CHAPTER
ONE: BACKGROUND ON ELECTRIC INDUSTRY COMPETITION AND RESTRUCTURING
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. Nineteen 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; 7th 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 following for the 1997 average and Maps M3-1,
M3-2, M3-3 in Chapter 3 for each of the 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 a comprehensive 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.
Background on Electric Industry Restructuring
1.1.1
Electric Utility Industry 1935-1995
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 following votes
by consumers. 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.
Local
franchises or leases are the base level of organization for service
territories. The Power Review Board has on file some 395 retail
service territory agreements in the state. Nebraska Public Power
District leases and operates distribution systems in 207 municipalities.
Other municipalities franchise their service territory to public
power districts, rural cooperatives, or other municipal systems.
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.
1.1.2
Changes in the Electric Utility Industry Following Passage of 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 contains a total of thirty sections, including
Title VII. Electricity. The primary purposes of the Electricity
Title are to open and expand the wholesale transmission market and
to encourage the development of new competitive generating companies,
in particular to provide wholesale marketing opportunities for Independent
Power Producers that were defined as Exempt Wholesale Generators.
It 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.
By
January 1999, FERC had approved five ISO's: California, Pennsylvania-New
Jersey-Maryland (PJM), Midwest (conditional), New York and New England.
In addition, the Texas Public Utility Commission had approved an
ISO for operation within the Reliability Council of Texas. Numerous
discussions concerning ISOs, Regional Transmission Organizations
(RTOs) and Transcos for other regions are underway. (See Chapter
5 for further discussion of ISOs, RTOs and Transcos.)
The
formation of an ISO for the MAPP region, including Nebraska, has
been underway since 1996. MAPP has restructured its organization
to include independent power suppliers, state regulators, and power
marketers. The organization recently agreed to a regional transmission
tariff which it will submit to FERC for approval. Further work is
being conducted on formation of a formal ISO, which failed to gain
approval of the organization's members in 1998. Discussions are
also underway for formation of an alternative private transmission
company. Major transmission-owning systems in Nebraska have been
active in the MAPP ISO and regional Transco discussions.
In
addition, to create greater operational efficiencies, the Nebraska
Public Power District has launched a plan, "Retail Realignment"
to have existing rural systems take on customers in certain towns
for which NPPD provides wholesale power. NPPD has also joined with
other large out-of-state public power systems that intend to market
wholesale power supplies. The Omaha Public Power District has examined
the possibility of forming an alliance with a private company to
construct new generating plants, and has considered participation
in an Iowa retail competition pilot project. The Lincoln Electric
System is selling wholesale power to an organization marketing to
retail chain stores in Missouri.
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.
1.1.3
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.
1.1.3.1
Advances in Technology
Beginning
in the 1970's, through the Public Utility Regulatory Policies Act
(PURPA) of 1978 and other initiatives, the federal government embarked
on a long-term effort to reduce dependence upon foreign oil through
development of new technologies for meeting electrical demands,
including renewable resources, co-generation, conservation, and
demand-side management. Generating plants fired by natural gas,
in particular, have encouraged hopes to reduce power costs.
The
availability of combustion turbines and low-cost natural gas has
allowed participation in the competitive wholesale market by more
players with much lower capital investment risk compared to building
large base-load coal and nuclear generating stations. Combustion
turbines can now be acquired with shorter planning intervals and
in flexible sizes ranging from 10 megawatt to over 120 megawatt
units.
In
the future, fuel cells, micro turbines, wind machines and other
generation that may be installed by customers, or in small interconnected
increments by the utility, may bypass conventional transmission
to allow distributed utility or customer-owned generation arrangements.
In
addition to changes in generation technology, the expansion of the
U.S. high-voltage transmission grid in the 1970s and 1980s, with
the assistance of digital electronic protective relays and control
systems, set the stage for expansion of the wholesale electricity
market. At the retail level, advances in transmission technology
also allowed the possibility of multiple buyers and sellers utilizing
the transmission grid.
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.
1.1.3.2
Economics Factors Creating Opportunity for Lower Costs
Among
the initial market forces prompting competition, are the high cost
of electricity production in many states and regions and comparatively
lower costs in other states and regions. Notable are the higher
levels of electricity prices and costs in California and the New
England states. Among the factors creating these high costs are:
dependence
upon oil-fired generating plants; above-cost PURPA-related contract
proliferation, and high-cost nuclear plants.
