RETAIL CHOICE

"Simple Choices" - How Much Will They Cost You?

Customer Choice, Consumer Value, Free Market, Big Savings - if you've been listening to the radio you probably have heard KN Energy advertising that soon, you can save money on your energy bill - that "Choice is a good thing." While this applies only to natural gas today, KN would like to sell electricity as part of their "Simple Choice" program.

Choice, in and of itself, is good - but a choice can only be as good as what you are allowed to choose from. That's why you need to ask "who will win and who will lose" if Customer Choice comes to Nebraska. Today the issue of customer choice is being considered at both the state and national legislative levels. It's a complex issue that, if you want to do the right thing, you will need to fully understand what you are choosing from before you make your choices.

Q. How are Nebraska electric utilities different from those in other states?

A. Nebraska is in a unique position when it comes to the electric industry. By state law there are no investor owned private utilities allowed to operate in the state. The electric utilities in Nebraska are either Public Power Districts, Municipal Systems, or Electric Cooperatives. These utilities are owned and financed by the citizens of the state and all "profits" made by them are returned to the citizens in the form of lower rates. Their goal is to make electricity affordable, often in areas, like the rural areas of this state, where it is expensive to supply .

In most of the other 49 states, the public power districts are replaced by investor owned electric companies who's primary goal is to make a profit for their stockholders. These private companies produce 75% of the nation's electricity and provide electric service to only 25% of the land area. Public power systems and cooperatives, like those in Nebraska, produce the remaining electric needs of the nation while serving 75% of the land area.

Q. How is the electric industry structured today?

A. Traditionally, there are three parts that make up the industry today. They are, generation of electricity, high voltage transmission, and local distribution.

Q. How would reregulation affect the customers in Nebraska?

A. The answer is that it is still to early to tell, but a recent study by the United States Department Of Energy concluded that Nebraska (those shown in areas 5 and 11 on the map shown below) will have higher rates if the electric industry is reregulated. As of today there is no working model for reregulating how energy will be sold and delivered. You may note that I have chosen the word reregulation rather than deregulation. The common theme being discussed will not deregulate the entire industry, only parts of it. The high voltage transmission portion of the business and the local delivery over the wires will continue to be regulated in some manner. Only the generation portion of the business and the actual selling of retail electric energy would be changed.

The current concept would allow a customer to choose from several energy providers in the same way people are allowed to choose their long distance telephone provider today. Niobrara Valley would still sell power, but other types of businesses could enter the market as well. The cooperative would still maintain and own the wires.

Q. How will electricity be delivered to me by a new supplier if they don't own the distribution or high voltage transmission wires?

A. The high voltage transmission providers and the local distribution systems would be required to let the energy marketers use their wires. They would be required to pay the "wire" providers for the use of their electric delivery system. Of course, the cost of buying delivery would be in the price you will pay for the electricity you buy.

Q. How will competition effect electric bills in Nebraska?

A. The opponents say that electric rates will not fall, especially for small commercial accounts like irrigation and crop drying. They are also concerned that residential users will not see any savings. They believe that the price breaks will go to the big users of electricity, like industrial accounts, just as occurred in natural gas reregulation. Their argument has been bolstered by the recent plans for transition to customer choice that has occurred in New York. New York has some of the highest electric rates in the nation. The New York Public Service Commission has reached a preliminary agreement that will allow certain large industrial customers to see a 25% rate decrease while the 3 million plus residential customers will only see a 3% rate decrease spread over a five year period.

The proponents say that bills will go down the same way phone service rates and natural gas rates have fallen since those industries were reregulated.

Presently, Nebraska enjoys electric rates that are on the average 15% below average national electric costs. If the high cost states see rates go down and move towards a new average price, costs to Nebraskan's can only go up to meet the new average. This is clearly shown by the graph below that was taken from the Department of Energy's recent study.

