Public Power: Is It Still Affordable?

This summary is based on the study The Costs and Benefits of Public Power in Nebraska: An Investigation of Electricity Rates, Taxes, and Competitiveness, by Dr. Ernie Goss and Research Economists Jeffrey Milewski and Scott Strain. 

Table of Contents:

Nebraska is the only state to distribute 100 percent of its electricity from public utilities. Most other states rely on regulated investor-owned utilities for the generation, transmission, and distribution of power. In theory, public power should provide customers with lower prices than for-profit utilities since electricity prices would not be impacted by profit margins or most taxes paid by private companies. Historically, public power in Nebraska has been more affordable than its for-profit competitors.
 

But a new Platte Institute study by Creighton University economist Dr. Ernie Goss and Research Economists Jeffrey Milewski and Scott Strain shows that while Nebraska’s average price for all electricity ratepayers is the third lowest among the region, the state’s electricity rates have grown at a much faster pace than neighboring states.
 

According to the study, low natural gas prices in the electricity market have significantly lowered wholesale electricity prices outside the state, reducing revenues that Nebraska utilities have used in the past to help keep rates in Nebraska low. Additionally, the Environmental Protection Agency’s (EPA) Clean Power Plan threatens the state’s ability to rely on affordable coal for the majority of its electricity generation. As a result, Nebraska’s statutory mandate to deliver low-cost, reliable public power is in jeopardy.
 

How does public power work in Nebraska?
 

The state has 169 different publicly-owned utilities, including public power districts, municipal electric systems, and rural cooperatives. The largest retail distributors are Omaha Public Power District (OPPD), Nebraska Public Power District (NPPD), and Lincoln Electric System (LES), which serve the majority of the population either directly or as a wholesale provider of electricity to smaller, locally-owned utilities. Electricity customers in Nebraska are categorized as residential, commercial, or industrial users, based on the level of electricity use.


Public power’s local ownership and lower costs have historically delivered significant benefits to Nebraska’s ratepayers. Utilities do not have to charge a profit margin and have the advantage of issuing tax-exempt financing, which is priced at lower interest rates in the market. Public power entities are also exempt from paying income and property taxes. These savings are typically passed along to ratepayers.
 

Nebraska’s proximity to affordable coal in Wyoming’s Powder River Basin has also played a substantial role in keeping electricity rates low. Statewide, Nebraska relies heavily on coal as the primary source of fuel for generation, and electricity rates correlate with coal prices in the market. Utilities can also sell excess power to other states. Revenues generated from these sales have helped lower rates for Nebraska’s consumers.
 

Why have rates increased?



Nebraska ranks in the top half of the regional states in terms of overall competitiveness of its residential rates and overall electricity prices, but in the bottom half in commercial and industrial rates. According to the study, prices per kilowatt-hour (KWH) expanded by 60 percent between 2007 and 2013. This was the fastest among West North Central (WNC) states and almost five times the growth of national average electricity prices.



Over the past decade, Nebraska had the greatest industrial electricity price volatility among all WNC states and the national average.
 


 

Nebraska’s electricity rates are projected to be 7.5 percent higher than the region by 2018.
 


 

The rapid growth in Nebraska’s industrial electricity rates could be attributed to the state’s heavy use of irrigation in agriculture. In 2003, the U.S. Energy Information Administration (EIA) began classifying these users as industrial. Customers in rural areas are expensive to serve because of the investment required to build the distribution infrastructure and the demand that irrigation systems require during certain times of the year. During peak times, mainly July and August, demand for electricity from irrigation systems sometimes exceeds capacity and forces local utilities to buy excess power from sources in other states, which if purchased at elevated prices would contribute to higher overall rate increases.
 

Despite this reclassification, changes in the fossil fuel market have also played a role in higher electricity rates. While natural gas consumption is quite small in Nebraska, the price of natural gas affects the overall wholesale market for electricity. The wholesale market is where Nebraska’s utilities can sell excess power to utilities in other states. However, the recent drop in natural gas prices has significantly lowered wholesale electricity prices, reducing the earnings that Nebraska utilities used in the past to help keep rates low.
 

The shutdown and recovery of the Fort Calhoun Nuclear Generating Station was also a major driver of Nebraska’s rapid growth in electricity prices beyond 2011. Recommissioning ultimately cost ratepayers an estimated $177 million, which is approximately 18 percent of OPPD’s yearly operating expenses.

Why are rates expected to keep increasing?
 

Nebraska ranks high among the region in terms of future price volatility, due to the state’s heavy reliance on coal for electricity generation. Except for solar, conventional coal is expected to experience the highest level of uncertainty regarding the range of expected prices in 2020.


 

Increasing federal regulations are the major driver of this price uncertainty. In August 2015, President Obama and the EPA announced the Clean Power Plan to control greenhouse gas emissions from coal-fired power plants. Nebraska’s target reduction in statewide carbon dioxide (CO2) emissions is 40 percent, which according to Fitch Ratings, presents the highest hurdle in the nation. The costs and uncertainties of reducing power plant CO2 emissions will be especially costly for Nebraska’s public utilities. Unless litigation blocks the plan’s implementation or a new administration rescinds the rule, the state’s ratepayers will have to pay for massive transmission infrastructure changes needed to accommodate significant amounts of new natural gas and renewable energy.
 

The true cost of wind energy
 

More wind and less coal is not a cost-effective strategy to contain Nebraska’s electricity prices. According to the study’s regression analysis, the higher the percentage of coal a state utilizes for electricity generation, the lower the cost of electricity. The more natural gas, wind, and nuclear that a state utilizes as a percentage of total generation, the higher the price of electricity. Nebraska prices, by boosting wind production 10 percent and by reducing coal production by 10 percent, would increase its overall electricity prices per KWH by 7.3 percent in 2018.
 


Most cost estimates do not account for the federal subsidies that taxpayers pay. The true cost of wind power must include both the rate on an electricity bill as well as the taxpayer dollars used to finance these projects. These considerations reveal that without subsidies, Nebraska’s electricity rates are lower than all WNC states.

These are 2014 rates across the state for all customer classes:



Nebraska has the fundamental tools to keep its public power cost-competitive. Many of the state’s utilities have their own coal-generating stations, which is why electricity rates remain affordable. Federal mandates like the EPA’s Clean Power Plan present major barriers to delivering low-cost and reliable electricity, since the rule will likely cause most of these units to permanently go offline. Nebraska’s ratepayers, particularly in areas serviced by smaller municipal utilities, will see significantly higher rates.

 

While market factors like the drop in natural gas prices do affect electricity prices, and federal subsidies for wind skew the state’s true competitive edge, increasing governmental regulations pose the biggest threat to eroding Nebraska’s public power model.

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