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 and may require 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.

In 1996, the Nebraska Legislature referred to the Natural Resources Committee Legislative Resolution 455, 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 Task Force made up of industry representatives and engaged a project manager and a facilitator to direct research and 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 has met monthly with the Advisory Group to share the progress and details of its research and to solicit suggestions and comments. The Task Force also conducted a survey of all Nebraska electric systems to gather data and information on key issues.

Phase I of the study provides a comprehensive overview of the history, structure, governance, operations, financing and comparative effectiveness and efficiency of Nebraska’s consumer-owned systems. Phase II of the study will be focused on the emerging issues of competition and restructuring and the possible effects on consumers and consumer-owned electric systems in the state. This report summarizes the Phase I research. All data is based on reporting for 1995, unless noted otherwise. The findings of the research are:

1. Nebraska’s electric industry evolved out of dual needs for power and irrigation and popular support for local control. With federal support the industry in Nebraska was transformed into a unique structure of all consumer-owned electric systems;
2. Consumers are served by 171 entities-municipal electric systems, public power districts, rural electric cooperatives, and others-one of the highest numbers of individual electric systems in any state;
3. While day-to-day management of the systems occurs at the local level, the legislature has played a vital oversight role to encourage coordination of the diverse systems;
4. The state’s 835,905 metered customers paid more than $1.1 billion in electric bills in 1995;
5. The statewide average electric rate (5.4 cents/kWh) ranked 11th lowest in the nation in 1995; average rates for individual systems range from below 4 cents/kWh to more than 8 cents/kWh;
6. Reliability for Nebraska’s systems ranks high in a comparison of limited statewide and national data available
7. The state’s electric systems have a total investment in plant and equipment of $6.2 billion, with major plants and facilities owned by the Nebraska Public Power District, the Omaha Public Power District, and Lincoln Electric System;
8. Peak demand for 1995 was estimated at 5,139 megawatts, with total Nebraska owned generating capacity of 6,034 megawatts (excluding certain purchases and sales);
9. The capacity of the fuel mix for 1995 was 54 percent coal, 14 percent nuclear, 18 percent hydro and 14 percent gas/oil;
10. Power reserves are 17.7 percent, but future reserves depend upon generating plant decisions and could reduce reserves to as low as 7.5 percent by 2005;
11. The state has no non-attainment areas for air pollution related to electric utility operations; new federal standards under consideration could alter that status;
12. The state’s diverse electric systems undertake individual forecasting of needs and supplies but engage in Integrated Resource Planning that assists in coordinating their efforts;
13. The work force consists of 6,700 full and part-time employees: 31 percent in generation/production, 46 percent in transmission and distribution, 18 percent in administrative functions with an annual payroll totaling more than $269 million; deregulation and restructuring could affect work force size, levels of safety and quality of service;
14. Nebraska systems have a lower average debt service coverage than other public power systems nationally, however the systems carrying major debt have been ranked as having good competitive position by financial analysts;
15. The electric systems transfer $51.2 million annually to state and local governments through taxes, fees and lease payments; this indicates a statewide tax equivalent rate of 4.7 percent, disaggregation of the REA/RUS rural systems indicates a rate of 5.7 percent for public power systems, roughly equivalent to the amount paid by consumer-owned systems nationally (5.8 percent) and investor-owned utilities (5.9 percent) in other states;
16. Governance and statutory requirements varies by type of system with some systems enjoying broader latitude or more expansive powers than others;
17. The state has had open transmission access (above 34.5 kV) and competition at the wholesale level for more than 30 years;
18. Pressures to alter the industry and establish competitive markets at the retail level could arise from federal actions and decisions, regional activities, decisions by neighboring states and interests for bundled or "multi-service" delivery within the state;
19. Deregulation and restructuring of the electric industry has the potential to alter the current structure, governance, operations and financing of the Nebraska systems.

Chapter One -- HISTORY

1.0 INTRODUCTION

Nebraska has long held a landmark position in the electric utility industry. More than 50 years ago, economic conditions and local interests combined to create an electric industry in which Nebraskans would be served entirely by consumer-owned electric systems - public power districts, municipal electric systems and rural electric cooperatives. The first half of the industry’s evolution in Nebraska was marked by a strong surge in the establishment of these systems combined with development of irrigation. The latter half has been characterized by efforts to achieve the benefits of statewide coordination of these diverse systems and, at the same time, retain the advantages of local control. Throughout this evolution, events at the federal level have stimulated change within the state-such as we are now witnessing.

This chapter summarizes the history of Nebraska’s electric industry. It provides context for national and regional comparisons and also for examination of principles, operations, and emerging issues presented in subsequent chapters. It also sets up a framework for examining policy evolution in the state and provides insights into tensions underlying policy development.

The history of Nebraska’s consumer-owned electric systems may be divided into five stages:

1.1 The first stage (1982-1910) - Formation of the first municipal systems

Early electrical system inventors, such as Charles Brush, Elihu Thomson and Thomas Edison, began marketing their equipment in the early 1880s. In Nebraska, as in other states, it was common for local entrepreneurs to form a company, gain a license for territorial use of equipment from one of the electrical equipment marketers and seek a local franchise from municipal government to provide electric service.