By
contrast, lower electricity prices in Western and Mid-Western states
have been created by factors including: availability of low sulfur
coal; competitive fuel transportation service; greater prevalence
of non-profit cost of service consumer-owned systems; availability
of hydro and federal preference power; and relative lack of high
cost PURPA-related contracts.
The
resulting difference in power prices, while not a major concern
for residential and small commercial customers, has become important
to large industrial and commercial customers such as General Motors
and Wal-Mart who are in a position to observe price differences
on a national scale. Large retail electricity end-users have applied
pressure for retail electricity competition on an individual basis
and collectively as members of trade associations such as Electricity
Consumers of America (ELCON). The majority of this pressure has
been applied to federal legislation and for retail competition in
high-cost states. This pressure has increased as wholesale markets
have expanded with the participation of more suppliers and marketers,
and has typically moved among neighboring states.
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 to the
detriment to electric rates within the state.
1.1.3.3
Political Support for Philosophy of Deregulation
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.
Deregulation
of Other Infrastructure Industries in the U.S.
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 at best,
experience in the deregulation of these industries offers lessons
that may prove useful.
1.2.1
Airlines
The
airline industry was deregulated with passage of the Airline Deregulation
Act of 1978. Prior to deregulation, eight major carriers dominated
the airline industry. In 1999, six of those carriers remain in service.
With the departure of Pan Am and Eastern, USAir and Southwest entered
the top eight. Following deregulation there was an initial surge
in competitors with a subsequent shake-out in the industry to concentrate
the number of carriers into hub and spoke systems with domination
at hub airports by a single airline such as TWA in St. Louis, Northwest
in Minneapolis, and American in Dallas.
The
deregulation of the airline industry was driven by dissatisfaction
with high average fares sustained above competitive levels, the
difficulty of entry of new carriers, and subsidies of low volume,
short distance routes by long distance, high volume service. Although
deregulation has brought about a reduction in average fares and
an increase in volume, problems exist in reduction in service to
small communities, and anti-competitive practices. Following a two-year
investigation, the U.S. Justice Department has charged American
Airlines, the world's second-ranking air carrier, with monopolizing
air routes and driving out discount competitors. The Justice Department
is also investigating United Airlines and Northwest Airlines for
similar practices.
For
Nebraskans, airline deregulation amply demonstrates the "winners
and losers" nature of establishing competitive markets.
Deregulation
advocates often point to rising airline traffic statistics and declining
airfare trends (measured on an average cents per mile basis) as
evidence of the efficiencies gained via deregulation. Often lost
in the discussion are questions regarding access to air service
in smaller communities, price disparities between certain short
haul versus long haul trips and the market dominance of specific
air carriers in selected markets.
On
a statewide basis, the number of passengers boarding commercial
flights (Enplanements) has risen nearly 60 percent over the past
twenty years. However this statistic masks the fact that enplanements
are currently not possible in places like Columbus or Sidney due
to the loss of all commercial air service in these cities. Prior
to deregulation, more than 5,000 passengers boarded commercial flights
in these communities each year.
All
13 air markets in Nebraska suffered a decline in number of enplanements
with the exception of Lincoln, which increased by 8 percent and
Omaha, which increased by 88 percent over the past 20 years. At
the time of deregulation, roughly 72 percent of all Nebraska enplanements
occurred in Omaha with about 28 percent occurring in Lincoln and
the other small Nebraska communities. According to the most recent
published data, the Omaha market now controls over 85 percent of
all Nebraska enplanements. The 11 other air markets in Nebraska
have all suffered a profound deterioration. Other than Omaha and
Lincoln total enplanements are down 67 percent. As noted above,
the Columbus and Sidney markets were eliminated entirely.
CHART
1-1 . Change in Enplanements 1978-1996
Prior
to deregulation, more than 130,000 passengers boarded commercial
flights annually in Nebraska's small cities. Today that figure is
less than 45,000 passengers and falling. Indeed, were it not for
Congressional appropriations to a federal subsidy program
1.2.3
Telecommunications
The
deregulation of the telecommunications industry began in the 1970's
as MCI struggled with AT&T and the Federal Communications Commission
to gain access to long distance telephone service utilizing microwave
technology. Deregulation was imposed in part by the courts beginning
in 1984 and finalized with the Telecommunications Act of 1996. In
the case of telecommunications deregulation and divestiture, the
introduction of competition has not led to the downfall of AT&T
and has opened opportunities for many new technologies and market
participants.
