CHAPTER TEN: SUMMARY OF KEY POINTS AND RECOMMENDATIONS

Summary

The key summary points and recommendations contained in each chapter are noted below:

CHAPTER ONE:

Background on Electric Industry Competition and Restructuring

1. Passage of the Energy Policy Act of 1992 and actions by the Federal Energy Regulatory Commission have set the stage for a transformation of the nation's electric industry.
2. States with high electric rates have taken early aggressive action in the belief that competition will reduce costs and rates where regulation has failed. Low-cost states have expressed concern that their costs may rise as a result of competition.
3. Nebraska has long been recognized as having among the lowest-electric rates in the nation.
4. Although one may debate whether any change is warranted for Nebraska, pressures make it prudent for the state to examine and address the transformation taking place.
5. In considering the future of Nebraska's electric utilities, it is important for policy-makers and citizens to understand the context and key issues concerning deregulation and restructuring of key infrastructure industries.
6. Electric industry restructuring is being driven by large industrial and commercial consumers, and competitive suppliers; and facilitated by advances in technology, opportunities for lower prices, and the prevailing philosophy to deregulate service key industries.
7. Proponents of electric industry restructuring and competition believe that costs can be reduced, new services provided, and technology advanced to benefit consumers.
8. Deregulation and restructuring of the electric industry is following deregulation and restructuring of other infrastructure industries in the US.
9. Deregulation in other industries has shown mixed results with some industries showing lower costs and more choices for consumers, while other markets show loss of service and higher rates.
10. Deregulation and restructuring of the electric industry in other nations, largely nationalized industries moving to private ownership, provide limited lessons for the U.S.
11. Proposed changes at the federal level to deregulate and restructure the U.S. industry for competitive retail markets could include a mandate with a fixed start date, in addition FERC and regional market pressures may encourage change in Nebraska.
12. Nebraska has an opportunity to develop a plan based on its own conditions and experience to address pressures arising at the state, regional and federal levels.

CHAPTER TWO:

Electric Industry Restructuring in Other States

1. All states are facing major changes in the electric industry, even without state legislation or rules for competition being passed or promulgated.
2. Nineteen states have enacted legislation to establish retail competition; three states have issued comprehensive regulatory orders; four states have pending legislative or commission orders; twenty-four states and the District of Columbia are studying restructuring and formation of competitive retail markets; five states have undertaken little preliminary action to date.
3. The states which had opened markets for retail competition by June 1, 1999 showed opportunities for large customers, but difficulty in creating market conditions that allow small commercial and residential customers to be served. The market has also been characterized by private deal-making and non-transparent pricing which prevent market forces from functioning effectively.
4. Early common problems in the open-market states indicate certain key issues must be fully addressed and certain preconditions should be met before undertaking retail competition aimed at benefiting all consumers.
5. Major mergers and extensive structural change is occurring in the industry, even in states which have not passed legislation or regulatory orders.
6. For Nebraska several major mergers in surrounding states could affect wholesale markets and increase the pressure to initiate retail competition
7. New business structures, alliances and multiple service providers are under consideration or forming
8. Electric utilities in Nebraska and neighboring states will all engage in an expanded wholesale power supply market, but no determination has yet been in Iowa, Kansas, South Dakota, Wyoming, or Colorado to establish retail competition.
9. While states are taking varied approaches, common problems are apparent both in wholesale and retail markets. It is essential that preconditions be met in structure and market conditions prior to Nebraska systems making a transition to retail competition.These conditions include: a fully functioning ISO and mature wholesale market, business transaction and consumer protection rules, market pricing that indicates savings on power costs significant enough to offset costs of the transition; a safety net in place to assure that no consumers suffer net harm from the transition.

