CHAPTER TWO: ELECTRIC INDUSTRY COMPETITION AND RESTRUCTURING IN OTHER STATES

Introduction

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

Overview of Activity at the State Level

As noted in Chapter One, while the Federal Energy Regulatory Commission is proceeding with efforts to expand regional wholesale markets, Congress has thus far left it to states to determine the timing and form of retail competition. As of June 1, 1999, nineteen states have enacted restructuring legislation: Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Pennsylvania, Rhode Island, Texas, and Virginia. (See Map M2-1: as may be noted there is a direct correlation between the costs indicated on Map M1-1 and activity noted in Map M2-1.)

Three state public utility commissions have issued comprehensive restructuring orders: New Jersey; New York; and Vermont.

Four states have pending legislative or commission orders: Missouri, Ohio, Oregon and South Carolina.

Twenty-four states and the District of Columbia have active legislative and/or regulatory processes underway to study restructuring and propose legislation (This includes Nebraska).

Five states have undertaken little preliminary activity to date. Among those states, Florida and South Dakota have indicated they do not anticipate any effort toward retail competition in the near term.

Analysts tracking state legislative proposals have noted there are fewer electric industry restructuring bills pending or anticipated at the state level in 1999 than in 1998. This has been taken as an indication that the first wave of movement toward retail competition, largely in the states with high electric rates, has passed. Underscoring this indication, in December 1998, public utility commissioners from 23 states issued a joint appeal to Congress to let states decide individually if and how they would restructure their electric utilities for retail competition. With electric rates averaging 24 percent below the national average, regulators in these states feared that retail competition could create a flow of low-cost power from their states, undermining benefits of local generation and damaging economic development. In 1998, the Governor of Nebraska formed the Governor's Public Power Alliance. The alliance has six members: Nebraska, Tennessee, Alaska, Puerto Rico, South Dakota and Washington state. Nebraska Governor Johanns serves as co-chair with Tennessee Governor Don Sundquist. The alliance was formed to ensure that consumers served by the nation's consumer-owned utilities are not disadvantaged by congressional efforts to restructure the nation's electric utility industry.

2.1.1 States Opening Competitive Retail Markets

In January 1999 retail competition for power supply was being established or underway in four of the states that has passed legislation: Rhode Island, California, Massachusetts, and Pennsylvania. During 1999, retail competition was also anticipated to open in Arizona, Illinois, New Hampshire (pending resolution of litigation), and New Jersey. In the year 2000: Connecticut and Maine. Nevada requires choice for all consumers by October 2001. Oklahoma and Montana have specified customer choice by July 2002, although the Oklahoma law is little more than a skeletal outline. Virginia's retail market is expected to open in January 2004.

Experience in the four states with open retail markets in January 1999 shows opportunities for large customers, but difficulty in creating market conditions that allow small commercial and residential consumers to be served. As a result of "cherry-picking" of large customers disaggregation of load has resulted that has diminished load factors and diversity making it more costly to serve the consumers left behind. The market has also been characterized by private deal-making and non-transparent pricing, which prevent competitive forces from functioning effectively. Officials in many states are watching the events in the formative retail markets. Although there are distinct differences between the competitive retail markets being initiated, common issues and problems have also emerged.

2.1.1.1 Rhode Island

The Rhode Island Public Utility Commission approved the principles of competition in August 1995. The legislature passed the Utility Restructuring Act on August 1, 1996 and it was signed by the governor one week later. Underlying the legislation was an agreement with the New England Electric System which served nearly all of the consumers in the state, and the remaining smaller utilities. It allowed for competitive supply for large industrial and commercial customers to begin in July 1997, and for residential consumers by January 1998. Competition was for power supply only; metering, billing and distribution and transmission functions were to remain regulated operations of the existing utility. For consumers who did not wish to choose a competitive power supplier, or who could not find one willing to serve them, the law created a "standard offer" price for power to be provided by the existing utility.

