Rate hikes jolt state’s power edge
Nebraska has lost its place among the top 10 lowest-cost electricity states after recent big price hikes. Average residential rates have gone up over 20 percent since 2008, even after adjusting for inflation.
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For as long as most people living in South Sioux City can remember, the Nebraska town has received its electricity from the nonprofit, publicly owned Nebraska Public Power District.
But after seven straight years of rate hikes raised NPPD’s electrical rates by more than 50 percent, South Sioux City leaders decided on a change.
Beginning in 2017, the town’s residents will start receiving some of their electricity from an Ohio-based private utility that promises lower rates. And after 2021, it’s likely that all of the town’s energy will come from either that company or another alternate provider.
South Sioux City’s decision underscores a looming challenge to NPPD, the state’s largest public utility — a challenge that could carry serious financial implications for the company, its customers and bondholders, and one that is shaking up the landscape of Nebraska’s unique public power industry.
Unlike Omaha Public Power District, which provides most of its electricity to residential and business customers who have no choice on where they get their electricity, NPPD is largely a power wholesaler. It contracts to sell most of its electricity to 76 other public power entities across Nebraska, who then resell it to their individual retail customers. And all of those wholesale contracts — representing just over half of NPPD’s annual sales — are set to expire at the end of 2021.
Despite concerted efforts by NPPD to work out new long-term deals with the customers — including a recent move in which the utility appeared to play some hardball — none have yet signed on. Instead, South Sioux City and three other northeast Nebraska utilities have informed NPPD they intend to contract with other generators for future power.
The lost customers at this point represent less than 5 percent of NPPD’s sales. Still, it’s not hard to imagine a scenario where large numbers of other customers decide to look elsewhere. Considering that NPPD is carrying nearly $2 billion in long-term debt, that’s a concern.
The analysts that grade NPPD’s bonds still give them high grades and rate the company’s outlook as stable, but one has expressed particular concern about the possibility of significant business losses. Ratings agency Fitch said in January that major customer losses could lead to “compressed operating margins and ultimately require remaining customers to absorb higher electric rates needed to support the district’s outstanding fixed obligations.”
NPPD CEO Pat Pope rejects any gloomy speculation. He thinks the vast majority of current customers will stay in the fold. And for those who don’t, he foresees no lack of takers beyond the state’s borders for NPPD electricity that remains very competitive nationally.
“Do I believe this is an end-of-life scenario for NPPD? Absolutely not,” Pope said. “When you really step back and look at the assets we have and our rate position, there are lots of people and companies in the United States that would kill to be our customer, quite frankly.”
Talk to some of NPPD’s other wholesale customers and there indeed seems to be a sense of loyalty to the Nebraska utility. Some find it hard to understand why any public power district in Nebraska would consider switching to a utility from out of state.
“If you’re going to represent and promote public power, what better way to do that than to buy power (generated) by another public power entity?” asked Gwen Kautz, CEO of Dawson Public Power District in Lexington.
But others question whether now is the time for any utility to be signing a long-term contract, given the great uncertainty in national energy markets. Among the wild cards are a possible federal crackdown on greenhouse gas emissions that would particularly impact generators like NPPD that get most of their power from coal.
Some Nebraska utilities are looking around. Beatrice, one of the NPPD’s largest municipal customers, last month hired a consultant to explore its energy options, and Superior has told NPPD that it is studying alternatives. Still others are rumored to be doing the same.
The contract discussions between NPPD and its customers also recently reached a critical juncture, as evidenced by a proposal thrown out by NPPD.
In a meeting with the utilities two weeks ago, NPPD’s Pope noted that the company expects nearly $1 billion in future costs for retiree health care and plant decommissioning that extend beyond the life of the current contracts. He told them that NPPD is considering raising rates as much as 8 percent starting in 2016 to begin recovering those costs during the six years that remain on the current pacts. However, customers that sign a new 20- or 25-year contract with NPPD would not pay that charge because NPPD would know that they plan to be partners for the long haul.
While the proposal may indeed be motivated to cover those future costs, it also would have two other clear effects: It would serve as leverage as NPPD tries to get the wholesale customers to sign new contracts yet this year. And it would financially punish those customers that have already decided to leave the fold.
Mark Shults of Northeast Nebraska Public Power District, a Wayne-based utility that has signed on with a generator in Kentucky for its future power, said he already has the utility’s lawyer looking at the proposal and would likely challenge the plan in court if NPPD tries to implement it. His utility and NPPD are already in court over another matter related to its plans to leave NPPD.
