Regulators say Wisconsin Energy plan raises big questions

In a filing sure to set off a tough regulatory and legislative struggle, Wisconsin Energy Corp. Thursday asked the Public Service Commission to rule a new generation affiliate can build 1,700 Mw of merchant generating capacity within its electric utility's service territory under existing state law. Wisconsin Energy is also asking for permission for Wisconsin Electric Power Co., its electric utility subsidiary, to spin off existing fossil fuel generation assets to the generation affiliate.


In a filing sure to set off a tough regulatory and legislative struggle, Wisconsin Energy Corp. Thursday asked the Public Service Commission (PSC) to rule a new generation affiliate can build 1,700 Mw of merchant generating capacity within its electric utility's service territory under existing state law.

Wisconsin Energy is also asking for permission for Wisconsin Electric Power Co., its electric utility subsidiary, to spin off existing fossil fuel generation assets to the generation affiliate. The proposal is part of a 10-year, $6 billion expansion plan the company reported in September.

The request "raises big, big issues" about market power and stranded costs among other questions, said Annemarie Newman, a PSC spokesperson. The submission appears to fly in the face of the conclusions of a PSC-ordered study which recommends the generation assets owned by Wisconsin Electric Power Co. (WEPCO) be sold off to three independent owners to reduce market concentration.

Submitted to the PSC earlier this month, the study concludes potential exists for the exercise of market power in Wisconsin and recommends the state institute several measures, including divestiture, to create a "workably competitive retail" market. The PSC is preparing its own market power study that will be submitted to state legislators in January.

Wisconsin Energy is proposing the generation affiliate will supply Wisconsin Electric with power to serve its retail customers under a long-term purchased power agreement, which would be subject to PSC and Federal Energy Regulatory Commission review.

The price of electricity from existing plants would be set under traditional utility cost-of-service regulations, while electricity generated by the proposed plants would be calculated as if the new capacity were owned and operated by a third party merchant power company.

Under current rules, Wisconsin Electric can propose to build cost-based generation within in its service territory and its parent can build merchant plants outside that territory. Some observers have suggested Wisconsin Energy's proposal will require legislation before the company can proceed with the plan, Newman said, because, for example, present regulatory structure doesn't provide for a purchase power agreement.

In its filing, Wisconsin Energy says that even if it builds the additional generation, Wisconsin Electric, will remain a "large and serious buyer" of capacity and energy from independent power producers building plants in Wisconsin and elsewhere. By 2010, Wisconsin Electric will be need about 1,000 Mw of merchant generation, about twice as much power as it buys from merchant power plants today, the company said.

The company's plan envisions the construction of at least one 500 Mw combined cycle, natural gas-fired unit and at least two 600 Mw coal-fired units over the next 10 years for a total of 1,700 Mw of new capacity. Construction of the initial power units is expected to cost about $2 billion.

The plan also includes a proposal to spend more than $1.3 billion over a 10-year period on the company's existing generation, as well as the retirement of older, less-efficient coal-fired units.

Following regulatory and environment approvals, WEC said plans to begin construction of a natural gas-fired combined cycle unit in 2003 with completion in 2005. The first coal-fired unit would break ground in 2004 with a projected in-service date of 2007. The additional units would be brought on-line between 2009 and 2013.

In addition to adding generating capacity, the plan calls for spending $2.7 billion on maintaining and upgrading the electric distribution system.

Wisconsin Energy Chairman Richard Abdoo said the proposal will help the state meet its critical electric energy needs by supplying customers reliable, quality, and reasonably priced energy services. The state's largest energy company, Wisconsin serves more than 1 million electric and 940,000 natural gas customers in Wisconsin and Michigan's Upper Peninsula through its primary utility subsidiaries Wisconsin Electric, Wisconsin Gas, and Edison Sault Electric.

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