CHAPTER NINE: PUBLIC PROCESS AND TIMING

Introduction

This chapter summarizes recommendations contained in preceding chapters and offers a planning framework for Nebraska. It reviews the public policy issues that have been raised and options for addressing those issues. It outlines the public process utilized in other states to make determinations and offers recommendations on public process for Nebraska. The chapter then describes a three-part "condition-certain" framework as an alternative to "date-certain" plans that have presented problems in other states. The "condition-certain" framework does not mandate retail competition, but prepares for state and local implementation of retail competition if preconditions are in place and benefits of a competitive retail market are assured. The "condition-certain" framework is recommended to be developed through two pieces of legislation: 1) Initial Legislation that would establish necessary planning authority and resources and prepare rules, standards and protocols; 2) Implementation Legislation that would establish a structure for retail competition once preconditions have been met and functional rules and structure are prepared. In recognizing the significance of local control, each municipal electric system, public power district, or rural electric cooperative would have the choice to participate, or not to participate, in the competitive retail market through its own public process.

Public Policy Issues

Every state must address how it will accommodate expansion of wholesale markets and changes in transmission organizations. Every state must also evaluate the costs and benefits of a transition to retail competition based upon its own unique conditions. As noted in earlier chapters, conditions in Nebraska differ significantly from those in other states. Nebraska. s issues are shaped by the low-cost wholesale power supply the state enjoys, and the structure of law, governance, regulation, and taxation that supports the non-profit consumer-owned systems. While expansion of the wholesale market and changes in transmission may be accommodated with little change in existing law and structure, a transition to retail competition would require extensive change in structure, governance, operations and principles. Such a transition would need to be justified by assured economic benefits for Nebraska consumers based on a definitive and sustained shift in regional market prices.

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.

Within the recommended "condition-certain" framework, there are several key policy questions and options for Nebraska to address. These have been discussed in preceding chapters and are outlined below.

9.1.1 Accommodation of National and Regional Changes

First, there is a need to accommodate changes occurring nationally and in the region for generation and transmission. There are two key questions and options to consider:

• How to maintain low-cost wholesale power supply?
  Options: contract-based (i.e. provisions in wholesale contracts that commit to long-term, low-cost pricing)
  administrative structure and policy-based (i.e. Nebraska Power Transaction Center)
  structure-based (i.e. Nebraska Generation Cooperative)
  joint-planning-based (i.e. closer coordination in generation planning)
  combination of options (contract, structure and joint planning)
  
• How to assure and maintain low-cost transmission access for all Nebraska systems?
  Options:
  participation in regional ISO/RTO
  development of Nebraska Transmission Organization
  development of regional public power ISO/RTO
  joint planning of transmission
  combination of options

9.1.2 Improvement of Nebraska Systems

Second, to improve system efficiencies and prepare for retail competition, minimize operating costs and maximize opportunities for delivery of electricity or other services:

• What structural changes might take place to improve local systems?
  Options:
  mergers
  alliances
  divestiture
  
• What changes in authority must take place to provide greater latitude for service delivery and business relationships?
  Options:
  ability for all consumer-owned systems to engage in multi-service delivery
  ability for all consumer-owned systems to engage in broadened public-to-public and public-to-private relationships

9.1.3 Preparation for Retail Competition

Third, to prepare for possible retail competition:

• What assurances of benefits to offset transition and transaction costs?
  statewide threshold analysis
  individual system opt-in threshold analysis
  
• What protections must be prepared for consumers?
  consumer protection rules and standards (including Consumer Bill of Rights)
  consumer education program
  statewide regulatory body in place
  safety net for small business, residential and rural consumers
  
• What transitional rules and standards must be in place?
  unbundling of charges on consumer bill
  access pricing
  market power restrictions
  rules regarding multi-service delivery
  business transaction protocols
  competitive supplier certification
  aggregation standards or rules
  transition cost quantification and recovery methods
  mechanisms to assure revenue neutral tax impacts
  
• What workforce protections must be in place?
  confirmation of safety standards
  confirmation of continued training and certification programs
  transition, training and placement packages in place for utility workers displaced by move to retail competition
  
• What protections for the environment, renewable energy and energy efficiency?
  Options:
  minimum portfolio standards
  green pricing to support choice of clean energy and green energy
  consumer contribution programs for renewable energy projects
  standards to define green power and green pricing
  consumer charge to cover public benefits programs
  consumer disclosure (label) net billing.

