Chapter Three - STATUTORY AND REGULATORY OVERSIGHT

3.0 INTRODUCTION

As noted in the previous chapter, governance of electric utilities in Nebraska is based at the local level. However, the day-to-day functions take place within the statutory and regulatory oversight of the state and federal government. Policies of regional utility organizations such as Mid-Continent Area Power Pool (MAPP) also have a significant impact on Nebraska’s electric utilities. Regulatory and statutory requirements for the various types of utility systems differ to an extent that may be significant in considering a transition to a competitive retail market.

The following chapter examines the differing statutory and regulatory regimes for each type of system; the jurisdictions of federal, state and local government; issues of retail and wholesale service areas; and fundamental requirements for service to consumers.

3.1 STATUTORY FRAMEWORK

The authority of the legislature to establish statutory law and regulatory agencies to provide oversight for electric utilities is derived from the Nebraska Constitution. The authority of local governments to participate in this process is also derived from the Constitution and framed by statute. The development of this framework has been an evolutionary process in which the principle of local control and local jurisdiction has been a guiding force.1

Unlike most states, consumers have played a primary role in the development of the industry in Nebraska. Through referenda (Initiative 324) and the opportunities provided by the legislature in statutory powers, consumers have the ability to form public power districts, rural cooperatives and municipal systems at the local level and to participate in the regulation of those systems.

Since passage of the Public Power District Enabling Act in 1933, the legislature has functioned to promote, support and urge cooperation in local actions.2 During this time, the industry has replaced private utility companies with expanded service from municipal systems, rural cooperatives and public power districts. As these systems have matured, the legislature has assumed an oversight role, augmented by the formation of the state Power Review Board in 1963.3

The sections below discuss the relative authorities and range of powers of each type of utility system and the restrictions to which they are subject. Table 3-1 illustrates the limitations on provision of various types of services, especially those that may be provided by public power districts. Table 3-2 indicates the differing range of authority each type of system has to conduct business. Table 3-2 includes the ability to enter into strategic alliances with private companies and service providers, an important emerging issue.

(1) Where "Yes" is indicated for Home Rule Municipalities, no additional authority is needed from the state level. Local authorization or ordinances may be necessary for those services not currently being provided.
(2) Where "No" is indicated in any of the first four columns, but one other of the political subdivisions in those four columns has "Yes" indicated, or some other political subdivision in the state has that power, the Nebraska Interlocal Cooperation Act would allow that power to be legally exercised by the other political subdivision through an interlocal agreement.
(3) The legal authority for municipalities to provide these services is not clearly defined.

3.1.1 Public Power Districts

Public Power districts (PPDs) are organized under Chapter 70 of Nebraska’s statutes.5 This law authorizes the PPDs to engage in the generation, transmission and distribution of electric energy. They may do so in cooperation with other PPDs, municipalities, other public agencies or electric cooperatives. PPDs may also supply water for irrigation and provide for flood control at their facilities, construct and operate ethanol production facilities and provide satellite television services in locations not served by cable television as of April 1987. PPDs are authorized to conduct their business in other states, subject to the limitations in the PPD’s petition for creation and the laws of the other state.

Legislation enacted during the 1997 legislative session expanded the powers of PPDs.6 These added powers include the ability to engage in additional service activities for commercial and industrial customers. They also alter the Interlocal Cooperation Act by including the ability for PPDs to enter into contracts with municipal systems or other political subdivisions with dissimilar powers in order to have one of the entities exercise all or some of the powers of the other.7 This could allow a range of services to be offered to be offered by a public power district, provided the requirements of other restrictions are met.

As political subdivisions of the state and as public corporations, PPDs can sue and be sued, enter into contracts, fix rates and buy, lease and sell property. However, there are substantial limitations. They cannot levy taxes or issue bonds secured by tax funds. They can issue tax exempt revenue bonds to finance the construction of their facilities. Those districts serving rural areas have access to financing through the Rural Utilities Service. Real and personal property of the public power districts is exempt from taxation, although they are required to pay an in-lieu-of-tax and gross receipts tax on sales within incorporated municipalities.