CHAPTER THREE:

Retail Competition Customer Choice and Consumer Protection

1. Conditions in Nebraska differ significantly from those of other states that are moving to establish retail competition. a) Retail competition offers an alternative to state regulation of energy pricing for private utilities; Nebraska systems are locally-controlled, and deliver electricity as a non-profit service at-cost. b) Nebraska's wholesale power market delivers electricity to local electric systems at a cost lower than the surrounding region, moving to a regional market could cause these power costs to rise, not decline.
2. Surveys of consumers indicate a certain amount of interest in retail competition in Nebraska.
3. The concept of "customer choice" and the freedom it implies has substantial appeal to consumers, but due to practical matters of high transaction costs and low profit margins "choice" and competitive access for small consumers remains an unrealized goal. This would affect more than 700,000 of Nebraska's 835,000 metered electric consumers.
4. Nationally, electric, natural gas, and telecommunications utilities are moving rapidly to transform themselves into delivery companies that offer customers a range of services in combination with electric energy.
5. Consumers appear to be most interested at this point in their electric supplier's core business, and not additional, unrelated services.
6. The market can be expected to move in advance of, and in some cases pre-empt, policy-making. In view of this fact, a proper structure is more important than behavioral rules to assure benefits of both wholesale and retail competitive markets.
7. For Nebraska, local utility boards have maintained the role of developing and implementing consumer protection policies based upon established principles of consumer-owned systems. Application of these policies may vary among local systems.
8. In a competitive retail market, statewide standards and policies would be needed, including a uniform "Consumer Bill of Rights."
9. Designation and development of a statewide regulatory body to augment the functions of local government will be essential.
10. Participation in retail competition should not be mandated, but local systems should be able to opt in through a public process at the local level.

CHAPTER FOUR:

Three Models to Address Nebraska Key Issues and Potential Impacts

1. The current structure of the industry is based on 170 entities providing wholesale and retail service through voluntary coordinating bodies, associations, and contractual relationships: 121 municipal systems; 31 rural power districts; 15 rural cooperatives, 1 public power and irrigation districts, 1 municipal joint action agency and 1 federal power agency.
2. Potential impacts and changes for the industry can be assessed by looking at three alternative models: a) a Modified Current Structure; b) Limited Access for Competition; c) Open Access for Competition.
3. The Modified Current Structure can enhance the current structure to create greater efficiencies and prepare for pressures of competition. Wholesale power supply level changes include a functioning ISO, a Nebraska Power Tranaction Center, and Nebraska Generation Cooperative Company. Retail level functions could remain largely unchanged, but retail structure could face mergers, alliances, or divesture.
4. The Limited Access Structure could also include the wholesale level changes in the Modified Current Structure, but would allow retail competition for a set of customers qualified by certain characteristics or phasing of the market. Limited Access allows for a managed approach to competition, but may only be a transitional step to Open Access.
5. The Open Access Structure requires the most significant change from the Current Structure. The same wholesale level changes could apply, and at the retail level any customer could theoretically have access to a competitive supplier. States utilizing an Open Access form have required divestiture of generating assets to assure fair competition. Open Access, as well as Limited Access would create a need for a statewide regulatory system, and would alter the principles of operation for the Nebraska systems, if they were to engage in the competitive retail market.

CHAPTER FIVE:

Changes and Impacts on Industry Structure and Operations

1. A determining factor for the development of any option, will be the extent to which Nebraska systems work together to achieve efficiencies in generation, transmission and distribution. If they do not work closely together, market pressures and attraction of alliances with other entities could undermine the cooperative relationships and contracts under which they currently operate.
2. The overriding issues that face Nebraska systems are: a) how best to accommodate expanded competition at the wholesale level to benefit Nebraska consumers; b) whether extensive changes at the retail level for competition would produce greater efficiencies, more reliable service, reduced costs, and adequate protection for consumers; or minimal changes in the existing structure will achieve the same or greater benefits.
3. Both economic and non-economic criteria need to be applied to evaluation of options. Economic criteria includes start-up and on-going costs for new regulation and other functions. Non-economic criteria includes risk, environmental, workforce, and equity issues.
4. For the wholesale power supply level, the Task Force recommends methods to retain low cost wholesale power including examination of a Nebraska Power Transction Center, a Nebraska Generation Cooperative Company, and mandatory participation in joint planning of generation. Additionally, the Task Force recommends on-going examination of the role of distributed generation and renewable energy resources.
5. At the Transmission level, the Task Force recommends: continued participation of transmission-owning systems in efforts to form a regional ISO, and also examination of a Nebraska Transmission Organization, and regional public power and consumer-owned ISO, as well as other methods to create greater efficiency for Nebraska's transmission network.
6. In terms of Regulation, the Task Force recommends that initial legislation be developed that includes the Nebraska Power Review Board as the initial regulatory body to coordinate work groups and hold hearings regarding proposed rules, standards, protocols, studies, and other preparatory work. The Power Review Board should also participate in national dialogue (i.e. FERC and NARUC) on transmissin regulation. The Task Force also recommends that the role of the ultimate statewide regulatory body to be authorized in implementation legislation (not necessarily the Power Review Board) augment the traditional roles of local boards overseeing delivery of electric service to consumers.
7. At the Distribution Level, the Task Force recommends modification of the Current Structure to enhance system operations and to prepare for the pressures of retail competition. Mergers and alliances should be voluntary, but incentives and criteria should be developed by the state. Divestiture should be assessed on a similar case-by case basis, using an income-based valuation methodology and criteria established by the state. Divestiture to another consumer-owned entity might be considered preferential to retain consumer equity and consumer control of facilities. However, any divestiture meeting necessary criteria should be allowed.
8. With specific incentives and criteria in place, laws and regulations could be changed to allow greater equity and latitude of business relationships and services by local distribution systems. This would allow all Nebraska consumers to receive benefits of multi-service packages that include electricity.
9. The Task Force recommends that a transition to retail competition should be undertaken only when preconditions are in place, and benefits offset transition and transaction costs. Each local system should be allowed to make a determination on whether to opt-in through its own public process. Competive retail systems may be required to functionally separate distribution, transmission and generation operations.
10. Provisions need to be made in any transition to assure stability and security for Nebraska's utility workforce to assure reliability and safety of the electric delivery systems.
11. On-going attention is needed for technology research and development. Distributed generation is a particularly important element. The potential for distributed generation must be given thorough consideration in long-term plans for restructuring the electric industry in Nebraska.

CHAPTER SIX:

Impacts on the Environment, Energy Efficiency, and Renewable Energy

1. Changes to competitive retail market systems could have impacts on the environment and energy efficiency and renewable energy
2. A competitive retail market could also have possible environmental impacts on air emissions, water quality and management of water resources.
3. Environmental impacts driven largely by economics of generation and could be affected by shift to low-cost generation and full-throttle operation of plants. Size and flexibility of units, capital costs, financing costs and federal hydro power policies need to be considered.
4. Several mechanisms for environmental protection: a) Environmental externalities must be considered in a shift to competitive market and could be addressed by emissions and fuel taxes; b) Portfolio standards; c) Choice for Clean Energy and Green Pricing; d) Surcharges or Access Charges.
5. Care needs to be taken in formulation of environmental policies to address competitive issues with surrounding states: a) possible adverse impacts of more stringent regulation/standards; b) impacts on interstate economic competition
6. Platte River issues need to be addressed including possibility that value of power generated may no longer be sufficient to cover total costs of providing environmental and other public benefits. One possible solution is an increase in fees or new fees for benefits and services.
7. In a highly competitive market some DSM programs may decline due to cost, however, price volatility may create greater interest in certain programs. Specific programs could be expanded as part of marketing strategy.
8. The trend toward an increased number of identified fixed costs components in utility bills may provide consumers with less incentive to take energy efficiency actions.
9. Legislative solutions rather than individual LDC solutions are needed.
10. The Task Force recommends that these items be considered: a) minimum portfolio standards; b) green pricing to support choice of clean energy and green energy; c) consumer contribution programs for renewable energy projects; d) standards should be set to define green power and green pricing; e) a consumer charge to cover public benefits programs; f) consumer disclosure (label); g) net billing.

