Rate hikes jolt Nebraska's power edge

Nebraska loses its longtime spot among the top 10 low- cost electricity states.

Kearney Hub photo

By Henry J. Cordes / World-Herald staff writer

Sunday, April 5, 2015

Bigger electric bills

Since 2008, the price of Nebraska’s retail electricity has risen faster than all but four states. In that time, states that rely on natural gas fared better than states such as Nebraska that primarily burn coal.

Nebraska remains the only state in America where every watt of electricity is delivered by nonprofit, customer-owned utilities — a structure that historically has offered Nebraskans some of the nation’s lowest energy costs.

But look at how much Nebraska’s public utilities have recently been raising electric rates and the results are, well, a little shocking.

Since 2008, only four states have seen bigger price jolts than Nebraska, according to a World-Herald analysis of federal electric rate data. Even when adjusted for inflation, average residential rates in Nebraska have gone up over 20 percent since 2008 — adding more than $18 to a typical monthly bill. Prices for industrial users have spiked even higher.

Not only are Nebraskans paying more to keep the lights on, the rate increases have cost Nebraska its longtime place among the top 10 lowest-cost electricity states.

Iowa is among the states whose rates now beat Nebraska’s. In fact, MidAmerican Energy, the for-profit private utility that serves Council Bluffs and much of western Iowa, in recent years has offered cheaper electricity than Nebraska’s public utilities.

“It’s somewhat alarming,” State Sen. Ken Schilz of Ogallala, chairman of the legislative committee that oversees the industry, said of the numbers.

So what’s going on?

Leaders of Omaha Public Power District, Lincoln Electric System and Nebraska Public Power District — the “big three” among Nebraska public electric utilities — say the state is just caught in a rough economic cycle, the big drivers being fundamental changes in national coal and natural gas markets. They point out that in spite of the challenges — and despite Nebraska’s vast rural stretches that can require miles of line to reach a single customer — the state still enjoys electrical costs that are well below average.

“The sky is not falling, by any means,” said Shelley Sahling-Zart, a top LES executive.

To be sure, even with the recent price spikes, Nebraska’s electric rates remain the envy of most states. On average, last year’s rates remained nearly 16 percent below rates nationally, and 4 percent below the Midwest region.

But The World-Herald analysis found those cost advantages to be less than half what they were just seven years ago. Nebraska’s rates for residential, commercial and industrial power have climbed closer to national averages than at any time in at least the past quarter century.

Nebraska’s competitive position has slipped most markedly when it comes to industrial rates, which can be a critical factor when major employers are looking to establish new operations. Since 2008, average industrial rates in Nebraska are up an inflation-adjusted 29 percent, even as such rates have fallen more than 8 percent nationally. Only three states during that time have seen a bigger industrial price spike than Nebraska.
Even some Nebraska power officials, already well aware of the recent rate increases, were surprised to see the degree to which the hikes have caused the state’s competitive edge to slip.
“I was less than happy with the trends I saw there,” said Tim Texel of the Nebraska Power Review Board, a state electric oversight agency.
The key question, everyone now agrees: Will Nebraska’s electric cost advantages continue to erode?

Role of wind unclear in MidAmerican's low rates

Many see that Iowa’s MidAmerican Energy now has lower rates than Nebraska’s utilities and have the same thought: It has to be the wind.
Indeed, MidAmerican surpassed the Nebraska utilities on rates at a time when it has been investing billions in wind energy, and its wind turbines are a common site to anyone driving through western Iowa. MidAmerican officials have repeatedly said their wind development has helped reduce costs for customers.
“It’s not all cause and effect, but I think there’s a relationship there,’’ said Ken Winston, a policy advocate for the Nebraska Sierra Club.
But there could be other factors.
MidAmerican began its wind investments while it was under a rate freeze imposed by Iowa state regulators. The state then extended the freeze as a condition of allowing the new wind investments.
Though wind turbines are cheap to operate because they require no fuel, they still require significant upfront investments in equipment and transmission lines to get the power where it’s needed.
State-by-state electrical rate data appear to show little correlation between states with heavy wind investment and states with lower rates.
South Dakota, North Dakota and Minnesota rank right behind Iowa in percentage of power generated from wind, all with far more than Nebraska. All three have fared poorly on rates in recent years. Two of the three have higher rates than Nebraska.
Without doubt, power industry officials say, the biggest driver on recent rate trends has been whether states burn natural gas or coal to fuel their power.
"I don’t think it’s a case of 'Gee, if we put in a whole lot of wind we’ll be cheaper,'" said Tim Texel of the Nebraska Power Review Board.

