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Klappa: Power plant delays could cost consumers

By Brian E. Clark

MILWAUKEE – Dane County Circuit Judge David Flanagan sent shock waves throughout Wisconsin late last month when he overturned the state's approval of Wisconsin Energy's $2.15 billion coal plant project at Oak Creek.

Flanagan's ruling – which was appealed to the state Supreme Court Tuesday afternoon – turns the state's energy planning process on its head, critics in the utility industry charge. They contend it puts into question not only Oak Creek, but many other power projects as well.

"We are playing catch-up already and this throws a giant monkey wrench into our ability to catch-up," said Wisconsin Energy Chairman Gale Klappa.

On a blustery morning this week WisBusiness.com Editor Brian Clark interviewed Klappa in Milwaukee to get his assessment of the ruling and what it means for the his company and the Badger State.

Brian Clark: Did Judge Flanagan's decision take you by surprise?

Gale Klappa:
Yes. At least it did me for a couple or reasons. He found, in his mind, basic flaws with the Public Service Commission's procedures and processes. But on the most substantive issues, the judge agreed that the Public Service Commission took the right action. That is very important.

First, he reaffirmed the need for the new capacity. He said we need Oak Creek. So on that one, he is absolutely on line with the commission's order.

On the second issue, he agreed with the commission that coal was and is the lowest cost option for customers.

On the third issue, whether or not the environmental impact statement was done in accordance with state statutes, he agreed that it was done appropriately and thoroughly.

So if you think about the most important underpinnings of the effort here – does the state need the energy, is the fuel the right for cost and was the environmental review done appropriately - he absolutely affirmed the commission's order.

He also rejected Calpine's argument that its natural gas option was less expensive.

So if you think about the most important public policy issue, the judge had no quarrel with our proposal or the commission's order allowing us to go forward.

Clark: The judge ruled that the commission broke state law by not requiring your company to propose an alternate site for Oak Creek and for not taking into account the cost of power lines for the new plants. Your company must have some pretty high-caliber legal advice. How could this have happened?

Klappa: We do have legal advice. (chuckle.) The judge is making an interpretation of statutes here that simply does not reflect the practice of the commission. We have been working with the PSC for four years on this whole proposal. If you look at the sites approved and their alternatives, all the companies (including Calpine and Wisconsin Public Service) that have projects approved have done the same thing with different proposals separated by short distances. Calpine's proposal, approved in June of 2003, is separated only by a railroad track going through the middle.

We have is a difference of interpretation between the judge and the commission on what constitutes an appropriate alternative site proposal. Wisconsin Public Service's proposal near Wausau, was – like ours – was for a brownfield site. Essentially, they had two different proposals separated by about a quarter mile.

If you look at how the commission has – appropriately, I think - analyzed alternative site proposals, we have all done the same thing. There is nothing unusual about the Oak Creek site. What the judge is looking for is much more diverse sites.

We all have real concerns with the judge over the second part of the alternative site ruling as well. If you read it literally, you not only have to have sites that are diverse, but they must have all the environmental approvals for all those sites.

That has never been the way business has been done in Wisconsin for getting a power plant approved. I don't know of any other state that works that way, not even in California.

Clark: Didn't the judge say you also failed to take into consideration the cost of the transmission lines?

Yes, he brought that up. The statute the commission is trying its best to comply with applied when the utilities in the state were responsible for their own transmission networks. Five years ago, if a utility went to the PSC to build a plant, they would have taken a transmission plan as part and parcel of the process. American Transmission Company now owns and operates the transmission network in Wisconsin and the Upper Peninsula of Michigan. We do not have accountability for transmission anymore. We can't say what transmission will cost. The way the commission has dealt with this question has been consistent and predictable. The judge is saying he doesn't agree with that process.

Clark: If upheld, what effect will it have on Wisconsin Energy's plans? And what will it costs consumers?

I hate to think about that, to be honest with you. Clearly, there are broad public policy implications to this ruling. If it is upheld, the most significant power projects we have worked on for years to improve the infrastructure of the state and get it where it needs to be are very much called into question. We might all have to go back to ground zero and that would be incredibly time consuming.

Moreover, the DNR does not have the time or the staff to review all alternative sites and grant permits in any kind of timely fashion. We'd have to grow the DNR staff exponentially. The time involved would be double or tripled. And we started on Oak Creek in 2000.

Clark: What would the cost be to consumers?

