PSC REF#:326817

Application of Wisconsin Electric Power Company, Wisconsin Gas LLC,
and Wisconsin Public Service Corporation for Declaratory Ruling and
Approval Regarding Long-Term Natural Gas Storage and Transportation
Arrangements

5-DR-112

FINAL DECISION
This is the Final Decision on the February 3, 2017, application of Wisconsin Electric
Power Company (WEPCO or WE-GO), Wisconsin Gas LLC (WG), and Wisconsin Public
Service Corporation (WPSC) (collectively, applicants) for declaratory rulings regarding longterm natural gas storage and transportation arrangements. The requested relief is GRANTED,
subject to the conditions in this Final Decision.
Background
On February 3, 2017, the applicants petitioned for declaratory rulings concerning the
reasonableness and prudence of a proposed natural gas storage and transportation transaction (the
proposed transaction). (PSC REF#: 297633, confidential; PSC REF#: 297634, public.) The
applicants stated that the proposed transaction will allow them to secure one-third of their natural
gas storage and associated transportation needs, reduce reliance on shorter-term leases and a
dominant provider of storage services, and deliver $200 million in net present value (NPV)
savings to customers over the life of the proposed transaction. The applicants further stated that
the proposed transaction is appropriate and timely because the demand and cost for natural gas

Public Service Commission of Wisconsin
RECEIVED: 06/29/2017 2:25:00 PM

PUBLIC SERVICE COMMISSION OF WISCONSIN

 Docket 5-DR-112
storage and interstate transportation will rise in the near future since the demand for natural gas
is increasing for electric generation, exports, and liquefied natural gas production.
Gas Storage Agreements
Under the proposed transaction, the applicants’ holding company, WEC Energy Group,
Inc. (WEC), will acquire Bluewater Natural Gas Holding, LLC (BGH), which owns underground
natural gas storage facilities in Michigan, for a total acquisition cost of $230 million
($225 million purchase price plus $5 million in transaction costs). The applicants are familiar
with BGH’s Bluewater facility because they currently lease much of its capacity. The Bluewater
facility is a relatively new facility that is less likely to require major investments in the near term.
Once WEC acquires BGH, the applicants initially proposed to enter into long-term, 60-year
storage service agreements with BGH’s subsidiary, Bluewater Natural Gas Storage LLC (BGS), 1
under an existing Federal Energy Regulatory Commission (FERC) approved market-based rate
tariff, on terms comparable to ownership that allocate storage capacity to each applicant in
proportion to its peak-day demands. During the proceeding, the applicants proposed to enter into
30-year storage service agreements with BGS, as opposed to the 60-year term initially proposed.
The proposed transaction is structured in this manner to insulate the applicants from the risk of
owning the Bluewater facility and to avoid the need for BGS to cancel its market-based rate tariff
and to establish new market-based rate tariffs with FERC.
Typical storage contract rates consist of firm storage reservation charges and firm
injection and withdrawal charges. The applicants negotiated a base reservation charge based on

1

Where the application refers to BGH and BGS collectively, this Final Decision uses these abbreviations somewhat
interchangeably as well.

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various annual costs and revenues. (PSC REF#: 300793; PSC REF#: 299840 at 4.) To the
extent there is a difference between the forecasted estimate and actual costs, both positive and
negative, a true-up component mechanism will take this difference and apply it to the base rate
as a true-up surcharge or credit. (PSC REF#: 299840 at 4.) This arrangement provides the
applicants the flexibility to operate the storage facility as if they owned it. The total annual
estimated costs and revenues included in the base reservation charge consist of the following
BGS annual cost components:
•

Bluewater purchase (return on and of investment)

•

Book depreciation

•

Base gas (recoverable)

•

Interest expense

•

Return on equity

•

Income tax

•

Property tax

•

Operation and maintenance (O&M), and capital expenditures 2

•

Existing storage revenue

•

Off-system contracts

•

Off-system park and loan contracts 3

(PSC REF#: 300793.) Any existing third-party storage revenue will be passed along to the
applicants and subtracted from the base reservation charge. (PSC REF#: 299838.)
The applicants proposed that the Commission will have an opportunity to review and
approve recovery in rates of material capital expenditures, which the applicants initially defined

2

Capital expenditures would not be recovered entirely in the year they are incurred, but instead capitalized.
In some years there may be revenues for the park and loan arrangement, but historically for the Bluewater facility
the park and loan has been an expense. Therefore, applicants have forecasted this as an expense over the 60 years.

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as those in excess of $7.5 million (PSC REF#: 299840 at 5), but later defined as $2.5 million.
During the proceeding, the applicants further proposed that they would revise the gas storage
agreements to provide that upon the applicants’ approval of a significant capital expenditure in
excess of $2.5 million, the applicants’ obligation to compensate BGS for the expenditure will be
limited to BGS’s actual expenditure or the approved amount plus 10 percent, whichever is less.
Gas Transportation Contracts
The Bluewater facility is well connected to interstate pipelines. Transportation from the
Bluewater facility to the Guardian Pipeline (Guardian) to which the applicants are connected is
available at very low cost. The applicants propose to use firm natural gas transportation capacity
currently available on the Vector Pipeline system (Vector) to deliver gas to and from the
Bluewater facility. Gas withdrawn from the Bluewater facility will be transported to Vector’s
interconnect with Guardian in Joliet, Illinois. The applicants currently contract nearly half of
their firm storage and associated transportation requirements from ANR Pipeline Company
(ANR). (PSC REF#: 297634 at 9.) The current ANR contracts are cost-based bundled storage
and transportation services, most of which are at or near ANR’s maximum tariff rate. (Id.,
Attachment 5 at 20-24.) The applicants also currently contract over 90 percent of Guardian’s
firm transportation capacity to bring gas into Wisconsin. The applicants lastly have existing
transportation contracts with Vector, which interconnects with Guardian. The applicants
proposed to utilize their existing Vector contacts, as well as enter into new long-term, firm
transportation rates for 20 years, to facilitate gas storage withdrawals. (Id., Attachment 3 at 3,
Attachment 5 at 16-17.) The contracts the applicants have negotiated with Vector for
withdrawals include a ramp up of firm transportation capacity as additional Bluewater storage

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comes available. (Id., Attachment 3 at 3.) At such time when the withdrawal contracts expire,
the applicants will have negotiation rights for extension upon expiration. (Id., Attachment 5
at 16.) The applicants also proposed to contract with Vector for gas storage injections. Vector
provides the applicants with the ability to source gas from either the Joliet Hub or the Dawn Hub.
These contracts for injection are reasonable as they will allow the applicants flexibility to source
gas from whichever hub is the least expensive.
Economic Analysis
As discussed below, the applicants conducted an economic analysis to derive the
proposed transaction’s $200 million in NPV savings to customers. The applicants compared the
costs of the proposed transaction to the costs they would incur using traditional portfolios of
services on a shorter-term basis. The cost savings are threefold. The applicants will save costs
on storage and transportation, and the proposed transaction will allow the applicants to quickly
adapt to market conditions. The applicants can also earn revenue by offering services to third
parties. The upfront cost of acquiring the Bluewater facility will be the highest in the first year
and will then decrease over time as it is depreciated. Thus, the proposed transaction’s costs will
exceed its savings in the first few years.
Recovery of the Proposed Transaction’s Costs
The applicants proposed to recover firm storage reservation charges and transportation
contract charges through their respective purchase gas adjustment clauses (PGAC). Using the
existing PGAC mechanism to recover all of the applicants’ charges allows one-for-one recovery
of all costs. One-for-one gas cost recovery methods permit local distribution companies (LDCs)
to price gas supplies aggressively for competitive markets without fear of under recovery of gas

