted primarily of vertically integrated electric utilities which include generation, transmission and distribution functions. Nationally, it is a mixed system of private investor-owned companies, and federal, state, and local consumer-owned facilities. In 1995 there were 244 investor-owned private electric utilities providing power to 75 percent of the nation's consumers; 931 rural electric cooperatives providing power to 11 percent of the nation's consumers; and 2,020 public power systems providing power to nearly 14 percent of the nation's consumers. Although some public power systems and rural cooperatives own generating plants, most function only as distribution systems. In addition to these utilities directly supplying consumers at the retail level, federal power agencies and independent power producers generate and sell power at the wholesale level.

The nation's power supply and distribution companies are organized into 26 power supply regions operating as part of three major grids of transmission lines, one east of the Rocky Mountains, one to the west, and one in the Texas region. They are also organized into nine regional electric reliability councils. Nebraska's electric systems in the eastern two-thirds of the state are part of the Mid-Continent Area Power Pool (MAPP) which covers a geographic region including South Dakota, North Dakota, Montana, Minnesota, western Wisconsin, Iowa and parts of Saskatchewan and Manitoba. Nebraska electric systems in the western part of the state are members of the Western Systems Coordinating Council (WSCC).

The organization and structure of the nation's electric industry that evolved during the 1935-1995 period resulted from a previous restructuring of the industry prompted by the federal Public Utility Holding Company Act of 1935 (PUHCA). The Holding Company Act broke up 16 major utility holding companies, which had come to control 75 percent of the nation's power output by the late 1920s. It addressed financial and market power abuses of the utility holding companies by creating barriers to limit market power and the potential for future abuse. This had specific significance for Nebraska. Several of these holding companies owned subsidiaries in Nebraska which had bought out more than one-third of the state's municipal electric systems, prevented the formation of rural electric cooperatives, and also hampered development and management of irrigation resources. Statewide initiatives and laws passed in Nebraska in the 1930s, complementary to the federal Holding Company Act, fostered a movement to buy out these holding company subsidiaries and structured the consumer-owned electric industry in the state today.

The state's 121 municipal electric systems, 31 public power districts and 11 rural electric cooperatives were organized as city departments, by petition, or by incorporation, respectively. Local boards of elected or appointed representatives govern these agencies. The municipal systems are regulated by the city council or village board (12 have boards appointed by the city council and mayor). These boards set rates, oversee quality of service, and make financing and budget decisions. The boards often operate in coordination with the city or village council. Major policy questions can be brought to voters as referenda questions in general elections.

Each public power district is governed by an elected board of directors who serve for a term of six years, with no limitation on the number of terms an individual may serve. The boards must have at least five members and no more than 21. Similar to municipal electric boards, the public power district directors oversee decisions on budgets, power supply, rates, and other policies. Board membership is not a full time job. Each board appoints a chief executive officer to manage the district's affairs as directed by the board.

Rural distribution cooperatives are governed by similar boards of directors elected by the member/consumers at annual meetings. Candidates do not appear on the general election ballot like public power district candidates. Because the rural distribution cooperatives are organized under laws for non-profit organizations they are not subject to the same statutory requirements as municipal and public power district systems.

The state's municipal systems, public power districts and rural electric cooperatives are further organized by voluntary coordinating bodies and associations such as the Nebraska Power Association, the Nebraska Rural Electric Association, and the Municipal Energy Agency of Nebraska. They also utilize cooperative and contractual relationships to gain operational efficiencies. At the wholesale level, these systems participate in a power supply market that operates as a voluntary contractual arrangement between interconnected utilities to facilitate reserve-sharing and to market surplus capacity and energy coordination.

Nebraska's locally-directed electric systems face potential changes in organization, principles, operations and governance in order to address expanded wholesale competition and new retail competition. Cooperative arrangements and principles of non-discriminatory, non-profit power delivery and local control utilized by the Nebraska systems are not compatible with the principles of a competitive market which are focused on service to selected high-use customers or selected groups of customers and market-based pricing. Competitive pressures could undermine cooperative arrangements utilized by Nebraska systems, unless they committed to methods to preserve those arrangements. Increased competitive pressure to alter non-profit, cost-of service pricing to market-based pricing could also raise Nebraska's wholesale and retail power costs.

Market pressures and the perception of market pressures are already engendering consideration of certain changes in response to events happening nationally and in the MAPP and WSCC regions.

1.1.1 Changes in the Electric Utility Industry After the Energy Policy Act of 1992

The transition now going on nationally and in the MAPP and WSCC regions was set in motion by passage of federal laws in 1978 and 1992, and subsequent federal regulatory actions.

