Will Nebraska Alter Its Customer-Owned Electric System?

For several years, many at the state and national levels have been predicting Americans would be choosing their electric company much like they select a long-distance carrier. They nicknamed this "the breakup of the last big monopoly" or "the battle of the Baby Bulbs." But in Nebraska that option could be far into the future, according to a new legislative study.

For the past three years, a group of 50 Task Force members have been looking at the state's unique power structure - the only state where the ratepayers own all the electric systems - and how to adapt to changes happening in the electric industries in other states.

24% Below the Average

In September, the Task Force released its preliminary findings and recommendations for consideration by the Legislature. One key recommendation was for the state to identify market conditions that must be met before any consumer in Nebraska's structure could be changed. Because the average rates in the state are already 24 percent below the national average, the study group felt few would benefit from opening the state's electric system to competition.

In other states that have opted for competitive electric systems, consumers have either benefited from very small mandated rate reductions - usually five to ten percent . or seen their rates rise.

In California, where hundreds of millions of dollars were spent to explain the new system to ratepayers and in advertising by new electric companies, about one percent of the state's residential customers changed electric companies. An estimated 20 percent of the largest customers, however, have switched electricity providers. Today, because of stranded assets and transition costs, some residential customers are actually paying more for electricity than under the utility monopoly system.

Under the study group's proposal, competition would only be allowed in Nebraska when the wholesale cost of electricity surpassed average regional costs. The group also recommends that the state's Power Review Board examine and propose the conditions triggering restructuring and how such a restructured industry would function. The report suggests that additional changes to laws may be necessary.

Federal Mandate Uncertain

Despite trying for several years, Congress has been unable to craft legislation encompassing nationwide restructuring of the electric industry. In part, this is because a quarter of the nation. s customers is served by publicly owned systems. Public ownership was not a factor when other industries . telephones, airlines and natural gas, for example . were deregulated. Another factor is that electricity is deemed far more essential than these other services.

The latest Congressional hearings on proposed legislation have focused on how to resolve tax issues between privately and publicly owned systems. While a House of Representatives subcommittee did forward legislation, experts have predicted it will not be widely supported without substantial changes. The Senate has already abandoned the issue for this year. Previously considered items such as federally mandated restructuring and opening of electric markets by a certain date have been abandoned.

Things to Ponder

Status of State Industry Restructuring Activity as of October 1, 1999

            

1. Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Maine, Maryland,
Massachusetts, Montana, Nevada, New Hampshire, New Jersey, New Mexico,
Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, and Virginia.
2. Michigan, New York, and Vermont
3. None
4. Alabama, Alaska, Colorado, District of Columbia, Florida, Georgia, Hawaii,
Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Mississippi,
Missouri, Nebraska, North Carolina, South Carolina, South Dakota, Tennessee, Utah,
Washington, West Virginia, Wisconsin, and Wyoming

The Advisory Group made a number of recommendations that may be considered by the Natural Resources Committee or the full Legislature:

1. A new market system must have mechanisms in place so prices are fair, just and reasonable for all consumers. There must also be a statewide body so prerequisites to a competitive market are in place before moving to the next step.

2. Adequate consumer protection mechanisms must be in place prior to moving to retail competition, including a statewide oversight agency, and provisions for a consumer bill of rights, consumer education and protections from abusive marketing practices.

3. Availability, affordability, reliability, efficiency, quality, safety, environmental protection and opportunity for economic development must be maintained or enhanced. These features should be available in a competitive market . through a combination of regulated and competitive market elements . with local, state, regional and possibly federal oversight.

4. Principal benefits and elements of public power, including low costs and local control, should be preserved.

5. Benefits of integrated resources planning, including demand-side management, conservation and renewable resources, should be preserved.

6. Existing environmental, financial and contractual commitments should be honored. The new structure should fold in commitments and contracts during the transition period and mitigation should allow recovery of stranded costs and benefits. These commitments to be honored include reasonable employee programs for early retirement, retraining, severance pay and adequate transition time.

7. All electric suppliers should have the flexibility to offer products, services, prices, terms and conditions that meet unique and diverse customer needs. To be competitive, incumbent electric suppliers should have the opportunity to offer other services.

