EXECUTIVE
SUMMARY
The
nation is entering a major transition for electric utilities from
a monopoly market to a partially deregulated competitive market.
The change marks a shift in the national philosophy of utility regulation
is spurring extensive restructuring of the industry into generating,
marketing, transmission and distribution companies. Decisions at
the federal level have set the stage for this transition and determinations
on the timing and form of competitive markets have initially been
left to the states.
Restructuring
and establishment of new competitive markets at the federal level
and in many states has been driven by a range of factors including
dissatisfaction with the ability of state regulators to control
costs, demands of large customers for price reductions, opportunities
and potential benefits of new technologies, and the emergence of
new suppliers and competitors.
In
1996, the Nebraska Legislature referred Legislative Resolution 455
to the Natural Resources Committee. It outlined a two-phase study
to examine issues related to competition and restructure of the
electric utility industry and the possible effects on the state.
The Natural Resources Committee established a ten-member Task Force
and engaged a project manager to direct research and a facilitator
to oversee a public process. The Natural Resources Committee also
established a 41-member Advisory Group made up of individuals representing
a wide range of interests in the state including consumer advocates,
environmentalists, labor and business representatives, electric
industry leaders, and legislators. The Task Force met monthly to
coordinate its efforts and to discuss details of its research with
the Advisory Group and to solicit their suggestions and recommendations.
Phase
I of the study, which was completed in December 1997, produced a
report that examines the history and current status of Nebraska's
electric industry. It provides a comprehensive overview of the structure,
governance, operations, financing and comparative effectiveness
and efficiency of Nebraska's consumer-owned systems.
Phase
II of the study examines the transition taking place in the industry
nationwide and events at the federal level and in other states related
to possible impacts and options for Nebraska's electric industry.
The
purpose of Phase II as outlined by the Legislature is: To provide
a comprehensive overview of the completed and anticipated developments
in wholesale and retail electric competition, including FERC activity,
utility mergers, PUC and legislative activities in other states,
federal regulatory and congressional initiatives; and an evaluation
of the potential effects of these developments on the consumer-owned
electric industry in Nebraska.
The
Task Force conducted policy research and data collection and analysis
for Phase II concerning events and conditions in other states, within
the region, and in Nebraska. The Task Force also worked extensively
with the Advisory Group. In addition to monthly meetings, the Advisory
Group divided into seven topic groups coordinated by Task Force
members. During a 10 month period these topic groups engaged in
Critical Path discussions on key questions related to competition
and restructuring of the electric industry in Nebraska and reported
back to the Advisory Group. The information and perspectives shared
in this process have helped to establish a firm base among major
stakeholders for future policy discussions and determinations.
The
Phase II Draft Report includes the research, findings and recommendations
of the Task Force, as well as the positions and perspectives of
the Advisory Group. While it represents a general consensus of the
Task Force, it contains varying positions on specific issues.
The
primary finding is that Nebraska faces a very different situation
than most other states. While many other states engaged in electric
industry restructuring are attempting to reduce high power costs,
Nebraska faces a challenge of how to maintain its low power costs.
And while other states are revamping state regulation of the industry
and private utilities, Nebraska's electric systems are locally-directed,
consumer-owned operations providing service at cost in a comparatively
efficient manner.
Proponents
of retail competition and industry restructuring reason that competitive
forces could spark innovation in services, technology, and savings
for consumers. However, economic benefits remain the bottom line,
and for a low-cost state such as Nebraska a transition to retail
competition could raise, rather than reduce power costs.
Each
state must evaluate the costs and benefits of a transition to a
competitive retail market based upon its own unique conditions,
and establish plans based upon those conditions.
For
Nebraska, expanded wholesale competition and changes in transmission
networks may be accommodated by the current structure. Modification
of the distribution systems may also take place to enhance efficiencies.
However, to establish retail competition, the structure, principles,
and operations of Nebraska's consumer-owned systems would have to
be altered significantly to move from non-profit, cost-based delivery
of services to a selective transactional market with market-based
pricing. Economic benefits would need to be assured to justify a
transition.
The
report recognizes that the industry, technology, and markets will
continue to evolve and that current low-cost conditions may change.
Pressures to implement a transition could arise from other utilities
in the region that Nebraska's electric systems are interconnected
with through a regional power grid; changes in federal requirements;
changes in regional markets; and the desire of some customer segments
and competitive suppliers in Nebraska. The possibility of changing
conditions requires that the state examine and address the transformation
taking place. Proposed federal legislation would require all states
to restructure their electric utilities and establish retail competition
by a date certain, unless the state has developed its own plan through
a public process.