Deregulation of the electric industry began with the passage of the Public Utility Regulatory Policies Act in 1978. This established the basis for independent, competitive companies to enter the power generation business at the wholesale level. During the 1980s federal regulatory efforts sought to enhance access to transmission lines for these new generators and to help establish competitive wholesale markets. In 1992, passage of the Energy Policy Act (EPAct) mandated broad open access to transmission lines and encouraged greater competition in generation. The EPAct set the stage for the most significant change in the electric utility industry since implementation of the Public Utility Holding Company Act of 1935.

The Energy Policy Act did not mandate retail competition and the Federal Energy Regulatory Commission (FERC) was specifically prevented from ordering retail competition. However, FERC efforts to expand wholesale markets has been accompanied by encouragement of states to establish competitive retail markets. The first major step in expanding wholesale markets and setting up retail competition is developing non-discriminatory transmission access.

In April 1996, FERC issued landmark orders 888 and 889 to implement open access to jurisdictional high voltage electric transmission systems. These orders also set in place the process to develop independent system operator (ISO) organizations and independent transmission companies (commonly known as Transcos or Independent Transmission Companies). The central issue is to create non-discriminatory open access for all suppliers and elimination of the ability of transmission owners to use the lines and facilities for their own strategic purposes.

For Nebraska and other states in the region, events to date can be characterized by efforts to form regional ISOs and transmission companies, expansion of the wholesale energy and transmission markets, upward price volatility in new wholesale markets, major utility mergers and reorganizations and the emergence of new competitive energy service companies, retail competition pilots, and limited retail markets opening in several states. In summary, for an industry that has relied upon joint planning of transmission and generation and relatively stable planning horizons, the transition to competition has created general uncertainty concerning the future.

In order to address the broad long term changes ahead, it is important to understand the key forces driving electric industry restructuring, experience with deregulation in other infrastructure industries, and changes proposed at the federal level and in other states.

1.1.2 Forces Driving Electric Industry Restructuring

Electric industry restructuring can be attributed to several key factors. It has generally been recognized that once transmission access began to open up and allow more wholesale transactions in the early 1990s, large industrial users and competitive wholesale suppliers in high-cost states pressed for access to develop competitive contracts at the retail level. Supporting these efforts were advances in generating plant and transmission technologies, electricity price disparities between states and regions, and political support for the philosophy of deregulation.

As competition evolves in the electricity industry, market forces could create additional new technologies currently unforeseen as well as marketer packages of combined energy services (i.e. natural gas and electricity), or combined "wires" services including telecommunications, Internet, and cable television, or even more diverse packages including home security and lawn services.

As wholesale markets expand, there is an expectation that the price of wholesale power will decline from previous levels in high-cost states and remain stable or slightly increase in low-cost states as the market prices reflect demand and as market risk is incorporated into price. However, early experience shows a high level of volatility in these markets and an increase, rather than a decrease, in wholesale prices of high-cost states. Recent studies conducted in low-cost states have indicated the potential for substantial increases in power prices. Other national studies, which will be discussed later in this report, indicate conflicting results as to whether Nebraska's consumers would experience price increases or decreases as a result of retail competition.

The opportunity for a low-cost state's generators to sell into the wholesale market can create pressure on low electric rates, depending upon the extent to which proceeds from these sales are returned to maintain or reduce current retail electricity prices. Of special significance and concern will be the extent to which a low-cost state's generating facilities are used to sell to customers outside the state of the detriment to electric rates within the state.

Expectations concerning lower costs from competitive markets are based on the assumption that market forces can bring about efficiencies and reduce costs better than a regulated market system.

Comparisons are often made between efforts to establish competitive retail markets in the electric industry, and deregulation and competition that is evolving in other infrastructure industries such as airlines, telecommunications, and natural gas. The electric industry is often viewed as the last major infrastructure industry to be deregulated.

The magnitude of the changes involved in creation of competitive markets and restructuring of electric companies dwarfs all other deregulation. No other industry approaches the complexity of issues and the amount of capital in transition. Because of the differences in each industry, great care must be taken in attempts to project parallel results.

1.2 Deregulation of Other U.S. Infrastructure Industries and in Other Nations

During the last two decades, deregulation of the major transportation and utility industries was brought about in part by the following deregulation initiatives:

  • Natural Gas Policy Act of 1978 and FERC Orders
  • Airline Deregulation Act of 1978
  • Motor Carrier Reform Act of 1980
  • Staggers Rail Act of 1980
  • Telecommunications Act of 1996 and Court Ordered Divestiture

While direct comparisons to the electric industry are limited, experience in the deregulation of these industries offers lessons that may prove useful.