Difficulties
remain in the telecommunications industry concerning responsibilities
for access charges, universal service and the shifting of cost responsibility
from the long distance customer to the local service customer. Additionally,
there is considerable concern over shifting funds from the regulated
portion of the business to the competitive side and the resultant
decline in repair service response. These issues support the position
of those advocating the retention of some regulation to oversee
access and service issues until there are alternatives to local
telephone service, which will provide the market discipline required
to improve such service.
The
communications industry has prospered under deregulation. AT&T
lost nearly 40 percent of its long distance customers to MCI and
others following divestiture and FCC orders introducing competition
in the long distance service. Court ordered divestiture and FCC
regulatory actions started the deregulation process with the breakup
of AT&T divesting the Regional Bell Operating Companies (RBOC's).
AT&T is now making the full circle with plans to get into the
local telephone business. Competition did reduce overall costs and
prices, however local exchange telephone rates absorbed the access
charges originally charged to the long distance service.
The
impact of telecommunications deregulation on Nebraska is similar
to experiences in many other states. Benefits include long distance
competition and technology growth. The challenge for Nebraska has
been the delivery of the benefits to all consumers in the state
in a timely manner, recognizing that urban areas usually benefitfrom
technological innovation more rapidly than rural areas because of
customer density and related factors. There is also a problem indicated
by a rise in complaints and increasing costs for residential service.
CHART
1-2
As
shown in Chart 1-2, the number of complaints filed annually with
the Nebraska Public Service Commission has increased substantially
over the past decade. Most of these are not service related but
rather are associated with unethical practices of the new entrants
in the long distance markets. Complaints associated with the practice
of "slamming" (the unauthorized switching of one's long
distance service) are increasing rapidly.
Local
residential telephone rates are now starting to rise. Chart 1-3
shows the pattern of local residential and business telephone and
displays that on average, local residential rates are rising faster
than business rates. In Lincoln, local residential rates are up
by more than 30 percent while business rates have actually declined
by about 19 percent since passage of the 1996 Communications Act.
CHART
1-3
While
local phone rates in rural Nebraska are still considerably less
expensive than those of the urban areas, there is cause for concern.
Under prior telecommunications policy, federal funds collected from
telephone companies are distributed as a subsidy to local telephone
companies to equalize the cost of local service particularly in
rural areas. The Federal Communications Commission (FCC) is now
considering revisions to the policy that could have profound effects
on large, sparsely populated states like Nebraska. Some local telephone
executives in these areas predict a doubling of local telephone
rates. The trend of the 1996-1998 period would seem to add credence
to this view.
Many
Nebraska communities do not yet have comparable communications services
with those offered in the larger urban markets. One industry analyst
has concluded that although rural Americans are active participants
in the "information age" communications technologies,
"the liability of geographic isolation which has historically
plagued rural areas still exists." This observation is supported
by the experience in states such as Pennsylvania, where broadband
services were developed for major urban areas, but not for rural
areas.
Natural
Gas
Competition
in the natural gas industry was initiated with Natural Gas Policy
Act of 1978 and subsequent orders issued by the Federal Energy Regulatory
Commission. Deregulation of the natural gas industry has progressed
for federally-regulated wellhead and transport pipelines. However,
retail competition at the local distribution company level is far
behind. Service to large commercial and industrial end-users is
in place in most states, but competition has yet to reach down to
small commercial and residential consumers in most areas.
While
there are vast differences between natural gas and electricity (natural
gas can be stored, for example) the regulatory orders on gas pipelines
and wellheads and the deregulation of natural gas pricing is quite
comparable to FERC Orders 888 and 889 on electric utility competition.
The general pattern of utilizing regulatory orders to restructure
the natural gas industry by FERC are being applied to the electric
utility restructuring process.
