WEC Energy discussed building liquefied natural gas (LNG) projects with the Wisconsin Public Service Commission before submitting an application, according to emails obtained by the Energy and Policy Institute.
WEC Energy Group’s Executive Vice President for External Affairs Bert Garvin emailed several PSC staffers in April and May to set up a meeting to “discuss our interest in potentially constructing liquefied natural gas facilities to address all three of our Wisconsin gas utilities.”
“We have pipeline supply challenges and this solution could address those challenges in a cost effective manner,” Garvin continued. “We would like to discuss our current LNG facilities (which are old); why building more LNG may make sense and ownership structures” (emphasis added).
A spokesperson for the PSC said, “The meeting did occur. They discussed what PSC filing requirements exist for constructing liquefied natural gas facilities in Wisconsin.”
Garvin was a member of the Public Service Commission from 2001 to 2007.
Since the discussion between WEC Energy’s lobbyist and other company executives with commission staff occurred before the LNG intentions were made public in a regulatory filing, it is not considered ex parte communication under Wisconsin law. Ex parte rules exist to ensure that all parties in a proceeding have a fair shot to make and respond to arguments, without one party getting a leg up through private conversations. Even if the private discussion did occur after a docket was open, it would not be an ex parte communication in Wisconsin, since the state’s ex parte law applies only to the commissioners and the hearing examiner. In 2013, utilities lobbied the state legislature to pass AB 214, which changed the ex parte rules and allowed commissioners’ executive assistants to have unilateral conversations with parties that don’t become part of the public record. However, these types of conversations are frowned upon by some in the regulatory community. Virginia Commissioner Mark Christie taught a session on ex parte communications at the 2016 Mid-Atlantic Conference of Regulatory Utilities Commissioners. Christie said it is best for commissioners and staff to avoid policy discussions with companies outside of scheduled hearings.
Recent reports from analysts and clean energy advocates suggest that the gas investments, which WEC Energy is requesting that its customers fund, could be less economical than cleaner alternatives and incompatible with Governor Evers’ climate goals.
Expanding gas infrastructure part of $15 billion five-year capital plan
On November 1, WEC Energy subsidiaries We Energies and Wisconsin Gas filed an application with the PSC to construct and place in service two new LNG peaking facilities in southeastern Wisconsin. The LNG peaking units are slightly different from LNG storage facilities, such as WEC’s Bluewater storage asset. According to the utilities’ application, “Underground storage facilities provide baseload natural [gas] supplies throughout the winter months, typically from November through March (150 days) … By contrast, LNG peaking facilities like those proposed provide supply during short periods of exceptionally high demand, typically less than ten days during the winter.”
During an earnings call with investors on November 5, Executive Chairman Gale Klappa discussed the need for the projects and added that the LNG facilities are part of the company’s five-year capital plan in which it expects to invest $15 billion. “We have identified three key areas for increased investment. First, we plan to expand our regulated natural gas infrastructure to meet growing customer demand. In particular, Wisconsin needs more natural gas peaking capacity at the highest demand times on the coldest days … to address the demand, we are planning two liquified natural gas facilities in our service area.”
The projects have a total estimated cost of $370 million, which the WEC Energy subsidiaries will recover – along with a profit margin – from customers’ utility bills.
WEC Energy’s gas infrastructure driving increase in revenue for shareholders
In June 2016 at a JPMorgan energy conference, then-WEC Energy CEO Allen Leverett told Wall Street analysts,
“We will have much more of a focus on addressing natural gas infrastructure and growing the natural gas business. I think, given — in terms of the ability to deploy capital and consistently earn your rate of return, I think that’s a much more straightforward proposition right now with the natural gas business than it is with electric.”
Leverett’s remarks have proven true. The Milwaukee-based utility holding company has significantly invested in natural gas infrastructure in recent years and in return, has generated millions in revenue that have contributed to WEC’s net income increasing from $640 million to $1.06 billion since 2015.
Klappa, the current CEO, has also expressed in recent months his desire of wanting to continue the company’s investments in natural gas infrastructure.
Last October, in New York City at the Wolfe Research Utilities & Energy Conference, Klappa drew attention to the recent gas explosion in Boston, using it to make the case for further gas investments. He said, “the very critical need to upgrade the natural gas distribution systems in our country are driving a fair amount of capital spend for us and capital investment opportunity for us in the natural gas distribution business … 42% of the $11.8 billion in our capital plan over the next 5 years is dedicated to expanding and upgrading the quality for our natural gas distribution system.”