The results of deregulation of other infrastructure industries are mixed at best. As seen in telecommunications and natural gas, much of the competitive structure remains to be put in place for small commercial and residential consumers. There have clearly been changes in structure of the industries, and technological advances have been fostered, but this must be weighed against the "winners-and-losers" experience at the local level, and corporate consolidations that may undermine viable competition.

General findings that may be applied to the electric industry from the experience in other infrastructure industries: 1) small commercial and residential consumers and those in rural areas face questionable benefits from deregulated markets; 2) it will take time for a competitive system to evolve to serve all consumers; 3) technological advances and new packages of services may be anticipated; 4) prices may not decline as anticipated; 5) greater and not less regulatory oversight may be required; 6) in particular, market power restrictions and regulatory oversight will be needed to prevent anti-competitive behavior.

In addition to the U.S. experience in deregulating and restructuring key infrastructure industries, such general findings are supported by experience of deregulation and restructuring the electric industry in other nations that began in advance of the U.S.

Deregulation and restructuring of the electricity industry in the U.K. was accompanied by a major extension of economic regulation.

In general electric industry restructuring in other nations indicates that:

1) expanded wholesale competition does not necessarily equate to lower cost power prices, 2) retail competition does not assure equal access for all customers and broad-based "customer choice", 3) transitions to competitive markets will require on-going legislative and regulatory involvement and are likely to take a decade or more to mature.

1.3 Activity at the Federal Level

At the federal level there are a number of bills before Congress to restructure the electric industry. In addition to these proposals, regulatory activity at FERC could affect Nebraska systems. The formation of Independent System Operators or regional transmission companies and expanded authority for FERC, could place increased pressures on Nebraska systems to adopt certain practices or policies related to transmission access and wholesale competition. FERC Orders 888 and 889, issued in April 1996 to implement the requirements of the Energy Policy Act of 1992; require all jurisdictional transmission owners to provide non-discriminatory open access to transmission to all current and potential users. It is important to note that FERC orders apply to "public utilities" that are generally defined as private investor-owned companies under FERC's jurisdiction. Public power and rural cooperative systems in Nebraska are not currently subject to FERC jurisdiction. However, because public power and rural cooperative systems own transmission lines that are interconnected with jurisdictional utilities and because they are members of regional power pools (such as MAPP), they are impacted by the FERC orders

FERC's goal is to eliminate the remaining patchwork of closed and open jurisdictional transmission systems and ensure that all these systems, including those that already provide some form of open access, cannot use monopoly power over transmission to unduly discriminate against others.

As noted earlier, Congress has initially left the timing and nature of electric industry restructuring up to the states to decide. States are moving forward on varying schedules and differing proposals for competition. As of October 1, 1999, 21 states have passed legislation to establish retail competition. Three states have established competitive markets by regulatory order, and 24 states and the District of Columbia, are studying the issue. In addition, 24 low-cost states, including Nebraska, have petitioned Congress to allow states to make their own determinations concerning the timing and form that competition and electric industry restructuring will take.

Both direct and indirect pressures resulting from federal actions and evolution of the market can be expected to increase. While federal consensus has not yet emerged, it is anticipated that after the year 2000 elections, Congress will be much more likely to act on this issue.

In the meantime, Nebraska has an opportunity to develop a plan based on its own conditions concerning the timing and elements of electric competition. The following summaries of each chapter outline the key points that may help to inform Nebraska's plan.

CHAPTER TWO:   Electric Industry Restructuring in Other States

This chapter reviews activity to establish wholesale and retail competition in other states. It looks at experience in states that have established retail markets and at preconditions for market and key issues being addressed by other states. The chapter also examines market transformation that is occurring with a focus on merger activity of significance to Nebraska. It concludes with a review of the pressures that may face Nebraska from neighboring states, regional agencies, and federal agencies.

  1. All states are facing major changes in the electric industry, even without state legislation or rules for competition being passed or promulgated.
  2. 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.
  3. 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.
  4. 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.
  5. New business structures, alliances and multiple service providers are under consideration or forming
  6. Electric utilities in Nebraska and neighboring states will all engage in an expanded wholesale power supply market, but no determinations have been made in Iowa, Kansas, South Dakota, Wyoming, or Colorado to establish retail competition.
  7. 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.
  8. Major mergers and extensive structural change are occurring in the industry, even in states which have not passed legislation or regulatory orders. For Nebraska several major mergers in surrounding states could affect wholesale markets and increase the pressure to initiate retail competition
  9. The broad effect of mergers in the Nebraska region is to create two large electric utility holding companies in Iowa where there were originally six, and to create one large electric utility holding company in Missouri/Kansas where there were originally three utility companies. Typical concerns that arise from electric utility mergers: 1) increased market concentration in generation and/or transmission ownership; 2) significantly increased growth in number of retail customers under single entity; 3) significantly increased corporate size of merged entity; 4) "convergence" of various services in new entity.