As more municipalities began granting franchises, state governments developed formal policies recognizing the local process and authority. The Nebraska Legislature passed a law regarding local powers over electric lighting and service in 1885. The law officially granted the mayor and council of cities created under the act the power to contract for and to regulate the operations of electric companies.¹

Local government drew their authority from voters who could also choose to grant the franchise for electric service to their municipal government. The City of Crete formed a municipal electric department in 1887, the first on record in the state. Crete was quickly followed by the Village of Prague (1887) and the Village of Panama (1888). As demand for electric service increased, eight more municipal electric departments formed in Nebraska prior to 1900. In neighboring states there was similar early activity.²

While this early municipal electric system formation was significant, most of the development before the turn of the century was undertaken by private companies. In 1902, Nebraska had 43 private power companies in operation, compared to its 11 municipal plants.³ However, this contrast was about to change.

The scale of technology at the turn of the century was favorable for municipal systems. The generating plants utilized at this time were commonly small hydro plants or small coal or diesel generators. The distribution systems were not extensive and existed largely for street lighting, or for combined street lighting and electric streetcar service. Nationwide, municipal systems multiplied at double the rate of private electric companies during the period of 1897-1907. Nationally, 60 to 120 new municipal systems were being formed every year. Nebraska was part of this trend.

The municipal electric system formations in Nebraska surpassed Minnesota and other states in the region during the 1900-1910 period. An additional 48 small towns and villages in Nebraska established municipal electric systems during the first decade of the century for a total of 59.⁴

The reasons for this growth are commonly attributed to the economic advantages of municipal electric systems - many of them provided street lighting at half the cost of private electric companies. But the sustained growth of municipal systems in Nebraska that began in the early 1900s and proceeded for two decades was also due to the broad base of popular support for local control.

Competition for electric franchises at the local level became commonplace and it was not unusual, as in the City of Lincoln, for both private and municipal systems to provide service. In large cities more than one private company might also provide service, each to a different neighborhood. Tensions commonly arose over multiple or competing franchise grants, or for proposals for municipalities to purchase an existing street lighting system, especially as service began to spread to commercial and residential customers.

While residents of cities, towns and villages debated and took opportunities to create municipal electric systems, or receive electricity from a private company, rural residents faced a very different situation. Nearly all rural residents living on farms confronted a future without the benefit of electricity for irrigation or power, unless they purchased and ran their own small gasoline generator, or in fewer cases, constructed a small dam or windmill with a DC battery system. Less than five percent of Nebraska farms were electrified by 1920 and of these only about one half percent had central station service.⁵

Life on isolated farms was a round of constant heavy labor for men, women and children. The long hours of toil in the fields were aggravated by severe weather in a climate that could turn vast areas of the state bone dry. Irrigation was a necessity for reliable crop production. Competition for water rights and efforts to construct irrigation ditches and canals had long histories in Nebraska’s counties and would come to play a major role in the state’s power development.

In 1908 President Roosevelt organized a "Country Life Commission" to study rural conditions. In transmitting the commission’s report to Congress, he stated: "It is the obvious duty of Government to call attention of farmers to the growing monopolization of water power. The farmers, above all, should have that power, on reasonable terms, for cheap transportation, for lighting their homes and for innumerable uses in the daily tasks on the farm."⁶ Coincident with the sentiment of the Country Life Commission, expanded formation of municipal electric systems and projects for rural electric service would become firmly rooted in Nebraska in the next phase of development.

1.2 The second stage of the industry’s evolution in Nebraska (1911-1933)

This period was marked by strong expansion in the number of municipal systems, the first efforts to establish rural cooperatives, a clash between the holding companies and municipal systems in which one-third of the municipal systems were sold and passage of Initiative 324 in 1930 and File 310 - "the Enabling Act" - in 1933.

With electric demand growing for commercial and residential customers, the industry began to change rapidly and competitive tensions between private companies competing for local franchises and new municipal systems increased. Leaders of private power companies promoted exclusive franchise territories and state regulation as an alternative to local franchise competition and the trend toward municipalization of electric systems that had begun. Wisconsin and New York formed the first two state electric regulatory commissions in 1907 and many states followed. However, Nebraska, along with other states in the Midwest, did not follow the path of comprehensive state electric utility regulation, but left franchise negotiation and rate-setting to the local level.

With local control firmly in place in Nebraska, more than 150 new municipal electric systems were formed between 1911 and 1920. By 1926 there were 282 municipal systems in operation in Nebraska cities and towns and only 56 private electric companies. Nebraska had more municipally-operated electric systems than any other state.⁷ In addition to the economic advantages of municipal systems, the broad base of popular support from small towns in Nebraska was reinforced by rural dwellers who hoped for extension of lines, especially in areas bordering towns and villages.⁸

In the early 1920s, private power companies opposed early efforts to form rural cooperatives.⁹ In the cities and villages, competitive tensions with private utilities mounted as well. This opposition became much more organized as new holding companies merged many small private electric companies into a single corporate structure.

On one hand these holding companies offered advantages in the economies-of- scale that had taken over the industry as the size of power plants increased and transmission technology allowed power to be transmitted to distant markets. However, these advantages were outweighed by market practices that abused consumers and financing practices that took advantage of unwitting stockholders.

