We Energies seeks to pass on plant cost overruns

The We Energies Oak Creek power plant.

The We Energies Oak Creek power plant. Photo By Mark Hoffman

Sept. 30, 2012

The biggest construction project in state history went more than 8% over budget, and in the next two months state regulators will decide who should pick up the tab.

We Energies executives say the Oak Creek power plant is still a bargain compared with similar projects built around the country.

But critics say customers shouldn't be on the hook for tens of millions of dollars in legal fees the utility incurred while fighting court cases before the plant was built, and a contractor dispute that arose during construction.

The extra $177.6 million for the power plant, tacked onto a price tag of $2.191 billion, is one of the key issues facing the state Public Service Commission as it weighs how much We Energies can raise electricity rates in January.

We Energies and its partner utilities say the extra costs were due to delays from lawsuits as well as extreme weather conditions that stalled construction, among other factors.

Customer groups and the auditors at the Public Service Commission are trying to determine whether the extra costs should be passed on to customers.

Among their targets are attorney's fees that approached $13 mil lion that led to the settlement of a contract dispute between Bechtel Power Corp., the contractor on the project, and We Energies.

Representatives of the Public Service Commission staff said the commission may want to cap the amount of We Energies' legal fees based on high rates charged by lawyers - some of which exceeded $700 an hour.

The Citizens' Utility Board, meanwhile, is seeking to have $45 million trimmed because the utility signed a construction contract with Bechtel Power Corp. even though litigation was proceeding against the project.

That litigation, launched by S.C. Johnson & Son Inc. as well as Clean Wisconsin and the Sierra Club, led to a judge's decision that delivered a setback to the project in November 2004. Seven months later, a divided state Supreme Court voted in favor of the PSC and We Energies, and construction began the next day.

CUB consultant Richard Hahn said the utility shouldn't have given its contractor the go-ahead while the legal fate of the plant was in doubt.

The Dane County Circuit Court ruling that withdrew the construction permit for the project "is not a simple lawsuit as it was characterized by the company," Hahn said. "It's the primary basis upon which the company was allowed to build such a large project. Its revocation was not simple litigation to be ignored."

Utility executives defended the move, saying the company was aware that steel and construction prices were on the rise and keeping the contractor on the job was the right move.

Rising costs

Steel and construction prices rose after We Energies locked in its contract with Bechtel, to the point where a similar plant being built in North Carolina will cost one-third more than Oak Creek, chief executive Gale Klappa said during a recent investor presentation.

Utility executive Rick Kuester, who oversaw construction in Oak Creek, said that under its settlement with Bechtel, the contractor was paid $72 million after seeking claims of more than $500 million. Achieving a settlement that required the utility to pay 14% of the total potential liability was "a good investment" in terms of hiring consultants and attorneys.

The consultant fees and lawyers the company hired "were necessary to vigorously defend this claim in order to maintain a reasonably cost project," said Kuester. "In my view, when you're faced with a half-a-billion-dollar claim, you want to make sure you aren't penny-wise and pound-foolish."

Jeffrey Kitsembel, who led the PSC staff's review of the overruns, said the legal expenses overall appeared to be reasonable but added the commission may want to cap the legal fees.

The PSC had capped the project cost at $2.19 billion but allowed the utility the ability to go over that amount by 5%. The current case involves reviewing all of the extra project costs to determine whether they were prudent.

The overall rate increase sought by the utility would result in bills climbing by 5%, or $138 million, in 2013, and by 3.6%, or $104.1 million, in 2014.

The Oak Creek project was a primary factor in the rate increases We Energies customers have seen since 2005.

In addition to the higher construction costs, the utility is seeking in its current case to bill customers for other projects, including air pollution controls at the original Oak Creek power plant as well as construction of the Glacier Hills Wind Park and a biomass power plant in north-central Wisconsin.

Plant has been used less

The new power plant that's at the center of the overrun dispute is now among the most efficient coal-fired power plants in the country, We Energies says. But it has run little this year because of plant repairs, as well as the falling price of natural gas.

The utility is not billing customers for the repairs or the operating problems, but that could be an issue in a future rate case proceeding before the state PSC.

Because Wisconsin has ample power supply and the Great Recession cut demand for electricity sharply, the Oak Creek power plant hasn't been called on to run as often as the utility expected when it first proposed building the plant.

But the utility said the project was instrumental in helping keep power flowing across the Midwest this summer during one heat wave. The power plant was needed to run - and to deliver even more power than its typical maximum output - for two afternoons in early July, when air conditioners sent power use to high levels across the region, Klappa said.

Hearings

Public hearings on the We Energies rate increase proposal are set for Monday in Milwaukee and Brookfield. The first hearing is at 1 p.m. at the Ambassador Inn, 2301 W. Wisconsin Ave., and the second is at 6 p.m. at the Best Western Plus Midway Hotel and Suites, 1005 S. Moorland Road, Brookfield.

Customers who cannot attend the hearing can submit comments about the proposal on the Public Service Commission's website psc.wi.gov. Click on "public comments" and the case number 5-UR-106.

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