9.1.4 Additional Policy Considerations

In addition to the key state level policy questions noted above, there are local and federal issues to be considered. At the local level:

• How to preserve consumer equity in a competitive retail market?
  Options:
  access pricing
  transition quantification and recovery
  mechanisms for revenue neutral tax impacts
  equitable methods for distributing proceeds from liquidated assets
  new structures to enhance consumer equity, savings, and leverage
  expanded cooperation and joint planning among Nebraska systems
  preferred divestiture or alliances with other consumer-owned entities
  
• How to preserve benefits of local governance?
  Options:
  assure adequate and accessible public process is in place at the local level
  assure adequate public communications
  policies for adequate representation in merged or allied consumer-owned entities

At the federal level, there are issues being taken up within Congress and federal agencies that could have far-reaching impacts on Nebraska, as well as other low-cost states. It is important that local and state government have clearly articulated and consistent policy positions on these issues:

• Issues in Congress
  Public Utility Holding Company Act
  Merger and Market Power Restrictions
  Proposed Sale of the Power Marketing Administrations
  or Alterations of Preference Power Policies
  Level Playing Field Issues Regarding Taxation
  Private Use Restrictions
  Public Benefits Fund (Rural Safety Net)
  Renewable Portfolio Standard
  Flexible Mandate
  
• Regulatory Issues
  Rules Regarding Formation of ISOs/RTOs/Transcos
  Merger and Market Power Restrictions

Public Process for Addressing Policy Issues

Nebraska faces the same three choices on how to proceed now confronting other states: 1) develop no policy. do nothing and allow market forces to advance and possibly limit future policy options; 2) develop policies within a planning framework that includes a phased approach based on preconditions for action; 3) undertake immediate comprehensive policy changes to establish retail competition.

Other states are utilizing one of these three approaches, with relative urgency of action depending in large part upon whether the state is facing high or low electric costs. As noted in Chapter Two, 19 states have passed legislation to restructure their electric industry, three states have utilized comprehensive orders from their regulatory commissions, and 24 states and the District of Columbia have active legislative and/or regulatory processes underway to study the issue. Four states have undertaken relatively little action, and among them, Florida and South Dakota do not anticipate any effort toward retail competition soon.

In states where definitive legislative or regulatory action has taken place, development of consensus has included "stakeholder" discussions and committees, as well as "settlement" agreements among utilities and various stakeholder parties. These agreements have typically attempted to include some benefit for all parties. Commonly, private utilities, which are the primary target of restructuring, have been allowed transition costs and securitization of debt that in some cases has provided windfalls for stockholders. Consumers have been offered mandatory rate reductions or rate caps. Competitive suppliers have been offered niche markets of large consumers and opportunities to purchase generating plants and other assets being divested. Consumer-owned systems in those states have commonly been offered an opportunity to maintain their current operations or opt-in to the competitive retail market.

For Nebraska, development of a public process will take preparation. The Unicameral is the only body that is in a position to address the issues of restructuring. But as in other states which have undertaken legislative action first, a statewide regulatory body is needed to promulgate rules, standards, and to oversee detailed examination of specific issues outlined in the legislation. Any extensive involvement by a regulatory body in Nebraska will require: 1) designation of such regulatory body; 2) possible increased statutory authority for the regulatory body as well as allocation of adequate resources.

The "settlement" efforts of other states generally do not apply to Nebraska. There are no issues to resolve between the interests of stockholders and consumers; consumers are the stockholders. Because utilities are non-profit and operate at cost-of service with consumer-owned facilities, there are no windfalls to offer. Because of low electric costs, there are no mandatory rate reductions, or rate caps to offer. Therefore, retail competition will have to provide attractive benefits on its own terms, rather than through incentives offered various parties to agree to a transition. And consistent with other states, and the tradition of local control in Nebraska, municipal systems, public power districts, and rural cooperatives should be able to determine whether or not to opt-in to a competitive retail market through their own public process.

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.

In view of this experience, Nebraska's consideration of retail competition needs to be based upon a "condition-certain" framework that requires certain preconditions that would support effective functioning of a market system.