The expansion of holding companies took place nationwide between 1906 and 1932 to an extent that 16 major holding companies came to control more than 80 percent of the nation’s electrical output. These same companies, often run by Wall Street firms, also controlled coal companies, ice companies, water companies, streetcar and railroad companies and a host of other operations. They actively used their political and financial influence to stop the expansion of municipal power systems, stifle early efforts at formation of rural cooperatives and pressure buy-outs of existing public power systems. They were also found to have run a highly effective national propaganda campaign out of some 30 state bureaus, and financing political candidates who favored them and opposing candidates and groups that did not. The practices of these electric holding companies alarmed leaders such as Theodore Roosevelt (and later Franklin Roosevelt) and Senator George Norris of Nebraska.

The first electric holding company entry into Nebraska came in 1917 with establishment of the Nebraska Power Company in Omaha, an affiliate of the American Power and Light Company. By 1925 four other major holding companies had entered the state, taking over smaller private electric companies and municipal systems as well Stone and Webster, the National Electric Group, United Power and Light and Samuel Insull’s Middle West Utilities. These five holding companies consolidated the 148 private companies operating in Nebraska in 1917 to 42 private operations by 1927.¹⁰

The trend for increasing municipalization and efforts to develop rural cooperatives met head-on in the mid-1920s with the consolidation and expansion of the private holding companies in Nebraska. Political battles raged for five years as the holding companies pushed for buy-outs of the small municipal systems. In some cases, municipal systems lacked the capital to improve their facilities or needed greater coordination with other systems that was not possible at that time. In rural areas where the holding companies claimed service territory but did not provide service, they constructed "spite lines" to eliminate the most lucrative farms from cooperative participation and mounted litigation against the early co-ops that had been formed.

Similar to the trend that took shape elsewhere in the country, 112 (more than one-third) of Nebraska’s municipal electric systems were sold to the holding companies between 1927 and 1930. As this trend began, the League of Nebraska Municipalities and state political leaders mounted an effort to develop revenue bond financing that would allow the municipal electric systems to expand and improve service without issuing general obligation bonds. The proposal was opposed by the private power companies and bills in two legislative sessions failed. In a bold political move supported by a statewide campaign, the issue was taken directly to the voters in an initiative petition in 1930. The initiative, known as "Initiative 324," passed by a margin of 151,353 votes and became law on December 3, 1930. Initiative 324 passed in every precinct, demonstrating the ongoing popular support for public power and making Nebraska a national leader in the area of revenue financing.

The three-year drive for revenue bond financing was led by Attorney General C.A. Sorensen, Senator George Norris and C.E. Beals (mayor of Crete). Following passage of the law, they continued their efforts and targeted rural electrification as an essential goal. Sorensen recognized three obstacles to rural service: 1) lack of proper legislation under which farmers could organize; 2) lack of low-cost wholesale electric energy supply; and 3) lack of money available at low interest rates.¹¹ Sorensen drafted a bill for the 1933 legislative session that would remove the first two obstacles to organization and low-cost power. The third obstacle of funding would be overcome by the federal government under the Public Works Administration programs and later the Rural Electrification Act.

The 1933 bill became known as Senate File 310, or the "Enabling Act." It proposed a process in which 15 percent of eligible voters in an area (a county, several counties or any number of voting precincts) could petition to form a public power and/or irrigation district and select a temporary board of directors.

There was much opposition to this bill. It passed the Senate by a good margin, but was approved in the House by only one vote. Criticism of House members who sided with the holding companies on this issue gave support to long-standing efforts to establish a unicameral legislature favored by Senator Norris and other political leaders.

1.3 The third stage of the industry’s evolution (1934-1946)

This period began with implementation of the Enabling Act and extended through the passage of the federal Rural Electrification Act and the Public Utility Holding Company Act to the takeover of all private electric company operations in the state.

Events at the federal level opened the way for local interests that had become rooted in Nebraska. The first event at the federal level was a shift in policy by the Roosevelt Administration to allow funding through the Public Works Administration (PWA) for irrigation and power projects. That was followed by passage of the Public Utility Holding Company Act (1935) which forced dissolution and restructuring of the holding companies after a four-year investigation into their abusive practices and the financial collapse of several major companies. Passage of the Rural Electrification Act the following year (1936) provided secure funding for rural electric generation, transmission and distribution projects. For Nebraska, the next decade would mark a vigorous resurgence of public power and rural systems.

Efforts led by Senator Norris at the federal level were successful in opening the way for financing and the federal Public Works Administration approved the Loup River and Platte Valley projects in 1933 and the Tri-County Project in 1935. In total, 16 public power districts were organized between 1933 and 1943 for the purpose of generating hydro power. Some of these districts were never completed and others operated solely as irrigation projects.

Initially, Governor Charles W. Bryan had hoped that all of these projects would form one large district, comprising 64 counties, to be called the Nebraska Public Power and Irrigation District. Senator Norris also advocated this approach, calling it a "little TVA" after the Tennessee Valley Authority project being undertaken to provide extensive hydro power resources in the South.¹² But territorialism and competition appeared inherent in the system. Individual development and competing interests became the order of the day. What the supporters of these projects had inherited along with their hard-won opportunity was decades of tension over development of their projects.

