Reliable energy will come about through deregulation

When 100 mph winds roared through southeastern Wisconsin May 31, approximately 175,000 customers of the Wisconsin Electric Power Co. woke up to no power that Sunday.
Without electrical service, everyday commerce ground to a halt. Images of retailers sitting outside their darkened stores were a stark reminder of how critical a reliable supply of electricity is to business and residential consumers alike.
Even though the storm was an isolated event, the issue of a reliable supply of energy has blown into Wisconsin like an ill wind that portends disaster – one which is slower in coming but every bit as potentially devastating from an economic standpoint.
Historically, Wisconsin has enjoyed some of the lowest electric rates in the country. And, just as important, a consistent, reliable flow of energy.
The state’s preferred energy status has helped to lure a substantial number of Illinois companies across the border to Kenosha, Walworth and Racine counties in search of lower electric rates.
Low rates and reliable power also serve to keep existing Wisconsin businesses from moving elsewhere.
However, an archaic regulatory model based on a century-old monopoly system currently threatens to put our low-cost energy supply in jeopardy.
Caught at the center of this tangled web is industry, which can no longer rely on a consistent flow of energy on hot summer days. On four occasions last July and August, WEPCO asked customers to conserve electricity as supplies grew tight. A total of 25,000 residential customers and 2,300 major industrial and other large customers were asked to cut back on their power use during peak periods of demand.
While businesses on both coasts are used to brownouts or rolling blackouts, the prospect here is almost unthinkable. Only twice before in its history had WEPCO been forced to ask its customers to restrict power consumption.
A survey last year by the Metropolitan Milwaukee Association of Commerce (MMAC) showed that energy reliability was one of the top business concerns.
At a crossroads
Wisconsin finds itself at an energy crossroads, says Eric Schenker, a retired University of Wisconsin-Milwaukee Business School dean. In effect, it boils down to a “pay me now or pay me later” scenario, says Schenker, who has taken up the free market cause on behalf of the MMAC. Wisconsin can pay higher energy rates now or pay later, Schenker says, with the cost being lost economic development opportunities if the decision to build new power generation and transmission is continually put on hold while the debate over what to do wears on.
Decisions that are made now and in the coming years will have a lot to say about the future of our reliable energy supply, which has been the backbone of our economy. But greater reliability will cost more in the short run, Schenker says.
While business owners want energy reliability, they are among the first to cry foul when their energy rates go up as they did when WEPCO was recently granted a 12.3% increase by the PSC to upgrade its generation and transmission to provide better electric power reliability. [Most of the rate increase can be traced to the operating troubles of the Point Beach plant.] But even with the increase, Wisconsin will still have lower rates than most metropolitan areas across the US, Schenker points out.
The fact is, Wisconsin currently imports 15% of its energy. There is not enough generating capacity in the state, and not enough transmission lines to import power from outside the state.
Last summer’s brownouts came about as the result of a not-so-unique set of problems which are afflicting utilities around the country.
For starters, the temporary shutdown of the Point Beach nuclear reactor along Lake Michigan created a power shortage. To the south, the available energy Wisconsin typically depended on dried up, as Illinois goliath Commonwealth Edison shut down some of its own problematic nuclear plants. Meanwhile, to the west, there were not enough existing transmission lines to import power when Wisconsin’s power grid maxed out.
That scenario could repeat itself again this summer, as power shortages caused by nuclear plant shutdowns in Illinois, Michigan and Ontario could put a strain on Wisconsin’s transmission system.
What has become clear in recent years is Wisconsin has too few power plants for its overall energy needs, an uncertain future tied to its two existing nuclear plants, and not enough power lines to carry needed power into the state.
The politics of dancing around the issue
While the solution seems simple – to build more generation and transmission – there are plenty of obstacles standing in the way. The question over how to best manage electric utilities is a seemingly endless political debate which tends to bog down in the minutae that are like tiles in the complex mosaic that make up the big picture of energy reliability.
Then there is the cumbersome environmental permitting process which makes it hard to get anything done – four years for a new transmission line and seven years or more to build a power plant.
Also, there is a myopic tendency on the part of some to look at the issue only within the confines of the state’s borders, says Bill Harvey, president of Madison-based Alliant Corp./Wisconsin Power & Light Co., which became the first Wisconsin utility allowed to merge with two out-of-state utilities in Iowa earlier this year. Rather, those involved in restructuring the utility industry here must view the North Central US as an interconnected regional whole, Harvey says.
A principle obstacle, to date, has been the regulatory stance of the Wisconsin Public Service Commission, which regulates utilities and requires an exhaustive advance planning process when a utility decides it wants to build a power plant or site a transmission line.
By the time utilities complete their advance plans, the market shifts and the plans are no longer valid, points out State Rep. Tim Hoven (R-Port Washington), chairman of the Utility Oversight Committee, which passed a bill this year that could go a long way to streamline the planning and approval process.
Frustrated with the PSC’s apparent unwillingness to take on the brave new world of energy deregulation, Gov. Tommy Thompson appointed Green Bay attorney Joe Mettner as head of the PSC earlier this year. Insiders say Mettner has a fundamental understanding of the complexities, and is more likely to embrace a market-based solution than his predecessor, Cheryl Parrino, who was steeped in the old-line, government-first stance of the PSC.
