Wisconsin PSC looks at coal-related issues in WEPCO rate case

The Wisconsin Public Service Commission is nearing a decision on several contentious issues, including cost overruns for the two new Elm Road coal units, within a rate case by Wisconsin Electric Power (WEPCO) and Wisconsin Gas LLC.

These companies, collectively known as We Energies, filed on March 23 for authority to increase electric and steam rates on Jan. 1, 2013, and on Jan. 1, 2014, and to decrease natural gas rates on Jan. 1, 2013. They are units of Wisconsin Energy (NYSE: WEC).

“The major projects driving the requested electric increase for 2013 and 2014 include environmental upgrades at the Oak Creek power plant that will go into service in 2012, the Glacier Hills wind project that went into service in December of 2011, the Rothschild biomass facility scheduled to go into service in September of 2013, and a new solar project scheduled to be finished in October of 2013,” said a briefing paper filed with the commission on Nov. 1 by commission staff. “Other drivers of the electric increase relate to the requested incremental recovery of Power the Future lease billings for the Elm Road Generating Station (ERGS) to reflect total construction costs, increased carrying costs associated with higher deferred regulatory balances, and increased operating and maintenance (O&M) expenses and capital spending to upgrade an aging distribution infrastructure.”

The briefing paper outlines the positions of various parties to the case and the decision options that the commission has before it in each of the contested parts of this case.

One example issue is a question about the proper allocation of the costs to operate the coal-fired Valley plant between the steam and electric utility operations, which had been deferred to this rate proceeding from the last WEPCO rate proceeding. The Valley plant was built primarily for electric generation and the commission has in the past approved a cost allocation method that assigned certain costs to steam customers. Since that time the economic value of the Valley plant has significantly diminished, especially since the start of the Midwest Independent Transmission System Operator (MISO) energy market.

A Citizens Utility Board (CUB) witness has testified that steam customers are not paying their fair share of the cost to generate steam used by WEPCO’s steam customers. WEPCO witness Allan Mihm testified that the Valley plant is still necessary for electric reliability and the current cost allocation is still appropriate.

The Valley plant is located in downtown Milwaukee. It consists of four steam boilers each capable of producing 650,000 pounds per hour of high pressure steam. This high pressure steam drives two steam turbine generators with a combined electric output of about 280 MW. Unit 1 was placed in service in 1968 and Unit 2 was placed in service in 1969.

WEPCO spent big legal money due to Elm Road problems

Another example issue is a series of cost overruns for the two new ERGS coal units, which are due to factors like legal costs to defend a plant permit from environmental group appeal and legal costs for WEPCO to battle with project builder Bechtel Power about various issues.

In its November 2003 decision authorizing construction of the ERGS units, the commission addressed the issue of potential construction cost overruns, the staff memo noted. The commission set an authorized total cost for construction of the ERGS units of $2.191bn, The commission limited recovery of any cost overrun to 105% of the total authorized cost, if the expenses are prudently incurred. Force majeure items must also be prudently incurred to be recovered in rates, but are not counted in the 105% calculation. One of the issues in the current case is what is the correct definition of force majeure to be used for determining the ERGS approved amount.

“On December 20, 2008, Bechtel submitted a claim for cost and schedule relief related to weather, labor, and WE Power caused delays,” the memo noted. “It reserved their rights to make additional claims and sought delays in the guaranteed in-service dates for both ERGS Units 1 and 2. On October 30, 2009, Bechtel updated the claim through July 23, 2009, to a total amount of $517.3 million and 10 months schedule relief for unit 1, and 7 months schedule relief for unit 2. In response to this claim, WE Power retained various legal counsel and outside experts to dispute the claim. The cost is $12,094,893.”

WE Power believes it needed a range of expertise to defend against the claim and keep the costs to WEPCO customers low, the memo added. “In its initial brief, CUB argues that since the majority of Bechtel’s claim was for weather impacts, and the company had a strong defense for the labor incentives claim, it was imprudent for WE Power to spend $6.8 million in litigation costs to defend against the labor incentives portion of the Bechtel Claim. CUB states the Commission should not require ratepayers to pay the $6.8 million in litigation costs associated with the labor incentives portion of the Bechtel Claim.”

WEPCO is also seeking recovery of litigation costs associated with the ERGS Wisconsin Pollutant Discharge Elimination System (WPDES) permit, the vacation and reinstatement of the ERGS Certificate of Public Convenience and Necessity (CPCN), and defense against the Bechtel claim. This cost item relates to internal WEPCO resources. The amount at issue is $1,063,252, the memo said.

In November 2003, after the commission issued its final decision authorizing the construction of ERGS, several interveners petitioned for judicial review of the decision in Dane County Circuit Court and a year later the circuit court vacated the final decision. The court’s ruling was appealed. A bypass and expedited review from the Wisconsin Supreme Court was sought. The Wisconsin Supreme Court reversed the circuit court and reinstated the CPCN on June 28, 2005.

Under the EPC contract between WE Power and Bechtel to construct ERGS, WE Power was required to issue a Full Notice to Proceed (FNTP) to Bechtel by March 15, 2005. Because the circuit court had vacated the final decision, WE Power could not issue the FNTP, exposing WE Power to specified daily increases in the EPC contract price. WE Power negotiated two extensions of the deadline for the issuance of the FNTP. The extensions included an increase in the contract price for each day of delay beyond March 15, 2005. After the state Supreme Court’s decision reinstating the Commission’s Final Decision, WE Power issued the FNTP on July 29, 2005.

“The increased cost under the EPC contract due to this delay was $41,224,265 plus $3,637,816 in litigation expenses and costs for internal resources required to manage the project for longer than originally intended,” the memo said. “The total additional cost attributable to the delay was $44,862,081.”

Elm Road, located at the site of the existing Oak Creek coal plant, consists of two supercritical pulverized coal units, each sized at 615 MW. Turnover and achievement of commercial operation of Unit 1 (including common systems) and Unit 2 was completed on Feb. 2, 2010, and Jan. 12, 2011, respectively.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.