We Energies customers could face balloon payment

State regulators to decide on rate proposal Thursday

The two-year rate freeze proposed by We Energies’ parent company comes with a catch: At the end of that period, electric customers would face the utility equivalent of a balloon payment on a mortgage.

The payment is projected to total $487.3 million by the end of this year and $850.8 million by the end of 2019.

It represents “the largest single driver of any future electric rate increase” for We Energies’ customers, WEC Energy Group, the parent company, has acknowledged.

The payment stems from deferred costs — some going back as far as 2002 — that are primarily related to the utility’s transmission system and a power plant in the Upper Peninsula of Michigan.

When customers should begin paying the costs, how the costs should be rolled into customers’ bills and whether customers should pay the full costs are among the issues state regulators

will be dealing with when they decide Thursday whether to approve the proposed rate freeze for electric and gas customers of We Energies and Wisconsin Public Service.

If approved, We Energies electric rates — excluding fuel costs, which fluctuate — will have remained unchanged for four years. And six years will have passed since its last significant rate increase.

But the freeze also hinges on continuing to put off the almost $500 million in deferred costs that We Energies contends it eventually should collect from customers.

It also would come at a price: The $487.3 million in deferred costs — now set aside in several different escrow accounts — is projected to increase by $153.1 million next year and by an additional $210.5 million in 2019.

The increases include operating costs not included in current rates and carrying costs on the accounts.

We Energies has proposed recovering the projected increase in the accounts — a total of $363.6 million — over 50 years, shifting the cost to future customers.

“They want to be able to say they froze rates and yet bill people down the road,” said Thomas Content, executive director of the Citizens Utility Board, which represents residential and small business utility customers in utility rate cases.

We Energies now has the seventhhighest residential electric rates out of 49 utilities in the Midwest, according to the Citizens Utility Board.

That’s not including the $487.3 million in deferred costs.

Wisconsin Public Service’s residential electric rates, in contrast, are in line with the Midwest average.

We Energies rates increased after the utility built two new units at its coalfired power plant in Oak Creek and spent heavily on wind farms, emission control equipment for its older plants and to upgrade its transmission system.

The staff of the Public Service Commission presented an array of options that would freeze We Energies’ and Wisconsin Public Service’s electric and gas rates through 2019 without shifting costs to We Energies’ future customers.

The Citizens Utility Board and many members of the Wisconsin Industrial Energy Group, which represents large industrial and commercial customers, contend that the utilities’ rates could be frozen for two years without the proposal to shift the deferred costs to We Energies’ future customers.

Also, the Initiative for Competitive Energy, a group formed to press state regulators to take a harder line on We Energies’ electric rates, contends that We Energies’ electric rates should be lowered and that the Public Service Commission should hold a full rate case, rather than considering WEC Energy Group’s proposed settlement.

For its part, WEC projects that We Energies would have to absorb $114 million in costs next year under the rate freeze. If charged to customers, that would work out to a 3.5% increase in rates. And Wisconsin Public Service would have to absorb $94 million in costs under the freeze.

The utilities, in other words, together would need to find more than $400 million in savings during the two-year freeze to maintain their current profits.

Further, WEC contends that if it were to recover that shortfall and also begin recovering the deferred costs in the escrow accounts over a six-year period, it would require an 11% rate increase.

In addition to freezing its rates through 2019, WEC Energy Group also proposes to:

Extend the earnings cap and revenue-sharing mechanism imposed by the commission on We Energies as part of its acquisition of Integrys Energy Group, the parent of Wisconsin Public Service, in 2015. It also would be expanded to include Wisconsin Public Service. The earnings cap has already generated $24 million in direct savings to customers, according to the company.

Make permanent We Energies’ and Wisconsin Public Service’s programs that enable large customers to buy electricity at basically wholesale prices once their use climbs above a certain threshold. The programs were put in place to give large customers an incentive to expand in Wisconsin.

The Citizens Utility Board opposes making the programs permanent, contending in part that it is a significant policy decision that should not be made without a full hearing.

“There should be more in the record on the impact on all customers, good and bad,” Content said.

Twenty-four large industrial and commercial customers, including Charter Manufacturing and Quad/ Graphics, support the freeze and the other elements of WEC’s proposal.

In its filing, WEC notes that the amounts in the escrow accounts represent actual costs incurred or revenues foregone by the company and that the Public Service Commission required the amounts to be put aside to be recovered by the company later.

“At some point, these escrow balances have to come into rates,” said Brian Manthey, a spokesman for We Energies.

The question is how and when the company collects the money.

We Energies is trying to find ways to do that while limiting the effect on customers as much as possible, Manthey said.

The staff of the Public Service Commission presented proposals that would lower the amounts in the escrow accounts or prevent them from growing while also freezing We Energies’ rates.

The Citizens Utility Board supports many of the PSC staff’s proposals. It also questions whether the full costs in the escrow accounts should be paid by customers.

WEC said the PSC staff’s proposals essentially expect We Energies to write off, or eat, $400 million. It also said that if the PSC accepts the staff’s proposals or those of the other parties, the commission should deny the freeze proposal and hold a full rate case.

WEC contends the outcome of a rate case would be a rate increase. Customer groups such as the Citizens Utility Board say that’s not a given.