Based
on these recognitions, the draft report provides a planning framework
for Nebraska centered on a "condition certain" approach
to retail competition. This approach requires that specific preconditions
in structure and the market be in place when, and if, a
transition
to retail competition is to be made for Nebraska's electric industry.
The planning framework also acknowledges the importance of local
control and allows each individual electric system to choose whether
or not to participate once the general conditions have been met.
Chapter
One
Chapter
One introduces background on electric industry competition and restructuring.
It looks at the experience of deregulation of other industries such
as natural gas, airlines and telecommunications in Nebraska. It
reviews electric industry restructuring in other nations and proposals
to restructure the industry in the U.S. The chapter notes that Nebraska
has an opportunity to develop a plan to address competition and
restructuring based on its own unique conditions.
Chapter
Two
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 market 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.
Chapter
Three
Chapter
Three addresses fundamental issues of retail competition, consumer
choice and consumer protections specific to conditions in Nebraska.
It examines wholesale supply pricing and other preconditions for
retail competition. It outlines the interest of Nebraska consumers
in "customer choice" and the regulatory structure and
rules needed for consumer education and protection. It also offers
the views and recommendations of the Advisory Group and the Task
Force. In summary, the chapter outlines consumer-related elements
that need to be in place if retail competition is to be established
in the state.
Chapter
Four
This
chapter introduces the three structural models utilized in this
study to examine the possible scope of change and the relative benefits
or impacts associated with introducing retail competition and undertaking
restructure of Nebraska's electric industry. The three models are
modified Current Structure, Limited Access, and Open Access. The
chapter examines the distribution, transmission, and generation
functions of each model and the key questions that arise from each
model. It also outlines potential impacts related to each model.
These are discussed in greater depth in later chapters.
Chapter
Five
This
chapter examines the impacts of electric industry restructuring
and formation of competitive markets on existing utility structure
and operations in Nebraska. It outlines the key issues and options
related to structure and operations. It provides an assessment of
the types of changes that would be required in Nebraska for variations
in the industry structure and its operations. This chapter addresses
a broad range of restructuring and competition issues related to
structure and operations, and takes up divestiture of generating
plants and distribution systems as one of the possible elements
of restructuring. Other studies could focus on divestiture alone,
however, this report addresses it only as one option in the general
context of restructuring and competition. The chapter closes with
a description of Advisory Group positions on key issues and options
and recommendations of the Task Force.
Chapter
Six
Chapter
Six provides context for the consideration of issues related to
the environment, energy efficiency and renewable energy. Specifically,
it discusses: the key environmental issues resulting from electric
utility operations; the likely impact of electric utility restructuring
on the economics that drive utility generating plant decisions;
and mechanisms considered in other states to maintain and advance
environmental protection, energy efficiency and renewable energy
development. It includes recommendations on the mechanisms to be
considered for Nebraska.
Chapter
Seven
Chapter
Seven focuses on changes in Nebraska's framework of law, governance,
regulation and taxation related to retail competition. It contains
an examination of the different ownership and governance constructs
for Nebraska consumer-owned systems and electric utilities operating
in other states. It includes a discussion of the state constitutional
provisions and statutes relating to power suppliers in Nebraska
and changes that would be needed if the state's policy-makers decided
to proceed with retail competition and restructuring of the industry.
It also includes an extensive discussion of tax law and methods
to preserve tax revenue streams.
Nebraska's
current law, governance, regulation and taxation 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
Chapter
Eight examines issues related to the existing costs and benefits
of the current structure of Nebraska's electric industry, and the
potential costs and benefits for restructuring of the industry to
establish retail competition. While a precise comparison of costs
and benefits is
beyond
the scope of this study, it is possible to illustrate the types
and the relative magnitude of comparative costs and benefits to
provide perspective for policy determinations.
The
chapter begins with an examination of wholesale power costs and
an illustration of the comparative costs and benefits of Nebraska's
current utility system. It then provides an extensive examination
of transition costs. It is significant to note that while there
is a potential for stranded cost on two generating plants, on a
statewide basis Nebraska has no net stranded cost; a measure of
the efficiency of the state's consumer-owned systems. The chapter
also includes discussion of tax revenues and methods of collection
in a system of retail competition. It concludes with a summary of
recommendations.
Chapter
Nine
Chapter
Nine 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 system,
public power district, or rural electric cooperative would have
the opportunity to opt into the competitive retail market through
its own public process.
Chapter
Ten
This
chapter contains a summary of the key points and recommendations
from each chapter.
The
Draft Report also includes a Glossary of terms related to electric
industry restructuring and competitive markets.
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