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Questions of size, power still dog Wisconsin utility giant

By LEE HAWKINS JR. , Milwaukee Journal Sentinel

November 07, 2000 (Knight Ridder/Tribune)—Ever since Wisconsin Energy Corp. sought a marriage with Northern States Power Co. in 1995, the company has been dogged by accusations that it controls too much of the state’s market for the generation of electricity.

In May 1997, those concerns killed the deal that would have created a new company called Primergy.

But even with Primergy dead and buried, the worries lived on. And last week, they were voiced again.

A Boston-based research firm released a study Tuesday that concludes the utility, which controls between 30 percent and 60 percent of the state’s power generation market, could take advantage of its market dominance to raise prices.

The renewed debate comes as regulators, utilities and business interests move to fix the state’s struggling electric power system. The booming economy, and with it the increased use of computers, has boosted demand to the point that it is beginning to outstrip supply. The state faces two problems: not enough generation and constrained power lines that make it hard to import power from elsewhere.

Today, the Primergy deal is considered one of the most memorable major utility combinations ever considered by the Federal Energy Regulatory Commission. That is mainly because of the agency’s pointed skepticism.

“It is still the only proposed merger that FERC has rejected in the electric utilities industry,” said Lee Cullen, an attorney for Customers First!, a consumer activist group. Cullen was an outspoken opponent of the Primergy deal.

“It was a big issue during early industry discussions on restructuring, and it continues to be,” Cullen says.

A major conclusion in the study — that the company should sell some of its plants to protect consumers — has renewed the controversy, forcing a discussion among utilities and state officials about how to address the issue.

As policy-makers decide how best to deal with a changing landscape for the sale and delivery of electric power in Wisconsin, utilities are working aggressively to change some of the key regulations imposed by the state.

Consumer groups chafe at such talk.

But on this everyone agrees: Wisconsin is not ready for outright deregulation, in which consumers would choose their own power companies much as they now choose their long-distance telephone providers.

Utilities and consumer groups alike say that there is not enough competition in the power generation side of the business here and that the system to transmit power is inadequate.

Wisconsin Energy executives say the answer to the market power equation is not to break up their company.

The study doesn’t consider broader implications of such a move, including the effects on workers, shareholders and customers, the company says. Forcing Wisconsin Energy to sell some of its generation capacity would gradually lead to the demise of the company, Wisconsin Energy contends.

“Once you split the assets up into so many segments, it really wouldn’t have the size to survive,” Wisconsin Energy spokesman Michael John said. “And it would probably end up being purchased by out-of-state entities.”

The company’s proposed alternative: a $6 billion plan to build three power plants in the state that would guarantee energy prices by making long-term contracts with customers.

Tabors Caramanis & Associates, a consulting firm based in Cambridge, Mass., that deals with utility issues, prepared the study for the state Public Service Commission after the state Legislature last year ordered the PSC to do the study. It cost $149,000.

Legislators wanted to know how likely it was that dominant companies would raise prices — or “exercise market power.” The agency is required to make a presentation to lawmakers by the end of the year.

The team of researchers concluded that long-term contracts alone would not be enough to alleviate the concerns about Wisconsin Energy’s dominant position in the market. They said such contracts would help consumers, as would encouraging independent power producers to build and sell power in Wisconsin.

But the study concluded that some of the company’s power plants would still need to be sold.

The prospect that the utility could leverage its dominance to raise prices has been a concern since the mid-1990s, but this debate is different, John said.

“The word market power is similar, but what is totally dissimilar is the fact that, this time, we have stated that there is a power problem in Wisconsin and we have proposed a mechanism to solve that problem,” John said.

“And we have addressed the issue of market power by ensuring continued regulatory control and long-term contracts.”

Market power had serious implications in the state’s utility market in the past, and it will be one of the central issues addressed over the next year by the Public Service Commission, said Jeff Butson, an agency spokesman.

The issue’s significance was demonstrated when regulators brought it up in the Primergy merger, Butson said.

At the time, both companies concluded that they could not continue with plans to create the $6 billion Primergy Corp. without knowing an end to regulatory gridlock was in sight. Executives pulled the plug on the combination two days after the Federal Energy Regulatory Commission said it would not approve the merger without modifications.

One suggestion was that the companies sell an undetermined number of power plants — most likely Wisconsin Energy plants in eastern Wisconsin — because of concerns that the merged company would control too much of the electricity market in the upper Midwest.

In 1995, the Public Service Commission also identified market power as a key issue with reference to Wisconsin Electric Power Co., a Wisconsin Energy subsidiary, in a study analyzing the future of Wisconsin’s electric power industry.

The agency resolved: “If the power pool does not operate efficiently because of the potential for market power or other factors, there is potential for power plants to be dispatched inefficiently, for electricity prices to be artificially high and for more power plants to be built than necessary.”

But although the market power issue is still being discussed, times have changed.

Wisconsin Energy executives say the Primergy merger gave them a chance to think the issue through and come up with a strategy to overcome skeptics’ questions.

“This is different. It isn’t about a merger or capturing customers in another state,” Wisconsin Energy’s John said. “We are going to look at the study more closely, line by line. But from what we’ve read, we believe we’ve answered the market power question.”

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© 2000, Milwaukee Journal Sentinel. Distributed by Knight Ridder/Tribune Business News.