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costs. See Order in GCRM Docket, Docket No. 5-GI-106, 1996 WL 34720600, at *15 (Pub.
Serv. Comm’n of Wis. Nov. 8, 1996). A gas cost recovery mechanism, such as the PGAC,
should “be designed in a way that the sharing of risk does not motivate actions that significantly
and adversely affect the goals associated with reliable service and reasonable gas costs to
customers.” Id. at *13. The applicants proposed to initially recover their net storage costs from
retail customers based upon annual demand requirements. The applicants must serve all of their
customer load and balance all gas supplies delivered to their distribution system.
Requested Declaratory Rulings
The applicants’ petition for declaratory ruling requested two declarations from the
Commission under Wis. Stat. § 227.41. First, the applicants requested that the Commission
declare that it is reasonable and prudent for the applicants to enter into the long-term storage
service and interstate gas transportation agreements. Second, the applicants requested that the
Commission declare that it is reasonable and prudent for the applicants to recover their allocated
portions of the costs to acquire, operate, and maintain the Bluewater facility through their
PGACs. The applicants also requested that the Commission approve an amendment to the WEC
Affiliated Interest Agreement to ensure that BGH has access to the full range of services
available within WEC through its service company and the operating companies. The
Commission addresses the applicants’ request to amend the WEC Affiliated Interest Agreement
in a separate docket, docket 5-AU-112.
Procedural History
Commission staff issued a number of data requests to which the applicants have
responded. These data requests concern: (1) rates and cost allocation (PSC REF#: 299839,

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confidential; PSC REF#: 299840, public); (2) procedural and jurisdictional matters
(PSC REF#: 299835); (3) business and contractual matters (PSC REF#: 299836); (4) economic
and financial matters (PSC REF#: 299837); (5) salvage value, seasonal spreads, and reservation
fees (PSC REF#: 299838); and (6) miscellaneous matters (PSC REF#: 300792; PSC REF#:
300793; PSC REF#: 300794; PSC REF#: 300795; PSC REF#: 300798, confidential; PSC REF#:
300799, public; PSC REF#: 300796; PSC REF#: 300797).
On March 17, 2017, the applicants submitted a brief on jurisdiction and scope. (PSC
REF#: 299529, confidential; PSC REF#: 299530, public.) On March 23, 2017, Commission
staff issued an agenda memorandum addressing whether the Commission should grant the
petition and issue a notice of proceeding setting the matter for hearing or deny the petition and
issue an order containing a brief statement as to the reasons why. (PSC REF#: 299828.) On
March 24, 2017, the Commission issued an Order Opening Docket and Notice of Prehearing
Conference. (PSC REF#: 299966.)
The Order Opening Docket and Notice of Prehearing Conference proposed three issues:
(1) whether it is reasonable, prudent and in the public interest for the applicants to enter into
long-term storage service agreements and related interstate gas transportation contracts in
connection with the Bluewater facility; (2) whether it is reasonable, prudent and in the public
interest for applicants to recover their allocated portions of the full cost of acquiring the
Bluewater facility and all of the reasonable and prudent expenses of operating and maintaining
the facility through their respective PGACs based upon annual demand requirements; and
(3) whether it is reasonable, necessary and in the public interest to impose conditions upon the
applicants in connection with their decision to enter into the proposed agreements and contracts.

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Commission staff, the applicants, and the intervenors 4 stipulated to these proposed issues, as well
as a procedure and schedule for disposition of this proceeding. (PSC REF#: 300956.)
On May 1, 2017, Commission staff issued a second agenda memorandum for comment.
(PSC REF#: 302107, confidential; PSC REF#: 302108, public). On May 15, 2017, the
applicants, CUB, WIEG, and ICE submitted comments on Commission staff’s second agenda
memorandum. (PSC REF#: 303135; PSC REF#: 303137; PSC REF#: 303141, confidential; PSC
REF#: 303142, public; PSC REF#: 303143.) A public and party hearing was held on May 23,
2017. (PSC REF#: 303984.) Commission staff and CUB submitted supplemental comments on
May 30, 2017. (PSC REF#: 303914, PSC REF#: 303932.) To assist in the Commission’s
evaluation and discussion, Commission staff submitted a Decision Matrix as Appendix A to its
supplemental comments. The party positions were inserted by Commission staff based upon the
previously filed comments of the parties. On June 2, 2017, the applicants submitted reply
comments. (PSC REF#: 304180, confidential; PSC REF#: 304181, public.) On June 8, 2017,
the applicants submitted a supplement to Commission staff’s Decision Matrix to reflect the
applicants’ reply comments, as well as all other information in Commission staff’s Decision
Matrix. (PSC REF#: 304511.) The Commission discussed this matter at its open meeting of
June 15, 2017.

4

The intervenors are the Citizen’s Utility Board (CUB), Wisconsin Industrial Energy Group (WIEG), ANR Pipeline
Company (ANR), and Initiative for Competitive Energy, Inc. (ICE). (PSC REF#: 298721; PSC REF#: 298795; PSC
REF#: 298814; PSC REF#: 300896.) The parties, for purposes of review under Wis. Stat. §§ 227.47 and 227.53, are
listed in Appendix A.

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Findings of Fact
1.

As conditioned by this Final Decision, it is reasonable and prudent for the

applicants to enter into the long-term storage service and interstate gas transportation agreements
based on the facts established in the Background and Opinion sections of this Final Decision.
2.

It is reasonable to impose a condition that the declaratory rulings issued in this

Final Decision are strictly based on the set of facts established in this proceeding, are only valid
to the extent that the set of facts remains in place, and are void to the extent that the set of facts
changes.
3.

It is reasonable to require the applicants to include provisions in the storage

service agreements stating that the applicants have entered into them with their affiliate BGS or
BGH voluntarily.
4.

It is reasonable to prohibit the applicants from asserting that the Commission is

preempted from assessing the reasonableness and prudence of the applicants’ decision to enter
into the service storage agreements with BGS or BGH or related matters in the future.
5.

It is reasonable to require the applicants to file with the Commission the storage

service agreements with their affiliate BGS or BGH and obtain approval from the Commission
under Wis. Stat. § 196.52.
6.

It is reasonable to require the applicants to amend the gas storage contracts to

shorten the term to 30 years. The recovery of the Bluewater investment shall continue to be
based on a 60-year depreciable life.

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 Docket 5-DR-112
7.