In addition to internal conflicts between the districts and tensions with the PWA, the three hydro projects faced a more serious problem in the ongoing opposition of the holding companies. In 1936, five private utility subsidiaries of the holding companies serving Nebraska brought suit against the Public Works Authority, questioning its authority to provide funds for the hydro projects. These companies provided 85 percent of the power generated in Nebraska. At the base of their opposition was a recognition that the three hydro projects could meet an estimated 80-85 percent of the state’s electric needs at very low rates,

At the time that they mounted their suit against the PWA, the holding companies were also fighting the enactment of the Public Utility Holding Company Act of 1935. The Holding Company Act provided mother major impetus to consumer-owned systems in Nebraska, While the REA and PWA provided the benefit of federal financing and support for development of the cooperatives and public power districts, the Holding Company Act broke the remaining influence of the private utilities. In one of the hardest fought battles of the New Deal, the Roosevelt Administration and Congress forced the national break-up of the electric holding companies that dominated the state. The electric holding companies filed suit against the law but it was upheld by the U.S. Supreme Court in 1938.¹³ For Nebraska this would mean dissolution and reorganization of American Light and Power, Electric Bond and Share, Middlewest Utilities, United Light and Power and Stone and Webster.

While the suit against the Holding Company Act was working its way through the courts, new rural electric systems were actively forming. Thirty-five rural electrification districts were formed between 1933 and 1943. Most of these electric systems were organized under the provisions of the public power law (the Enabling Act) and enjoyed the status of governmental subdivisions.

While the rural electric systems brought service to new customers, the major hydro districts began efforts to purchase facilities of the private companies. To overcome problems in financing these purchases, the Nebraska Legislature amended the Enabling Act in 1939 to allow formation of a new debt-free power district to act as a wholesaler for the other power districts. On August 5, 1939 Consumers Public Power District was established. Following the Supreme Court’s decision supporting the break-up of the holding companies, 14 private utility companies were purchased at a cost of $42,206,245.53 between 1940 and 1942.¹⁴

Along with these purchases, there was an effort to provide greater coordination for the hydro projects. At the urging of the PWA, a joint operating agreement among the three hydros was put in place in 1940 to assure interconnection of the projects, pooling of output and division of revenues. To carry out these arrangements, the Nebraska Public Power System (NPPS) was created to act as a wholesale marketing and transmission agency. The Legislature recognized that greater coordination and efficiencies achieved through NPPS would translate to savings and expanded service for consumers and destructive competition between the systems could be avoided.¹⁵

There was not uniform agreement on the formation of the NPPS. A legislative committee that held hearings across the state in 1943 found the primary objection to this joint operation was that "... it may result in too great a concentration of authority over the public power program. Since the hydros produce nearly half of the power generated in the state, the fear has been expressed that unified management will tend to place users of electricity at the mercy of ‘the system’ and possibly lead to the growth of a ‘political machine'."¹⁶

One view held that the three hydro projects were destined to merge into a single district. An opposing view challenged this vision, contending that "the advantages of consolidation have already been gained through the joint system [NPPS] and that the degree of local control which is preserved through the retention of the three separate boards is valuable, especially in dealing with problems of irrigation."¹⁷

Despite these internal debates over the future shape of consumer-owned systems in the state, the formation of Consumers Public Power District and the formation of the Nebraska Public Power System, coupled with the U.S. Supreme Court upholding the break-up of the holding companies, created conditions for the complete buyout of private power company facilities. By 1942, Consumers had acquired all but a small portion of the remaining private power facilities outside of Omaha.

Changes were in the wind for Omaha as well. The American Power and Light holding company and Electric Bond and Share Company were ordered to dissolve by the federal Securities and Exchange Commission on August 22, 1942. Like the case against the Holding Company Act itself and the suit against PWA financing of the hydros, the holding companies took this order to the U.S. Supreme Court where it was ultimately upheld. With this forced divestiture, the Omaha Public Power District would acquire American Light and Power’s subsidiary, the Nebraska Power Company, on December 2, 1946.

The new consumer-owned electric utility organization in the eastern two-thirds of the state held to functional lines. Central, Loup and Platte hydro districts operated the generating plants. Transmission and interconnection services were provided by the NPPS. Retail distribution was carried out by the municipal systems, the rural cooperatives and public power districts. In the western third of the state, Consumers acted independently of NPPS and the hydro projects. Additionally, some municipal systems provided their own generation.¹⁸ Despite the takeover of the private power companies and the formation of NPPS, there were deep internal divisions between the consumer-owned systems.

Increased competitive friction between Consumers and the municipal systems surfaced in 1942 and 1943. The law under which the Consumers District was organized explicitly recognized the right of municipalities to acquire from Consumers the electric distribution system (though not the generating plants) located within the municipalities. If a satisfactory price could not be reached through negotiation, the price was to be determined by a condemnation proceeding if the city elected to purchase.¹⁹

Some municipalities believed local control was preferable, that the prices paid by Consumers to buy out the private utilities were too high and/or the municipality could finance at a lower interest rate. The promise Consumers made was to give each city its distribution system when Consumers’ bonds were retired. In what was probably the first case of concern for "stranded investment" in Nebraska, Consumers’ officials feared that if the municipalities acquired the distribution systems through condemnation at a lower price than Consumers had paid, "The remaining cities served by the district will have to pay in rates a portion of the bonded indebtedness which will be escaped by the cities which condemn."²⁰