The goal of the legislation was to gain savings for consumers by breaking up the geographical utility monopolies. However, the standard offer rate was set so low that small consumers have not found competitive suppliers to serve them. This was also an initial problem for municipal and commercial consumers. Increases in standard offer prices over time are expected to remedy this situation. In regard to elimination of the utility monopoly, although power supply may become more diversified, mergers and acquisitions by a British company. National Grid Group PLC. are expected to bring all distribution services and standard offer customers under a single company for the entire state.

2.1.1.2 California

California's electric industry restructuring legislation, Assembly Bill 1890, was in process during the same period as Rhode Island's legislation and was signed into law six weeks later, in September 1996. As implemented, it opened the retail market for all consumers on March 31, 1998. The law called for a 10 percent reduction in electric rates and "standard offer" prices for those without a competitive supplier. It allowed 100 percent stranded cost recovery by utilities (estimated at $28 billion) and allowed the state's three major investor-owned utilities to issue up to $10 billion in state-backed bonds to finance, or securitize, additional debt from the transition. The state's three major investor-owned utilities were required to completely unbundle and to divest 50 percent of their fossil fueled generation. The proceeds are expected to help offset stranded costs and provide financial resources to these utilities for competitive operations. State regulators have also ordered the three major utilities to unbundle the cost of metering and billing from other distribution services. Competition is being examined for these services in addition to power supply.

Consumer-owned systems which serve 30 percent of the state's electric consumers have been given an "opt-out" and several years to hold hearings and determine whether to make the transition to a competitive retail market.

Underlying California's transition has been the creation of a wholesale market system consisting of an Independent System Operator (ISO) for transmission services and a Power Exchange (PX) acting as a market hub for wholesale power auctions. Participation in the ISO and PX are mandatory for the state's three large investor-owned utilities and voluntary for other participants. The start-up of the ISO and PX proved much more complex than originally anticipated and delayed the opening of the retail market from an original date of January 1, 1998. Costs to establish the ISO and PX also rose to more than one billion dollars. Part of this high cost can be attributed to the short time frame allowed for start-up and the complexity and size of the computer system and operations required to manage the ISO and PX. The PX has been subject to price volatility, causing concern among competitive retail suppliers about market stability.

As part of its restructuring, the state also put in place an $89 million program for extensive consumer education and protection, as well as charges to assure on-going development of renewable energy and energy efficiency. However, as in Rhode Island, large industrial and commercial consumers have received competitive supply while in total only a fraction of the state's ten million consumers (estimated a slightly more than one percent) have been able to contract for competitive power supply. Shortly after the market opened, major competitive suppliers announced that they were abandoning the residential market, due to the low "standard offer" price allowed to incumbent utilities. The number of competitive suppliers in the state has reportedly dwindled to 25 and further erosion is anticipated. A survey undertaken by RKS Research and Consulting found that the majority of respondents believed that the three investor-owned utilities were not committed to the concept of an open energy market. Voters, however, declined to overturn the state electric restructuring legislation in November 1998 and advocates of competition believe it will take time for the market to mature.

2.1.1.3 Massachusetts

Massachusetts passed its Electric Utility Restructuring Act in November 1997. The legislation closely tracked that of California and Rhode Island. The intent of the law was to bring rate reductions and benefits of competition to consumers over time. It set conditions for a mandatory rate reduction, a low standard offer rate, and voluntary divestiture of generating plants by investor-owned utilities. In addition to allowing full recovery of all prudently incurred stranded costs, the law authorized issuance of bonds to securitize utility debt. Municipal electric systems were left outside the jurisdiction of the law, but those that do not open to retail competition by March 1, 2003, are required to conduct a study on competitive choice of generation, and a possible municipal referendum. Public power systems choosing to engage in competitive supply outside their borders are required to immediately open their territories to other power suppliers. Municipalities without public power systems were also recognized as having the authority to aggregate consumers.