At a Barclays Energy Power Conference just weeks before the Wolfe Research conference, Klappa talked about how customers in the Midwest have historically relied on propane, and the opportunity his company sees when customers switch off of propane and onto the WEC Energy natural gas network. “Once you’re hooked into our network, you don’t got to do anything but pay the bill. So there’s convenience, there’s price, there’s security. And we’re seeing good customer growth as a result, 2%, 2.5% customer growth each year.”
More recently, Klappa’s appetite for expanding the gas business segments was on display with investors. During a quarterly investor call on August 5, 2019, a Bank of America Merrill Lynch analyst asked WEC Energy executives about any future natural gas storage opportunities that the company might pursue.
Klappa said, “We would very much like from a strategy standpoint to own more storage to take volatility out from our retail customers. This would strictly be storage for our retail gas customers, and Bluewater is a great example … but it has to be gas storage that fits our needs and has to be gas storage that on which we can earn our predictable, reasonable rate of return.”
WEC Energy’s 2017 Bluewater LNG acquisition
In February 2017, WEC Energy purchased Bluewater Natural Gas Holdings company and its LNG storage facility. The company submitted an application to the Wisconsin PSC. It proposed to recover the purchase cost of $230 million, along with annual operations and maintenance expenses, through 60-year storage service agreements with its gas utility subsidiaries in Wisconsin.
After pushback from commission staff and consumer groups, WEC amended its proposal to 30-year contracts. The commission approved that proposal in June 2017 by a 2-1 vote. Commissioners Ellen Nowak and Mike Huebsch voted in favor of the plan, while Commissioner Lon Roberts issued a dissent. Roberts said WEC placed the burden of risk entirely on the ratepayers if the benefits of the storage service agreements do not materialize, and the shorter 30-year term “does not go far enough” in shielding ratepayers from financial risk.
Roberts further said, “The natural gas industry has undergone significant changes in the past 60 years, from regulatory, economic, and engineering perspectives. I am uncomfortable approving a proposed transaction based on modeling that does not, and perhaps cannot, account for the same type of disruptive industry changes. Even a 30-year term for the proposed transaction is too long.”
Will WEC Energy’s gas investments become stranded assets?
WEC Energy’s buildout of fossil fuel infrastructure in the Midwest comes at a time when experts are warning regulators to protect customers from risky investments, and when Wisconsin state policymakers are currently identifying ways to mitigate and adapt to the effects of the climate crisis as part of Governor Evers’ Task Force on Climate Change. Lt. Governor Mandela Barnes is chair of the task force and recently said he and the members will be taking a holistic approach but the priority is to “drive us to a clean energy future, simply put.” California, New York, Hawaii, Colorado, and Maine all have economy wide carbon-neutrality goals.
“There’s no pathway to stabilizing the climate without phasing gas out of our homes and buildings. This is a must-do for the climate and a livable planet,” said Sierra Club’s Rachel Golden in a recent USA Today article that examined local governments banning natural gas hookups to new construction.
Several Rocky Mountain Institute (RMI) reports analyzed the need for natural gas infrastructure projects. In September, RMI published two reports titled, “The Growing Market for Clean Energy Portfolios” and “Prospects for Gas Pipelines in the Era of Clean Energy.” RMI found that because wind, solar, and energy storage technologies are cost-competitive with new natural gas power plants, both new gas plants and pipelines will face stranded cost risks.
Just as relevant to WEC’s investments in its gas distribution network and peaking facilities is RMI’s 2018 report, “The Economics of Electrifying Buildings.” The RMI researchers found that electrification is cost-effective for customers who replace both a furnace and air conditioner simultaneously, for most new home construction, and for customers looking to switch away from propane:
“Although these represent less than 10% of US households, they account for more than 20% of space and water heating emissions. Electrification is very cost-effective for propane customers, and has a comparable cost to heating oil depending on local pricing. Electrifying these homes in the near term can build scale and market maturity to support even more widespread electrification in the future.”
250,000 people in Wisconsin currently depend on propane to heat their homes.
In a recent Greentech Media op-ed, RMI Managing Director Bruce Nilles and Principal Mark Dyson write, “while the gas industry adds one new retail customer every minute, these same customers will end up bearing the brunt of gas infrastructure investments for decades to come.”
The RMI electrification report recommended that regulators, policymakers, and utilities prioritize rapid electrification, and that they stop supporting the expansion of the natural gas distribution system for residential and commercial buildings.
Together, the RMI reports point to a consistent theme that expanding any gas infrastructure is both economically risky and incompatible with climate change goals.
Photo source: YouTube, https://bit.ly/33WxXak