CHAPTER SEVEN:

Changes and Impacts on Law, Governance, Regulation and Taxation

1. Electricity is provided at retail in Nebraska by three distinct entities: municipal electric systems, public power districts, and rural electric cooperatives. While the organizational control of these entities is locally based, all are subject to the statutory authority of the Nebraska legislature.
2. With the exception of service territory issues and construction of major generation and transmission facilities, state regulation has a limited role in Nebraska's electric industry.
3. Public power districts and municipal systems are subject to strict statutory mandates regarding open meetings and maintenance of public records. Such requirements do not apply to investor-owned electric utilities.
4. In a competitive retail market, the differences between consumer-owned and investor-owned electric systems would need to be addressed to prevent investor-owned utilities from gaining competitive advantages. To avoid the appearance of conflict of interest, public officials who serve on elected statewide regulatory bodies would need to be prohibited from accepting political contributions of any kind from the entities subject to the jurisdiction of the agency on which they seek to serve or from the employees or directors of such entities.
5. Modification of the Current Structure, including mergers, divestiture, or establishment of new cooperative or public power entities, would need to examine governance issues to assure adequate consumer representation, access and input to decision-making. Statutory changes should be made to facilitate mergers and consolidations, conversions of power districts to cooperatives, and to allow more public/private partnerships. Changes are also needed to allow transfer of the generation assets of public power districts and municipalities to a generating cooperative and to allow the sale of power district property to private companies in a manner similar to that applying to municipal and cooperative systems.
6. Public power entities in Nebraska are considered "non-jurisdictional" under strict reading of federal definitions. They are not by definition "public utilities" subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC) although legislation pending in Congress would expand FERC's authority to cover all transmission-owning entities. Changes in state statutes are needed to allow the state's transmission-owning utilities to join RTOs or turn operation of their systems to some sort of independent system operator.
7. In the event that an open access competitive model is implemented in Nebraska, the state will need to enhance the role of a statewide regulatory agency to oversee and enforce market rules. This agency will need additional staff and resources to perform its functions. During the interim period, the Power Review Board should be the lead agency to coordinate development of necessary rules, standards, protocols, consumer protection, and follow-on studies.
8. Public power districts and municipal systems are subject to "Dillon's Rule" . which is a rule of statutory construction that generally provides that political subdivisions of the state are functionally limited to those activities expressly specified in their enabling statutes. Investor owned electric utilities are not subject to this rule and may engage in any lawful business consistent with its corporate articles. Statutory changes are needed to achieve more parity in products and services that can be provided by the state's power suppliers under the existing structure, at least between municipal systems, power districts, and chapter 70 cooperatives. In addition, a constitutional amendment is needed to give public power districts the ability to provide economic development assistance on a par with municipalities and cooperatives.
9. Current law generally provides that public power entities must have retail rates that are, "fair, reasonable, and non-discriminatory." Concern has been raised that that an open access competitive model would result in discriminatory pricing practices in violation of this mandate.
10. Certain advertising efforts by public power entities are potentially controversial while investor-owned utilities may spend virtually any sum deemed appropriate by management.
11. Electric utilities represent a major source of revenue to federal, state and local governments. Many of today's tax laws were enacted under the assumption that electricity would be provided primarily by utilities operating on a monopoly basis with price set by cost of service rate regulation.
12. Competition and nontraditional regulation ultimately may preclude the simple pass-through to ratepayers of a utility's tax burden. Consequently, these changes bring pressure upon regulators, legislative bodies and electric utilities to evaluate tax costs.
13. State laws would need to be revised in a manner consistent with federal law that preserves existing tax revenues while not giving any competitive advantage to any group of electric energy providers.
14. The Task Force recommends that Nebraska adopt revenue-neutral impacts as a minimum policy guideline.
15. The Task Force recommends discussions with neighboring state governments and state government associations to develop alternatives that avoid interstate conflicts.
16. The Task Force recommends facilitated resolution of the private use issue.
17. Nebraska's current law, governance, regulation and taxation currently provide a framework for consumer-owned systems to operate as non-profit monopolies. Accommodation of an expanded wholesale power supply market and transmission reorganization in the region can occur with relatively few changes. Establishment of retail competition, however, would require a comprehensive revision of this framework.