The market opened March 1, 1998, four months after the legislation. Regulators maintained a hectic pace to put adequate rules in place for utility and supplier transactions and were still engaged in that process following the open-market date. In addition to incomplete or uncertain rules, the fact that a functioning ISO was not in place until May 1, 1999 had a dampening effect on the market. Also, as in California and Rhode Island, "standard offer" rates were initially set below market prices. While large industrial and commercial customers have received competitive supply, small commercial and residential consumers have been left with their existing utility, until such time as the standard offer rate for electric energy reach market price levels. As in California, major competitive suppliers left the residential market until market prices improve. A referendum vote in November 1998, had the same results as California, with voters not wanting to overturn the new law.

A year after the opening of the retail market, power supply marketers were working primarily through industrial and business organizations to acquire high-use customers. One estimate was that approximately 6,000 customers have switched. Aggregation of consumers by public associations and municipalities was underway with larger consumers in those groups receiving service. As in California, these transactions have been private, and transparent pricing necessary for viable competition has not been available to consumers or competitors.

The opening of the competitive wholesale auction system. ISO New England. on May 1, 1999 further chilled the retail market, delivering higher, and not lower prices. While some analysts believe this is a short term aberration, others believe that market prices may remain high and volatile until additional generating capacity is built in the region.

In the meantime, mergers are underway for several of the state's investor-owned utilities (most of which have divested their fossil-fired generating plants and ascertained their stranded costs). This has led to speculation that Massachusetts consumers could be served by only one or two distribution companies in the near future. Because several of those companies are engaged in delivery of other services. such as telecommunications, natural gas, or cable television. concern about market power and the viability of competition is likely to emerge.

2.1.1.4 Pennsylvania

Pennsylvania restructuring legislation was enacted in December of 1996 and scheduled for initial implementation on January 1, 1999. Similar to other states, the law required the Pennsylvania's seven investor-owned utilities to separate their generation and distribution operations. Also similar to other states, the incumbent utility would provide metering, billing and distribution services, although this too could become subject to competition. Pennsylvania. s plan also provided for a rate cap that may extend for nine years, stranded cost recovery, divestiture of assets, and securitization for a portion of the stranded costs. Public power systems and electric cooperatives were not required to open their markets unless they wanted to compete outside their territories.

Different from other the other states, Pennsylvania established "pilot projects" for each utility that phased into its open market. Also, the state did not establish a "standard offer" price but set a "shopping credit" price equal to each utility's cost of power. Although it constituted a similar benchmark price for competitors to beat, the "shopping credits" were set at more realistic levels than standard offer prices which were not necessarily based on a utility's power costs. The "shopping credits" provided greater opportunity for profit and attraction for competitive power marketers. Forty-two suppliers were approved by the state utility commission. Mass advertising and marketing efforts to consumers became widespread.

Each of the incumbent investor-owned electric utilities developed a competitive subsidiary and market program along with the pilot programs. The pilot programs were deemed a success. Of a total or three to four million customers eligible, more than 1.8 million signed up for the opportunity to switch to a new power supplier by sending in a postcard. Of the 1.8 million, an estimated 400,000 customers were noted to have actually changed power supplier in the early months of the market. Most alternative suppliers selected were subsidiaries of their incumbent electric utility. Industrial and commercial customers made up the majority of those who switched, with only about 10 percent of residential customers making a change. As in other states, aggregation of customer groups through business and other organizations occurred to bring marketers low-cost access to customers. Because of high transaction costs for each customer and disaggregation of load due to "cherry-picking," consumers advocates in the state are concerned about how small commercial and residential customers will be able to enter and gain benefits in the market. Rising and volatile wholesale power costs and a shakeout among competitive suppliers, with marketing subsidiaries of existing utilities having a competitive advantage, are also seen as possible detriments to full market participation. Merger activities in the state could also affect the future of the competitive market.