Pope defended the proposal, saying the costs that NPPD is proposing to recover are fair given that they were largely incurred under the current wholesale customers. He acknowledged that some of the customers still pondering whether to sign with NPPD will see the proposal as an effort to pressure them. “But the clock is ticking,” he said.
Regardless of what happens, it seems clear that months and possibly years of uncertainty and unrest could still await NPPD, its wholesale customers and thousands of Nebraska ratepayers.
Tim Texel of the Nebraska Power Review Board, which oversees the state’s public power industry, said the situation bears watching.
“Those contracts are very important for NPPD,” he said.
Nebraska is the only state in the nation where every watt of electricity is delivered by nonprofit, community-owned power companies. And on the state’s public power landscape, there is no bigger player than NPPD.
From its headquarters in Columbus, NPPD serves most of the state outside of the Omaha and Lincoln metro areas, with a presence in 86 of the state’s 93 counties. And it is also the largest generator of electricity in the state. Its coal-fired Gerald Gentleman Station near Sutherland is the state’s largest power plant. The utility also operates Cooper Nuclear Station near Brownville and either runs or has an interest in other coal, wind, natural gas and hydro plants.
In terms of customers, just under 30 percent of NPPD’s business comes from towns across the state it serves directly at retail. Most of its business is selling power to other utilities, particularly to 25 rural power districts and cooperatives and 51 municipal power systems across Nebraska.
NPPD’s rates for decades had been among the cheapest anywhere, aided by its close proximity to the low-sulfur coal in Wyoming’s Powder River basin.
NPPD’s low-cost power from Gentleman and Cooper also has been in demand on the broader wholesale market. In addition to its primary Nebraska wholesale customers, NPPD has in recent years had deals to sell power to other major utilities, including Lincoln Electric System and Kansas City Power & Light. And it has also for years sold still more power on the open national market, using those out-of-state sales to subsidize the rates of its Nebraska customers.
Given NPPD’s powerful and prominent position and history of low rates, it would have been almost unimaginable a decade ago to think Nebraska wholesale customers would consider switching to a utility from out of state.
But NPPD’s rates began to creep up in the early 2000s as NPPD brought its latest new major power plant online, a Nebraska City generator that it partnered with OPPD to build. And then beginning in 2008, NPPD and the rest of Nebraska’s public power industry was buffeted by a fast-changing energy market.
The price of coal went up substantially. At the same time, the fracking boom caused natural gas prices to plummet by more than half. Suddenly natural gas-fired energy was much more competitive on price, ramping up competition on the national wholesale market. NPPD saw the price that it was receiving for energy on the open market drop from nearly $50 per megawatt-hour to $21 — giving NPPD less out-of-state money to subsidize Nebraska rates.
In addition, NPPD’s favorable contracts with Lincoln and Kansas City expired. That left NPPD “long on power,’’ or with more power than it needed to serve its primary customers. That can lead to inefficiencies. Most importantly, it forced NPPD to sell thousands of additional megawatt-hours of its electricity into the depressed open market.
The result was not pretty for NPPD’s customers.
Federal data shows its average retail rates went up 40 percent between 2008 and 2013 — more than 10 times the national average and four times the rate of inflation.
Though NPPD’s overall rates were still below average nationally, NPPD’s residential rate — boosted by a hefty built-in tax it pays to many of the towns it serves — in 2013 topped the national average.
And wholesale customers also saw sizable rate increases — some 55 percent between 2007 and 2013. NPPD’s standing as a low-cost provider took a beating.
Pope acknowledged to customers last fall that NPPD was no longer among the cheapest 25 percent of power providers in the country — “where our customers expect us to be.”
Meanwhile, bond ratings agencies began expressing concern, noting that about $1 billion of NPPD’s bond debt extends beyond the expiration of its Nebraska wholesale contracts.
As a result, beginning in 2013, Pope and NPPD officials launched discussions on extending those contracts.
The effort struck some wholesale customers as, at best, poor timing.
The wholesale customers had had little choice in recent years but to pass the NPPD rate increases on to their own retail ratepayers. And many of those folks weren’t happy.
“People pay their utility bills right in our office here,” said Lance Hedquist, city manager of South Sioux City. “We were hearing complaints.”
Hedquist said many customers were also well aware that MidAmerican Energy, which serves Sioux City across the river in Iowa, offered cheaper rates.
Likewise, Shults said he and his board at Northeast Nebraska Public Power District questioned the wisdom of signing long-term with NPPD, given both the recent rate history and the uncertainty in energy markets.
“We just weren’t going to sign a 25-year contract with anybody,” Shults said. “The industry is too unstable and going through too many changes.”