The Legislature’s Subcommittee on Public Power concluded in 1944 that ". . . it will be a benefit to the State if the district is permitted to operate in substantially its present form, at least until the bulk of its bonds have been paid. The subcommittee recognizes that cities have a legal right to acquire their own distribution systems by negotiation, or by condemnation, and it appreciates the natural desire of cities to do this. It hopes, however, that cities will be made to feel their interests are fully protected while remaining in the Consumers’ system and that resort to condemnation will not be encouraged." The subcommittee believed that the interests of the State of Nebraska will be best served by a program of friendly cooperation between all public agencies concerned, namely, the hydros, Consumers, the municipalities, the rural electrification districts and the Legislature.²¹

The subcommittee recognized that "Under the circumstances, some degree of competition and rivalry between them is inevitable." The subcommittee also recognized that the NPPS "has done much to prevent rivalry and competition between the three hydro districts," and noted the difference of opinion over whether they should be merged. "Any suggestion of consolidation of the hydros and Consumers necessarily raises the question as to which one will absorb the other and who will manage the resulting entity." The subcommittee chose not to engage in administrative supervision. "Further experience will no doubt determine whether or not such supervision is necessary," they concluded.²²

Following the committee’s recommendations, the legislature did not support a statewide plan for reorganization, but proceeded with what would become a long-term policy to encourage "friendly cooperation" among the consumer-owned systems.²³

It has often been noted that with the establishment of the Omaha Public Power District in 1946, Nebraska became an all-public power state. However, one small area of private service by Northwestern Public Service Company remained in Niobrara and Santee until 1949. On December 12, 1949 this was transferred to service by North Central Public Power District.²⁴ Nebraska’s achievement was recognized nationwide. In 1949-50, South Dakota attempted to follow Nebraska’s example, but efforts to pass legislation similar to the Enabling Act met staunch opposition from the private utilities and failed in the legislature.²⁵

1.4 The fourth stage (1947-1973)

The achievements of the consumer-owned systems in Nebraska were readily evident. Between its establishment in 1939 and 1943, Consumers instituted rate reductions totaling $1.5 million in gross revenues.²⁶ NPPS was able to reduce system reserve requirements from 25 percent to 12.21 percent through interconnection of electric systems inside and outside the state. With 31 public power districts and five rural cooperatives in place, the demand for electricity in the state doubled twice between 1947 and 1957.²⁷ The physical expansion of the system was marked by the fact that 95 percent of rural dwellers received electricity by 1957, up from 25 percent in 1944. But along with obvious benefits, this burgeoning growth added to the stress and tensions between the systems. Much of the activity during the late 1950s through the early 1970s centered on efforts to refine and reorganize statewide operations and create more public oversight of the industry.

The year 1944 began a new era in Nebraska. The problems the consumer-owned systems faced were the problems of success. Following the war, power demand expanded rapidly as new public power districts and rural cooperatives formed. Cornhusker Public Power District had formed in 1943, Custer Public Power District (1944), Twin Valleys Public Power District (1944), North Central Public Power District (1945), South Central Public Power District (1945), Southwest Public Power District (1945), Loup Valley Rural Public Power District (1946), Omaha Public Power District (1946) and Wheat Belt Public Power District (1947) followed. The prospect of a power shortage from the rapidly growing demand from these and other systems forced consideration of new construction, new contract negotiations and a new alignment of complicated relationships.

The principle underlying the entire system was service to consumers at the lowest possible cost. This principle was supported by two primary understandings: 1) that NPPS would be the agency to coordinate transmission and generation services; and 2) that Consumers would provide retail marketing until 1972, when upon expiration of its bonded debt, it would turn over the distribution systems to the municipalities. All three elements would meet strong competitive tests in the coming decade.

By 1951, the state’s demand had doubled over 1945 needs. Tensions between the systems mounted over contested service areas and who would construct new generation at the lowest cost. The tensions and divisions were heightened by the availability of power from the federal dams being constructed by the Bureau of Reclamation along the Missouri River in the Dakotas. Public power systems, rural cooperatives and private utilities positioned for access to this power and initiated efforts to gain control over proposed transmission lines. Tri-State Generation and Transmission Association formed in 1952 to assure access to these supplies by its members in Colorado, Wyoming and western Nebraska. Eleven of the rural districts formed the Northeast Nebraska Generation and Transmission Cooperative in 1954 to plan for their own generation and transmission. Two years later, 22 of the rural systems created the Nebraska Generation and Transmission Co-op to replace the Northeast G&T.²⁸

In August 1955, Governor Anderson brought the managers of the public power and rural cooperative systems together in an attempt to resolve their differences. Consumers proposed a merger of all the facilities of Platte, Loup, NPPS and Consumers into a state-wide organization controlled by a single board of directors. NPPS had a similar merger plan that omitted Consumers. Litigation over Consumers’ proposal resulted in the state Supreme Court determining that Consumers was not bound by its contract with NPPS and that it could generate and transmit power under its own charter. In the meantime, demand was about to double again over 1951 levels.

Along with these disputes over who would construct and operate generating plants, there were also disputes over construction and control of transmission lines and a looming background issue over which regional power pool to participate in. One group that would become the Mid-Continent Area Power Pool was viewed by some as a planning organization controlled by private utilities. Another group, centered around the Mid-West Electric Consumers Association, sought to create a public power pool. Despite these disputes, a new maturation began to emerge by 1960.