2.1.2 Key Issues in Other States

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. A functioning and stable wholesale market and adequate market rules are essential for retail market development. The need for other preconditions is also apparent in the experience of the states undertaking competition and restructuring of their electric utilities. (These preconditions are outlined below and discussed in chapters 3 and 5, and as part of a policy framework in Chapter 9.)

First in terms of structure:

1. A viable wholesale power supply market must be in place with some type of market hub in the form of a Power Exchange or transaction center.
2. A transmission network with non-discriminatory access for suppliers must be in place and fully functioning.
3. All market power issues must be addressed including corporate and operational reorganization and divestiture of assets.
4. A strong regulatory structure must be in place that can promulgate rules and standards and provide adequate enforcement and oversight.
5. For electric systems that will not benefit from a competitive retail market, provisions must be made to allow an alternative path.

Second, in terms of a retail market and benefits for consumers:

1. Consumer electric bills must be "unbundled" to show component costs for power supply, transmission, distribution, and other charges.
2. Consumer protection and education programs for low-income and all consumers must be in place.
3. The affects of load disaggregation should be examined to determine impacts on potential savings, service efficiency and competitive access by all customers.
4. Access Pricing must be in place that is equitable and does not subsidize new competitors, not disadvantage consumers or equity of the existing utility.
5. Public benefits that might be stranded such as renewable energy programs,energy efficiency or social programs must be addressed.
6. Standard Offer, Default Service, or Shopping Credit Prices must be formulated based on realistic costs and market pricing.
7. Market prices must be transparent, no private or hidden pricing can be allowed that would undermine consumer signals and other market forces.
8. Stranded costs, or other costs of a transition must be addressed in a manner that prevents cost shifting and allows for necessary recovery of costs.

These issues, and how they may impact or be addressed in Nebraska are examined in detail in subsequent chapters. From the perspective of a general discussion on state activities, it is important to note that how they are handled will be affected by on-going transformation of the market itself and how electricity and related services may be bought, sold and delivered. Back, Next

Market Transformation and Mergers

The prospect of competition in the electric industry is having a dramatic effect on both the structure and services in states that have opened their retail markets and in those which have not. This transformation can be seen in terms of new players in the market, new multi-service packages, and new business structures.

The prospective and actual opening of the retail electricity market has brought many new participants or "players" into the electricity service markets. Included in this group of new players are commodity market and broker organizations formerly participating in competitive natural gas market and other energy supply markets, major energy and telemarketing firms, and new investor groups buying into or creating supply and service organizations. While the total number of companies engaged in electric supply recently numbered 3,000, that figure has more than doubled with activity at the wholesale and retail levels. Many international energy companies are also entering the U.S. electric industry markets.

At the wholesale level, an increase in players is producing an increase in the number, volume and nature of power transactions. FERC has approved 488 electric wholesale generators and an estimated 52,000 megawatts of merchant plant capacity is currently proposed nationwide. Another 40,000 megawatts of capacity is in transition through plant divestitures. The level of transactions at the wholesale level has already increased. It is assumed a similar increase has occurred in the MAPP region as well.

The trading of electricity as a commodity has resulted in greater price volatility and associated futures market where transparent price information may be found. Also, available are contracts for dealing with price risk including options and hedging arrangements. These activities have involved traditional utilities, commodity marketers and brokers, and financial and commodity exchanges.

As the volume of wholesale market transactions and the potential for volatility has grown, there have been pricing problems. This is apparent in the experiences of New England and California, but more dramatic was a cost spike in the Mid-West during the June 1998 in which power shortages and market failure drove prices up from a range of $25 to $50 per megawatt hour to more than $7,000 per megawatt hour. Part of that market failure was due to a power marketer defaulting on delivery as prices rose.

Moody's Investor Services has noted that delivery failures might not be anomalies, and that additional failure by power marketers should be expected given the "large number of players in this nascent market and fragile financial positions of several of these companies."