“Given the healthy state of this economy, there is no reason why anyone ought to have their lives disrupted by a shortage of electricity.”
– Bill Harvey,
Alliant Corp./Wisconsin Power & Light
While Wisconsin still enjoys low rates, it would be short-sighted to credit the watchdog role of the PSC and the Citizen’s Utility Board, points out Alliant’s Harvey. One of the reasons the rates are low, he says, is that ratepayers are not funding new or expanded plants.
So, while Wisconsin still has low rates, it is stuck with a growing reliability problem with no real consensus about how to address the issue.
“We’ve spent the last few years just trying to decide if life was changing,” observes Dave Parker, a utility industry analayst for Robert W. Baird & Co. in Milwaukee. “The PSC postponed a decision [on deregulation in 1997], and decided to study it for another couple of years. Life has been so darn good here for so long that people hesitate to change.”
A deregulated, free-market approach would have addressed the state’s current energy reliability woes much more quickly than the old command and control government regulatory model, Alliant’s Harvey says.
“Given the healthy state of this economy, there is no reason why anyone, anywhere ought to have their business or personal lives disrupted because of a potential shortage of electricity,” Harvey says.
The free-market solution
In the last two years, the effects of hanging on to an outdated regulatory structure are apparent. Wisconsin utilities have earned an average of 7.6% per share compared to the national industry average of 23.9% per share, and a Midwest utility average of 30%.
Over the previous 50 years, Wisconsin was as a national leader in regulation of its public utilities and in the performance of those utilities. But now, Wisconsin has fallen behind the rest of the nation in addressing its energy future and the effects are apparent. Investors are moving their money to other Midwestern utilities which do not operate under the same constraints.
Even though a new energy reliability bill (AB-940) that passed the legislature is a step in the right direction, current laws do not go far enough to allow Wisconsin utilities to compete in a more open market environment, UWM’s Schenker says. Current rules set up extreme measures that make it impossible for Wisconsin utilities to build needed power plants. The laws, in effect, handcuff Wisconsin utilities, allowing out-of-state companies the opportunity to come here and profit by building power plants and by selling the electricity to Wisconsin utilities, Schenker says. That, he says, will not keep electric rates low. But it will serve to hold down the returns of Wisconsin utilities, making them unattractive to investors.
To restore the financial strength of Wisconsin utilities, the state needs to implement a free-market environment in which utilties can fairly compete, Schenker says. That will allow the utilities to use their own vast experience to maximize profitability.
Out of the ongoing debate, a mandate emerged late last year to streamline the planning and approval process with the ultimate goal of energy reliability. The outcome of that effort is Assembly Bill 940, which replaces the lengthy advance plan process with a strategic energy assessment, which would enable power companies to move faster on building new infrastructure, especially on smaller generation facilities.
AB-940 could also pave the way for a so-called Independent System Operator (ISO). The ISO would serve as a traffic cop to regulate the flow of energy outside of the self-serving interests of the utility companies. In an ideal deregulated world, with an ISO in place, cheap power could be “wheeled” on the network from a far-away plant in a place like Idaho to a business here requesting the service.
But the prospect of a deregulated marketplace is at least five years away, Harvey believes.
In the meantime, don’t expect the state’s big utilities to build additional generating capacaity until the free-market debate is resolved, Harvey believes. Building new plants now will only complicate the sticky matter of stranded costs, and who gets stuck paying for them.
Instead, look for wholesale merchant plants to fill the energy gap, Harvey says. Those plants built by independent ventures from outside the state will be gas-fired, and range from 85 to 175 megawatts per unit. Simple cycle combustion turbine plants can be constructed for $200 to $250 per installed kilowatt. Those plants are designed for peak periods when more power is required.
One of those quasi-independent power producers, LS Power Co., built a smaller 236 megawatt plant in Whitewater. LS Power turns around and sells the energy it produces to WEPCO. Another small-scale plant operates in the Green Bay area, and sells the power to Wisconsin Public Service Co.
Those gas-fired plants can be added in smaller increments, and can be constructed faster with less difficulty in siting. They are environmentally palatable, as they do not produce noxious materials the way coal-fired plants do, nor do they present the safety and operating problems of a nuclear reactor. They also use less water, do not require a railroad line, and are smaller in scale than traditional power plants.
What needs to happen now is for opposing factions to get on the same page, Baird’s Parker and Alliant’s Harvey both agree. Parker says politicians, regulators and businesses need to start operating from the same playbook.
What will bring those opposing factions together is customers, who could care less about the finer points of the electric power debate, Harvey says.
“Customers are interested in having the electic system meet their needs as they see them, and not as some monopoly, government regulator or special interest group sees them,” Harvey says. “Customers are going to say ‘Enough is enough, give us the energy we need at a price we are willing to pay.'”
That’s why customers will embrace a free-market approach as the ultimate solution to the state’s energy reliability problem.
July 1998 Small Business Times, Milwaukee