Planning for generation and transmission was very compartmentalized, with each system or entity undertaking its own studies and proposing construction of its own facilities. Recognizing the need for increased cooperation and coordination, leaders of Nebraska’s consumer-owned system attempted to set their differences aside. Consumers and NPPS attempted to formulate an "Integration Contract" in 1958 and 1959. This was intended to consolidate the facilities of the two organizations without an actual merger. It would have combined all transmission, substations and generating facilities then in operation, including the hydros, into a single system. However, the contract was regarded as too complicated by many who believed an actual merger of the agencies would be best.

Out of the general recognition that there was a duplication of facilities and functions as well as a need to resolve service area disputes, the state legislature came forward with two legislative bills and a resolution in 1961. It was acknowledged that the regime of the 1940s and early 1950s was focused on serving undeveloped markets. This relied on permissive local control and flexibility in contractual arrangements. The market was now largely developed and required more refined management and oversight. This management need indicated some form of mandatory state level control might be beneficial.²⁹

The study and discussion generated by these bills accomplished three things: 1) merger or consolidation of consumer-owned system was formally placed on the table; 2) the Power Review Board was created; and 3) an industry group - the Nebraska Power Industry Committee - was brought together forming the basis for the Nebraska Power Association and opportunities for greater voluntary coordination and cooperation.

The first step was formation of the Power Review Board (PRB) through LB 220, passed in 1963, The primary responsibilities of the PRB were to: 1) resolve disputes over service territory in a voluntary process if possible, but with a mandatory order if necessary; 2) to review and approve proposed generation and transmission facilities; and 3) to provide advisory opinions for resolution of rate disputes. Passage of the bill indicated a deliberate shift from the policy of the legislature’s 1944 policy of "friendly cooperation" and letting competition and occasional friction proceed in order to expand service.³⁰

After establishing the Power Review Board, the legislature pursued statewide consolidation of generation and transmission. In 1965, the legislature passed LB 764 - known as the "Grid Bill" - which mandated the merger of Loup, Platte, Consumers and NPPS. At the same time Eastern Nebraska Public Power District voluntarily merged with OPPD.

The following year, however, the Nebraska Supreme Court declared the Consumers, NPPS and Loup merger to be unconstitutional.³¹ A referendum vote was mounted in 1968 to gain public support for an amendment to the state’s constitution to allow the legislature to form a wholesale-only G&T grid, but it was rejected by voters.³² The legislature had passed L.B. 297 in the previous year to allow use of transmission lines for wheeling competitive wholesale power supplies. With the failure of the referendum, the legislature refined the competitive use of transmission for wholesale power supplies in 1969. At the same time, faced with ongoing pressures, the major public power entities began to work out a mutually agreeable method to combine their operations. The result was the voluntary formation of the Nebraska Public Power District (NPPD) in 1969.

Through NPPD, both Consumers and NPPS continued their functions. NPPD consolidated most of the state’s generating and transmission facilities into a single G&T entity serving 87 of the state’s 93 counties. It was not the consolidation originally envisioned by Governor Bryan and Senator Norris in 1933, but it was a major step toward statewide coordination. NPPD served more than 200 municipalities that had finally received their distribution systems from Consumers and leased them back to NPPD. NPPD also controlled much of the state’s transmission. Tri-State continued to serve rural cooperatives and districts in western Nebraska. The Omaha Public Power District served the more heavily populated southeast region of the state. The Nebraska G&T served 24 rural electric systems. And independent municipals provided their own generation and contracts.

None of this restructuring put a decisive end to the tensions between the systems, but it did serve to create greater coordination and establish the basis for addressing complex problems about to emerge in the 1970s.

1.5 The fifth stage (1973 - present)

The pressures on the consumer-owned systems continued to evolve. During the 1940s and 1950s, it had been the pressure of growth that was doubling every six years and the friction between new systems operating independently and without clear service territories. In the 1960s, it was the pressure to create greater statewide coordination, clarify service territories and consolidate industry operations. In the 1970s, it became the pressures of changing economics, a shift from economies of scale, a drop in expected demand growth and the emergence of conservation, new technologies and social and environmental concerns. It was a new and more complicated world with new rules.

Following years of mounting concern over steadily degrading conditions of the nation’s water and air, the federal government passed a series of new environmental laws. The Clean Water Act of 1968 was followed by the National Environmental Policy Act of 1969 and the Clean Air Act of 1970. These laws would begin to alter the process for development of power plants and transmission lines. Just as the effect of these laws began to take hold, the electric utility industry worldwide witnessed unprecedented cost increases from the oil embargo of 1973 and its ensuing price shocks.

Even before the oil embargo, inflation had been rising, construction costs had been escalating and the historic trend for a steady decrease in electric prices due to economies-of-scale had reversed and prices had started climbing. The oil embargo gave a dramatic surge to prices that sparked a drop in the traditional seven percent per year growth in demand for electricity.