It is reasonable to require the applicants to amend the gas storage agreements to

provide their approval of an annual Bluewater O&M cost budget, which shall be reflected in
each of the applicants’ annual gas supply plans filed with the Commission.
8.

It is reasonable to require the applicants to submit capital expenditures for the

Bluewater facility that exceed $2.5 million to the Commission for approval, and to amend their
gas storage agreements to provide that upon their approval of a significant capital expenditure
exceeding $2.5 million, the applicants’ obligation to compensate BGS for the expenditure will be
limited to BGS’s actual expenditure or the approved amount plus 10 percent, whichever is less.
9.

It is reasonable to require the applicants to periodically submit information that

will allow Commission staff to verify that the proposed transaction is in fact creating customer
savings.
10.

It is reasonable to require the applicants to recover their costs incurred under the

gas storage agreements through their PGACs until their next base rate case, which at that time
the costs will be placed in base rates.
11.

It is reasonable for the applicants to recover the proposed transaction’s costs only

from sales customers now, but the Commission retains the authority to require the applicants to
recover costs from transportation customers in the future.
Conclusions of Law
1.

As conditioned by this Final Decision, the Commission has jurisdiction to issue

this declaratory ruling pursuant to Wis. Stat. §§ 196.02, 196.03, 196.395, and 227.41, the Natural
Gas Act, Pike Cnty. Light and Power Co. v. Pa. Pub. Util. Comm’n, 465 A.2d 735 (1983), and
Ky. W. Va. Gas Co. v. Pa. Pub. Util. Comm’n, 837 F.3d 600 (3d. Cir. 1988).

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2.

The Commission may impose any term, condition, or requirement necessary to

protect the public interest pursuant to Wis. Stat. §§ 196.02 and 196.395.
Opinion
Commission’s Jurisdiction and Discretion
As noted above, the applicants requested declaratory rulings pursuant Wis. Stat. § 227.41,
which states that “any agency may, on petition by any interested person, issue a declaratory
ruling with respect to the applicability to any person, property or state of facts of any rule or
statute enforced by it.” The Commission has previously exercised its discretion and applied its
ratemaking authority under Wis. Stat. §§ 196.02 and 196.03 to issue declaratory rulings
concerning the reasonableness and prudence of proposed utility investment. See, e.g., In re Wis.
Elec. Power Co., Docket No. 6630-DR-104, 2001 WL 1671064 (Pub. Serv. Comm’n of Wis.
Oct. 17, 2001); In re Wis. Pub. Serv. Corp., Docket No. 6690-DR-105, 2002 WL 32083055
(Pub. Serv. Comm’n of Wis. Nov. 8, 2002); In re Wis. Pub. Serv. Corp., Docket No.
6690-DR-107, 2003 WL 22683461 (Pub. Serv. Comm’n of Wis. Nov. 12, 2003); In re Kewaunee
Nuclear Power Plant, Docket No. 5-EI-136, 2005 WL 937257 (Pub. Serv. Comm’n of Wis.
Apr. 21, 2005). The Commission finds that issuing the declaratory ruling regarding the
reasonableness and prudence of the proposed transaction falls within its discretionary authority
under Wis. Stat. §§ 196.02, 196.03, and 227.41, as well as prior Commission decisions. Based
upon the instant record discussed below and the unique facts and circumstances of this case,
granting the requested declaratory ruling now adds certainty needed to effectuate the proposed
transaction, which is proposed to save ratepayers in the future. However, because the
Commission may only issue a declaratory ruling concerning a “state of facts,” the Commission

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finds it reasonable to impose a condition that the declaratory rulings issued in this Final Decision
are strictly based on the set of facts established in this proceeding, are only valid to the extent
that the set of facts remains in place, and are void to the extent that the set of facts changes.
In addition to comporting with Wisconsin law, issuing declaratory rulings regarding the
prudence of the proposed transaction, with the conditions discussed below, falls within the
authority left to the Commission under the Natural Gas Act. In their brief on jurisdiction and
scope, the applicants addressed the applicability of Mississippi Power & Light Co. v. Mississippi
ex rel. Moore, 487 U.S. 354 (1988). There, the Court held that the Mississippi Commission was
preempted from reviewing the prudence of a retail utility’s participation in a FERC jurisdictional
agreement allocating the capacity and costs of a nuclear power plant between the retail utility
and its affiliates, including a wholesale generating company and other retail utilities. The
applicants asserted that Mississippi is inapplicable because each of the applicants will enter into
separate agreements with BGH, as opposed to a FERC jurisdictional allocation agreement among
themselves and BGH. The applicants stated that the proposed transaction is instead governed by
the principle established in Pike Cnty. Light and Power Co. v. Pa. Pub. Util. Comm’n, 465 A.2d
735 (1983), and Ky. W. Va. Gas Co. v. Pa. Pub. Util. Comm’n, 837 F.3d 600 (3d. Cir. 1988).
The principle established in these cases is that where a retail utility has a choice among suppliers,
the Commission, rather than FERC, may evaluate whether the retail utility was prudent in
selecting a particular supplier among available alternatives.
The Commission finds that it is reasonable to impose several conditions to confirm the
Commission’s jurisdiction in this proceeding as defined by the Natural Gas Act and applicable
case law. First, to ensure that the applicants have a choice among suppliers, as the applicants

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claimed, the Commission finds that is reasonable to require provisions in the storage service
agreements stating that the applicants have entered into them with their affiliate BGS or BGH
voluntarily. Second, the Commission finds that it is reasonable to prohibit the applicants from
asserting that the Commission is preempted from assessing the reasonableness and prudence of
the applicants’ decision to enter into the service storage agreements with BGS or BGH or related
matters in the future. Last, the applicants are required to file with the Commission the storage
service agreements with their affiliate BGS or BGH and obtain approval from the Commission
under Wis. Stat. § 196.52. 5 In sum, all of the foregoing conditions are intended to ensure that the
proposed transaction conforms to Wisconsin and federal law, that the Commission’s declaratory
rulings issued in this Final Decision are limited to the proposed transaction as the applicants
presented to the Commission, and that the proposed transaction receives any necessary
Commission approval prior to the applicants incurring charges thereunder.
Reasonableness and Prudence of the Proposed Transaction
As noted above, the applicants requested that the Commission declare it reasonable and
prudent for the applicants to enter into the proposed transaction. With the conditions imposed
below, the Commission finds that it is reasonable and prudent for the applicants to enter into the
proposed transaction based on the following discussion of the natural gas industry and the
economic savings the applicants can achieve through the proposed transaction.

5
For instance, in docket 5-AE-208, WEPCO and WPSC sought Commission approval of a purchase power
agreement between the affiliated public utilities under Wis. Stat. § 196.52, despite the fact that they also sought
FERC approval under the affiliate abuse standard established in Boston Edison Co. Re: Edgar Elec. Energy Co.,
55 FERC ¶ 61,382 (1991) (Edgar). Under Edgar, FERC “must ensure that the buyer has chosen the lowest cost
supplier from among the options presented, taking into account both price and nonprice terms (i.e., that it has not
preferred its affiliate without justification).” Id.