"Condition-Certain" Phased Approach and Preconditions for Retail Competition

As described briefly in the discussion of public policy issues, the first part of this "condition-certain" approach is to preserve Nebraska's position in the electric energy market and undertake efforts to maintain low wholesale power costs and enhance transmission access. The second part is to undertake efforts to enhance the efficiencies and operations of the local systems. The third part is to prepare for retail competition.

Experience in other states has clearly demonstrated the need to have certain market, structure, and regulatory conditions met prior to establishing a competitive retail market. These general preconditions can be identified in five areas: 1) viable wholesale market; 2) functioning ISO/RTO and adequate transmission; 3) competitive market pricing with savings adequate to offset transition and transaction costs; 4) regulatory rules, standards, protocols, consumer protections and detailed examinations; 5) statewide regulatory body designated to enforce rules and oversee market.

Viable Wholesale Market

A viable wholesale market requires an operational regional "market hub" through which transactions may take place. It requires sufficient buyers and sellers to make an active market. It requires clear and equitable trading rules. While judgment of what level of these requirements are sufficient may be considered subjective, viability should be reflected in stable or predictable pricing patterns.

Functioning ISO/RTO and Adequate Transmission

Equitable access to low cost transmission is essential to a competitive retail market.

This requires a FERC approved organization with fully functional rules and tariff, and transmission facilities adequate to support the transactions within the region and state.

9.3.3 Competitive Market Pricing

Wholesale market pricing in the region must be competitive with Nebraska wholesale power costs to an extent that transition and transaction costs of retail competition will be offset by savings and threshold analyses is required to assess potential benefits. As described later, the threshold analyses should indicate a sustainable and conclusive shift in pricing has occurred. Judgments should also be made that there are a sufficient number of competitive power suppliers who meet the threshold to create a viable retail market.

Regulatory Rules, Standards, Protocols, Consumer Protections

The rules, standards, protocols and protections outlined in Section 9.1.3 should be fully developed through a public regulatory process prior to establishing retail competition. The Task Force has recommended that work groups be organized to develop these elements under the coordination of the Nebraska Power Review Board which has historically maintained jurisdiction over the Nebraska electric systems. The rules, standards, protocols proposed by these groups should be subject to public hearings and formal adoption. The legislature would have the option of authorizing the Power Review Board to adopt these rules, standards, and protocols, or incorporating them in proposed Implementation Legislation.

9.3.5 Statewide Regulatory Body

Retail competition requires a statewide regulatory body to augment the regulatory function that has been traditionally resided at the local level. As demonstrated in the experience of other states, it is essential that a statewide regulatory body first work with stakeholders to develop adequate rules, standards, and protocols as described briefly in 9.3.4. Second, a statewide regulatory body, not necessarily the Power Review Board, needs to be designated to oversee and enforce those rules, standards, and protocols.

Nebraska's Public Process

The process by which Nebraska might undertake this "condition-certain" phased approach has five parts: 1) Implementation Legislation; 2) Work Groups Developing Rules, Standards, Protocols, Protections with the NPRB; 3) Monitoring of Wholesale Market Threshold Examination of Benefits of Retail Competition; 4) Implementation Legislation (if the Threshold Examination determines benefits for retail competition); 5) Opt-In By Local Systems

Initial Legislation

Initial Legislation would address the policy questions and options outlined in Section 9.1. It would formally adopt the "condition-certain" approach. It would authorize the formation of work groups and coordination to be undertaken by the Nebraska Power Review Board and allocate necessary resources. In regard to that work, it would outline the rules, standards, and protocols to be developed. It would outline the consumer protections and education plans to be developed. It would outline the environmental and workforce protections to be enacted. And it would authorize the follow-on examinations to be undertaken. It may or may not include final designation of what statewide regulatory body would ultimately oversee and enforce market rules.

The Initial Legislation would also provide policy direction regarding maintenance of low cost wholesale power supplies, and access to low-cost transmission access for all Nebraska systems. It would provide instruction regarding mergers, alliances and divestiture, including possible incentives for merger studies, and criteria for divestiture. It would also include changes in current law to allow greater latitude for the Nebraska systems to provide delivery of a range of "wires" and "energy" services, and greater ability for consumer-owned systems to engage in public-to-public and public-to-private business relationships.