One FERC Commissioner addressing a meeting of power marketers stated that the Mid-West failure had a profound affect on his thinking about the state of power markets and what FERC's next steps should be. He reasoned that the electric industry was straddling two eras and that too much had happened to stop or turn back. He concluded that FERC had to move forward aggressively to get transmission organizations and regional wholesale markets in place.

While volatility at the wholesale level will affect prices and competitive supply at the retail level, the retail market is undergoing its own transformation. At the retail level, new and old players alike are anticipating the "convergence" of "wires" and energy services. In order to participate in the competitive electricity market and replace revenues lost with market share, utilities are entering into new services such as telecommunication, home security, cable television, insurance, and real estate. These efforts are aimed at taking advantage of an incumbent's relationship with its current and former electricity customers and in many cases, and to utilize electric utility infrastructure assets such as fiber optics, underground ducts, overhead lines and wires technology experience. Natural gas and other companies are approaching the same issue from their own direction, to add electric services.

In order to organize and position themselves for wholesale and retail market transformations, new business structures are emerging. These include alliances between utility and financial, or multi-service services organizations, and mergers and consolidations on an increasingly larger scale. Mergers and consolidations of the industry in particular hold potential far-reaching impacts for the viability of competitive markets and benefits for consumers.

2.2.1 Mergers and Consolidations

Along with the transformation taking place in the market with new players, new businesses and new services, the structure of the industry is entering a period of extensive consolidation. As noted in Chapter One, some analysts anticipate that within five years the industry may be served by as few as forty utility companies, others estimate even lower numbers.

Historically, electric utility mergers and acquisitions can be separated into three distinct phases. The first phase is the initial mergers and acquisitions that started at the beginning of the industry in the latter part of the 19th century and lasted into the 1930s. The nature of these mergers and acquisitions was a transition from individual ventures to vast holding companies. This transition occurred in the absence of effective electricity regulation.

In phase two, the major, large holding companies were dismantled in the 1930s and 1940s when the provisions of the Public Utility Regulatory Policies Act (PUCHA) of 1935 were implemented. This dismantling lead to the existence of more than 220 investor owned electric utilities, a dozen of which remained in holding company form and were regulated by the federal Securities and Exchange Commission.

Phase three is currently underway and consists of (1) Investor-owned utility (IOU) mergers and acquisitions, (2) IOU plant acquisitions, (3) IOU acquisitions of foreign electric utilities, and (4), formation of new IOU holding companies.

Of specific interest are potential impacts on Nebraska of regional electric utility mergers and acquisitions indicated below in Table 2-1.

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

The broad effect of the above mergers is to create two large electric utility holding companies in Iowa where there were originally six, and to create one large electric utility holding company in Missouri/Kansas where there were originally three utility companies. The Iowa and Missouri/Kansas borders to Nebraska are the most populated areas and most significant electrically with the exception of the Western Area Power Administration to the north.

The following are typical concerns that arise from electric utility mergers: 1) increased market concentration in generation and/or transmission ownership; 2) significantly increased growth in number of retail customers under single entity; 3) significantly increased corporate size of merged entity; 4) "convergence" of various services in new entity. Each of these is discussed briefly below.

2.2.1.1 Increased Market Concentration in Generation and Transmission

There are several issues to be considered when electric utility mergers increase concentration of generation and/or transmission. Fewer generation suppliers in the deregulated, competitive generation market can lead to oligopoly situations. A market consisting of a relatively few large generation competitors can lead to potential price manipulation. Mergers of electric utility transmission systems can expand ownership control by fewer market entities over a large portion of the transmission network. Policy-makers should consider the following transmission-related issues:

Expanded interstate transmission networks could make oversight on market power issues more difficult for the states and emphasize the need for "real" non-discriminatory open access to transmission service.

Transmission networks are merging at a time when few effective Independent System Operators (ISOs) have been formed and federal policy on emerging Transco's has not been fully developed. The relationship between ISO's and Transco's has not been fully defined by operation experience or federal policy, in part because both the ISO and Transco concepts are in evolutionary stages.

