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New Study: Public Power Becomes Less Affordable in Nebraska

January 8, 2016 By Cheryl Kaften

A new study conducted on behalf of the Omaha, Nebraska-based Platte Institute for Economic Research has found that, while electricity rates in the Cornhusker State are the third-lowest in the West North Central (WNC) region of the country, they are increasing at a much faster pace than those in neighboring states.

The research paper – entitled The Costs and Benefits of Public Power in Nebraska: An Investigation of Electricity Rates, Taxes, and Competitivenesswas produced by economist Dr. Ernie Goss and research economists Jeffrey Milewski and Scott Strain of Creighton University, also in Omaha, and was released by the institute on December 30.

The top line on the research is that Nebraska’s electricity rates are projected to be 7.5 percent higher than those in the rest of the region by 2018.

Public power rate escalation

Indeed, the new findings confirm that Nebraska’s electricity rates increased 60 percent between 2007 and 2013, compared to those in Missouri (48.7 percent), Kansas (41.1 percent), Minnesota (34.8 percent), South Dakota (32.2 percent), North Dakota (32.0 percent), Iowa (15.1 percent) and the United States as a whole (13.7 percent). Nebraska’s rate of price escalation was the fastest among the WNC states and almost five times the growth of national average electricity prices.

 Historically, public power in Nebraska has been more affordable than the energy distributed in other states by for-profit competitors. Indeed, Nebraska is the only U.S. 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.

Thus, the researchers noted, in theory it makes sense for the state to price its energy more competitively. 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.
However, the findings show that  low natural gas prices in the electricity market have significantly reduced wholesale electricity prices outside the state – reducing revenues that Nebraska utilities have used in the past to help keep rates down.

Why rates are ratcheting up

What’s more, the researchers said, the Environmental Protection Agency’s (EPA) Clean Power Plan, rolled out last August, threatens the state’s ability to rely on affordable coal for the majority of its electricity generation.

Nebraska’s proximity to coal in Wyoming’s Powder River Basin has 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 also can sell excess power to other states. Revenues generated from these sales have helped reduce rates for Nebraska’s consumers.

In addition, while consumption of another fossil fuel, natural gas, is negligible 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.
What’s more, Nebraska’s commercial and industrial rates for electricity are far higher than its residential rates – tipping the scales considerably. Over the past decade, Nebraska had the greatest industrial electricity price volatility among all WNC states and the national average.
The rapid growth in Nebraska’s industrial electricity rates also might be attributable to the state’s heavy use of irrigation in agriculture, the Creighton University economists theorized. In 2003, the U.S. Energy Information Administration (EIA) began classifying these users as industrial.

Customers in rural areas, such as farmers, are expensive to serve because of the investment required to build the distribution infrastructure and the demand for irrigation systems during certain times of the year; especially July and August. . During those peak times, 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.
Finally, the shutdown and recovery of the Fort Calhoun Nuclear Generating Station also must be mentioned as a major driver of Nebraska’s rapid growth in electricity prices beyond 2011. Recommissioning ultimately cost ratepayers an estimated $177 million, which is about 18 percent of Omaha Public Power District’s (OPPD’s) annual operating expenses.

Looking ahead
Nebraska ranks high 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.

While the state has the fundamental tools to keep its public power cost-competitive, the researchers found that 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 the coal units to permanently go offline.

The researchers predict that Nebraska’s ratepayers, particularly in areas serviced by smaller municipal utilities, will see significantly higher rates going forward.

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