Other
similarities are also apparent. For example transition costs in
natural gas may have been overstated initially because much of the
cost was already being paid by the end-users. Deregulation accelerated
the payment of those costs and unfortunately for residential and
small commercial customers, large industrials avoided much of the
transition cost through by-pass of local systems. Despite the level
of these costs, benefits to consumers have exceeded transition costs,
although transition to customer choice for residential and small
commercial customers still lags behind opportunities for larger
customers. At a structural level, the top five gas marketers dominate
60 percent of gas market, and new market structures have emerged
that include marketing hubs and risk management features, similar
to what is now emerging for electric utilities.
Nebraska's
experience with natural gas competition is just emerging. Unlike
other states, local governmental bodies set Nebraska's retail natural
gas rates, not by a state utility commission. Retail customer choice
is now being offered in certain Nebraska natural gas markets but
it would be premature to assess the results at this stage. Nevertheless,
natural gas deregulation at the producer wellhead and open access
of the transportation sector are now well established nationally
and some preliminary findings of the impact of these efforts on
the state of Nebraska are possible.
Gas
pricing data for the state of Nebraska as collected and published
by the US Department of Energy show that nominal gas prices for
all consumers trended downward in the mid 1980s but have edged up
again in the 1990s. generally in concert with national pricing trends.
However, the gap or percentage markup of retail rates for residential
customers over the city gate price has widened substantially over
the past ten years while rates to industrial customers seem to more
closely track city gate prices.
Similar
to the experience in other states, this data suggests that it is
the large industrial customers in Nebraska who have reaped the greatest
rewards to date from natural gas deregulation while the smaller
residential and commercial customers continue to pay higher rates
relative to the city gate price. However, this situation may change
under the new competitive gas program opened in the state in June
1998.
In
December 1997, KN took a broad approach to encourage interest in
"choice" in the natural gas arena. According to a federal
Government Accounting Office (GAO) report that reviewed an early
look at retail gas deregulation in 16 states, the KN Choice program
showed 70 percent of eligible Nebraskans (more than 57,000 customers)
mailed in ballots (selection forms).
An
interlocal organization of more than 60 communities called PACE
(Public Alliance for Community Energy) was specifically formed to
ensure that Nebraskans had a choice under KN's Choice competitive
supply program. PACE was the only significant competition to the
KN affiliates. In winning more than 25 percent of all participants
and almost 20 percent of all eligible customers, PACE outperformed
the 43 competitive gas supply programs examined by the GAO report.
The
GAO report also states that overall, about 4 percent of eligible
residential and small commercial customers have selected competitive
gas suppliers. Percentages vary widely among programs, from lows
of zero percent in New Mexico and one-half percent in California
to 50 percent in Wyoming (6,000 sign-ups) and 70 percent in Nebraska
(57,400 sign-ups).
1.2.6
Summary of Deregulation in Other Infrastructure Industries
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.
Restructuring of the Electric Industry in Other Nations
Electric
utility industry restructuring and the introduction of competitive
markets in the U.S. have been proceeded by deregulation and restructuring
of the electric industries of other nations. Restructuring of the
industry has occurred in Australia, New Zealand, Norway, and the
United Kingdom (U.K.). Experience in the U.K., in particular, may
provide useful perspective because of the many concepts imported
to the U.S. restructuring efforts.
1.3.1
Restructuring in the United Kingdom
The
electricity industry in the U.K prior to restructuring and privatization
consisted of the Central Electricity Generating Board (CEGB) for
generation and transmission and 12 regional distribution companies
known as area boards. The area boards purchased power from the CEGB
under a tariff that was set by the CEGB, which was subject to governmental
economic policy. The government influence was a large factor in
such economic issues such as continued purchase of high cost coal
from the national coal organization and the support of high cost
nuclear and R&D programs.
It
could be said that during government ownership, electric reliability
was more than adequate, however it could also be observed that this
reliability came at a price that included over-staffing and overbuilt
electrical systems.
Electricity
rates prior to restructuring and privatization were high but not
out of line with other European countries.
The
U.K. began restructuring and privatizing its electric industry during
the tenure of Margaret Thatcher. The process started with The Electricity
Act of 1989, which set out to privatize the industry, operated primarily
by the central government. The Central Electricity Generating Board
(CEGB) was divided into four separate organizations. These included
two generating companies, one Transmission Company, and the distribution
network consisting of the incumbent 12 regional boards, all of which
were ultimately privatized. Non-nuclear generating plants were sold
to private entities, and nuclear plants were shut down or placed
on the market later. Aside from the political agenda for privatization,
other major forces in the transition were efforts to obtain proceeds
for the national treasury, to lessen dependence on high-cost coal,
and to address problems with nuclear plants.