CHAPTER EIGHT:

Cost/Benefit Considerations

1. Just as Nebraska' s framework for law, governance, regulation and taxation support a monopoly structure of consumer-owned systems, the economic underpinning of the Nebraska systems is aimed at non-profit delivery of electricity. While a range of benefits that include local control, consumer equity, stability in pricing and costs, and integration with local planning may be considered among the benefits of consumer-owned systems, the bottom line is the price of service delivery.
2. Nebraska's electric systems currently provide among the lowest electric rates in the nation. As discussed in Chapter 3, the state's comparative position in terms of electric prices remained the same from 1995 though 1997. The average retail price for Nebraska's commercial consumers was the 6th lowest in the nation (5.46 cents/kilowatt hour); industrial consumers were the 7th lowest (3.61 cents/kilowatt hour); residential consumers were the 9th lowest (6.38 cents per kilowatt hour).
3. Proponents of competitive retail markets reason that competition can bring about cost reductions and innovation in technology and services. While this reasoning may apply effectively to high-cost states, it does not address Nebraska's current low-cost situation.
4. The policy conclusion that may be drawn from an initial cost/benefit illustration is that retail competition cannot assure savings for the majority of Nebraska consumers until a substantial and decisive shift has occurred in the relative wholesale power costs of Nebraska and the region.
5. As recommended in Chapter 5, efforts should be undertaken by the Nebraska systems to maintain low wholesale power costs. Current and anticipated wholesale power costs compared to those of the region should be monitored on a regular basis. If efforts to maintain low wholesale power costs fail and cost differentials are evident for an extended period of time, resulting in necessary offsets and potential benefits from retail competition, implementation of retail competition might be undertaken. If retail competition is to be implemented, detailed cost/benefit analyses weighing both economic and non-economic criteria would need to be assessed to allow a local system determination of whether or not to participate.
6. The cost/benefit or "threshold" analyses would need to be conducted with an examination of all transition and transaction costs. This requires understanding of the methods of valuation and recovery of transition costs and tax revenues in a manner that would protect Nebraska. Transition costs are comprised of stranded costs, start-up costs and on-going costs.
7. There is a potential for stranded costs on Nebraska. s two nuclear generating units. If stranded costs are calculated on a system-wide basis, the benefits of lower cost generation will help offset higher cost generation.
8. Time is an important factor in mitigating stranded costs.
9. In order to honor the debt obligations of Nebraska's consumer-owned electric utilities, any stranded costs on nuclear facilities should be recovered through the end of the plant's current operating license.
10. Transmission assets associated with stranded generation assets should have stranded cost recovery to the extent those assets cannot be re-utilized elsewhere in the transmission and delivery network.
11. Purchased power contracts existing at the effective date of retail choice legislation in Nebraska should be honored for the life of the contract.
12. The costs of any stranded fuel and/or fuel transportation contracts should be handled in the same manner as the associated generation. Start-up and on-going costs are incremental to current costs and should be recovered from consumers in a choice environment.
13. The primary policy principle for Nebraska would need to be assured, equitable gains for all consumers, and revenue-neutral or net-neutral impacts from the costs of a transition. This principle would need to be applied to the range of potential impacts that may include wholesale power costs, impact on Nebraska utility revenue, tax impacts on local and state government and other related areas.
14. Nebraska should use a bottom-up, ex ante (before the fact) administrative approach to initially quantify and collect stranded costs. Actual stranded costs should be based on the bottom-up, ex post (after the fact) administrative approach using actual competitive market conditions and a true-up mechanism to reconcile the amounts previously collected under the ex ante estimate.Nebraska's utilities should mitigate stranded costs to the extent possible before retail competition begins.
15. Certain existing benefits will be stranded as a result of retail choice. These benefits will have to be recovered through user or access fees.
16. Stranded costs should be analyzed on a system-by-system basis and considered for unit- by-unit analysis if other states are implementing such cost recovery. This would involve a quantitative study, which would include estimates of market price of energy, the date when retail competition would begin, discount rates and numerous other factors. The Task Force recommends that such a quantitative study be conducted under the auspices of the Nebraska Legislature and Nebraska Power Review Board as part follow-on studies.
17. Stranded costs, start-up costs, and on-going costs should be recovered from all consumers in a retail competition environment.
18. Transition cost recovery should be made with non-bypassable access or user fees as appropriate.
19. Tax policy problems are especially difficult for local governments, which have relied heavily on tax revenues from electric utilities located within their jurisdictions, because these governments have only limited sources of other revenue available to them. It is possible that targeted state aid may be the only effective means of assisting certain local governments with especially severe exposure to tax revenue losses.
20. The general consensus is that state laws would need to be revised to preserve existing tax revenues while not giving any competitive advantage to any group of electric energy providers.
21. Nebraska's general tax policy should result in revenue neutral impacts to taxing entities in a retail choice environment.
22. An estimate of total costs for transition to retail choice in Nebraska should be made and compared to experience of other states to determine the credibility of energy price changes published in recent national studies.