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Natural Gas Industry and Proposed Transaction Background
Natural gas storage is a crucial component of the reliable and low-cost natural gas service
that the applicants provide to their customers. Wisconsin’s geology is not suitable for the
development of underground natural gas storage facilities because the state lacks large
underground cavities capable of storing natural gas under pressure, such as depleted oil or gas
reservoirs, aquifers or salt caverns. Wisconsin is the only upper Midwest state that lacks gas
storage capacity. As a result, the applicants’ access to natural gas storage is limited to
out-of-state, third-party controlled resources that are available through interstate gas pipeline
interconnections. The applicants currently rely primarily on ANR tariffed services for a
significant portion of their storage and associated transportation needs. The applicants use
storage to provide reliable and reasonably priced natural gas service to their customers. The
ability to transport gas for injection into storage, later to be withdrawn for delivery to their local
distribution systems, serves a number of important roles for natural gas utilities generally.
For example, natural gas storage: (1) provides a flexible source of firm gas supply to
meet peak day demand in the winter and spring shoulder months; (2) balances demand with
supply; (3) hedges against price volatility; (4) reduces costs for long-haul pipeline capacity;
(5) diversifies supply and enhances reliability. Currently, the applicants are dependent on
out-of-state providers, namely ANR as noted above, for natural gas storage and the pipeline
capacity required to transport the natural gas to and from storage. Further, the amount of storage
capacity available in the market, particularly in the Midwest, is expected to remain constant.
There has been no expansion of storage in the Midwest in the last 5 years and none is underway
now.

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Given these concerns, the applicants can obtain more direct control of natural gas storage
and associated transportation on a long-term basis through the proposed transaction. The
applicants have access to alternatives to ANR’s tariffed storage and transportation services by
virtue of their interconnections with Guardian, which was constructed in eastern Wisconsin in
the 2000s as an alternative to ANR. The Commission approved the applicants’ construction of
laterals to connect with Guardian as a second source of pipeline capacity for the purposes of
meeting growing demand, enhancing reliability, increasing the utilities’ diversity of suppliers of
pipeline-related services, and establishing competition for interstate pipeline and third party
services. Through Guardian, the applicants have access to the Vector pipeline system, which in
turn connects to a number of underground natural gas storage facilities in eastern Michigan. The
current and expected pricing of the transportation capacity needed to inject and withdraw natural
gas in and out of storage in Michigan via the Vector and Guardian pipelines is significantly
lower than ANR’s tariffed transportation service.
The Bluewater facility is a relatively new facility located in southeastern Michigan. The
applicants are familiar with this facility, as they currently lease about three-quarters of its
working gas. The applicants asserted that compared to older underground gas storage facilities,
the Bluewater facility’s more recent design and construction renders it capable of more flexible
operations to help protect the applicants and their customers from changing market conditions.
The Bluewater facility is less likely to require major investments in the near term to modernize
and comply with new safety and environmental requirements. The Bluewater facility is well
connected to interstate pipelines and multiple supply basins, providing access to both the Joliet

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and Dawn Hubs and the Appalachian shale gas basin. Direct transportation paths from the
Bluewater facility to Guardian are currently available at very low cost.
As noted above, WEC will acquire BGH in order to insulate the applicants from the risk
of owning the Bluewater facility and to avoid the need for BGS to cancel its market-based rate
tariff and the need for the applicants to establish new market-based rate tariffs with FERC. The
total acquisition cost of $230 million ($225 million purchase price plus $5 million in transaction
costs) represents a fair market value for Bluewater. The applicants originally proposed to enter
60-year storage contracts with BGH upon the acquisition closing. However, during the
proceeding, the applicants offered to reduce the term of the storage contracts to 30 years. These
contracts will represent about 30 percent of the applicants’ total gas storage portfolio, the
remainder of which will be a mixture of cost-based and market-based arrangements of short and
medium term, resulting in diversification that will provide the applicants and their customers
with a level of protection from the scarcity of availability and cost of these services. The storage
agreements will provide the applicants access to gas storage on terms comparable to ownership.
The applicants will be responsible for the full cost of acquiring BGH and operating and
maintaining the Bluewater facility over the contract term, including the return on and of the price
by which WEC acquired the Bluewater facility.
Securing long-term access to gas storage allows the applicants to secure significant
savings through the execution of new lower-cost and long-term gas transportation contracts for
delivery of gas between the Bluewater facility and Wisconsin. The applicants will use firm
natural gas transportation capacity currently available on Vector to deliver gas to and from the
Bluewater facility, and gas withdrawn from the Bluewater facility will be transported to Vector’s

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interconnect with Guardian in Joliet. The applicants will then utilize their existing capacity on
Guardian to deliver the gas withdrawn from storage to their local distribution systems.
Applicants’ Economic Analysis
The applicants conducted an economic analysis of the proposed transaction in which they
compared the costs they would incur for long-term access to the Bluewater facility and the
associated transportation arrangements with the costs they would incur using their traditional
portfolios of services contracted on a shorter-term basis. The applicants assumed that the cost of
operating and maintaining the Bluewater facility will escalate at the same rate as the cost of
shorter-term cost-based and market-based services. This is a conservative assumption because,
as noted above, the Bluewater facility is relatively new and should not need the same level of
investment to modernize and comply with new safety and environmental requirements that older
storage facilities in the Midwest, including the majority of ANR’s facilities, will. Therefore,
WEC’s acquisition of the Bluewater facility will likely reduce the applicants’ exposure to storage
cost increases. The savings reflected in the economic analysis are threefold.
First, the cost of long-term access to storage capacity under the BGH service agreements
will be lower than the cost of continuing to purchase a similar quantity of cost-based and
market-based storage services on a shorter-term basis. The applicants can reduce the level of
pipeline “no notice” balancing service they currently purchase. The displacement of winter term
supply and the Bluewater facility’s enhanced injection capability will provide the applicants with
increased daily supply flexibility and, thus, less need for no notice service.
Second, the applicants’ long-term access to storage capacity in Michigan will enable
them to make long-term commitments to purchase lower cost transportation capacity on the

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Vector pipeline. The applicants’ ability to decrease their reliance on higher-cost transportation
capacity will generate significant savings that will increase over time.
Third, WEC’s ownership of the Bluewater facility will provide the applicants the
flexibility to optimize their use of the facility in response to market conditions. In addition, BGH
generates revenues from sales of gas storage service to third parties, the provision of “park and
loan” gas services, and opportunity sales of gas out of storage. Under the storage contracts, these
revenues will be passed directly on to the applicants and then to their customers.
Through their access “akin to ownership” of the Bluewater facility, the applicants should
be able to achieve cost reductions for their customers from optimizing injections and
withdrawals throughout the year. In the applicants’ base case, and compared to leasing similar
amounts of gas storage and transportation capacity on a shorter-term basis, the proposed
transaction will reduce the applicants’ purchased gas costs by about $200 million NPV, based on
60-year storage contract terms. The savings are even greater in the applicants’ high storage cost
case, and the applicants still realize significant savings in their low storage cost case as well.
Commission Determination
For the numerous reasons discussed above, the Commission finds that it is reasonable and
prudent for the applicants to enter the proposed transaction, with the following conditions.
Pursuant to their offering, it is reasonable to require the applicants to amend the gas storage
contracts to shorten their terms to 30 years. The recovery of the Bluewater investment, however,
shall continue to be based on a 60-year depreciable life. This condition mitigates the risk that
Commission staff and some of the intervenors expressed with respect to the initially proposed
60-year storage contract term. The Commission recognizes that the facility’s economic life may