The Initial Legislation would authorize the development of Statewide Threshold Analysis and Local Opt-In Threshold Analysis and provide instruction on the application of the statewide analysis by the Power Review Board. It would list the preconditions to be met prior to establishment of retail competition.

The Initial Legislation would also provide instruction for the drafting of proposed Implementation Legislation. It would require administrative unbundling of the charges on a consumer bill. And it would require notification by local systems to all consumers that the "condition-certain" policy framework has been adopted and what it implies.

9.4.2 Work Groups and Nebraska Power Review Board

The Nebraska Power Review Board would coordinate and oversee the development of the proposed rules, standards, protocols, protections, and follow-on examinations outlined in the Initial Legislation. This would include the development of Threshold Analyses. The NPRB would also assist in drafting proposed Implementation Legislation. The work groups would be designated to represent all Nebraska stakeholders in the process and their work products would be subject to public hearing and comment.

9.4.3 Monitoring and Threshold Examination

Examination of benefits would take place when regional wholesale market prices and Nebraska wholesale prices indicate the potential for consumer savings. There are two distinct Threshold Examinations. one statewide, and one local. The statewide examination would determine if: 1) a sustainable and conclusive shift has occurred in the comparison of state and regional wholesale power supply prices; 2) the shift is sufficient to offset transition and transaction costs of a competitive retail market and create savings for all consumers. In undertaking this examination, the statewide Threshold Analysis would identify and quantify not only current and projected wholesale power supply costs, but also identify and quantify all transition and transaction costs.

The statewide Threshold Analysis would also certify that all necessary preconditions have been met, and that a sufficient number of competitive suppliers meet the threshold measure to make a viable retail market.

The findings and recommendation of the Statewide Threshold Analysis would be subject to comment at a public hearing, prior to being submitted to the Legislature. Considerations might include whether a sufficient number of electric systems would have interest in participation, and if not, how costs of transition might be allocated.

The local system Threshold Analysis would be undertaken at the discretion of the local system as part of its public process. It would look specifically at its own specific wholesale power supply costs, and specific transition and transaction costs, as well as other local elements of primary consideration. This analysis would be utilized if there were positive findings by the statewide Threshold Analysis and subsequent passage of Implementation Legislation to establish retail competition.

9.4.4 Implementation Legislation

Implementation Legislation drafted as a requirement of the Initial Legislation would be submitted upon a positive recommendation of the statewide Threshold Analysis and certification that the preconditions are in place. It would include the comprehensive changes in law and regulation required to make a transition to retail competition. This would include changes in existing law, as well as new authorities, regulations, and protections.

9.4.5 Opt-In By Local Systems

Local systems would opt-in based on the findings of their own specific Threshold Analysis. The form of public process by which determination regarding opt-in might take place would be determined at the local level consistent with the requirements of state and local law.

Timing

The "condition-certain" framework utilizes an alternative to calendar dates established without regard to market conditions and necessary preconditions of structure. Drafting and enactment of Initial Legislation could be undertaken in the immediate future to assure timely guidance for evolving issues. Once authorized, development of rules, standards, protocols, consumer protection, and follow-on examinations could take place during a 12-18 month period following passage of Initial Legislation. Given the policy development in many of these areas already undertaken by other states, facilitated development of policy for Nebraska should be possible.

Preconditions for a viable wholesale market and functioning ISO/RTO would be expected to evolve while this work is being conducted. Also, development of efforts to maintain low wholesale power costs and to assure low-cost transmission access could be concurrent with the progress of the work groups and the NPRB. Statewide Threshold Analysis would, clearly, not be undertaken until the rules, standards, protocols, etc. have been developed.

The timing for application of the statewide Threshold Analysis would depend upon market conditions and the status of structural preconditions. Thus, no firm date can be given for Implementation Legislation, or subsequent decisions by local systems to opt-in.

For general purposes of initiating this two-part legislative approach, 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.

Advisory Topic Group Recommendations

The Public Policy and Timing topic group of the LR455 Advisory Group offered the following recommendations. The Advisory Group discussed the overview of the "condition certain" policy framework, but did not address these issues specifically. Many of these points reflect policy considerations of statements made by other Advisory Group subcommittees.