TABLE 2-1 . Utility Mergers and Acquisitions in North Central U.S.

Merger of:

With

Date of Merger

New Entity

Notes

Midwest Energy (Iowa Public Service)

Iowa Resources (Iowa Power and Light)

1990

Midwest Resources, Inc.

Merger of Holding and Operating Companies

IE Industries (Iowa Electric Light and Power)

Iowa Southern Utilities

1991

IES Industries, Inc.

Acquisition

Western Resources (Kansas Power and Light)

Kansas Gas and Electric Company

1992

Western Resources, Inc.

Acquisition

Midwest Resources Inc.

Iowa-Illinois Gas and Electric

1995

MidAmerican Energy Company, Inc.

Merger

Union Electric Company

Central Illinois Public Service Company

1997

Ameren Corporation

Merger

WPL Holdings Inc.

IES Industries and Interstate Power Company

1998

Alliant, Inc.

Merger

CalEnergy Company, Inc.

MidAmerican Energy Holdings Co

1998 (announced and approved by stockholders)

MidAmerican Energy

Purchase/Merger

WPS Resources Corp. (Wisconsin Public Service

Upper Peninsula Energy Corp.

1998

WPS Resources Corp.

Acquisition

Western Resources, Inc.

Kansas City Power and Light Co.

1998 (filed amended plan)

Westar

Merger proposal

Northern States Power . Transmission Co. subsidiary

Alliant Inc. transmission facilities

1998

Northern States Power . Transmission Co. subsidiary

Lease of transmission system facilities

MidAmerican Energy

CBS and Home Real Estate Companies (Omaha)

1998

 

Acquisition

Northern States Power

New Century Energies

1999 (Approval Pending)

Xcel Energy

Merger

CHAPTER THREE: Retail Competition Customer Choice and Consumer Protection

Chapter Three addresses fundamental issues of retail competition, consumer choice and consumer protections specific to conditions in Nebraska. It examines wholesale supply pricing and other preconditions for retail competition. It outlines the interest of Nebraska consumers in "customer choice" and the regulatory structure and rules needed for consumer education and protection. It also offers the views and recommendations of the Advisory Group and the Task Force. In summary, the chapter outlines consumer-related elements that need to be in place if retail competition is to be established in the state.

  1. 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.
  2. Surveys of consumers indicate a certain amount of interest in retail competition in Nebraska.
  3. The concept of "customer choice" and the freedom it implies has substantial appeal to consumers, but due to practical matters of relatively high transaction costs and low profit margins, "choice" and competitive access for small consumers remains an unrealized goal in open market states. Such a failure in Nebraska would affect more than 700,000 of the state's 835,000 metered electric consumers.
  4. 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.
  5. Consumers appear to be most interested at this point in their electric supplier's core business, and not additional, unrelated services.
  6. 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.
  7. 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.
  8. In a competitive retail market, statewide standards and policies would be needed, including a uniform "Consumer Bill of Rights."
  9. Designation and development of a statewide regulatory body to augment the functions of local government would be essential for a competitive retail market.
  10. Participation in retail competition should not be mandated, but local systems should be able to opt in through a public process at the local level.

Table 3-1 Nebraska Retail Customers

STATE OF NEBRASKA - RETAIL

Class of Consumers

No. of Consumers

% of Consumers

Energy (MWH)

% of Sale

Revenues ($1,000)

% of Rev.

Residential

687,214

82.2

7,564,902

37.0

$482,306

43.5

Commercial

105,847

12.7

6,648,369

32.5

$339,276

30.6

Industrial

2,368

0.3

4,775,113

23.4

$188,115

16.9

Irrigation

31,569

3.8

749,624

3.7

$61,504

5.5

Other

8,907

1.0

692,219

3.4

$39,049

3.5

TOTAL

835,905

100.0

20,430,22727

100.0

$1,110,250

100.0

>Source: L.R. 455 Survey

CHAPTER FOUR: Three Models to Address Nebraska Key Issues and Potential Impacts

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.