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extend beyond the 60-year depreciable life. Thus, the applicants shall provide to the
Commission the results of any future depreciation study.
While the proposed transaction’s NPV savings with 30-year storage contract terms will
not be as high as with 60-year storage contract terms, the proposed transaction will still generate
significant NPV savings. Commission staff’s evaluation of the applicants’ economic analysis
demonstrates that the proposed transaction’s NPV is sensitive to operating and capital costs
escalation. Accordingly, it is reasonable to require the applicants to amend the gas storage
agreements to provide their approval of an annual Bluewater O&M cost budget, which shall be
reflected in each of the applicants’ annual gas supply plans filed with the Commission. It is
further reasonable to require the applicants to submit capital expenditures for the Bluewater
facility that exceed $2.5 million to the Commission for approval, and to amend their gas storage
agreements to provide that upon their approval of a significant capital expenditure exceeding
$2.5 million, the applicants’ obligation to compensate BGS for the expenditure will be limited to
BGS’s actual expenditure or the approved amount plus 10 percent, whichever is less. Last, it is
reasonable to require the applicants to periodically submit information that will allow
Commission staff to verify that the proposed transaction is in fact creating customer savings.
Cost Recovery Mechanism
The applicants also requested that the Commission declare it reasonable and prudent for
the applicants to recover the proposed transaction’s costs through their PGACs. For the reasons
discussed below, the Commission finds that it is reasonable and prudent for the applicants to
recover the proposed transaction’s transportation contract costs through the applicants’ PGACs.
However, the Commission finds that it is not reasonable and prudent for the applicants to recover

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 Docket 5-DR-112
the proposed transaction’s gas storage contract costs through the PGACs indefinitely. Instead,
the applicants may recover these costs through their PGACs until their next rate cases, at which
time the applicants must subsequently recover these cost through base rates.
PGAC Background
The Commission developed PGACs to correct over-recovery or under-recovery of
commodity-related gas costs, which generally include storage and transportation costs (but not
plant or other assets) either because of changes in the cost of gas supplies or customer usage was
different than anticipated in base rates. See Order in GCRM Docket, supra, 1996 WL 34720600,
at *2. Based on the nature of the gas industry in the late 1980s and early 1990s, the Commission
developed PGACs because LDCs were seen as price takers without the ability to influence the
amount they could pay for gas supplies. Id. at *2-*7.
Under the Commission’s gas cost recovery process, “[t]he price seen on bills by utility
customers represent[s] rates for service that have been developed and affected by both
ratemaking conventions and gas cost recovery mechanisms [i.e., PGACs].” Id. at *13-*14. “In
regard to ratemaking conventions, the estimated annual gas costs for a utility in a rate case are
assigned or allocated to the various customer rate classifications. These assignments and
allocations result in the base rates for utility service.” Id. at *14. However, gas cost recovery
mechanisms, such as PGACs, “recover the differences between the estimates used in developing
the base cost of gas rates and the actual gas costs that are relevant to the current monthly gas
volumes actually acquired and used to provide customer service.” Id.
To effectuate the gas cost recovery process, the Commission requires public utilities to
submit gas supply plans for Commission approval. See, e.g., id. at *20. The Commission has

20

 Docket 5-DR-112
found this to be “a reasonable means for assessing a [public] utility’s entire portfolio.” Id.
at *38. Gas supply plans must include, among other things, volume and cost-related data on
pipeline and storage facility capacity contracts. Id. Costs incurred in accordance with approved
gas supply plans will be passed on to ratepayers. Id. at *22. As such, changes in these forecasts
must obtain Commission approval. Id. at *39. Cost increases not included in an approved gas
supply plan may not pass through PGACs until approved. Id. at *40.
In sum, the average base cost of gas is determined during a public utility’s rate case. The
source of supply, throughput data, and the purchased gas to sales ratio are derived from the
public utility’s most recently approved gas supply plan. When the public utility’s cost of natural
gas supply or sales data changes from the estimates reflected in the base average gas costs, new
rates for average gas costs are calculated and the cost difference is recovered through the PGAC.
Criteria for Developing and Using PGACs
Based on an evolution of the gas industry since the late 1980s and early 1990s when the
Commission developed PGACs, LDCs can now exercise a level of control over the price they
pay for gas supplies. Thus, the Commission has established a number of criteria for gas utilities’
development and use of gas cost recovery mechanisms. First, reliable service must be
maintained under any acceptable gas cost recovery mechanisms. Id. at *10. Second, the sharing
of risk and reward should be balanced between shareholders and ratepayers. Id. at *11. Third,
the operation of gas cost recovery mechanisms should provide appropriate price signals. Id.
at *13. Fourth, the operation of gas cost recovery mechanisms should not unduly hinder the
transition to workable markets. Id. at *14. Fifth, the operation of gas cost recovery mechanisms
should be designed to achieve the lowest reasonable cost of gas to its customers via the

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 Docket 5-DR-112
submission of gas supply plans. Id. at *16. Sixth, the Commission must have detailed and
timely information in order to carry out its regulatory responsibilities. Id. at *17. Finally, gas
cost recovery mechanisms should minimize the need for retrospective review of utility
transactions. Id. at *18. The applicants stated that the proposed transaction’s costs should be
recovered through their PGACs because their existing BGH contracts are recovered through their
PGACs and that the proposed transaction meets the guiding principles noted above.
(PSC REF#: 299839, confidential; PSC REF#: 299840, public.)
Applicants’ Basis for Recovery of the Proposed Transaction’s Costs Through
PGACs
First, the applicants stated that recovery through their PGACs provides reliable service at
reasonable costs because it provides: (1) significant, positive NPV; (2) long-term certainty akin
to ownership; (3) operational access to market-area storage; and (4) access to long-term storage
service at expected savings. Second, the applicants stated recovery through their PGACs shares
risk and reward among shareholders and ratepayers. In particular, the applicants stated that
shareholders forego the opportunity to invest capital elsewhere for 60 years, while ratepayers
acquire storage facilities at costs consistent with other utility investments. The applicants further
stated that additional significant capital investment will be subject to Commission review, and
that the potential for opportunity sales will accrue to ratepayers, not shareholders. Third, the
applicants stated that recovery through their PGACs will provide timely and appropriate price
signals to customers because the method of pricing working gas in storage will not change and
that monthly PGAC filings and true-ups will facilitate prompt pricing adjustments. Fourth, for
these same reasons, the applicants stated that recovery through their PGACs will not thwart the
development of workable competitive markets. Fifth, the applicants stated that submitting the