With the growing interconnectedness of the nation’s energy grid, the northeast Nebraska utilities felt they no longer had to just assume they’d get their power from NPPD. There are plenty of wholesale providers, both public and private, in other states.
So in late 2013, Northeast went together with the neighboring municipal systems in Wayne, Wakefield and South Sioux City to put out a joint request for proposals from any power company willing to meet their needs.
In the end, Northeast, Wakefield and Wayne signed on with Big Rivers Electric Corp., an electric cooperative based in Kentucky that promised to beat NPPD’s rates.
How could a utility located hundreds of miles away undercut on price a Nebraska utility that is already a below- average cost provider? It has to do with the current glut in the nation’s energy market.
If a utility has excess energy beyond what it needs to serve its own customers, it has incentive to sell it — even at rates below its normal prices. That’s because the utility’s fixed costs are already generally covered by its native customers, who still derive benefit from the out-of-state sales. It’s an energy game NPPD has itself played for years.
In this case, Big Rivers was particularly desperate to get the Nebraska business. It had recently lost its two biggest customers, a pair of aluminum refiners, leading to downgrades in its bond ratings and huge rate increases for its remaining customers.
Shults and Big Rivers have declined to reveal the nature of the agreement they struck. A published report in Wayne last year indicated that the rate is actually indexed to NPPD’s rate, set at 10 percent below whatever NPPD is charging.
Most importantly to Shults, the new contract’s term is relatively short, expiring after 2026.
South Sioux City went its own way and plans to sign on with a subsidiary of American Electric Power, a Columbus, Ohio-based utility that is among the largest electric companies in the nation.
“We have great faith and a great relationship with NPPD,’’ Hedquist said. “But we also have to look at what is right for our community.”
While the northeast Nebraska utilities will still receive some energy from NPPD through 2021, they are also seeking to take advantage of provisions in the current contract to begin shifting away. South Sioux plans to take reduced power as soon as 2017. Exactly how quickly the utilities can reduce their take is in court now.
Understandably, relations are chilly between NPPD and its wayward northeast Nebraska customers. NPPD officials suggest the utilities are making a short-term market play that in the long run will not benefit their ratepayers. Shults and Hedquist disagree.
It remains unclear whether NPPD will lose wholesale customers on a wholesale scale.
Dawson’s Kautz said obviously no one was happy with the NPPD price increases. But she said the hikes were justified, given what was happening in the markets. And NPPD has a history of being responsive to its customers, she said. Her utility is inclined to stay with NPPD.
Bruce Vitosh, CEO of Norris Public Power District in southeast Nebraska, agreed. He said his district did a detailed analysis and found that most power providers in the region in recent years have seen the same cost increases experienced by NPPD. He still sees NPPD as the best option over the long haul.
“Our intent is to continue to work with NPPD to have them be our power supplier of the future,” he said.
In current contract discussions, NPPD has argued that it needs a term of 20 to 25 years in duration. Some customers have pushed for a shorter term.
NPPD also is not offering to lock in a particular price, which has not been part of the current agreement, either. But it is pledging to keep working to get back into the lowest-price quartile of wholesale providers. And in one of its latest proposals, NPPD is also offering to build performance incentives into the contract. If NPPD’s rates fell to the midpoint among a peer group of providers, customers would be able to reduce their power from NPPD.
Pope strongly believes that public power in Nebraska should remain unified and “hang together in a cooperative spirit for the good of all.’’
“That’s how we leverage our strength as the nation’s only public power state,” he said.
Meanwhile, the ratings agencies are watching. Fitch has particularly expressed concern about the NPPD’s “slow progress on reaching a new agreement.”
“The (expiring) contracts expose NPPD to considerable operating risk that has been well-managed to date, but could ultimately pressure the (bond) rating in coming years,” Fitch wrote. But it also noted NPPD’s still-competitive rates and “reportedly good relations’’ with its longtime customers.
Pope acknowledged that NPPD without progress does risk a lower bond rating, which would increase the utility’s cost of borrowing.
Asked if NPPD has made contingency plans in the event it loses significant numbers of customers, Pope said no. However, he said NPPD would do what was necessary to remain viable, even if that means shutting down some generating plants. “If we lose load, we will do what we can to minimize our costs so as to not adversely impact the remaining customers,” he said.
But he and NPPD officials also express confidence that, in the end, most of their current customers will see the long-term benefit of staying with NPPD.
“Am I nervous? No,” said Traci Bender, NPPD’s chief financial officer. “I want to get this resolved. Because there are so many opportunities for us, I want to get through the contract process.”
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