  1. 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.
  2. 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.
  3. 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 a statewide Nebraska Generation Organization. Retail level functions could remain largely unchanged, but the current retail structure could face mergers, alliances, or divestiture.
  4. 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.
  5. The Open Access Structure requires the most significant change from the Current Structure. The same wholesale level changes could apply, and at the retail level any customer could theoretically have access to a competitive supplier. States utilizing an Open Access form have required divestiture of generating assets to assure fair competition. Open Access, as well as Limited Access would create a need for a statewide regulatory system, and would alter the principles of operation for the Nebraska systems, if they were to engage in the competitive retail market.
  6. In assessing potential changes it is important to understand the relationships of the Nebraska systems outlined in Chart 4-1.
  7. Chapter 5 provides detail on considerations of the Modified Current Structure, Limited Access and Open Access models.

CHAPTER FIVE:  Changes and Impacts on Industry Structure and Operations

This chapter examines the impacts of electric industry restructuring and formation of competitive markets on existing utility structure and operations in Nebraska. It outlines the key issues and options related to structure and operations. It provides an assessment of the types of changes that would be required in Nebraska for variations in the industry structure and its operations. This chapter addresses a broad range of restructuring and competition issues related to structure and operations, and takes up divestiture of generating plants and distribution systems as one of the possible elements of restructuring. Other studies could focus on divestiture alone, however, this report addresses it only as one option in the general context of restructuring and competition. The chapter closes with a description of Advisory Group positions on key issues and options and recommendations of the Task Force.

  1. 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.
  2. 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.
  3. 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 that often translate into long term economic impacts.
  4. 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 resources.
  5. 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 for greater efficiency in Nebraska's transmission network.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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. A key precondition would be a substantial and decisive shift from the low wholesale power cost advantage Nebraska currently enjoys, which may continue as indicated in Chart 5-1.

CHART 5-1 WHOLESALE POWER PRICE PROJECTIONS FOR NEBRASKA AND REGION 1999-2010

CHAPTER SIX:  Impacts on the Environment, Energy Efficiency, and Renewable Energy

Chapter Six provides context for the consideration of issues related to the environment, energy efficiency and renewable energy. Specifically, it discusses: the key environmental issues resulting from electric utility operations; the likely impact of electric utility restructuring on the economics that drive utility generating plant decisions; and mechanisms considered in other states to maintain and advance environmental protection, energy efficiency and renewable energy development. It includes recommendations on the mechanisms to be considered for Nebraska.

  1. Changes to competitive retail market systems could have impacts on the environment and energy efficiency and renewable energy
  2. A competitive retail market could also have possible environmental impacts on air emissions, water quality and management of water resources.
  3. 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.
  4. Several mechanisms for environmental protection need to be considered: a) Emissions and fuel taxes to address environmental externalities; b) Portfolio standards; c) Choice for Clean Energy and Green Pricing; d) Surcharges or Access Charges.
  5. Care needs to be taken in formulation of environmental policies to address competitive issues with surrounding states: a) possible adverse impacts of more stringent regulation/standards; b) impacts on interstate economic competition.
  6. 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.
  7. 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.
  8. 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.
  9. Legislative solutions rather than individual Local Distribution Company solutions are needed.
  10. 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/net metering.
  11. Policies for these programs have been adopted both in states that have passed legislation to establish retail competition, as well as states that have not. This is indicated in Table 6-1 below.

Table 6-1 STATE POLICIES FOR DEVELOPMENT OF RENEWABLE ENERGY

State

Types of Policies In Place

 

Renewable Energy Requirement

Public Benefits Fund

Net Metering

Disclosure

Arizona

 

 

Yes

 

California

 

Yes

Yes

Yes

Colorado

 

 

Yes

 

Connecticut

Yes

Yes

Yes

Yes

Delaware

 

 

Yes

 

Idaho

 

 

Yes

 

Illinois

 

Yes

Yes

 

Indiana

 

 

Yes

 

Iowa

Yes

 

Yes

 

Maine

Yes

 

Yes

Yes

Maryland

 

 

Yes

Yes

Massachusetts

Yes

Yes

Yes

Yes

Minnesota

Yes

Yes

Yes

 

Montana

 

Yes

Yes

 

Nevada

Yes

 

Yes

Yes

New Hampshire

 

 

Yes

Yes

New Jersey

Yes

Yes

Yes

Yes

New Mexico

 

Yes

 

Yes

New York

 

Yes

Yes

Yes

North Dakota

 

 

Yes

 

North Carolina

 

 

Yes

 

Ohio

 

 

Yes

Yes

Oklahoma

 

 

Yes

 

Oregon

 