What
resulted was profound impact on the British coal industry and reduced
coal prices and mining costs. There was also an improvement in nuclear
plant generating costs and an unanticipated "Rush-to-Gas"
following privatization involving projects with combined cycle combustion
turbine technology. Consumer prices went down, but the privatized
generation, transmission and distribution companies accumulated
windfall profits. This was due in part to the fact that estimated
privatized operating costs were initially overstated and prices
were maintained according to those estimates while actual costs
declined with the introduction of lower cost generating technologies.
Oxford economist George Yarrow developed analyses showing prices
would have gone done even more on their own due to the decrease
in fuel prices.
In
addition to high estimates of operating costs, most of the wholesale
power transactions were bilateral, with generating companies retaining
monopoly power. This reflected a partial failure of the expected
competitive generating market mechanism. With only two principal
generators, the previous government monopoly became a private duopoly.
In February 1999, the UK's new head regulator, Callum McCarthy accused
generators of "gaming" the system and overcharging customers
nearly $150 million in the month of December alone. Prices dropped
29 percent following his accusation.
At
the local level, many large customers received price reductions
in the competitive environment. However, the residential consumers
began to receive competitive access only in early 1998. This residential
access is incomplete and necessary metering is not in place. It
remains to be seen when competitive benefits will accrue to this
customer class.
Restructuring
in Other Nations
While
the experiences in the U.K. are particularly instructive for the
U.S. because of the import of concepts, significant electric industry
restructuring is occurring in many other countries on several continents.
In all nations, electric industry restructuring is still a work-in-progress.
The
Scandinavian countries, Australia and New Zealand are each involved
in making generation more competitive and ensuring equitable and
efficient transmission access. As in the U.S., their efforts include
developing new power exchange and transmission institutions, wrestling
with pricing and ancillary service and secondary market matters,
putting in place new regulatory protections, and expanding competition
at the retail level. For each country, policy choices must be tailored
to their own conditions: geography, capacity needs, political environment,
and whether the industry was centrally owned and planned as a cost-of-service
operation, or as a diverse public and private enterprise.
One
common factor they have all assumed, is that for competition to
work, transmission must be independent from other commercial market
interests. Because transmission grids in these countries have typically
been in centralized public hands, rather than the patchwork of private
and public interests in the U.S., the effort to establish transmission
independence is a more straightforward task.
In
the U.K., privatization and establishment of competitive markets
has required substantial regulation and the need for on-going regulatory
oversight. Privatization of the electricity industry by the government
in the U.K. in fact 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.
Proposed Changes to Restructure the US Electric Utility
Industry
As
noted earlier, electric industry competition and restructuring in
the U.S. began with passage of the Public Utility Regulatory Policies
Act in 1978, and was expanded by the Energy Policy Act of 1992 and
subsequent regulatory orders by the Federal Energy Regulatory Commission.
Federal actions addressing issues in the wholesale market have prompted
activity at the state level on retail competition. These actions
are on-going.
Issues
addressed by proposed federal legislation that hold impacts for
the Nebraska electric systems include:
Repeal
of the Public Utility Holding Company Act of 1935: Passage of the
Public Utility Holding Company Act in 1935 mandated the breakup
of the major holding companies dominating electric generation and
supply nationally. The passage of the act restructured the electric
utility industry into its current form. It allowed continued holding
company operation only under strict terms and conditions. For Nebraska
this broke the political influence of these companies and set the
stage for purchase of their operations by Consumers Public Power
District in the latter 1930's and the Omaha Public Power District
in the mid 1940's.
Since
the passage of the act in 1935, private electric companies have
mounted periodic efforts to amend or repeal PUHCA. Repeal of the
act is part of restructuring legislation being proposed. This is
especially significant in view of amendments that have been made
to the act in recent years and the wave of utility mergers and formation
of new electric holding companies currently underway. Critics of
the act believe it to be outdated and an obstacle to competition.
Those opposing repeal believe that premature removal of restrictions
contained in the act could undermine fledgling competitive markets
by allowing a few large dominant companies to gain market power.