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 Docket 5-DR-112
required gas supply plans will allow the Commission to determine whether the operation of the
gas cost recovery mechanisms are operated in a way to achieve the lowest reasonable cost of gas.
Sixth, the applicants stated that they will provide the Commission with detailed, timely,
consistent, and standardized information through the required PGAC reporting. Last, the
applicants stated that the Commission’s issuance of the requested declaratory rulings will
achieve the goal that operation of gas cost recovery mechanisms should minimize the need for
retrospective reviews of utility transactions.
Commission Determination
The Commission finds that recovering the proposed transaction’s transportation contract
costs through the applicants’ PGACs is reasonable based on the applicants’ current practice of
recovering similar transportation contract costs in their PGACs. The lengths of the proposed
transaction’s transportation contracts are not unreasonable, and in past gas supply plans, the
Commission has approved the use of both short- and long-term transportation contracts.
Currently, WE-GO, WG, and WPSC have short- and long-term storage transportation contracts
with other companies ranging from 1 to 18 years in length. In addition, several other Wisconsin
gas utilities have long-term storage transportation contracts ranging from 10 to 29 years in
length. Further, the current and expected pricing of the transportation capacity needed to inject
and withdraw natural gas in and out of storage via the Vector and Guardian pipelines is
significantly lower than ANR’s tariffed transportation service.
However, the Commission finds that it is not reasonable to recover the gas storage
agreements through the PGACs indefinitely because such recovery does not appropriately
balance risk and reward among shareholders and ratepayers. If the applicants are permitted to

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 Docket 5-DR-112
recover the gas storage contracts on a one-for-one basis through their PGACs, the applicants’
ratepayers bear all the risk associated with the contracts. The applicants would be guaranteed
recovery of all charges incurred under the gas storage contracts regardless of how the market
may change, and the ratepayers would be required to pay for such contracts even if they prove
uneconomic in the future. Recovery of gas storage agreement costs through base rates more
appropriately balances risk and reward among shareholders and ratepayers. Including these gas
storage contract costs in base rates does not guarantee full recovery of all costs, but would allow
the applicants a reasonable opportunity to recover prudently incurred costs under their contracts
with BGS. The reward is that the applicants are allowed to retain any opportunity sales or
benefits from increased sales or other cost savings. The risk to the applicants would result from
the potential for decreased sales and unanticipated expenses, which may prohibit the applicants
from fully recovering costs. Two WEC subsidiaries currently own underground storage
facilities, the Manlove Field and the Partello Field. (See PSC REF#: 297634 at 17.) These
storage facilities and the associated base gas are treated as rate-based assets, and the costs
associated with them are recovered through state (Michigan and Illinois) rate case processes.
Likewise, the O&M expenses incurred relative to these facilities are recovered in base rates.
Similarly, the applicants previously proposed in a rate case to recover the carrying cost of
gas-in-storage through their PGACs, which would guarantee earning the authorized return on
associated investment in stored natural gas. See In re Wis. Elec. Power Co., docket no.
5-UR-103, 2008 WL 294759, at *57 (Pub. Serv. Comm’n of Wis. Jan. 17, 2008). The applicants
asserted that with “volatility in the natural gas market, it is unreasonable to hold the utility and its
shareholders responsible for changes in the carrying costs on the gas inventory when the PGA[C]

24

 Docket 5-DR-112
mechanism could be used to accommodate fluctuations in natural gas costs and inventory
levels.” Id. The Commission denied the request, holding that it was inconsistent with: (1) prior
Commission decisions denying similar requests for the applicants; and (2) the Commission’s
findings in the Order in GCRM Docket. 2008 WL 294759 at *58. The Commission noted that
LDCs could “no longer claim to be mere ‘price takers’ but rather must be viewed as players
whose expertise, judgment, and dedication are able to significantly affect the delivered price they
pay for gas supplies.” Id. (quoting Order in GCRM Docket, supra, 1996 WL 34720600, at *6.)
The Commission required the applicants to recover the carrying cost of gas-in-storage through
margin (base) rates given their forward-looking nature. 2008 WL 294759 at *58.
The total costs that would be included in base rates would be the current base reservation
charge, actual known true-up cost, and the test-year forecasted true-up expenses. The applicants
anticipate beginning to incur costs under the gas storage contracts in the short term. Currently,
the applicants have filed for a base rate freeze for gas rates through 2019. (PSC REF#: 300739;
PSC REF#: 300749.) It is therefore reasonable for the costs incurred under the gas storage
agreements be recovered through their PGACs until their next base rate case, at which time they
will be placed in base rates. Recovering the costs through the PGAC until the next rate case also
allows the applicants to gain operational experience without risk of under-recovery.
Recovery from Certain Customer Classes
The applicants propose to initially recover the cost of the proposed transaction from sales
customers. WIEG requested that the applicants only recover the proposed transaction’s costs
from sales customers, not transportation customers, because the applicants have not
demonstrated that the proposed transaction will provide storage to transportation customers, nor

25

 Docket 5-DR-112
have they demonstrated that the proposed transaction is an economic storage alternative for
transportation customers that have market-based storage options available. While the
Commission finds WIEG’s points to be valid, the applicants have also indicated that the
proposed transaction could benefit transportation customers in the future. For this reason, the
Commission finds it reasonable for the applicants to recover the proposed transaction’s costs
only from sales customers for now, but the Commission leaves open the possibility for the
applicants to recover the proposed transaction’s costs from transportation customers in the
future.
Order
1.

As conditioned by this Final Decision, it is reasonable and prudent for the

applicants to enter into the long-term storage service and interstate gas transportation agreements
based on the facts established in the Background and Opinion sections of this Final Decision.
2.

The declaratory rulings issued in this Final Decision are strictly based on the set

of facts established in this proceeding, are only valid to the extent that the set of facts remains in
place, and are void to the extent that the set of facts changes.
3.

The applicants shall include provisions in the storage service agreements stating

that the applicants have entered into them with their affiliate BGS or BGH voluntarily.
4.

The applicants are prohibited from asserting that the Commission is preempted

from assessing the reasonableness and prudence of the applicants’ decision to enter the service
storage agreements with BGS or BGH or related matters in the future.

26

 Docket 5-DR-112
5.

The applicants are required to file with the Commission the storage service

agreements with their affiliate BGS or BGH and obtain approval from the Commission under
Wis. Stat. § 196.52.
6.

The applicants shall amend the gas storage contracts to shorten the term to

30 years. The recovery of the Bluewater investment shall continue to be based on a 60-year
depreciable life.
7.

The applicants shall amend the gas storage agreements to provide their approval

of an annual Bluewater O&M cost budget, which shall be reflected in each of the applicants’
annual gas supply plans filed with the Commission.
8.

The applicants shall submit capital expenditures for the Bluewater facility that

exceed $2.5 million to the Commission for approval and shall amend their gas storage
agreements to provide that upon their approval of a significant capital expenditure exceeding
$2.5 million, the applicants’ obligation to compensate BGS for the expenditure will be limited to
BGS’s actual expenditure or the approved amount plus 10 percent, whichever is less.
9.