2.2.1.2 Significantly Increased Growth in Number of Customers Served by Single Entity

The size of electric utilities on Nebraska's eastern and southern boundaries should be taken into account when considering changes to the state's retail market structure:

• MidAmerican Energy Company headquartered in Iowa has approximately 650,000 electric customers and 620,000 natural gas customers.
• Westar in Missouri/Kansas will have more than one million electric customers upon approval of its proposed merger.
• Individually, Western Resources has approximately 600,000 customers and Kansas City Power and Light has over 400,000 customers.
• By comparison, Nebraska has a total of approximately 840,000 metered electric customers. OPPD, the state's largest retail provider, has approximately 250,000 electric customers.

2.2.1.3 Significantly Increased Corporate Size of Merged Entity

In addition to the number of retail customers within the service area of merged utilities and holding companies, a significant increase in corporate size and resources is a factor that policy makers must consider regarding introduction of retail competition in Nebraska. The following issues should be considered:

• Westar (Western Resources) has major investments in home security systems;
• MidAmerican Energy has recently acquired major real estate firms in the Omaha area;
• Holding company growth in services "beyond" the electric meter creates market leverage whether or not the holding company serves the customer with electricity;
• Some Nebraska utilities are taking steps to grow the scope of their business to seek similar advantages.

Increased size of merged holding companies on state borders could also take on substantial meaning for the issue of privatization in Nebraska.

Summary of Market Transformation and Mergers

Impacts resulting from market transformation and mergers and consolidations will depend upon actions by state and local governments to limit market power and the potential for market and consumer abuses. Experienced regulators have recognized that the best deterrent is in the structure of the market, rather than behavioral rules. The Federal Trade Commission staff recommended to FERC in February 1998 that it rely on structural remedies and asset divestiture to establish effective competition at the wholesale level. Federal Trade Commission analysts noted that there are substantial difficulties in identifying and documenting the exercise of market power and preventing it through rules. Monitoring could require transaction-by-transaction oversight and would be difficult when transactions are time sensitive.

The same is true at the retail level. Incentives for abuse need to be removed and to the market structure needs to allow multiple players operating on clear rules, without market dominance. Such a structure could have strong implications for multi-service providers, particularly those with large numbers of customers. At the national level, the American Public Power Association and the National Rural Electric Cooperative Association have filed a Joint Petition with the Federal Energy Regulatory Commission (FERC) requesting a two-year moratorium on utility mergers that would combine more than one million customers.

As part of electric industry restructuring plans, states need to examine the potential for market power abuses and incorporate protections into the proposed market structure, as well as assuring adequate resources for timely anti-trust and restraint-of-trade investigations. "Convergence" of wires and energy businesses could prove to be an especially difficult issue.

Pressures on Nebraska from Neighboring States, Regional Agencies, Federal Agencies

Electric utilities in Nebraska and its neighboring states will all engage in an expanded wholesale power supply market and reorganization of transmission. But no determinations have yet been made in Iowa, Kansas, South Dakota, Wyoming, or Colorado to establish retail competition.

TABLE 2-2 -- Restructuring Activity in States Adjacent to Nebraska

As of mid-1999, there is little pressure emerging from neighboring states for Nebraska to move toward a competitive retail electric market. However, given factors such as similar economic characteristics, similar electricity prices, common marketing areas of various sales and manufacturing organizations and tradition, events in those states deserve close monitoring.

As indicated in Table 2-2, the states indicating the greatest movement toward establishing retail competition appear to be Iowa and Kansas. Generally, the neighboring states are relatively low-cost and not under extensive pressure to create retail competition. Iowa. s progress to date can be attributed in part to the enactment of legislation shifting utility property tax obligations to a tax based upon consumption and the number of poles in use. South Dakota and Wyoming indicate the least interest in moving toward retail competition.