Mergers and consolidations of power districts are allowed and have occurred on numerous occasions. A vote of the consumers of the district is not required to undertake this action. However, votes are necessary for other actions. With certain exceptions involving the sale of transmission or distribution lines that extend into another power district, the sale of surplus property, or voluntary modifications of service areas that require the transfer of facilities to an adjoining district. For those PPDs serving fewer than 13 counties, a majority vote of 60 percent of the electors is required to sell, lease or transfer properties to another district if the action is not part of a merger or consolidation. All public power districts are prohibited by statute from selling or leasing their property to any private person, firm or corporation engaged in the business of selling electricity for profit.8

3.1.2 Rural Cooperatives

Rural Cooperatives may be organized under Chapter 70, Article 7 of the state’s Nonprofit Corporation Act, Chapter 21-1901 et. seq. Nebraska-based cooperatives are all organized under the Nonprofit Corporation Act, except for the Nebraska Electric Generating and Transmission Cooperative which is organized under Chapter 70. A cooperative, other than one organized under Chapter 70, can engage in any lawful business activity approved by their members and authorized in their Articles of Incorporation. This may include selling other forms of energy and providing telecommunications services, cable television and selling and servicing residential appliances.

Mergers and consolidations of electric co-ops are clearly allowed under state law, but must follow the procedures specified by statute. Generally, approval of two-thirds of the members of the co-ops affected and approval of the boards of directors is required for a plan of merger to be approved.

Aside from being unable to legally transfer property acquired from a public power district to a private for-profit entity, there is no statutory restriction on the sale of a cooperative’s property to a private for-profit corporation. However, procedures in Nebraska statutes are required to be followed. As private corporations, the property of a cooperative is subject to property taxes.

The comparative range of authorities of PPD’s, cooperatives and municipal systems to conduct business is outlined in Table 3-2.

(1) Under state law, political subdivisions cannot do indirectly that which they are not authorized to do directly. (See State ex rel Johnson v. Consumers Public Power Dist., 143 Neb. 753, 10 N.W. 2nd 784, 152 A.L.R. 480.) MEAN is granted broad powers under Neb. Rev. Stat. 18-2441, subsection 8.
(2) Activities cannot involve lending of credit or actions that would risk tax-exempt status.
(3) See process and limitations described in Section 3.1.2.
(4) See limitations described in Section 3.1.2.
(5) Rural Cooperatives cannot transfer property acquired from a public power district to a private for-profit company.
(6) Subject to limitations in the PPD’s petition for creation and laws of the other state.
(7) Limited to wholesale sales of electricity and gas, although may also own facilities out-of-state.
(8) Broad range of activities allowable.
(9) Broad range of activities allowable.

3.1.3 Municipal Systems

Municipal systems in Nebraska are organized under the following chapters of Nebraska’s statutes: Cities of the Metropolitan Class (population of 300,000 or more) 14- 101 et seq. (Served by OPPD) 70-505; Cities of the Primary Class (population of more than 100,000 but less than 300,000) 15- 101 (Served by LES); Cities of the First Class, (population 5,000 to 100,000) 16-101; Cities of the Second Class (population of more than 800 but less than 5,000) 17-101; Villages 17-201.

Under Nebraska Statute 18-412.07, cities and villages that own and operate electrical facilities shall have and may exercise their power and authority to plan, finance, acquire, construct, own, operate, maintain and improve electric generation or transmission facilities located within or without the cities. As mentioned in Chapter 2, this authority may be conducted by an elected or appointed board and subject to oversight from the city or village council.

Under Nebraska Statute 18-412.08, cities and villages are empowered to participate jointly and in cooperation with one or more electric cooperatives or electric membership corporations in the establishment and operation of facilities of the generation or transmission of electric power and energy in order to achieve economics and efficiencies of scale.

When a public power district operates within the city or village, the district is required at all times to have a valid and subsisting franchise, either running to it as original grantee from such city or village or assigned to it by a grantee of the city. To sell or lease assets, a public vote may be required. If the public power district, such as NPPD, provides the services, the facilities and property cannot be sold to a for-profit business.

Under the Nebraska Constitution, municipal electric systems are exempt from property taxes, but may at local discretion make in-lieu-of-tax payments to the municipality.