Yes

Yes

Yes

Pennsylvania

Yes

Yes

Yes

 

Rhode Island

 

Yes

Yes

Yes

Texas

Yes

 

Yes

Yes

Vermont

 

 

Yes

 

Virginia

 

 

Yes

 

Washington

 

 

Yes

 

Wisconsin

Yes

Yes

Yes

 

Data current as of 10/99

Source of survey information: Union of Concerned Scientists (www.ucsusa.org/energy)

CHAPTER SEVEN:  Changes and Impacts on Law, Governance, Regulation and Taxation

Chapter Seven focuses on changes in Nebraska's framework of law, governance, regulation and taxation related to retail competition. It contains an examination of the different ownership and governance constructs for Nebraska consumer-owned systems and electric utilities operating in other states. It includes a discussion of the state constitutional provisions and statutes relating to power suppliers in Nebraska and changes that would be needed if the state's policy-makers decided to proceed with retail competition and restructuring of the industry. It also includes an extensive discussion of tax law and methods to preserve tax revenue streams.

Nebraska's current law, governance, regulation and taxation provide a framework for consumer-owned systems to operate as non-profit monopolies. Accommodation of an expanded wholesale power supply market and transmission reorganization in the region can occur with relatively few changes. Establishment of retail competition, however, would require a comprehensive revision of this framework.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. If 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.
  8. 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.
  9. 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.
  10. Certain advertising efforts by public power entities are potentially controversial while investor-owned utilities may spend virtually any sum. 
  11. 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.
  12. Competition and nontraditional regulation ultimately may preclude the simple pass-through to ratepayers of a utility's tax burden. Consequently, these changes bring pressure upon regulators, legislative bodies and electric utilities to evaluate tax costs.
  13. State laws would need to be revised in a manner consistent with federal law that preserves existing tax revenues.
  14. The Task Force recommends that Nebraska adopt tax revenue-neutral impacts as a minimum policy guideline.
  15. The Task Force recommends discussions with neighboring state governments and state government associations to develop alternatives that avoid interstate conflicts.
  16. 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).
  17. 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 framework.

Table 7-1 ENTITIES AND RANGE OF TAX PAYMENTS UNDER THREE MODELS

STRUCTURE ELEMENTS

CURRENT

LIMITED ACCESS

OPEN ACCESS

Market Characteristics

Type of Entity

 

  • Consumer-owned
  • Consumer-owned
  • Investor-owned
  • Power Marketer
  • Power Broker
  • Aggregator
  • Transmission Company
  • Service Company
  • Consumer-owned
  • Investor-owned
  • Power Marketer
  • Power Broker
  • Aggregator
  • Transmission Company
  • Service Company

Type of Service

  • Bundled
  • Bundled/Unbundled
  • Supply Competitive
  • T&D Regulated
  • Metering, Billing & Collecting
  • Unbundled
  • Supply Competitive
  • T&D Regulated
  • Metering, Billing & Collecting
Transfer Payments
  • Yes
  • TBD
  • TBD
PILOT (C,S)
  • Yes
  • TBD
  • TBD
Revenue Tax (S)
  • Yes
  • TBD
  • TBD
Property Tax (S)
  • Yes
  • TBD
  • TBD
Distribution System Leases (O)
  • Yes
  • TBD
  • TBD
General Fund Transfers (O)
  • Yes
  • TBD
  • TBD
Franchise & Contracts (O)
  • Yes
  • TBD
  • TBD
Income Taxes (S)
  • No
  • TBD
  • TBD
Sales & Use Taxes (S)
  • Yes
  • TBD
  • TBD
Broad Energy Tax (S)
  • No
  • TBD
  • TBD
Transaction Tax (S)
  • No
  • TBD
  • TBD

Legend:
C: Constitution Based
O: Ordinance Based
S: Statute Based
TBD: To Be Determined

     

      

      

    Location of Service Suppliers

    • Local

    • Local
    • Intrastate
    • Interstate

    • Local
    • Intrastate
    • Interstate

    CHAPTER EIGHT:Cost/Benefit Considerations

    Chapter Eight examines issues related to the existing costs and benefits of the current structure of Nebraska's electric industry, and the potential costs and benefits for restructuring of the industry to establish retail competition. While a precise comparison of costs and benefits is beyond the scope of this study, it is possible to illustrate the types and the relative magnitude of comparative costs and benefits to provide perspective for policy determinations.