Nebraska utilities say they feel good about the future.
The big three enacted only minimal rate increases in 2014 and 2015, years in which many other utilities around the country — including MidAmerican — raised prices.
Indeed, federal figures released last month show that Nebraska rate increases during 2014 were below average nationally and below the rate of inflation — the first time that has happened in six years.
But predicting the future is made even more difficult by the rapid changes that are transforming the electrical power landscape, including deregulation, increasing competition on the grid, new energy-saving technologies and concern about global climate change.
The biggest wild card is a new federal rule expected out later this year that seeks to slash carbon pollution from existing power plants. It potentially holds costly implications for states such as Nebraska that derive most of their power from coal.
“We’re hoping this is the high point in the cycle and we start dropping after this,” Texel said. “I don’t know if that’s true. But that would be my hope.”
Nebraska’s utilities have long touted the benefits of the state’s public power structure. Having the generation and delivery of electricity publicly owned and operated makes the utilities more accountable to the people, they say. And any profits are reinvested in the system, helping keep power reliable and rates low.
“Our customers, not big investors in New York and Chicago, own Nebraska’s utilities,” says the Nebraska Power Association, which represents the state’s utilities. “That means Nebraska’s utilities can focus exclusively on keeping electric rates low and customer service high.”
There’s also little doubt that proximity to the ample low-sulfur coal in Wyoming’s Powder River basin has helped keep Nebraska rates low.

From the late 1990s through the 2000s, Nebraska electric consumers could hardly have had it better. Nebraska consistently ranked among the 10 lowest-cost states.
However, some profound changes over the past decade in the utilities’ business — many driven by forces far beyond the state — have dramatically altered the picture for Nebraska consumers.
During the early 2000s, Nebraska utilities collectively invested $1.8 billion in a wave of new facilities, something they periodically must do to meet growing demand. OPPD and NPPD went together on a new $700 million coal-fired generator in Nebraska City, and both utilities invested hundreds of millions to extend the lives of their nuclear plants. LES doubled its generation capacity, including buying into a new MidAmerican coal plant near Council Bluffs.
The utilities began boosting rates to fund the construction, though in many cases the increases imposed were not far above the rate of inflation.
Then came a series of seismic market jolts.
The Great Recession came crashing into Nebraska in 2008, reducing the demand for electricity and reducing utility revenues.
At the same time, the utilities saw sizable increases in their costs for coal.
The average per-ton coal costs for Nebraska’s utilities climbed by nearly two-thirds, the biggest increase for any state in the nation, according to federal data. OPPD’s combined costs of coal and contracts to ship it by rail went up 135 percent.
But it’s arguable the price of natural gas — a fuel source that produces little of Nebraska’s electricity — had the biggest impact on Nebraska ratepayers.
Because of “fracking” techniques, drillers were able to reach untapped gas stores, setting off a natural gas boon. Suddenly, a resource that had been considered scarce and pricey became plentiful and cheap.
Natural gas prices plummeted, falling by almost two-thirds between 2008 and 2012. More importantly for Nebraska ratepayers, power from natural gas was suddenly more competitive with coal and nuclear.
Gas-charged electricity, combined with ever-growing generation from wind farms, ramped up competition in the nation’s wholesale electricity markets, sending prices tumbling.
Nebraska utilities for years had been scoring big profits selling their excess electricity on that market to utilities in other states. And every dollar in profit they made subsidized the rates of Nebraska consumers.
By 2012, NPPD saw the average price for electricity it sold on the open market drop from nearly $50 per megawatt/hour to just $20. OPPD was similarly hurt. Losing out on tens of millions of dollars, the utilities say they had little choice but to turn to ratepayers to help make it up.
“We’re not making the margins we were in the past,” said Tim Burke, OPPD’s recently installed CEO. “That puts pressure on your rates to go up.”
OPPD suffered an additional blow with the debacle at its Fort Calhoun Nuclear Station.
The plant, shut down in April 2011 for a routine refueling, was suddenly surrounded by Missouri River floodwaters. Then a fire and other safety violations caused federal regulators to step in. The three-year cold shutdown cost OPPD nearly $200 million — an expense it will be paying off over the next decade.