3.2 JURISDICTIONAL AND REGULATORY ROLES

The requirements and powers regarding operation of the individual systems described above are utilized by public bodies at the local, state and federal levels. Each has specific areas of jurisdiction or overlap.

3.2.1 Local Jurisdiction and Regulation

As noted in Chapter 2, local level of government has jurisdiction and regulatory authority over rate setting and day-to-day operations and financing. This authority is based in the participation of voters/consumers through their city or village councils and/or electric board. Decisions may be made at public meetings, or through referenda questions placed directly before voters.

3.2.2 State Jurisdiction and Regulation

State jurisdiction covers the entire range of intrastate policies and operations, including the ability to alter local jurisdiction or regulation. The state’s unicameral legislature follows the powers and authorities established in the state Constitution and exercises plenary power over the industry from formation to financing. Citizen input is considered the legislature’s "second house" and the legislature utilizes public hearings to facilitate this process.

The Executive branch of state government also has a wide range of policy influence. The Governor proposes policy and legislation and appoints directors of state agencies that regulate, assist and coordinate the electric industry. State regulation applies largely to the formation and intrastate operations of the electric utilities. At the state level, the consumer-owned systems are regulated and/or assisted by the following regulatory bodies and state agencies:

• Power Review Board (see additional information below)
• Public Service Commission (see additional information below)
• Department of Environmental Quality (see additional information below)
• Energy Office (see additional information below)
• Department of Water Resources (oversees water permits for generation)
• Department of Economic Development (directs policy on urban and rural development)

3.2.2.1 Power Review Board

Of these agencies, the Power Review Board (PRB) has the most significant impact on electric industry operations. As noted previously, the board was created by the 1963 Legislature. Since then, regulatory duties have been added to the board’s original mission. One of the primary functions of the board is the certification of both retail and wholesale service areas that designate areas utilities may serve. There are 395 retail service area agreements and 21 wholesale service area agreements on file at the PRB. Each file contains the written agreement between the parties plus maps showing the outline of each service area agreement.10

The PRB also oversees joint planning to the extent that it exists. Nebraska law requires: "All retail power suppliers having adjoining certified service areas shall engage in joint planning with respect to customers, facilities and services, taking into account the considerations specified in Nebraska Revised Statute 70-1007 (five criteria), including the possibility that an area may be annexed by a municipality within a reasonable period of time." As part of its joint planning function, the PRB oversees formulation and filing of the Integrated Resource Plan by the Nebraska Power Association.11 (See Section 4.3 for information on the Integrated Resource Plan.)

3.2.2.2 Nebraska Public Service Commission

The Nebraska Public Service Commission (PSC) is a constitutional agency headed by five elected commissioners. Unlike state public service commissions in most other states, it does not have jurisdiction over retail rate-setting for electric utilities. The PSC is responsible for regulating telecommunications companies, grain warehouses and dealers, private water companies, taxicab and limousine operators, intrastate trucking companies, the adequacy of clearance of certain electric transmission lines and railroad safety. The PSC also has limited jurisdiction over new transmission facilities, particularly if those facilities may interfere with its other areas of oversight such as railroads. If utility services become increasingly bundled or packaged as "multi-services" in the future, the role of the PSC may become more integral to the operations of electric utilities.12

3.2.2.3 Department of Environmental Quality

The Department of Environmental Quality (DEQ) administers the rule, regulations and standards adopted to protect and improve water, air and land quality in the state.13 It includes the Water Quality Division, the Air and Waste Management Division, the Management Services Division, the Low-Level Radioactive Waste Program and the Environmental Quality Council. The DEQ can have a significant impact on the state’s power industry through its oversight of permits and air and water pollution standards. The agency also has an especially important role in the joint regulation (with the Department of Health and Human Services) of the disposal of low-level radioactive waste.14

3.2.2.4 Nebraska Energy Office

The Nebraska Energy Office was first created by an executive order in November 1973 to help respond to the energy crisis. It was a Department of Revenue division until 1977 when it was made a separate state government unit. It became a Governor’s Policy Research Office division in 1987. The Energy Office has no direct oversight responsibilities relating to the Nebraska electric systems. However, the agency’s statutory responsibilities grant it authority to develop comprehensive emergency energy plans, energy conservation and management strategies and long-term resource forecasts. The Energy Office administers the state’s energy conservation loan program and other federally mandated programs. It is also engaged in policy-making within the state and through regional and national organizations such as the National Governor’s Association.15