    The chapter begins with an examination of wholesale power costs and an illustration of the comparative costs and benefits of Nebraska's current utility system. It then provides an extensive examination of transition costs. It is significant to note that while there is a potential for stranded cost on two generating plants, on a statewide basis Nebraska has no net stranded cost; a measure of the efficiency of the state's consumer-owned systems. The chapter also includes discussion of tax revenues and methods of collection in a system of retail competition. It concludes with a summary of recommendations.

    1. 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.
    2. 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).
    3. 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.
    4. The policy conclusion that may be drawn from an initial cost/benefit illustration is that retail competition cannot assure savings for the majority of Nebraska consumers until a substantial and decisive shift has occurred in the relative wholesale power costs of Nebraska and the region.
    5. 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.
    6. 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.
    7. 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 to offset higher cost generation.
    8. Time is an important factor in mitigating stranded costs
    9. 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.
    10. 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.
    11. Purchased power contracts existing at the effective date of retail choice legislation in Nebraska should be honored for the life of the contract.
    12. The costs of any stranded fuel and/or fuel transportation contracts should be handled in the same manner as the associated generation. Start-up and on-going costs are incremental to current costs and should be recovered from consumers in a choice environment.
    13. 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.
    14. 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.
    15. Nebraska's utilities should mitigate stranded costs to the extent possible before retail competition begins.
    16. Certain existing benefits will be stranded as a result of retail choice. These benefits will have to be recovered through user or access fees.
    17. 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.
    18. Stranded costs, start-up costs, and on-going costs should be recovered from all consumers in a retail competition environment.
    19. Transition cost recovery should be made with non-bypassable access or user fees as appropriate.
    20. 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.
    21. 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.
    22. Nebraska's general tax policy should result in revenue neutral impacts to taxing entities in a retail choice environment.
    23. 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 analyses.

    Table 8-4 SUMMARY OF STATE TRANSITION COST PROVISIONS

    State

    Transition Cost Feature

    Alabama

    Allows reasonable stranded cost recovery through exit fees. For public utilities that are not under PSC jurisdiction, special state courts would review contracts and stranded investment claims. In all cases, utilities could seek 100 % recovery for losses subject to some mitigation rules.

    Arizona

    ACC's deregulation plan allows for stranded cost recovery using exit fees and mandates using mitigation measures; full recovery of stranded costs is possible but not assured. The bill permits stranded cost recovery via a surcharge on distribution service, to be collected through 12/31/04.

    California

    AB 360 allows utilities to issue $7.3 billion in bonds (securitization) to pay off stranded investments. The CPUC voted that certain onsite generation serving new or incremental load, that does not require use of a utility's transmission or distribution system, can be exempt from the stranded cost recovery competition transition charge.

    Connecticut

    To recover stranded costs, utilities must separate their transmission and distribution business and sell their non-nuclear generation by 000 and interests in nuclear generation by 1/2004. Utilities will be allowed to sell bonds to cover stranded costs (securitization) up to the 10% rate reduction. The plan would allow full recovery of stranded investment costs through a universal charge on customer bills.

    Delaware

    PSC final report recommends that utilities have an opportunity to recover stranded costs. The PSC is to determine the magnitude of reasonable stranded costs for each utility.

    Illinois

    HB 362 allows for recovery of stranded costs based on a formula for lost revenue approach to determine the amount of transition costs which utilities can recover from customers during the change from a regulated to a competitive environment. IOUs are allowed to collect transition costs through December 31, 2006. They will be allowed to petition the Illinois Commerce Commission to extend this period to December 31, 2008, based on financial integrity, ability to provide service, impact on competition and the IOU's prudence

    Maine

    LD 1804 allows recovery of stranded costs after reasonable mitigation efforts, but deferred detailed decisions to the 1998 legislative session. The law requires investor owned utilities to sell their generation assets and become wires companies by March 1, 2000.

    Maryland

    PSC order states that utilities be allowed recovery of stranded costs. Utilities must file plans for stranded cost recovery by 3/98. The selling off of generating assets, or divestiture, is not required nor prohibited. Also, the PSC may approve securitization to mitigate transition costs

    Massachusetts

    Legislation allows full recovery of stranded costs over a 10-year transition period

    Michigan

    Proposed PSC plan would allow full recovery of stranded costs using exit fees through 2007. Stranded cost recovery would feature a periodic true-up process to ensure fairness

    Minnesota

    10/97: PUC report proposed exit fees to pay percentage of stranded costs.

    Mississippi

    11/97: Report recommends PSC have discretion in recovery of stranded costs, on a utility-by-utility basis, through a wires charge. Exit fees and securitization were deemed anti-competitive and would not be used.