The Fort Calhoun Nuclear Station was surrounded by Missouri River floodwaters in 2011. A fire and other safety violations caused federal regulators to step in and shut down the plant for three years, costing OPPD nearly $200 million.

The results of all the market upheaval can be clearly seen in the Nebraska utilities’ rates.
In 2009, OPPD boosted average rates by 14.5 percent, the utility’s biggest single-year increase in 36 years. Collectively, between 2008 and 2013 — the most recent year for which national utility data is available — OPPD raised its average rate 37 percent, more than 10 times the national average hike and four times the rate of inflation.
OPPD’s industrial rates shot up an inflation-adjusted 44 percent even as such rates fell 9 percent nationally.
NPPD had similar increases in that time. By 2013, its average residential rate topped the U.S. average, though company officials say that’s misleading. Built into its rates are steep lease payments that cities NPPD serves can charge and use to fund their own operations — effectively a 12 percent tax that NPPD believes is the highest in the nation.
LES’s overall increases over the five-year span were less, but still were about five times the national average and more than twice the inflation rate. LES largely kept residential rates flat relative to inflation, with its industrial and commercial customers bearing a heavier share of the increases.
Statewide, the average industrial rate for the past three years has actually been higher than the U.S. average, though the Nebraska utilities say that figure is distorted. Irrigation, which federal data counts as industrial, is a heavy energy load in Nebraska and occurs during the costly peak summer months. The effect is to drive up Nebraska’s average industrial rate.
Even with irrigation counted, however, Nebraska industrial rates previously used to beat the national average by a wide margin — by 25 percent in 2001. Now that is no longer true.
Meanwhile, across the river, the rates MidAmerican charged its residential and business customers remained flat for more than a decade.
The company had seen its rates frozen by state regulators beginning in 1996 after consumer advocates argued they were too high, and the freeze was ultimately extended. The utility could have sought increases had its margins dropped below a certain level, but the company remained profitable even as it was investing billions in a new coal plant in Council Bluffs and new wind turbines.
The long period without a rate increase in the end gave MidAmerican customers some of the lowest rates of any utility in the country — well below those of Nebraska’s big three.
In 2000, MidAmerican’s average price for electricity was 14 percent higher than OPPD’s. By 2013, that had flipped, with MidAmerican’s rate 24 percent lower than the Omaha utility’s.
MidAmerican’s strong rate performance helped Iowa beat Nebraska in average electrical rate by 2011 and to move into the nation’s lowest-cost 10. And Iowa wasn’t the only state to pass Nebraska by.
By 2013, Nebraska’s average rate had fallen to 16th lowest before rebounding to 14th last year. As recently as 2007, Nebraska ranked 5th best.
Among the states whose rates now beat Nebraska’s are Arkansas, Oklahoma, Louisiana, North Dakota and Utah.
The state rankings also show the dramatic impact coal and natural gas prices have had on electricity costs nationally: States that predominantly burn coal for electricity nearly all saw big rate increases, while natural gas states nearly all saw sharp reductions.
Nebraska utility officials say they’re just as displeased as their customers with the rising rates. Pat Pope, the CEO of NPPD, said his company is committed to helping Nebraska get back among the 10 lowest-cost states.
“I recognize that to deliver on the promise of public power, we have to be the lowest-cost power supply with high public service,” Pope said.
To that end, the company in recent years has worked to cut costs, including reducing its workforce by some 10 percent. That helped the company keep its retail rates flat over 2014 and 2015.

