Utilities, Mich. governor agree to sweeping UP energy settlement

By Jeffrey Tomich | 01/14/2015 09:01 AM EST

Michigan Gov. Rick Snyder yesterday announced a series of agreements involving the state, electric utilities in the Upper Peninsula and the area’s largest employer, aimed at stabilizing energy supplies in the region and sparing residents from a dramatic spike in electric bills.

The agreements were announced in a joint statement from the Republican governor and other parties involved, including Michigan Attorney General Bill Schuette (R), Wisconsin Energy Corp., Upper Peninsula Power Co., Invenergy LLC and Cliffs Natural Resources Inc.

Key terms include:

  • Utilities owned by We Energies and Integrys Energy Group Inc. in the Upper Peninsula, as well as the Presque Isle coal-fired power plant, would be sold to UP Power. That would leave a single company to provide electric service to most of the area. UP Power indicated it will adopt existing rates.
  • UP Power, which is expected to take over at Presque Isle by July, would continue to operate the plant for several more years. The utility would seek to end an agreement with the regional grid operator, the Midcontinent Independent System Operator, which had required payments to keep the plant running to maintain electric reliability.
  • Cliffs Natural Resources, the operator of two iron ore mines in Upper Michigan, would purchase a "significant majority" of its power from UP Power until the Presque Isle plant’s retirement, which is anticipated in 2020 in order to meet federal emissions requirements.
  • Chicago-based Invenergy would build, own and operate a new natural gas-fueled combined heat and power facility on Cliffs’ site to supply electricity and steam. Excess energy would be sold to local utilities. Cliffs and Invenergy had previously signed a letter of intent to explore the potential for the plant.
  • Snyder, Schuette, the Michigan Public Service Commission staff and Cliffs would drop objections filed with the Federal Energy Regulatory Commission and state regulators to the Wisconsin Energy-Integrys merger.

While financial terms and other details of the agreements weren’t disclosed, including sale prices for the assets being transferred to UP Power, parties on all sides would appear to get some benefit.

Snyder said the agreements represent a major step toward stabilizing supplies and costs in the Upper Peninsula and eliminating huge rate increases faced by many upper Michigan residents related to the Presque Isle power plant in Marquette, Mich.

"This is a critical development for the Upper Peninsula and our entire state," Snyder said in the statement. "The solution these agreements advance ensures reliability, rids the U.P. of years of unaffordable charges, improves the environment and most of all gives the U.P. the power and ability to adapt to the future."

Snyder, who was sworn in on New Year’s Day to begin a second and final term as the state’s chief executive, said the effects on Upper Peninsula’s electric customers will vary widely, but they will see a reduction in bills after the system support resource payments end, probably in July.

Absent some change, residents could be asked to pay approximately $150 more a year, and businesses could pay tens of thousands of dollars a year depending on their location and energy usage.

For We Energies and Integrys, the agreement by the state of Michigan and Cliffs to drop their objections to the purchase removes the most significant barrier to the companies’ completing the transaction on schedule in the second half of the year (EnergyWire, June 24, 2014).

Boiling point in the UP

The agreements address a complicated issue that had been simmering for a couple of years but came to a full boil last summer.

At the center of it all is the 344-megawatt Presque Isle plant owned by Milwaukee-based We Energies. For decades, the plant, completed in the 1970s, supplied power to the Tilden and Empire iron ore mines, which were industrial mainstays for the Upper Peninsula’s economy.

But the relationship ended in 2013 when a power purchase agreement expired and the mines took advantage of a Michigan law that allowed switching energy suppliers. And with a looming deadline to comply with U.S. EPA air quality regulations, We Energies chose to suspend operations and later to retire the plant.

Grid operator MISO later determined the plant was needed to keep lights on in the region and required payments to keep Presque Isle open. And a series of subsequent decisions would nearly double the annual cost of doing so to $100 million and leave panicked consumers in sparsely populated Upper Michigan responsible for nearly all of it (EnergyWire, Oct. 28, 2014).

Michigan elected officials, including U.S. Sens. Debbie Stabenow (D) and Carl Levin (D), pleaded to FERC for help. Meanwhile, Snyder and Schuette called on the commission to investigate We Energies’ proposed purchase of Integrys, calling the deal "fatally flawed."

If the pending Integrys deal didn’t bring We Energies to the table to negotiate with Michigan officials, it at least sped up the solution.

"There is a clear need for a solution with or without our purchase of Integrys Energy," Allen Leverett, president of Wisconsin Energy, said in a memo to Presque Isle’s 170 employees yesterday morning. "However, our proposed purchase of Integrys accelerated conversations about a solution for the UP."

Benefits for all

Leverett said the agreed-to solution has numerous benefits.

"It will create a standalone electric utility in the UP of Michigan that can be planned solely to serve the needs of the customers there, given the market structure that Michigan has chosen," he said. "This will allow Michigan to plan for longer-term generation options in the UP. Finally, it gives all of you more certainty than the … agreement that MISO provides."

Gale Klappa, the company’s CEO, said the agreements create a framework that will benefit Upper Michigan residents for years. We Energies will maintain 10 hydroelectric plants in Upper Michigan after the sale of its electric distribution system and the Presque Isle plant is complete.

The transaction represents a significant addition for UP Power, which currently serves about 52,000 customers in the region and owns 72 megawatts of generating capacity — almost half of which is hydroelectric.

Barbara Siehr, the utility’s CEO, said the expansion is "consistent with our business strategy and with our commitment to the U.P. and Michigan in general."

Carmel, Ind.-based MISO, too, suggested the agreements should benefit all parties.

"MISO looks forward to working with stakeholders to discuss the proposed solution," spokesman Andy Schonert said in a statement.

The transfer of utility assets to UP Power is expected soon after the closing of We Energies’ purchase of Integrys later this year. Meanwhile, the Invenergy plant is expected to begin operation prior to the retirement of Presque Isle in 2020.

Snyder and others cautioned that there’s still work to be done to finalize the agreements, which include contingencies that are subject to further discussion.

But the governor said he is "very optimistic" about the transactions receiving necessary regulatory approvals and ultimately being completed.