Although little oil-fired generation was used in Nebraska, the impact of the market changes came through. The federal government passed the Energy Supply and Environmental Coordination Act in 1974 which placed prohibitions on electric utilities burning natural gas or petroleum products, creating constraints for some of the smaller systems that had generation fueled by natural gas.³³ Rising costs of generation convinced many small municipal systems to sign with NPPD as their wholesale supplier, others worked through the League of Municipalities to form a new organization, the Nebraska Municipal Power Pool (NMPP) to acquire new power supplies. NMPP was officially established in October 1975 as a joint action agency. Its purpose was to provide the 19 member municipal systems with a vehicle to participate in ownership of large generating plants being constructed and to acquire wholesale power supplies. The emergence of NMPP placed it in competition with NPPD.

Every system mounted efforts to keep costs down. In addition to investing directly in new plants or negotiating competitive contracts, some systems sought to expand their service territories to increase sales and reduce costs. Others sought to change the requirements of providing service to high cost customers. The legislature undertook three studies during the 1970s to address this new wave of problems.

In the first study, published in February 1976, the legislature’s Public Works Committee reviewed rates and operations of NPPD and OPPD in recognition of the fact that these utilities were trend-setters for the state. The study also examined the general trends and constraints of the operating and economic conditions of the many interlocking electric systems in Nebraska when viewed as a state-wide public power industry. While OPPD and NPPD were judged to be well-managed, the principal conclusion was that "the public power community of Nebraska, viewed as the statewide electric power industry, appears to lack a mechanism for unified direction for achieving industry-wide coordination and for introducing public purpose into formulating future policies. Such unified control is not practical within the industry’s present structure without additional direction by the Nebraska State Legislature."³⁴

Although no immediate changes in law resulted from the studies, they drew attention to specific planning and coordination issues. In response, the Nebraska Power Association and its members developed a Joint Planning Committee to examine optimum plans for new power resources,

Public pressure also began to mount. Five consumer-oriented bills were introduced in 1978 under L.R. 161: 1) to establish a public counsel for electric utility customers; 2) to require a notice and two public hearings for electric rate increases; 3) authorization of lifeline rates; 4) a requirement for the Power Review Board to analyze rate structures for effect on conservation and submission of detailed cost estimates on facilities subject to PRB approval; and 5) a requirement for rates to reflect actual costs. None of these bills became law.³⁵ However, legislation enacted in 1979 gave the Power Review Board the authority to review additions to municipal generating capacity under a three-part test.³⁶ The planning element of this law was expanded in 1981 with new legislation that required the Power Review Board to produce and publish power supply planning information or to work with the industry to produce it.³⁷ The Nebraska Power Association took up this task to develop a statewide plan and forecast.

These efforts in Nebraska mirrored the drive for power supply planning and energy efficiency taking place at the federal level.³⁸ Passage of the Public Utility Regulatory Policies Act (PURPA) by Congress in 1978 began a new era of planning and construction of power plants. PURPA encouraged programs for energy efficiency and conservation as well as independent power production and wholesale competition. With deregulation of natural gas being initiated and talk of deregulation for electricity in the wings, PURPA would take on far-reaching implications, ultimately posing as much impact as the Public Utility Holding Company Act of 1935.

As the Nebraska Power Association and the Power Review Board initiated the state’s planning efforts in the early 1980s, the recession cut deeply into national and farm-state economies. Over the next decade, the growth in demand for electricity continued to drop in Nebraska as in other states.³⁹ What utilities in Nebraska and all across the nation faced was the possibility of mounting supplies of surplus power and unneeded high-cost contracts. This trend gave support to national proposals to deregulate some segments of the industry. One answer private utilities formulated to sluggish growth and rising costs was a proposal to repeal the Public Utility Holding Company Act of 1935 to allow them to restructure into holding companies and diversify their operations. This would allow them to set up "independent" subsidiaries to compete with emerging PURPA-qualified power producers and to engage in other businesses. Although the Holding Company Act was not repealed, its oversight was loosened which set off a wave of new electric holding company formations. By the late 1980s nearly three-quarters of the private electric companies had adopted a new holding company form. Public power systems and rural cooperatives also examined ways in which they might restructure to address market pressures and slow growth.

In 1987, at the direction of the legislature and requests from the Power Review Board, the Nebraska Power Association began work on a review of the consumer-owned industry structure in Nebraska, The report, issued in November 1988, outlined five options for restructure: 1) continue the status quo - case-by-case basis which would allow the industry to consider individual system reorganizations as issues arose; 2) generation and transmission reorganization - consolidating transmission and generation functions, perhaps into a single entity; 3) distribution system reorganization - consolidating distribution systems into 10 to 20 geographically contiguous and equally-sized distribution systems; 4) a single Nebraska electric utility bringing all generation, transmission and distribution under a single entity; and 5) enhanced inter-utility cooperation - allowing the industry to evaluate opportunities for joint action and cooperation with mechanisms such as joint planning, resource sharing and joint facility development.⁴⁰

Options one and five were the preferred industry choices - maintaining the traditional policy of "friendly cooperation." The NPA responded very firmly to pressures to consolidate operations. The conclusion stated:

"This study leads us to a number of conclusions regarding industry-wide reorganization. Consolidating and increasing the size of a utility can result in economic savings and performance enhancements. Those must be offset against adverse impact on local area interests or other possible adverse impacts on local interests. Enhanced inter-utility cooperation through joint ventures or other means is already resulting in service improvements, utility efficiencies and improvements in costs without structural reorganization of the industry

"The most effective reorganization activities involve two or more willing parties . . . Legislatively-mandated industry-wide reorganization will be met with considerable opposition because there is no existing data to support the need for such an undertaking. This is further emphasized by the fact that Nebraska’s electric industry has a proven track record with the present public power industry structure as it has evolved and continues to evolve."⁴¹

Events may have followed a status-quo course if external market pressures had not continued to intrude on state decision-making. Although Nebraska’s average electric rates remained relatively low, elsewhere the surpluses of the 1980s and the emergence of independent power producers created a national drive to open transmission access and create and expand competitive wholesale markets. Coupled with this drive, large industrial consumers also pressed for competitive contracting at the retail level.