Source: Energy Information Administration,
Office of Integrated Analysis and Forecasting,

Q. Are there any other factors that might affect rates in Nebraska?

A. The biggest concern is who will pay the debts on those generating plants that can't sell at a competitive price. In other states, lawmakers are saying that the taxpayers should pay the cost since the new plants were built only with the approval of the state regulatory agencies. Others say the share holders of the utility should pay through stock dividends and prices. In Nebraska, since the public already owns the utility there is no stockholder to pay the costs of stranded investments. Only the consumer or the taxpayer are available to pay this cost, and they are the same person.

Q. How will reregulation affect the reliability of the service Nebraskans receive?

A. As of today, no one can say for sure. At present, since there is no way to store electricity in large quantities, the federal government requires generators to keep a 15% power generation reserve. This reserve is maintained to meet the immediate need for power if a generator would go out of service unexpectedly. Under reregulation this requirement may no longer exist.

Another issue is overload of the high voltage transmission system. It was designed to provide reliability by allowing generators to use their 15% generation reserve to keep the electric system running if another generator went off the system.

Critics are concerned that if under competition utilities may no longer be required or could afford to provide the 15% reserve. They are also concerned that the existing transmission system will be overloaded if it is used for a delivery system for high volume electric sales instead of being used for moderate sales between local utilities. This happened twice last year when the high voltage transmission system on the west coast was used in this manner. Fourteen states were without electrical power for over ten hours.

Q: When will this change take place?

A: In some states with high electrical costs, like California and Pennsylvania, it has already begun. These states have already passed bills that will require the electric industry in their states to reregulate. Consumer Advocacy Groups in California are concerned that residential consumers will not see any savings - that only the large users will receive the benefits of reregulation.

In Nebraska, Senator Chris Beutler, the chairman of the Natural Resources Committee for the Nebraska legislature, was instrumental in getting Legislative Resolution 455 passed during the 1995 session. The first part of the resolution required a study of the structure on the electric industry in Nebraska. This part of the study was recently completed and shows Nebraska with some of the lowest cost power in the nation. The second part will consider the effects on Nebraska electric rates if the electric utilities in the state are reregulated. The final report is due out in December of 1999.

However, all of this will be mute if Congress passes any of the several bills now being considered that would mandate reregulation of the electric industry in all fifty states.

Q. Why hasn't customer choice been tried before?

A. First, the idea of a "deregulated" electric industry where customers have a "choice" is not new. The electric industry, has been around in its present form since 1892. In the early days, many small power suppliers existed, and people had a choice who they could buy power from. In the cities several power companies would run power lines down the same alley and you could pick and choose the company you wanted to buy from. In 1900, American Light and Traction was founded specifically for the purpose of buying out and controlling these small local utilities.

This was the beginning of the electric utility holding company. Between 1922 and 1927, the number of holding companies rose from 102 to 180 and at the same time the number of operating companies fell from 6,355 to 4,409. By 1932, the eight largest holding companies controlled 73% of the investor owned electric business. The Public Utility Holding Company Act of 1935 broke up the holding companies and the industry became increasingly regulated by the states to protect the interests of the consumer. This ended the first experiment in customer choice.

Today, the large investor owned utilities are merging at a rapid pace and are actively working in Congress to have the Public Utility Holding Company Act repealed.

Q: Will customer choice be good for Nebraska?

Unfortunately, that question remains unanswered and will come only in hindsight. Never-the-less, if reregulation is mandated the following minimum conditions should be met if we are to protect the integrity of electric service as we know it over the years.

All classes of consumers should be treated equitably.

Stranded costs should be borne by those who choose to leave their current supplier.

All energy providers--not just utilities--should be subject to the same standards.

All consumers should have access to electric service.

Safety and reliability must not be jeopardized.

Exclusive delivery service areas should be maintained for safety and reliability.

The information on this subject is sketchy because it's so complicated but, I believe it's reasonably accurate. If you are concerned about reregulation of the electric industry in Nebraska, and you should be, contact your State Senator and your congressional representative in Washington DC or call the cooperative for more information.

We welcome questions and comments! Contact us at niobraravalley@nvemc.org
Copyright 1998, Niobrara Valley Electric Membership Corporation. All rights reserved.