The applicants shall periodically submit information that will allow Commission

staff to verify that the proposed transaction is in fact creating customer savings.
10.

The applicants shall recover their costs incurred under the gas storage agreements

through their PGACs until their next base rate case, which at that time the costs shall be placed
in base rates.

27

 Docket 5-DR-112
11.

The applicants shall recover the proposed transaction’s costs only from sales

customers now, but the Commission retains the authority to require the applicants to recover
costs from transportation customers in the future.
Dissent
Commissioner Roberts dissents and writes separately (see attached).
Dated at Madison, Wisconsin, this 29th day of June, 2017.
By the Commission:

Sandra J. Paske
Secretary to the Commission
SJP:ev:DL:01549243

See attached Notice of Rights

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 Docket 5-DR-112
PUBLIC SERVICE COMMISSION OF WISCONSIN
610 North Whitney Way
P.O. Box 7854
Madison, Wisconsin 53707-7854

NOTICE OF RIGHTS FOR REHEARING OR JUDICIAL REVIEW, THE
TIMES ALLOWED FOR EACH, AND THE IDENTIFICATION OF THE
PARTY TO BE NAMED AS RESPONDENT
The following notice is served on you as part of the Commission's written decision. This general
notice is for the purpose of ensuring compliance with Wis. Stat. § 227.48(2), and does not
constitute a conclusion or admission that any particular party or person is necessarily aggrieved or
that any particular decision or order is final or judicially reviewable.
PETITION FOR REHEARING
If this decision is an order following a contested case proceeding as defined in Wis. Stat.
§ 227.01(3), a person aggrieved by the decision has a right to petition the Commission for
rehearing within 20 days of the date of service of this decision, as provided in Wis. Stat. § 227.49.
The date of service is shown on the first page. If there is no date on the first page, the date of
service is shown immediately above the signature line. The petition for rehearing must be filed
with the Public Service Commission of Wisconsin and served on the parties. An appeal of this
decision may also be taken directly to circuit court through the filing of a petition for judicial
review. It is not necessary to first petition for rehearing.
PETITION FOR JUDICIAL REVIEW
A person aggrieved by this decision has a right to petition for judicial review as provided in Wis.
Stat. § 227.53. In a contested case, the petition must be filed in circuit court and served upon the
Public Service Commission of Wisconsin within 30 days of the date of service of this decision if
there has been no petition for rehearing. If a timely petition for rehearing has been filed, the
petition for judicial review must be filed within 30 days of the date of service of the order finally
disposing of the petition for rehearing, or within 30 days after the final disposition of the petition
for rehearing by operation of law pursuant to Wis. Stat. § 227.49(5), whichever is sooner. If an
untimely petition for rehearing is filed, the 30-day period to petition for judicial review commences
the date the Commission serves its original decision. 6 The Public Service Commission of
Wisconsin must be named as respondent in the petition for judicial review.
If this decision is an order denying rehearing, a person aggrieved who wishes to appeal must seek
judicial review rather than rehearing. A second petition for rehearing is not permitted.

Revised: March 27, 2013

6

See Currier v. Wisconsin Dep’t of Revenue, 2006 WI App 12, 288 Wis. 2d 693, 709 N.W.2d 520.

29

 Docket 5-DR-112
APPENDIX A
CONTACT LIST FOR SERVICE BY PARTIES
ANR PIPELINE COMPANY
ERIC M MCLEOD; JEFFREY L VERCAUTEREN
33 EAST MAIN STREET STE 300 PO BOX 1379
MADISON WI 53701
USA
ERIC.MCLEOD@HUSCHBLACKWELL.COM;
JEFF.VERCAUTEREN@HUSCHBLACKWELL.COM
APPLICANT GAS UTILITIES
QUARLES & BRADY
411 EAST WISCONSIN AVE
MILWAUKEE WI 53202
USA
BRAD.JACKSON@QUARLES.COM; JOE.WILSON@QUARLES.COM
CITIZENS UTILITY BOARD
KURT RUNZLER; DENNIS DUMS
6401 ODANA RD
MADISON WI 53719
USA
RUNZLER@WISCUB.ORG; DUMS@WISCUB.ORG
INITIATIVE FOR COMPETITIVE ENERGY INC
THOMAS L. FRENN; DAN EASTMAN
812 E STATE STREET
MILWAUKEE WI 53202
USA
FRENNLAW@GMAIL.COM; DAN.EASTMAN@ICE-WI.ORG
PUBLIC SERVICE COMMISSION OF WISCONSIN
ALEX MAHFOOD; KATE CHRISTENSEN
610 NORTH WHITNEY WAY PO BOX 7854
MADISON WI 53707
USA
ALEX2.MAHFOOD@WISCONSIN.GOV; KATE.CHRISTENSEN@WISCONSIN.GOV

30

 Docket 5-DR-112
REGULATORY AFFAIRS
WISCONSIN PUBLIC SERVICE CORPORATION
231 W. Michigan Street - P321
Milwaukee WI 53233
USA
PSCWNotification@integrysgroup.com
WISCONSIN ELECTRIC POWER COMPANY
CATHERINE PHILLIPS
231 W MICHIGAN ST STE A292
MILWAUKEE WI 53203-2918
USA
CATHERINE.PHILLIPS@WE-ENERGIES.COM
WISCONSIN ELECTRIC POWER COMPANY
THEODORE EIDUKAS
PO BOX 2046
MILWAUKEE WI 53201
USA
PSCWNOTIFICATIONS@WE-ENERGIES.COM
WISCONSIN GAS LLC
THEODORE EIDUKAS
PO BOX 2046
MILWAUKEE VA 53201
USA
PSCWNOTIFICATIONS@WE-ENERGIES.COM
WISCONSIN INDUSTRIAL ENERGY GROUP
HEINZEN LAW SC
2 EAST MIFFLIN ST STE 402
MADISON WI 53703
USA
STEVE.HEINZEN@HEINZENLAW.COM
WISCONSIN INDUSTRIAL ENERGY GROUP
TODD STUART
10 EAST DOTY STREET STE 800
MADISON WI 53703
USA
TSTUART@WIEG.ORG

31

 PUBLIC SERVICE COMMISSION OF WISCONSIN

Application of Wisconsin Electric Power Company, Wisconsin Gas LLC,
and Wisconsin Public Service Corporation for Declaratory Ruling and
Approval Regarding Long-Term Natural Gas Storage and Transportation
Arrangements