3.2.3 Judiciary

In addition to these Executive branch agencies, the state’s judicial system also plays a role in electric utility policy and operations. Appeals from the Power Review Board are brought to the court system, either the Supreme Court or the Nebraska Court of Appeals. Disputes relating to rates are generally governed by the state judicial system. Litigation over new legislation or policies promulgated by other agencies of the state government also may be subject to judicial review.16

3.2.4 Federal Jurisdiction and Regulation

The power and authority of the state is subject to the federal Constitution, Congress, the Supreme Court and the requirements of federal agencies which oversee implementation of federal law and regulations. Federal oversight for electric utilities generally applies to wholesale and interstate transactions, as well as to a range of environmental, safety and finance requirements. Federal law that has had major impacts on the electric systems in Nebraska includes:

• Securities Act of 1933
• Securities Exchange Act of 1934
• Public Utility Holding Company Act of 1935 (PUHCA)
• Federal Power Act of 1935
• Rural Electrification Act of 1936
• Reclamation Project Act of 1939
• Flood Control Act of 1944
• Clean Water Act of 1968
• National Environmental Policy Act of 1969 (NEPA)
• Clean Air Act of 1970
• Endangered Species Act of 1973
• Energy Supply and Environmental Coordination Act of 1974 (ESECA)
• DOE Organization Act of 1977
• National Energy Act of 1978
• Public Utility Regulatory Policies Act of 1978 (PURPA)
• Energy Tax Act of 1978 (ETA)
• National Energy Conservation Policy Act of 1978
• Power Plant and Industrial Fuel Use Act of 1978
• Economic Recovery Tax Act of 1991
• Nuclear Waste Policy Act of 1982
• Electric Consumer Protection Act of 1986 (ECPA)
• Tax Reform Act of 1986
• Clean Air Act Amendments of 1990 (CAAA)
• Energy Policy Act of 1992 (EPACT)

The following regulatory bodies oversee implementation of these and other laws and regulations that impact Nebraska utilities:

• Federal Energy Regulatory Commission (FERC)
• Department of Energy (DOE)
• Environmental Protection Agency (EPA)
• Western Area Power Administration (WAPA)
• Rural Utilities Service (RUS)
• Nuclear Regulatory Commission (NRC)
• Federal Communications Commission (FCC)
• Internal Revenue Service (IRS)
• Federal Emergency Management Agency (FEMA)
• U.S. Fish and Wildlife Service (USFWS)
• Securities and Exchange Commission (SEC)
• Municipal Securities Rulemaking Board (MSRB)

3.2.5 Organizations Outside of Nebraska that Influence Governance

In addition to federal jurisdiction and regulation, there are regional organizations such as the Mid-Continent Power Pool (MAPP) that affect transmission and generation availability and contract transactions in Nebraska. As described briefly in Chapter 2, MAPP is a voluntary organization of 60 full members, 19 associate members and six regulatory members serving more than 16 million people in seven states and two Canadian provinces. Its membership consists of investor utilities, cooperatives, municipals, joint action agencies, public power districts, independent power producers, marketers, a federal power marketing agency and two Canadian Crown Corporations. Each segment of the industry, except marketers and independent power producers, owns transmission in MAPP, but no segment owns a majority of the transmission in the MAPP region.17 The role of MAPP and its policies will be increasingly important to Nebraska utilities as competitive markets for power evolve. Chapter 6 discusses MAPP’s prospective role and possible impacts on Nebraska utilities in more detail.

The policies of neighboring states also affect the operations and service provided by Nebraska utilities to the extent that interstate transmission and generation is utilized and to the extent that Nebraska electric systems supply consumers in other states and out-of-state systems supply Nebraska consumers. This issue is also examined in Chapter 6.

3.3 FUNDAMENTAL SERVICE AND RATE REQUIREMENTS

State law establishes fundamental requirements for service to consumers. These laws we parallel to laws and requirements of other states although they my differ in application. In other states, a state regulatory agency may oversee application of these laws. In Nebraska they fall primarily under local jurisdiction and the implementation of the requirements may vary by type of utility. Table 3-3 indicates the varied policy making jurisdictions.