We don't know, but we negotiated very good contracts with the Bechtel Corp. They went out and locked in prices for steel, concrete and equipment. Bechtel has informed us that many different types of steel products are now up between 30 and 60 percent since we signed the contract. We are estimating a one-year delay will cost about $150 million. That's if we cannot break ground by May 1. This would have very dramatic impacts to customers. My broader concern is how to keep the lights on until '09. What do I say to Charter Steel, one of our biggest customers, when they are thinking about expanding north of Milwaukee? What do I say to the Medical College of Wisconsin when the chairman calls and asks if he will have the electricity he needs for a major expansion of medical research facilities west of Milwaukee? What do you say to businesses that want to grow here?

Without that capacity in '09, our forecasts show that our reserve margins go to 5 percent or less in the state. In layman's terms, that carries with it the incredibly high probability of blackouts. The commission here requires utilities to have an 18 percent reserve margin. A 5 percent margin is scary. It does not promote growth or jobs being created in Wisconsin.

Clark: How about bringing in power from outside?

That's not a very good alternative. The transmission network is already deficient. We only have four major transmission lines in and out of the state and they are all fully loaded. You can't get transmission rights to bring in 15 megawatts for the summer of '05. We are talking about more than 1,000 megawatts.

Clark: How quickly will this be back in court?

This week. We will ask for an expedited review by the appellate court. We will also ask state Supreme Court to take up the case. (NOTE: This interview took place the day before the appeal filed Tuesday)

Clark: How long will this delay Oak Creek in a best-case scenario?

Best case, we will still break ground in May. I hope the courts will see the public policy urgency of this case.

Worst case, it could be years.

Clark: Sen. Robert Cowles, R-Green Bay, has suggested doing away with the alternative site requirement. Is there a legislative solution?

I think we looked at two different sites. The Legislature needs to look at the issue of whether you need an alternative location if you are proposing additional capacity for an existing brownfield site. I can understand and support the reasoning on greenfield sites. But we've been generating electricity at Oak Creek for 50 years.

Clark: How strong is the demand for electricity?

It has historically grown by 2 to 3 percent a year. Yes, we've had a soft economy and a couple of very mild summers. And yes, conservation and alternative energy can play a role. But there is nothing I see that doesn't indicate demand will continue to grow by 2 to 3 percent annually. We are at a point where we need big, workhorse plants that run 24/7 for additional baseload capacity. That is the best way to economically meet customer demand. I think even our opponents would agree that we need baseload capacity. Those workhorse plants have not been built in this state since 1984, so we have been living off that for 20 years and the need is compelling.

What we can do is throw up peaking units that use natural gas. They are quick to construct, but very expensive to operate. The fundamental fact is that the need for baseload capacity is not going away, unless the economy goes into and stays in the tank. And no one wants that.

Clark: What about natural gas?

Technologically, it can be the solution. But not practically. We are building natural gas- fired units at Port Washington, but for intermediate, not baseload use. A number of peaking plants, which are gas-fired, have been built in this state in the past decade.

If we say we give up and that we will build gas plants at Oak Creek and use them for baseload needs, that decision alone would increase the amount of natural gas used in the entire state by 25 percent. We have pipeline constraints as well, so that system would have to be expanded. It would have a whole new set of environmental requirements. It also would put pressure on our manufacturing customers who need natural gas in their processes. Our large industrial customers are begging us not to add a lot of natural gas demand. It would put a lot of upward pressure on natural gas prices, which are volatile. Coal is better economically.

Clark: Are nuclear power plants in the future?

At this point, it is illegal to even think about that in Wisconsin. (chuckle) There is a state law that says until the federal government opens up the nuclear waste depository for spent fuel, no new nuclear power plants will be built.

At some point, in my opinion, if global warming continues to be an issue and natural gas price volatility and supply continue on the track they are on, then we will have to get serious about our other options. I think nuclear will play in that mix. But that is not a solution for our Oak Creek problem.

Clark: Is there any way to make coal less of an environmental problem?

Yes, and we have proposed to build into the Oak Creek site – besides two coal-fired plants – a large chemical plant that will eliminate the lion's share of emissions, including mercury. If we are successful in bringing the Oak Creek units on line, we will generate more power while reducing emissions by 50 percent. There have been huge technological advances in recent years. It just is not well understood in this state that you can build a new plant and have a very clean environment.

Clark: With all the management changes in the last year, are there any more reorganization plans in the works?

Nothing significant, though we are always tweaking things. I pretty much have the team in place that I want with people from the inside and some from outside. An example is Rick Kuester to head up our generation business. He is one of the few people walking around who has nuclear experience and very recent experience building coal-fired plants.


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