The Proposed Compromise: A Wisconsin Solution

After six months of discussions the Customers First! Coalition (CFC) and Wisconsin Energy (WE) have reached a tentative agreement on a proposed compromise regarding the generation issue. The compromise is a suggested new regulatory framework for new generation. The PSC will review and act upon this proposed compromise. Prior GenCo proposals would have required extensive legislative activity in the form of a major rewrite of the existing regulatory compact. This proposed compromise can be approved by the Public Service Commission this year.

The essential elements of the compromise are as follows:

1. Existing Plants Are Not Deregulated. The parties agree not to seek deregulation of the state's existing fleet of power plants. This is good for residential, commercial, and industrial customers, and good for economic development. Under current regulation Wisconsin electric prices are relatively low. This is because they are based on system average embedded cost, which is lower than the marginal cost of new plants (including new gas-fired combined-cycle plants). Under the compromise this pricing mechanism will continue. The compromise also means that difficult issues like fashioning remedies for market power (such as divestiture) will be deferred, as well as who gets the credit or loss arising from the difference between the market value and the book value of the state's power plants (stranded benefit/stranded cost).

2. State Jurisdiction Is Maintained. Under the compromise the PSC maintains jurisdiction over existing and new plants, and the rates charged to customers. Unlike the pending GenCo proposals, jurisdiction will not shift to the FERC in Washington. Wisconsin, unlike California, will be able to retain control of its energy policies.

3. The State Gets the Baseload Power Plants It Needs. Wisconsin has not built a baseload (24/7) plant since 1985. It needs new baseload capacity, given the growth in the state's electric demand. The cheapest baseload power is clean coal, provided that it can be permitted. The price of coal is lower and less volatile than the price of natural gas (volatile gas prices are another reason for the California disaster).

4. A New Regulatory Mechanism Is Established. This will be a long-term lease between the utility and a limited-liability company (LLC). The utility will operate and maintain the new plants, control and dispatch them, and make all sales of electricity from them. Utility workers will continue to run the plants. The LLC will construct and be the passive owner of the plants, recovering its capital and earning a return through the lease payments from the utility. The parties have agreed upon the key terms of the lease to propose to the PSC. The lease, as approved by the PSC, will provide regulatory certainty to both investors and customers.

5. This is a Wisconsin Solution. Under the proposed compromise more than just WE's customers will benefit. The new regulatory mechanism can be used as a model by other Wisconsin utilities. Also, WE has agreed to permit other providers in the state to participate in the benefits of the new plants, either through ownership or power purchases.