Customers First! Coalition and Wisconsin Energy Corporation Reach Compromise on a Framework for Future Electric Generation In Wisconsin

February 2001

Amid growing concern about the reliability of electricity supplies and future costs to customers in Wisconsin, the Customers First! Coalition (CFC) announced that talks with Wisconsin Energy Corporation (WEC), and its electric utility subsidiary Wisconsin Electric Power Company, have produced a proposed framework outlining basic principles for building new electric power plants in Wisconsin. Late last year, CFC issued its Generation Action Plan, designed to ensure that public utilities in Wisconsin build or buy more low-cost, reliable supplies of electricity to meet the needs of their residential, commercial and industrial customers. The Generation Action Plan proposed to accomplish these goals without exposing Wisconsin customers to the risks involved with California-style deregulation schemes.

CFC's Plan has three essential objectives:

• No surrender of state jurisdiction to the federal government
  
  
• Continued state regulation of existing power plants paid for by Wisconsin customers
  
  
• Innovative regulation by the Public Service Commission of new power plants to secure cost-based supplies for customers and create incentives for utilities to build

At about the same time, WEC unveiled a plan called Power the Future (PTF). Although PTF would have added needed generation in Wisconsin, it had features in common with California deregulation. CFC viewed PTF as far too risky for Wisconsin customers, given the need for more generation in our state.

The talks between CFC and WEC addressed modifications to PTF to achieve WEC's goals and also CFC's objectives. The result is a new plan called Power the Future-2 (PTF-2), which WEC will soon propose to the Public Service Commission. CFC views PTF-2 as consistent with its Generation Action Plan, and commends WEC for the changes it made to the original PTF plan. While PTF would have required major changes in state law, PTF-2 can be accomplished by the Public Service Commission this year. CFC and WEC believe that PTF-2 will make it possible to move ahead quickly to address Wisconsin's future electricity needs in a way that substantially reduces controversy and risk.

Under PTF-2, existing power plants will stay within the utility itself, assuring that customers will still have access to cost-based power from the plants that they have been supporting through their utility bills. New power plants will be built and owned by a new generation company within WEC, but separate from the public utility. The new generation company would then lease the assets to the utility under a long-term lease (20 to 25 years), and the utility would control, operate and maintain the new plants using utility employees.

Unlike the supply contracts originally proposed in PTF, which would shift authority to the federal government, this lease arrangement would keep intact the authority of the Public Service Commission over the new plants (including rates based on cost). At the end of the lease period, under PTF-2, the utility could keep the power for its customers either by extending the lease or buying the power plant outright at market value, if the Public Service Commission approves the transaction.

PTF-2 offers significant benefits. Under PTF-2, WEC would construct much-needed new generating capacity in Wisconsin. The company will make use of its existing sites at cost for the new power plants. These sites already have fuel delivery and transmission facilities and other infrastructure in place, and building new plants there will shorten the time and risk of acquiring new sites and developing them. WEC has also committed to enhanced conservation and renewable energy measures. Both customers and the utility will benefit from avoiding over-reliance on generating with natural gas, which has experienced volatile, increasing prices.

Electricity from new power plants, regardless of who builds them and what fuel they use, will be more costly than current supplies at rolled-in average prices. By choosing coal as well as natural gas, however, PTF-2 will save customers money compared to natural gas alone. Each 600 megawatt coal plant will save $800 million dollars over the life of the plant. Without PTF-2, electricity prices are expected to go up by about 4 percent a year, faster than the rate of inflation. With PTF-2, prices are expected to go up only about 3 percent, or less than the rate of inflation.

The long-term lease concept is a new regulatory approach in Wisconsin with significant benefits. The Public Service Commission (and not the federal government) will have authority over the leases and can assure that the terms provide reliable and cost-based electricity to customers over the long term and at the same time give incentives to investors. While existing plants will continue to be regulated as they are now, new plants will receive consideration on a stand-alone basis. Individual CFC members and others with interests affected by the new plants will have the opportunity to present their positions to the Public Service Commission before the lease terms are set.

Recent events, especially in California, have shown just how important it is for a state to have an adequate supply of electricity. The California crisis has also shown that it is critical to keep jurisdiction over state energy supplies from being transferred to the federal government and to keep our relatively low-cost generation available in state at cost-based rates. CFC believes that WEC's PTF-2 plan meets CFC's essential criteria for serving Wisconsin's present and future power needs without risking a California-style deregulation disaster.