In 1992, following three years of discussion and debate, Congress passed the National Energy Policy Act. The act gave the Federal Energy Regulatory Commission increased authority to open transmission access and encouraged greater competition in wholesale markets. Although the act did not authorize retail competition, the forces of deregulation had been unleashed and both power marketers and major industrial consumers began pushing states to allow the formation of competitive retail markets.

States with high cost electricity were the first to begin deliberations. By early 1995, nearly half the states had some proposal under consideration. In April 1996, the Federal Energy Regulatory Commission issued its landmark Order 888 and Order 889, mandating all jurisdictional transmission owners to open access to all current and potential users under common transmission tariffs, provided rules on stranded investment and set guidelines for "real time" competitive wholesale markets. By the end of 1996, all states but Tennessee had taken up consideration of electric industry deregulation. Four states had passed legislation to allow retail competition and several bills had been introduced in Congress that would require wholesale and retail competition in every state.

Deregulation pressures had already begun to surface in Nebraska. The Municipal Energy Agency of Nebraska and the Nebraska Municipal Gas Agency formed "Energy America" in 1995, an agency whose purpose was to engage in competitive marketing of natural gas and electric supplies both inside and outside Nebraska. The Omaha Public Power District voluntarily filed a transmission tariff with FERC, signaling its intent to enter the competitive market and the deregulation of gas and telecommunications raised consideration of "bundled" or multi-service competition from a host of companies.

In the midst of this activity in 1996, the Nebraska Legislature passed resolution L.R. 455 to establish a study of the issues related to competition and restructuring of the electric industry and its potential impacts on a range of issues.

1.6 Summary and Emerging Issues

The fundamental principles for electric service in Nebraska among all systems have been: 1) highest quality; 2) best reliability; and 3) lowest cost. For more than 50 years, state policy has been to apply these principles through locally controlled non-profit electric systems. The fundamental tension during this time has been between the interest in maintaining local control and efforts to achieve efficiencies through coordination between the diverse local electric systems. Added to this has been a growing pressure to make environmental concerns an ongoing part of decision-making. The legislature has long maintained a policy to urge voluntary coordination and cooperation among the systems. Currently this voluntary cooperation is being achieved to a great extent through the Nebraska Power Association. Competitive pressures could undermine this voluntary cooperation between the systems, or force alterations of the industry structure, its governance, its operations and financing.

Federal actions, regional actions and forces within the state are likely to increase the pressure for competitive retail electric service. To address competitive pressures, the Nebraska Legislature will need to consider whether or not to urge the industry to restructure on a voluntary basis, to formulate legislative action to require restructuring or to take no action at this time. The legislature may also need to determine whether to take a segmented or comprehensive approach to address possible market overlap from telecommunications, natural gas, cable television and other "wires" or energy services. Decisions made by the state concerning competition in one industry may affect the options for bundling services from other industries.

A longer term issue is how formation of large market systems and structures will affect policy development. If technology continues to trend toward small scale local generation in the long term, this could be of great benefit for Nebraska’s diverse locally controlled systems. However, the large market systems formed in the meantime could diminish local control and alter the structure of the diverse systems and options for small scale technology usage.

Several fundamental questions emerge from historical and policy considerations regarding possible competition for retail electric service:

• What policy options or competitive market models would be available to the state?
• How would the basic principles of quality of service, reliability and low cost be affected by any given market option or model?
• Under any given option, would consumers lose their opportunity as voters to participate in policy and rate setting? And how would local control be affected?
• How would transitional issues under any given option affect the long-term structure being established?
• How would economic and non-economic benefits for consumers be assured? How would reliability be assured? Would costs shift from large to small consumers? Would competition have varying impacts for urban and rural consumers?
• What role would consumers play in determinations about a competitive market system? What role would cities and towns play in determinations? What role would the legislature play? What role would the electric systems play?
• Would the legislature take a segmented or comprehensive approach to competition in retail electricity and other "wires" or energy services?

In order to provide a basis for further study of the implications of competitive retail markets for electricity, the following chapters describe the structure and governance, statutory and regulatory oversight, planning and operations and financing of the Nebraska systems as they currently exist.

Chapter One - HISTORY

Chapter Two - STRUCTURE AND GOVERNANCE

Chapter Three - STATUTORY AND REGULATORY OVERSIGHT

Chapter Four - PLANNING AND OPERATIONS

Chapter Five - FINANCE AND TAX

Chapter Six - DEREGULATION AND RESTRUCTURING

Glossary

Chapter Notes

The Central Nebraska Public Power and Irrigation District
415 Lincoln Street
P.O. Box 740
Holdrege, Nebraska 68949
Phone 308-995-8601 Fax 308-995-5705