Wisconsin Electric Power Company Seeks Cost Recovery for Abandoned Coal-Fired Generating Plant

Wisconsin Electric Power Company (WEPCO) has asked the Federal Energy Regulatory Commission (FERC) for approval to recover in wholesale rates the remaining rate base of its Presque Isle Power Plant, a 359 MW coal-fired generating plant that WEPCO retired earlier this year. The FERC recently accepted the application, made it effective subject to refund, and established hearing and settlement judge procedures. Wisconsin Electric Power Company, 167 FERC ¶ 61,175 (2019).

WEPCO provides retail and wholesale electric service to customers in Wisconsin and the Upper Peninsula of Michigan. After more than 30 years as part of the WEPCO generation fleet, Presque Isle was retired in March for economic reasons. Sales of electricity to wholesale electric service customers at cost-of-service rates regulated by the FERC constitute approximately 5.5% of WEPCO’s electrical load. WEPCO is seeking to recover the unamortized balance of the plant in Presque Isle allocated to its wholesale electric service customers over Presque Isle’s expected remaining useful life.

Regulated utilities typically are permitted to include the cost of the plant in their rate base only during the period in which the plant is used and useful in providing the service at issue. Because it has been retired from service, Presque Isle is no longer used and useful in providing wholesale electric service. Nevertheless, WEPCO has argued on the basis of the FERC’s decision in Yankee Atomic Electric Co., Opinion No. 390, 67 FERC ¶ 61,318 (1994) (Yankee), that it should be permitted to recover the unamortized balance of Presque Isle from its wholesale customers because:

• The decisions to invest in Presque Isle in 1987 and to retire Presque Isle in 2019 were prudent.
• Presque Isle operated safely and reliably as part of WEPCO’s generation fleet for more than 30 years before its retirement.
• Retirement of Presque Isle in 2019 is expected to reduce costs to WEPCO’s wholesale electric service customers by approximately 2.6%. 

Cloverland Electric Cooperative, one of WEPCO’s wholesale electric service customers, opposes the application. Cloverland argues, among other things, that its power purchase agreement with WEPCO does not support recovery of costs of the Presque Isle plant after Presque Isle was retired, and that the amounts WEPCO is seeking to collect are excessive.

The circumstances in Yankee are very different from those faced by WEPCO. Most significantly, Yankee was a single-asset generating company that had no source of revenue other than that derived from sale of electricity under its FERC-jurisdictional power contracts. Each public utility that purchased electricity from Yankee was also a shareholder of Yankee. Moreover, each such purchaser was required by its power contract to pay its share of the total cost of service each month, regardless of whether the plant was producing power during that month, and to continue to make certain payments to Yankee even if the power contracts were terminated.

The FERC occasionally permits utilities to include construction work in progress in the rate base before a new facility has become used and useful as an incentive for construction of facilities with desirable attributes. The FERC may also authorize a utility to recover prudently incurred costs of certain facilities that have been abandoned due to factors beyond the control of the public utility. However, there are no generally applicable FERC policies under which a utility may continue to recover from captive customers the unamortized costs of a generation facility that it has retired prematurely. For that reason, WEPCO’s application for authorization to include the unamortized balance of Presque Isle in its rate base presents some interesting policy issues, including:

• Is it reasonable for a utility to continue recovering costs of an uneconomic generating station from captive customers after the generating station has been retired and, therefore, is no longer used and useful?
• Should the FERC authorize a utility to recover the unamortized balance of uneconomic coal-fired generating units to encourage early retirement of such units?
• If early retirement of a generating unit will reduce a utility’s overall cost of service, to what extent should the savings be shared between the utility and its captive customers?
• Is it reasonable for a utility to recover costs of a retired generating unit from its captive customers if the effect of the payment is to subsidize the utility’s participation in competitive wholesale electricity markets with its remaining generation units?
• Is it unduly discriminatory for a utility to recover from its captive customers the unamortized costs of an uneconomic coal-fired generating unit which it has retired if otherwise similar utilities lacking captive customers are unable to recover any of the unamortized costs of comparable generating units?

This proceeding may ultimately be resolved through a settlement agreement that does not explicitly address these issues. However, in the absence of settlement, FERC’s decision is likely to provide guidance on at least some of these issues. Any such guidance may affect the pace of retirement of older coal-fired generating units and, therefore, the pace of replacement by newer and more efficient generation, including solar and wind-powered units. In that event, this proceeding may have national implications.