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Thursday, Jan. 24, 2008

Lights Out?

Why are we paying more for less?

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Wisconsin consumers are using less energy. That’s a good thing. But we’re paying more for that energy. In 2006, we paid a record amount—almost $19.5 billion, about $1.1 billion more than we spent in 2005. And experts warn that when the numbers come in for 2007, we’ll have yet another record-breaking year.

So what happened? Are conservation efforts working, but not enough to offset the skyrocketing costs of fossil fuels? Are we investing in the energy sources that will guarantee a steady supply of clean, affordable energy in the future? Can Wisconsin businesses incorporate these expenses, or will they be driven overseas? And are the utilities’ business practices, as well as the state’s energy guidelines, helping to bring down the cost of energy?

Wisconsin’s Energy Profile

The new numbers on energy use come from the Wisconsin Office of Energy Independence, which compiles statistics for the state’s use of all kinds of energy—petroleum, coal, nuclear power, electricity and renewable fuels such as wind, solar and biomass.

The agency found that after a long period of rising demand, energy consumption in Wisconsin decreased 2.1% in 2006. Residential energy use decreased by 5.9%, a mix of energy efficiency efforts, such as installing newer appliances and weatherizing homes, and a milder summer and winter that demanded less air conditioning and heating.

Yet residential electricity consumers aren’t being rewarded for their efforts to conserve energy. In fact, we’ll be paying more for power, at least in southeastern Wisconsin. Last week, the state Public Service Commission (PSC) finalized the electricity rates for We Energies customers for 2008 and 2009. Residential users’ rates will go up 5% in 2008 and 4.5% in 2009, while large manufacturers will see their rates go up 1.4% in 2008 and 1.5% in 2009. We Energies will earn a 10.75% profit during the next two years.

But the rate increase could have been worse. We Energies originally wanted to raise rates 28% this year—you read that right, 28%—but proceeds from the sale of its nuclear power plant in Point Beach will be used to cover the utility’s revenue shortfall. The almost $1 billion sale is a one-time-only deal, as We Energies doesn’t have another nuclear power plant to sell off in the future.

Brian Manthey, spokesman for We Energies, said that the rate increase is modest, and the utility’s customers will be spared the large rate spikes that have occurred in other parts of the country. “We don’t operate in a vacuum,” Manthey said. “If you look at other states, increases in energy costs have been much more dramatic than in Wisconsin. We’ve been fortunate.”

But Charlie Higley, executive director of the Citizens Utility Board (CUB), said that electricity rates have increased 60% since 1997, while inflation has increased 27% during the same period. “Given that price increase I’m not surprised that, even though we’re using less electricity, expenditures have gone up, or that the amount of electricity hasn’t been growing as much as it has been historically,” Higley said.

Yet residents aren’t the only ones feeling the squeeze. Todd Stuart, executive director of the Wisconsin Industrial Energy Group (WIEG), said that his members, mostly large manufacturers and papermakers, have been dealing with rate increases of 7% or more for years, more than twice the rate of inflation. He said that while health care’s steeply increasing costs have gotten the spotlight, energy costs have been rising just as steadily.

Stuart, who jokes about being “Mr. Doom and Gloom,” said that the price of staying in business may be too much for some companies on the edge. “We have seen 7% [rate] increases almost every year,” Stuart said. “At some point, it’s a perfect storm. When is that going to hit into our competitiveness? I think it already has to some extent. We’ve got health care costs that are growing at that rate, we’ve got electricity costs that are growing, and you’ve got other costs that are growing, and it’s making us less and less competitive.”

The Rising Cost of Fossil Fuel

Energy prices were pushed upward in 2006—and likely in 2007, although the data are not in yet—mainly because of the rising cost of oil. In 2002, a barrel of oil was about $25-$30; it hit $75 in 2006. Now, it’s hovering around $100 a barrel. This is driving up the cost of almost everything, from the food on our table to the cost of keeping the lights on to the way we commute to work or how we spend our spare time.