1. A new market system must have mechanisms in place to ensure that prices are fair, just and reasonable for all consumers. It must include an efficient market of both buyer and sellers and transparent pricing. Additionally there must be a statewide body to ensure that prerequisites to a competitive market are in place before moving to the next step.
2. Adequate consumer protection mechanisms must be in place prior to moving to retail competition, including a statewide oversight agency, and provisions for a consumer bill of rights, consumer education, and protections from abusive marketing practices. The criteria for the appropriate statewide agency should include protections from unreasonable or unfair influence of various pressure groups.
3. Availability, affordability, reliability, efficiency, quality, safety, environmental protection and opportunity for economic development must be maintained or enhanced. These features should be available in a competitive market, through a combination of regulated and competitive market elements, with local, state, regional and possibly federal oversight.
4. Principal benefits and elements of public power, including low costs and local control, should be preserved.
5. Benefits of integrated resources planning, including demand-side management, conservation and renewable resources, should be preserved.
6. Existing environmental, financial and contractual commitments should be honored. The new structure should fold in commitments and contracts during the transition period and mitigation should allow recovery of stranded costs and benefits. These commitments to be honored include reasonable employee programs for early retirement, retraining, severance pay, and adequate transition time.
7. All electric suppliers should have the flexibility to offer products, services, prices,terms and conditions that meet unique and diverse customer needs. To be competitive, incumbent electric suppliers should have the opportunity to offer other services.
8. All suppliers of electricity to Nebraska consumers are to be subject to fair and consistent laws, rules, and regulations, including public access to information.
9. Price information should be public knowledge, competitors should be able to keep commodity cost information confidential. Statewide oversight agency should have sufficient access to confidential information to ensure against abusive market practices.
10. If retail competition is allowed in Nebraska, all electric suppliers should have the authority to conduct retail electric operations and provide products and services outside of Nebraska. Products and services offered outside of the state should not be at the detriment of Nebraska electricity consumers.
11. There should be a comprehensive plan implemented in step-by-step process which allows for meeting step goals before moving to next step.
12. Comprehensive enabling bill by legislature allowing decisions by voters (members) and/or local boards and commissions for locals opt out or opt in, and related decisions. Voters/local boards would have local opt-out or opt-in choice to make on their participation in the new market structure.
13. If part of a comprehensive plan to make a transition to retail competition, the legislature should determine criteria and standards for divestiture as part of legislation addressing utility asset sales to private entities. The state should not mandate divestiture. The decision to divest should be at the local level. Municipals and cooperatives currently have these rights. Consider allowing extending right-of-first-refusal to public power agencies for purchasing assets being divested.
14. In terms of timing, waiting for federal standards may not be adequate if the market moves faster than legislation. A better trigger point is having certain regional or state conditions met; such as when an open, competitive, efficient generating/wholesale market is in place in the region, oversight agencies are in place, and it can be demonstrated that all consumers will benefit from retail competition.
15. The preferred approach would be to have set target dates for achieving discrete market steps. The process would not move forward without achieving the trigger mechanism goals for each step. Possible steps could include satisfactory development of regional wholesale market mechanisms such as ISO, generator competition, vibrant wholesale energy market. Other steps should include having appropriate state oversight and public protection agencies in place.
16. Mergers should be voluntary, with decisions made at the local board level.
17. Alliances should be encouraged. Multiple service provisions involving alliances should also be encouraged.
18. Actions needing to be undertaken at the local level to preserve Nebraska's options in considering structural and operational changes include: maintain local control authority for significant decisions involving participation in retail competition.
19. Actions needing to be undertaken at the state level to preserve (and enhance) Nebraska's options in considering structural and operational changes include: remove barriers from consumer-owned utility's ability to compete; take away barriers to divestiture of assets; expand participation of Nebraska Power Review Board in current national debate on competition in electricity; qualify existing Nebraska hydroelectric resources as renewable.
20. Actions needing to be undertaken at the regional level to preserve Nebraska's options in considering structural and operational changes include: delineate role of Nebraska Power Review Board for regional transmission and power exchange organizations; remove state barriers to public power participation in regional transmission organizations.
21. Actions needing to be undertaken at the federal level to preserve Nebraska's options in considering structural and operational changes, such as: maintain preference power. maintain tax-exempt debt for asset financing; support opt-out/opt-in choice for federal customer choice legislation; support Nebraska hydro to qualify as renewable in proposed federal portfolio standards.

Chapter Summary

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 Ten: Summary of Chapter Key Points and Recommendations
• Glossary