    Montana

    SB 390 allows recovery of stranded costs through nonbypassable customer transition charges. It also allows for securitization for financing certain transition costs.

    Nevada

    The PUC is authorized in AB 366 to determine recoverable stranded costs and may impose a procedure for the direct and unavoidable recovery of allowable stranded costs from ratepayers. However, stranded cost recovery is not guaranteed.

    New Hampshire

    HB 1392 states that utilities should be allowed to recover net unmitigated stranded costs, and are obligated to take reasonable measures to mitigate their stranded costs. Nonbypassable charges to consumers is recommended as the recovery mechanism (entry and exit fees are not preferred). The PUC Final Plan discusses stranded cost recovery through divestiture of generation assets and contracts and securitization of debts.

    New Jersey

    .8/98: In a ruling on PSE&G's restructuring plan, an ALJ has opined that PSE&G should recover from ratepayers most of its stranded costs and would have to cut rates by 10-12 %. Another ALJ issued an initial decision on Atlantic City Electric Co.'s stranded costs and unbundling filings agreeing that stranded cost estimates are acceptable and should be recovered. Legislative and BPU approval are needed to implement utility restructuring plans. Utilities would be entitled to recover all non-mitigatable stranded costs over an 8-year period, including nuclear decommissioning costs. Total stranded costs for the state's four IOUs are estimated at $7 billion

    New York

    In the PUC order, it states that the PUC will determine each utility's allowable recovery of stranded costs. Utilities are expected to use creative means to reduce the amount of stranded costs prior to consideration. Utilities will include stranded cost recovery plans in their restructuring filings with the PUC.

    Ohio

    12/97: Stranded costs were addressed in the report issued by the co-chairs of the Legislative Joint Committee on Electric Deregulation. The plan allow for recovery of stranded costs using nonbypassable wires charges. Utilities would be allowed during the 5-year transition period beginning 1/2000 and ending 12/2004 to receive "transition revenues" or stranded costs under certain conditions, but likely expect less than 100% of recovery.

    Oklahoma

    4/97: Under SB 500, each entity must propose a recovery plan for stranded costs. Transition charges can be collected over a 3- to 7-year period and must not cause the total price for electric power to exceed the cost per kWh paid by consumers when the law was enacted during the transition period

    Pennsylvania

    HB 1509 allows stranded cost recovery through CTC's; however, the detailed decisions and amount of recoverable costs are left to the PUC. The legislation expects utilities to use reasonable mitigation measures, and securitization is allowed but not required.

    Rhode Island

    Stranded costs recovery is allowed through a customer transition charge of 2.8 cents per kilowatt-hour from 7/97 through 12/2000, and at rates subsequently set by the PUC through 2009. At that time, utilities must sell off 15 percent of their facilities to determine a market value in order to readjust the stranded cost transition charge.

    South Carolina

    In the proposed implementation plan submitted by the PSC, recovery of reasonable, verifiable stranded costs is allowed. Utilities would submit recovery plans for approval by the PSC.

    Texas

    5/98: The PUC's revisions to their plan for deregulation would allow securitization of stranded assets, estimated to be $4.5 billion if retail competition happens in 2001. Deferring full competition one more year would lessen stranded costs to $3.3 billion, and delaying competition until 2003 would set stranded costs at approximately $2.3 billion.

     

    Chart includes information from retail competition reports from EIA and NRECA

    CHAPTER NINE:Public Process and Timing Considerations

    Chapter Nine 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 and offers recommendations on public process for Nebraska. The chapter describes "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 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 system, public power district, or rural electric cooperative would have the opportunity to opt into the competitive retail market through its own public process.

    1. 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.
    2. 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 could delay the opportunity for all consumers to participate.
    3. 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.
    4. The "condition-certain" framework requires that a definitive and sustained shift in regional wholesale 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, consumer education, green power standards, public benefits and standards, determinations on methodologies for stranded cost quantification and recovery, rules for access pricing;
    • Legislative provisions and processes for revenue-neutral state and local tax impacts;
    • Follow-on studies completed (statewide Generation Organization or Power Optimization Center, Transmission Efficiencies, Threshold Benefits Study)
    • Opt-In by Local Systems.
    1. While timing of the Initial Legislation is at the discretion of the Unicameral, consideration should be given to the opportunity that currently exists prior to a possible federal mandate, and in view of the competitive markets forming for other "wires" and energy-related services in the state. Consideration may also be given to the possibility that early action could assist with modification and enhancement of the current structure of the industry and assure that Nebraskans continue to enjoy low-cost power resources.

    CHART 9-1 STEPS FOR CONDITION-CERTAIN PHASING