8. All suppliers of electricity to Nebraska consumers are to be subject to fair and consistent laws, rules and regulations, including public access to information.

9. Price information should be public knowledge, competitors should be able to keep commodity cost information confidential. A statewide oversight agency should have sufficient access to confidential information to ensure against abusive market practices.

10. If retail competition is allowed in Nebraska, all electric suppliers should have the authority to conduct retail electric operations and provide products and services outside of Nebraska. Products and services offered outside of the state should not be at the detriment of Nebraska electricity consumers.

11. There should be a comprehensive plan implemented in step-by-step process that allows for meeting step goals before moving to next step.

"Nebraska is the only state in the country
entirely served by public power.  This means
no utilities operate to generate a profit, with
responsibilities to stockholders.  Instead,
Nebraska utilities are responsiblie to the
citizens of the state, and operate in their
best interests.  Electric service is clearly in
the public service.  Reliable and affordable
energy service is absolutely essential to the
survival of rural citizens of Nebraska. 
At the same time, every community in the
state, from Omaha to Chadron, deserves
economical electricity to meet their demands.

"Public power has a unique role to play
in Nebraska.  It helps keep many smaller
communities thriving.  The infrastructure
to provide electricity to less populated
parts of the state can be expensive. 
One of the major reasons public power
developed in Nebraska was to ensure
these communities are served
economically and reliably.  We must
not forget these roots."

Nebraska Governor Mike Johanns              
Excerpted from              
a guest editorial issued              
during Public Power month.              

12. Legislature should allow decisions by voters and local boards and commissions for electric systems to opt out of or into restructuring.

13. As part of a comprehensive plan to make a transition to retail competition, the Legislature should determine criteria and standards for divestiture of utility asset sales to private entities. The state should not mandate divestiture. The decision to divest should be at the local level. Municipals and cooperatives currently have these rights. Consider extending right-of-first-refusal to public power agencies for purchasing assets being divested.

14. In terms of timing, waiting for federal standards may not be prudent if the market moves faster than legislation. A better trigger point is having certain regional or state conditions met; such as when an open, competitive, efficient generating/wholesale market is in place in the region, oversight agencies are in place, and it can be demonstrated that all consumers will benefit from retail competition.

15. The preferred approach would be to set target dates for achieving discrete market steps. The process would not move forward without achieving the trigger mechanism goals for each step. Possible steps could include satisfactory development of regional wholesale market mechanisms such as an independent system operator, generator competition and vibrant wholesale energy market. Other steps should include having appropriate state oversight and public protection agencies in place.

16. Mergers should be voluntary, with decisions made at the local board level.

17. Alliances should be encouraged. Multiple service provisions involving alliances should also be encouraged.

18. Local actions needed to preserve Nebraska's options in considering structural and operational changes include: maintain local control authority for significant decisions involving participation in retail competition.

19. State actions needed to preserve and enhance Nebraska's options in considering structural and operational changes include: remove barriers from consumer-owned utilitys' ability to compete; take away barriers to divestiture of assets and expand participation of the Nebraska Power Review Board in current national debate on competition in electricity; qualify existing Nebraska hydroelectric resources as renewable.

20. Regional actions needed to preserve Nebraska's options in considering structural and operational changes include: delineate role of Nebraska Power Review Board for regional transmission and power exchange organizations and remove state barriers to public power participation in regional transmission organizations.

21. Federal actions needed to preserve Nebraska's options in considering structural and operational changes, include: maintain preference power; maintain tax-exempt debt for asset financing; support opt-out/opt-in choice for federal customer choice legislation; and support Nebraska hydropower to qualify as renewable in proposed federal portfolio standards.

What's Next

The Natural Resources Committee of the Legislature will likely have a hearing on the recommendations during the next session which begins in early January.  Bills implementing the study group's recommendtions may also be considered.

The complete text of the legislative task force's preliminary report can be found at the Energy Office's web site at www.nol.org/home/NEO

Editor's Note:
The last time discussion of deregulation of the state's electric industry appeared
in the Quarterly  was the Spring 1997 issue when the legislative study was just
getting underway.

Return to the Fall 1999 Newsletter