3.3.1 Universal Service

The term "universal service" describes a policy or goal of providing affordable electric service "to virtually all citizens regardless of their income." This policy is supported by common law requirements for public utilities, federal policies and programs, state statutory provisions and local utility policies and programs.18

Universal service requirements evolved from similar requirements for gas companies providing residential and commercial service prior to the advent of electric service. For electricity it took on particular significance for rural areas. In Nebraska, the push for universal service was largely a rural phenomenon which began in the early 1900s as rural residents began to undertake actions for access to the benefits of electricity which were being enjoyed by most residents of urban areas.

State policy requires: "Any supplier of electricity at retail shall furnish service, upon application, to any applicant within the service area of such supplier if it is economically feasible to service and supply the applicant."19 State law also provides authority to municipalities to establish requirements for service.20

The modern-day application of "universal service" policy can best be gleaned from a review of the state’s electric utilities’ line extension policies. These are the policies adopted by the local utility’s board of directors or a city council that lay out the conditions under which new electric service will be provided. Since the adoption of these policies are the responsibility of the local decision-makers, they can be tailored to fit the local conditions or the prevailing philosophy of the local board and considerable variation in them can be found.

Today, there are only a few rural electric systems in Nebraska that follow the old policy of "area coverage" where electric lines are extended to new customers at no cost to the consumer, wherever they may wish to locate. It is very difficult to generalize regarding electric utility line extension policies because there is a wide variation in the approaches taken. However, they can be divided into three categories: facilities-related, money-related and revenue-related.

Emergence of competition for retail customers could raise significant questions regarding who is responsible for connecting customers, or for paying the costs for connecting customers.

3.3.2 Obligation to Serve

The term "obligation to serve" refers to a responsibility or duty imposed on electric utilities both at common law and by statute to provide sufficient electric generation and transmission capacity to be able to provide adequate and reliable electric service to all customers, both retail and wholesale, within the utility’s assigned service area or with which it has contractual relationships.

The obligation to have adequate supplies to serve all connected customers is not a specific statutory or regulatory requirement in Nebraska. However, public policy is clearly indicated by state statutes that stipulate it is state policy "to provide citizens of the state with adequate electric service at as low overall cost as possible" and to provide "dependable electric service at lowest possible cost."21 In a consumer-owned system it is assumed that adequate supplies will be purchased or planned. Further, reliability and reserve requirements of MAPP make it mandatory for members to have adequate reserves and contingency supplies.

At the wholesale level, statutes require any Nebraska generating agency to provide an interconnection with any distribution system desiring power. There is also a requirement to sell power to the distribution system at wholesale if surplus energy is available. Surplus transmission capacity must also be made available for such transactions.22

In a competitive retail market, the requirement for adequate supplies and reserves would need to be assigned to a "default" provider.23 There are substantial concerns that inadequate planning and a loss of cooperation between utility systems could result in a loss of reliability and dependable service.

3.3.3 Fair, Reasonable and Non-Discriminatory Rates

Electric rates are generally based on cost-of-service principles. As noted in Chapter 2, large users who are less expensive to serve generally enjoy lower kilowatt-hour rates. Residential and rural consumers who are more expensive to serve face higher kilowatt-hour rates. The process and requirements for setting rates varies by type of utility system.

For public power districts and public power and irrigation districts, Nebraska Revised Statute 70-655 requires the board of directors of a public power district or a public power and irrigation district to set rates which permit the district to operate in a successful and profitable manner. It further requires that the rates set be "fair, reasonable and nondiscriminatory and so adjusted as in a fair and equitable manner to confer upon and distribute among the users and consumers of commodities and services furnished or sold by the district the benefits of a successful and profitable operation and conduct of the business of the district." In order to stimulate economic development, a PPD may provide discounted rates to large industrial customers for a period of five years under the Quality Jobs Act.