One positive result of the higher oil prices is that Wisconsin residents and businesses are driving less as a way to economize, the Office of Energy Independence report states. In 2006, the average statewide price of gasoline increased by 30.5 cents a gallon, to $2.626 a gallon. Gas is now about $2.84 in the Milwaukee area.

CUB’s Higley said that the cost of oil is also pushing up the cost of coal, which is the source of 70% of the energy used by Wisconsin’s utilities to create electricity. He said that the price of oil tends to drive the cost of other fuels, and that demand for coal is rising all around the world, which allows the relatively few producers of low-sulfur coal in the western United States to raise their prices.

“There are only a few coal companies that provide that [low sulfur] coal, so they have market power,” Higley said. “And generally, when oil prices go up to some degree, the coal industry will increase its prices just because it can.”

And if the price of coal goes up more than Wisconsin utilities project in their formal two-year rate requests, it is able to go back to the PSC and ask to raise rates for its customers in the interim. “We actually had a rate freeze for a while,” said We Energies’ spokesman Manthey. “But there were also fuel costs, called ‘carve out adjustments,’ meaning that we could go back to the [Public Service] Commission and make the case that these costs have changed and the commission could decide to add those costs to the rates. So even during the rate freeze there were times that we could present information about fuel cost increases.”

Not only are we spending more on gas and other fossil fuels, and could pay even more in the future, but that money is leaving Wisconsin. As David Jenkins, director of commercialization and market development for the Office of Energy Independence, put it, 95% of Wisconsin’s energy sources are from out of state—including oil, coal, uranium and natural gas—and money spent on those sources is leaving the state as well.

As the Office of Energy Independence report explained, “It is estimated that about two-thirds of Wisconsin’s energy expenditures leave the state’s economy, a significant drain of $13 billion, or about $5,800 per household. This exported state wealth was magnified by higher prices for all fuels, except natural gas, in 2006.”

Jenkins said that money could be put to good use to develop energy sources that could be produced in Wisconsin, such as wind or solar power. “It would have been nice to have had that amount of money invested in renewables,” Jenkins said. “We could have created jobs here, rather than overseas, and have a little more control over our destiny.”

To that end, Gov. Jim Doyle has set the “25x25 goals” for the state, or generating 25% of the state’s electricity and transportation fuels from renewable resources by 2025, as well as investing in research on renewables to capture business from other states. He has also convened a Global Warming Task Force, which will release its findings and recommendations this spring.

Investing in Old and New Technology

While Doyle’s goals may be worthwhile, they aren’t in total agreement with the policies put into place early in this decade, when utilities began upgrading their power plants and transmission lines, after power shortages in the late 1990s. Part of that includes We Energies’ Power the Future plan, the highlight of which is the $2.2 billion expansion of the coal-fired power plant in Oak Creek, as well as the switch at its Port Washington plant from coal to natural gas. At the time, it was estimated that energy demand would increase 2.6% per year, which justified the building spree.

We Energies’ Manthey said that the current building cycle only occurs every 25 years or so, to upgrade the state’s power infrastructure. “If you go back to just before 2000, there were serious reliability problems in Wisconsin, because there had not been an investment in transmission or generation,” Manthey said.

The costs incurred during the upgrades and expansion have been placed on ratepayers’ bills since 2005; part of this year’s rate increase is due to the Oak Creek construction. We Energies requested that ratepayers fork over $166 million for that coalfired plant in the coming two years, and they will be paying until the utility recovers its construction costs.

Yet some question if this investment in a coal-based power plant was the wisest decision, especially now that prices for fossil fuels have increased while demand for electricity is less than projected before launching the project.

“I think that they overforecasted demand,” said Katie Nekola, energy program director for Clean Wisconsin. Although We Energies’ growth has been flat in recent years, it’s still able to recover the revenue that it had projected it would earn. Put simply, because We Energies’ customers aren’t using as much electricity as the utility had forecast, the company is able to ask for more money in the future to recover its lost revenue. In a sense, customers can be penalized for using less energy. In last year’s rate request before the Public Service Commission, We Energies asked for $61 million more from ratepayers to cover that revenue shortfall.