At the regional level, the formation of an ISO, Transco, or other regional transmission organization, could create wholesale market changes and a rise in wholesale pricing that could trigger greater pressure for retail competition. Progress toward development of a regional transmission organization within MAPP appears stalled. Although MAPP approved a regional tariff, utilities in the east portion of MAPP are shifting to the Midwest ISO. In western Nebraska, efforts to form a regional transmission organization known as "IndgeGo" last year did not reach fruition, although additional efforts are underway.

At the federal level, FERC is continuing to pursue regional transmission organizations and seeks legislative expansion of current jurisdiction to order participation in a regional organization such as an ISO. The FERC is encouraging restructuring of the retail market at the state level and is working to ensure the evolution of transmission organizations to support state restructuring. Additionally, FERC has been supportive of electric utility mergers and acquisitions and will face expanded market power issues if the Public Utility Holding Company Act of 1935 is repealed.

Mergers in neighboring states, particularly those that combine services and already offer some of those services in Nebraska, may hold a special challenge to state policy-makers.

Summary

Other states are taking varied approaches, but common problems both in wholesale markets and efforts to establish retail markets are apparent.

As noted in section 2.1.2, experience and discussion in other states indicate several key issues to be considered in any plan to address expansion of markets for wholesale power supply, and establishment of retail competition. The most important of these are preconditions for a competitive market:

First in terms of structure:

1. A viable wholesale power supply market must be in place with some type of market hub in the form of a Power Exchange or transaction center.
2. A transmission network with non-discriminatory access for suppliers must be in place and fully functioning.
3. All market power issues must be addressed including corporate and operational reorganization and divestiture of assets;
4. A strong regulatory structure must be in place that can promulgate rules and standards and provide adequate enforcement and oversight.
5. For electric systems that will not benefit from a competitive retail market, provisions must be made to allow an alternative path.

Second, in terms of a retail market and benefits for consumers:

1. Consumer electric bills must be "unbundled" to show component costs for power supply, transmission, distribution, and other charges.
2. Consumer protection and education programs for low-income and all consumers must be in place.
3. The affects of load disaggregation should be examined to determine impacts on potential savings, service efficiency and competitive access by all customers.
4. Access Pricing must be in place that is equitable and does not subsidize new competitors, not disadvantage consumers or equity of the existing utility.
5. Public benefits that might be stranded such as renewable energy programs,energy efficiency or social programs must be addressed.
6. Standard Offer, Default Service, or Shopping Credit Prices must be formulated based on realistic costs and market pricing.
7. Market prices must be transparent, no private or hidden pricing can be allowed that would undermine consumer signals and other market forces.
8. Stranded costs, or other costs of a transition must be addressed in a manner that prevents cost shifting and allows for necessary recovery of costs.

The prospect of competition in the electric industry is having a dramatic effect on both the structure and services in states that have opened their retail markets and in those which have not. This transformation can be seen in terms of new players in the market, new multi-service packages, and new business structures.

Impacts resulting from market transformation and mergers and consolidations will depend upon actions by state and local governments to limit market power and the potential for market and consumer abuses. Experienced regulators have recognized that the best deterrent is in the structure of the market, rather than behavioral rules. Strong uniform regulation of the market that includes prevention of market power abuses and adequate resources for timely anti-trust and restraint-of-trade investigations is needed. "Convergence" of wires and energy businesses could prove to be an especially difficult issue.

With an understanding of these elements, Nebraska needs to assess methods to address wholesale competition and evaluate the conditions needed for retail competition to provide benefits for all consumers.

• Contents
• Executive Summary
• Chapter One: Background on Electric Industry Competition and Restructuring
• 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: Changes and Impacts on Law, Governance, Regulation, and Taxation
• Chapter Eight: Cost/Benefit Considerations
• Chapter Nine: Public Process and Timing Considerations
• Chapter Ten: Summary of Chapter Key Points and Recommendations
• Glossary