Municipalities are not required by state statute to fix fair, reasonable and non-discriminatory rates for electrical services. Nebraska law grants to the various types of municipalities a great deal of rate flexibility. Section 17-810 in the Nebraska Revised Statutes allows the Board of Public Works in Second Class cities to set rates. Statutes applicable to Cities of the First Class, Second Class and villages are found in Section 19-1404, whereby rates are set by ordinance. In the Lincoln Electric System’s case, the city council has adopted PURPA’s 133 rate-making standards, which requires cost-of-service rate-making. In addition, the Nebraska Legislature recently adopted a provision, similar to the discretion given to the public power districts, which allows municipalities to negotiate economic development rates under limited circumstances.24

A cooperative organized under Chapter 70, Article 7 is required to "be operated without profit to its members, but the rates, fees, rents or other charges for electric energy and any other facilities, supplies, equipment, appliances or services furnished by the corporation shall be sufficient at all times (1) to pay all operating and maintenance expenses necessary or desirable for the prudent conduct of its business and the principal of an interest on the obligations issued or assumed by the corporation in the performance of the purpose for which it was organized, and (2) for the creation of reserves." There is no requirement in statute that the co-ops' rates be "fair, reasonable and non-discriminatory" as required for the public power districts.

The rural distribution cooperatives organized under the Nebraska Nonprofit Corporation Act are not subject to the section quoted above or to the provisions which apply to public power districts and have a great deal of flexibility in setting their rates. The setting of rates is a matter left to the discretion of the co-op's board of directors subject tot he provisions of Nebraska Revised Statute 70-1017.

This law applies to all electric systems, cooperatives included, and permits a retail customer to petition the PRB for a determination of whether the system is treating all customers fairly and without discrimination within the same class. An appeal of the PRB's decision may be taken to the Court of Appeals.

Note: Local requirements vary depending upon the policy decisions of local boards. State requirements provide a common standard for each locality served. All PPDs are also required to meet the state standard for fair, reasonable and non-discriminatory rates for wholesale sales. Note (1) indicates that the PPDs may face a conflict with requirements for fair, reasonable, and non-discriminatory rates with the setting of special low-income or subsidized rates.

3.3.4 Low Income and Subsidized Rates

Most states require private investor-owned utilities to adhere to a set of standards and practices for those customers who qualify for low-income service. This typically includes: reduced rates, payment plans and other services related to public assistance programs. Municipal and other public power systems in those states are usually considered non-jurisdictional and establish their own programs and policies regarding low-income customers.

In Nebraska, low-income policies are locally-determined and may vary. All systems have shut-off policies and moratoria regarding shutoff schedules, but there is no uniform set of standards.

3.4 SUMMARY AND EMERGING ISSUES

The expansion of competitive wholesale markets and proposals for competitive retail service pose significant impacts for statutory frameworks and regulatory oversight. The diverse types of systems have varied powers and restrictions that affect their ability to compete. Local oversight my help to address local conditions and desires, but greater uniformity with or without competition may also serve to benefit consumers. The differences in the scope of powers and opportunities for the systems and the need for a level playing field would likely become exacerbated in a competitive environment. Among the fundamental questions and issues:

• Is there a need to create more uniform standards, powers and policies either with or without the advent of retail competition?
• To what extent would alteration in structure require changes in the statutory and regulatory framework? For generation? For transmission? For distribution?
• To what extent will MAPP policies and practices alter the operations and options of Nebraska systems?
• To what extent will FERC policies and decisions alter the operations and options of Nebraska systems?
• What would be the roles and jurisdictional authorities of the legislature and state regulatory and planning bodies, such as the Power Review Board?
• What would be the extent of state or local jurisdiction over out-of state power suppliers and marketers?
• Who would have responsibility for fundamental requirements for universal service, planning responsibility for obligation to serve all consumers and protection of low-income
• Consumers who may not be desirable to competitive power marketers?

The impacts of these and other related questions require an understanding of the current operations and planning for the Nebraska systems, as well as the comparative efficiency and effectiveness of the Nebraska systems described in the following chapter.

Chapter One - HISTORY
Chapter Two - STRUCTURE AND GOVERNANCE
Chapter Four - PLANNING AND OPERATIONS
Chapter Five - FINANCE AND TAX
Chapter Six - DEREGULATION AND RESTRUCTURING
Chapter Notes
Glossary