CHAPTER NINE:

Public Process and Timing Considerations

1. In view of the fact that technology, market conditions, and policy will continue to evolve, and the federal government may issue some form of mandate for competition, the Task Force has recommended that Nebraska's public policy framework be developed first around a priority to maintain low wholesale power costs; second to enhance the operation of the Nebraska systems; and third, to prepare for retail competition on a conditional basis. This approach provides both flexibility and security for Nebraska consumers.
2. Other states have undertaken efforts with a "date-certain" approach. This has resulted in the competitive market opening prior to functioning ISOs being in place, prior to adequate transaction rules being in place, and prior to market pricing at levels at which all consumers might benefit. The result has been the formation of niche markets for large customers, while all consumers must pay the costs of the transition. Disaggregation of local loads through niche markets and "cherry-picking" could delay the opportunity for all consumers to participate.
3. The recommended condition-certain policy framework allows Nebraska to address its own unique conditions. It does not mandate retail competition, but provides a step-by-step public process to assess and adopt retail competition should that market form offer assured benefits and protections for all Nebraska consumers.
4. The "condition-certain" framework requires that a definitive and sustained shift in regional market prices have taken place to provide an offset to transition and transaction costs for Nebraska consumers. It also requires several market and structural preconditions:
   --Regional ISO/Transco in place;
   --Viable Wholesale Market in place;
   --Retail Rates Unbundled;
   --Statewide Regulatory Agency in place (including several subpoints for rules for certification of suppliers, rules and electronic business systems for transactions, consumer protection rules, consumer education, green power standards, public benefits rules and standards, determinations on methodologies for stranded cost quantification and recovery, rules for access pricing;
   --Legislative provisions and processes for revenue-neutral impacts on state and local tax revenues in place;
   --Follow-on studies completed (Generation Cooperative, Transmission Efficiencies, Threshold Benefits Study)
   --Opt-In by Local Systems.
5. While timing of the Initial Legislation is at the discretion of the Unicameral, consideration should be given to the opportunity that currently exists prior to a possible federal mandate, and in view of the competitive markets forming for other "wires" and energy-related services in the state. Consideration may also be given to the possibility that early action could assist with modification and enhancement of the current structure of the industry and assure that Nebraskans continue to enjoy low-cost power resources.

• Contents
• Executive Summary
• Chapter One: Background on Electric Industry Competition and Restructuring
• Chapter Two: Electric Industry Competition and Restructuring in Other States
• Chapter Three: Retail Competition, Customer Choice, and Consumer Protection
• Chapter Four: Three Models to Address Nebraska Key Issues and Potential Impacts
• Chapter Five: Changes and Impacts on Nebraska's Electric Industry Structure and Operations
• Chapter Six: Changes and Impacts on the Environment, Energy Efficiency and Renewable Energy
• Chapter Seven: Law, Governance, Regulation and Taxation
• Chapter Eight: Cost/Benefit Considerations
• Chapter Nine: Public Process and Timing
• Glossary