Rate increases at OPPD and LES have also been low for those two years, totaling 1.6 percent at OPPD and 2.9 percent at LES.
Conversely, MidAmerican’s rates have been on the rise for the first time in 18 years. The company last year was authorized a three-year rate increase of some 10 percent.
LES officials say a rate survey they recently conducted for 2015 suggests the company’s residential rate is once again lower than MidAmerican’s. However, even when MidAmerican’s hike is fully in place next year, its overall rates are likely to remain markedly below those of Nebraska’s utilities.
While the rate increases of recent years clearly cost Nebraska consumers, it’s unclear that the state has been hurt when it comes to economic development.
Nebraska did lose out to Iowa on some data centers, but the data firms did not cite electrical rates as a major factor.
Greater Omaha Chamber of Commerce officials say the potential development targets they talk to remain pleased with how OPPD’s rates stack up. OPPD also recently implemented a new economic development rate that allows it to provide a lower rate to new or expanding businesses.
“We are comfortable with where we are, but that comfort is not static,” OPPD’s Burke said. “Our focus is on how we can be more competitive in the future on residential, commercial and industrial rates.”
When it comes to future rates, natural gas prices will remain a key. There is disagreement nationally over whether cheap natural gas is a new normal or whether the market will return to its former volatility.
“I would hesitate to say cheap natural gas is here forever,” said Sue Kelly, president of the American Public Power Association. “The market is normal until it isn’t.”
The pending federal rules regarding greenhouse gas emissions also hold big implications here. Depending on the requirements of the Environmental Protection Agency’s Clean Power Plan, coal-burning states like Nebraska could face major costs to reduce plant emissions or shift to new fuel sources.
But Nebraska’s utilities say they feel the state is in a better position to meet the new standards, thanks largely to recent years’ investments in wind energy.
It’s been well-documented that Nebraska utilities were slow to invest in wind. Since they are not traditional tax-paying companies, they could not take advantage of the federal tax credits that have spurred most of the wind development around the nation. The Nebraska utilities eventually came up with a workaround, contracting with private entities that develop the wind generation.
In addition to new wind generation, OPPD is shutting down some coal burners, shifting others to natural gas and expects to be getting a third of its load from renewable sources by 2018.
LES is likewise moving aggressively, expecting to be as much as 48 percent renewable by next year.
NPPD’s renewable resources are lower, though Pope said the company’s substantial nuclear power gives the company an energy portfolio that’s nearly half carbon-free.
“Nebraska public power has shown that we’ve been pretty resilient,” said LES Chief Executive Kevin Wailes. “I believe we are going to remain very competitive.”

MidAmerican Energy Co. is a subsidiary of MidAmerican Energy Holdings Co., a division of Berkshire Hathaway Inc., which also owns The Omaha World-Herald Co.

Contact the writer: 402-444-1130, henry.cordes@owh.com

Public Power: What it is

In Iowa and most other states, most electricity is provided by state-regulated, investor-owned companies. But in Nebraska, public power is king — a concept the state has embraced for more than a century.
In the early days of electricity, for-profit private utilities weren’t particularly eager to serve rural areas. And some cities and towns saw advantages in having the service publicly owned. The first municipal electric system formed in Nebraska in 1887.
In 1933, the Nebraska Legislature authorized the formation of government subdivisions for the sole purpose of providing electricity. Public power districts with elected boards like OPPD and NPPD would provide their residents with electrical services much as school districts provide education or cities deliver parks, libraries and streets. By 1946, when the last of the 43 for-profit utilities in Nebraska was bought out and merged into OPPD, Nebraska’s conversion was complete.
All but one state have at least some public power entities, but Nebraska is the only one where all power is community-owned. Consumers are served by 167 public utilities, including municipal companies, power districts and rural cooperatives. OPPD is the nation’s 12th-largest public utility by customers served, while LES ranks No. 23.
Large public utilities such as OPPD, NPPD and LES own significant generating facilities. OPPD and NPPD even opened nuclear plants during the 1970s. But most of the smaller power districts, municipals and co-ops don’t generate their own power. They buy it at wholesale from generators like NPPD and then provide it to their customers at retail.
In the past two decades, a third structure for providing power has emerged nationwide: competitive. Seventeen states now let customers choose from competing private providers. The World-Herald analysis shows that many of those states have seen the steepest decline in rates in recent years, though their rates also remain among the highest in the nation.
Gary Aksamit, a Nebraska native who operates a Texas-based power marketing firm, has been telling state lawmakers in Nebraska over the past year that Nebraska consumers would be better served if the state continued to have power delivered through public utilities but turned over the actual generation of energy to a competitive private sector.
“Nebraska policymakers must start asking how much electricity rates would go down, or at least not increase, with competition in the electric market,’’ he said.
Sue Kelly, president of the American Public Power Association, suggests Nebraska already has it right. Across the nation, public power has been proven over time to be the cheapest and best option, she said.
“You are better off with a public power system that is responsive to your community, interested in economic development and keeps the money there,’’ she said.
— Henry J. Cordes

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