Repeal opponents urge that amendment of PUHCA be viewed as part
of comprehensive legislation on industry deregulation and restructuring,
and not as independent legislation.
For Nebraska, repeal of the Holding Company Act poses possible pressures
from new holding companies with combined service operations and
an existing presence in the state through other services. (See Chapter
2)
Merger
and Market Power Restrictions: Concerns about concentration of ownership
and control of generation and transmission and distribution systems,
as well as combined service companies, are paramount issues at the
federal level. Such concentration of ownership could undermine fledgling
competition. The primary method of addressing increased pressures
from new holding companies is through merger and market power restrictions.
FERC currently has limited authority to condition mergers. Various
federal legislative proposals have suggested that providing the
FERC with expanded oversight authority on utility acquisition and
mergers would safeguard against undue market power. Public power,
rural cooperative, and consumer organizations have urged FERC to
declare a two-year moratorium on mergers that would create customer
groups greater than one million while assessing the types of restrictions
needed.
Sale
of the Power Marketing Administrations: Repeated proposals have
surfaced to sell of the federal Power Marketing Administrations.
Proponents argue that privatization of the Bureau of Reclamation
and Army Corps of Engineer facilities of the Southeastern Southwestern
and Western Area power marketing administrations could provide as
much as $6.6 billion to federal coffers. Opponents have expressed
concern that if the PMAs were divested, areas served by consumer-owned
systems receiving preference power could be significantly harmed
by increases in the price of wholesale power. Impacts on water management
and irrigation programs are also concerns of opponents.
Nebraska
systems purchase approximately 10 percent of their energy from the
hydro plants of the Western Area Power Administration.
Level
Playing Field Issues: Various bills introduced in Congress have
addressed perceived competitive advantages of public power systems
or private electric utilities. Private electric utilities have attacked
public power access to tax-exempt financing, and public power and
rural electric cooperative access to federal preference power such
as Nebraska. s power from the Western Area Power Administration.
Private companies have also attacked the ability of public power
systems to engage in telecommunications and other "wires"
services. Public power systems counter that, private power companies
have also utilized $37 billion in tax-exempt financing, enjoy more
than $57 billion in deferred tax payments, and should not limit
competition and the opportunities for consumer benefits in other
wires services. The outcome of legislation in this area is vitally
important for decisions pertain to public power participation in
both wholesale and retail electricity competition.
Private
Use Restrictions: This is a very important tax-related subset of
the "level playing field" issues. Facilities developed
with tax-exempt funding such as transmission facilities and generating
plants face Internal Revenue Service restrictions that do not allow
for, or limit, private use of those facilities. Given FERC's efforts
to open up all transmission, public power systems are put in a position
of violating their bond covenants and losing tax-exempt financing
if the use of those facilities by private power companies exceeds
the restrictions. Opponents of public power want to eliminate all
tax-exempt financing. However, a number of Congressional bills have
proposed to remedy this situation by revising IRS rules so that
tax exempt financing may be utilized for transmission and distribution
facilities, but not for generating plants that could be viewed as
having an unfair advantage in competitive wholesale power supply
markets.
Flexible
Mandate: Many congressional bills have proposed a date certain for
all states to start retail competition. The Clinton Administration
bill offers a flexible mandate in which states may opt-out from
the date certain of January 1, 2003, if they have gone through a
public process to formulate their own plans to address electric
utility competition and restructuring.
In
addition to the proposals in Congress, 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.
Recommendation:
It is important that Nebraska state and local policy-makers develop
consistent and clear positions on proposed federal legislation and
FERC activities, and that they continue to monitor the federal arena
for decisions that could have far-reaching impacts for the state.
s electric consumers and economy.
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 June 1, 1999, 19 states have passed legislation
to establish retail competition. Three states have established competitive
markets by regulatory order, four states have legislative or regulatory
orders pending and 24 states and the District of Columbia, are studying
the issue. In addition, 24 low-cost states have petitioned Congress
to allow states to make their own determinations concerning the
timing and form that competition and electric industry restructuring
will take.
Pressure
at the federal level to establish national requirements for all
states and date-certain timelines is increasing. While 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. Experience in other states, and the events taking place
in the market described in Chapter Two can help to inform the key
issues Nebraska's plan may address.
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