Nekola pointed out the irony in We Energies’ argument that it needed to undertake the largest construction project in the state of Wisconsin. “I’m hearing two stories here,” Nekola said. “That [We Energies] needs to build more of these plants, and keep the old ones online, and yet they’re not selling as much electricity anymore, and they don’t expect to.”

To be sure, We Energies is attempting to build up its renewable portfolio, especially by investing in a wind farm in Fond du Lac County. But Nekola said that investment pales in comparison to the investment in the coal plant. We Energies asked for $42 million in its latest rate request to pay for the wind farm, about a fourth of what it requested for the coal plant.

“You’re paying far more for the coal plant than you ever will for wind projects,” Nekola said. Nekola said the state has to get serious about developing clean energy sources and conserving what we consume. “There are only so many supply-side solutions available to us,” Nekola said. “I think that we’re fooling ourselves if we think that we can produce our way out of this problem, rather than focusing on energy efficiency and conservation.”

Paying for Environmental Upgrades

But the expansion isn’t the only upgrade planned at Oak Creek. According to an agreement made with the Environmental Protection Agency, We Energies must comply with air quality standards at the Oak Creek plant. We Energies has decided to install sulfur dioxide and nitrogen oxide control technology on four of its existing units at the power plant.

In its filings with the Public Service Commission, which has to sign off on the request, We Energies estimates that the environmental upgrades will cost $820 million—a cost the company will pass on to customers in the coming years. Stuart of the WIEG said he’s afraid of a “perfect storm” brewing, as consumers pay off the Power the Future plan and then have to foot the bill for these environmental upgrades.

“Manufacturers can only eat so many cost increases,” Stuart said. “The utility can generally pass on most of their cost increases. That’s a big difference. If we haven’t passed that point already, there’s going to be a limit to what manufacturers can take in the form of increases and still be competitive in the world market.”

Stuart recommended that We Energies utilize an alternative form of financing available for utilities when making environmental upgrades. Stuart said that We Energies had lobbied for the law that created this form of bond financing—but using is it voluntary, not mandatory.

Stuart and others estimate that the alternative bond financing would reduce the $800 million cost by about $300 million, a significant savings for ratepayers. The catch, though, is that it would most likely reduce We Energies’ profits.

We Energies’ Manthey said the company is considering using the financing, but hasn’t made a decision yet. Sen. Robert Cowles (R-Green Bay), who authored the original bill, is working on new legislation that would mandate that utilities use this type of financing to reduce costs to their customers.

Katie Nekola, from Clean Wisconsin, said an expert hired by her organization put the total costs at around $1.2 billion, saying that We Energies is underestimating the costs of the upgrades. That cost, of course, will be passed on to customers.

Nekola called the units “old dogs”— the oldest one dates back to the 1950s— and said they should be shut down.

“Allowing these old boilers to limp along for another 20 years is just irresponsible, both in terms of electric rates to customers and in terms of getting serious about global warming,” Nekola said. She said that the upgrades are a mixed bag. While they will help to reduce the emission of sulfur dioxide and nitrogen oxide, they’ll also make those units less efficient. What’s more, the new technology will do nothing to reduce mercury or carbon dioxide emissions, and Nekola warns that the old units won’t meet standards to be set by a new mercury rule that’s currently in the works. That, in turn, will require more upgrades.

“It’s really a bottomless pit of expenses for the customers and I would contend that what they get out of it is not good—not good enough, anyway,” Nekola said. Nekola said that money should be invested in clean, renewable energy and technologies instead of being put into an aging coal-fired power plant.

“They could be investing this $820 million in clean energy, and that’s what they should be doing,” Nekola said. Two hearings will take place on Feb. 4, at 3 and 7 p.m., at the Oak Creek Community Center, 8580 S. Howell Ave. Comments can also be made online at www.psc.wi.gov.

What’s your take? Write: editor@shepex.com.

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