5-DR-112

DISSENT OF COMMISSIONER LON ROBERTS
I respectfully dissent from the Commission’s decision to issue the declaratory ruling, as I
would have declined to issue the requested declaratory ruling. When the Commission decided to
open this docket in March 2017, I was personally interested in learning more about the proposed
transaction. I believe the Commission made the right decision to open the docket at the time, but
since learning more about the proposed transaction, I would have declined to issue the
declaratory ruling for several different reasons.
First, purely from a policymaking perspective, I believe that determining the
reasonableness and prudence of the proposed transaction in the context of this declaratory ruling
is less appropriate than making such a determination in either a rate case, gas supply plan
proceeding, or affiliated interest proceeding. The applicants [Wisconsin Electric Power
Company (WEPCO), Wisconsin Gas LLC and Wisconsin Public Service Corporation (WPSC)]
sought a declaratory ruling regarding the reasonableness and prudence of entering long-term
transportation and storage contracts with their potential affiliate prior to WEC Energy Group,
Inc. (WEC), acquiring Bluewater in order to obtain cost recovery assurances for WEC. Stated
another way, under the guise of asking the Commission whether it is reasonable and prudent for
the applicants to enter into long-term storage and transportation contracts if WEC purchases

 Docket 5-DR-112
Bluewater, the question that is really being asked is should WEC acquire Bluewater. Only
then—after any such acquisition—is the question presented ripe for the Commission’s
adjudication. It is undisputed, however, that WEC does not require any Commission approval
prior to acquiring the unregulated Bluewater. I would have therefore required WEC to rely on its
business judgment to make that business decision. While the applicants asserted that the
Commission issues approvals for utilities to construct or acquire utility plant, such as the
Riverside facility, such approvals are required under Wisconsin law. No such approval is
required here because it is WEC—not the applicants—that is proposing to purchase the
Bluewater facility. Further, these construction or acquisition approvals required under
Wisconsin law do not constitute determinations of prudence or rate recovery. The Commission’s
discussion of prudence and rate recovery in the decision approving the Riverside facility made
clear that such approval did not constitute a determination of prudence or rate recovery. See
App. of Wis. Power & Light Co. for a Certificate of Public Convenience and Necessity to Build
an Approximately 650 Megawatt Natural Gas-Fueled Power Plant at its Riverside Energy
Center Facility in the Town of Beloit, Rock County, Wisconsin, Docket No. 6680-CE-176, 2016
WL 2825926, at *16-*18 (Pub. Serv. Comm’n of Wis. May 6, 2016). Even if issuing an
approval for utilities to construct or acquire plant did constitute a determination of prudence, the
case on which the applicants rely makes clear that Wisconsin law does not necessarily guarantee
that all prudent expenditures are entitled to rate recovery. Wis. Pub. Serv. Corp. v. Pub. Serv.
Comm’n of Wis., 109 Wis. 2d 256, 325 N.W.2d 867 (1982). There, the court stated that “[w]e do
not have before us and we do not decide the issue of whether prudent expenditures are always
recoverable from ratepayers.” Id. at 265. Rather, “prudence is a factor the [Commission]

2

 Docket 5-DR-112
considers in setting utility rates.” Wis. Pub. Serv. Corp. v. Pub. Serv. Comm’n of Wis., 156 Wis.
2d 611, 616, 457 N.W.2d 502 (Ct. App. 1990). Of course, another factor the Commission
considers is whether the acquired or constructed plant is “used and useful.” Wis. Tel. Co. v. Pub.
Serv. Comm’n of Wis., 232 Wis. 274, 341-48, 287 N.W. 122 (1939). It is lastly worth
mentioning that any utility acquisition or construction decision is entitled to a presumption of
prudence. In re Wis. Power & Light Co., Docket No. 6680-UR-110, 2001 WL 969109 (Pub.
Serv. Comm’n of Wis. June 19, 2001).
While the proposed transaction may present the potential for ratepayer benefits, I would
have declined to provide assurances to WEC where the claimed benefits of the proposed
transaction may not materialize. If those benefits do not materialize, the burden would fall
entirely on the ratepayers under the structure of the proposed transaction. Importantly, this
burden would not necessarily fall entirely on ratepayers if the applicants were acquiring
Bluewater directly. Balancing risk and reward appropriately is necessary to any contractual
relationship, especially one with an affiliated party implicating captive ratepayers. The
applicants did not adequately demonstrate that they have achieved that balance under the
structure of the proposed transaction. I appreciate that the applicants have proposed several
conditions in an attempt to strike a better balance, but I do not believe they went far enough and
do not balance risk between shareholders and ratepayers.
Second, I believe the Commission has several clear paths for reviewing the
reasonableness and prudence of any decision by the applicants to enter long-term transportation
and storage contracts with their affiliate in the event that WEC does in fact acquire Bluewater.
Depending on the appropriate method of cost recovery, the traditional manner for such review

3

 Docket 5-DR-112
would be in the context of a gas supply plan case or rate case. In a gas supply plan case,
Commission staff reviews a utility’s entire portfolio of gas supply and evaluates the
reasonableness and prudence of a particular component based on the totality of the
circumstances. The Commission could also review the reasonableness and prudence of the
applicants’ decision in a rate case. Assessing the reasonableness and prudence of utility
investment is one of the hallmark functions this Commission performs in determining the
revenue requirement and setting rates.
Further, where the storage contracts would be affiliated interest agreements, the
applicants would be required to obtain Commission approval under Wis. Stat. § 196.52. While I
recognize that the Commission may not necessarily pass judgment on the justness and
reasonableness of the rate contained in the storage contract, the Commission may evaluate the
reasonableness and prudence of entering into the storage contracts with their affiliate. As the
applicants are well aware, the Commission recently approved in Docket No. 5-AE-208 the
purchase power agreement between WEPCO and WPSC under Wis. Stat. § 196.52 without
passing judgment on the justness and reasonableness of the Federal Energy Regulatory
Commission (FERC) approved contract rate. See App. of Wis. Pub. Serv. Corp. and Wis. Elec.
Power Co. for Approval of Affiliated Interest Agreements and Fuel Rate Treatment Related to a
Capacity-Only Transaction to Ensure Wis. Pub. Serv. Corp. Resource Adequacy Requirements in
Lieu of Building Additional Generation, Docket No. 5-AE-208, 2017 WL 2311172 (Pub. Serv.
Comm’n of Wis. May 24, 2017). Whether an affiliated interest agreement is reasonable and
consistent with the public interest involves more than reviewing the rate. Indeed, the
Commission routinely includes language in its orders approving affiliated interest agreements

4

 Docket 5-DR-112
stating that such approval does not constitute a determination that the rate is just and reasonable.
This would be the case with these affiliated interest agreements as well, and it appears that the
applicants have conceded, at least with respect to the decision to initially enter into the storage
contracts, that the Commission has authority under Wis. Stat. § 196.52.
Not only does the Commission’s authority under Wis. Stat. § 196.52 extend over the
utility’s initial decision to enter an affiliated interest agreement, but the statute also expressly
provides that the Commission “shall have continuing supervisory control over the terms and
conditions of contracts and arrangements under this section as necessary to protect and promote
the public interest.” As legal commentary makes clear, this provision is intended to “meet the
possibility of initial misjudgment or of economic change.” Legislation Extending Control Over
Public Utility-Affiliate Contracts, 45 Harv. L. Rev. 729, 733 (1932). The statute also expressly
states that “Commission approval of a contract or arrangement under [Wis. Stat. § 196.52] shall
not preclude disallowance or disapproval of a payment under the contract or arrangement if upon
actual experience under the contract or arrangement it appears that the payments provided for or
made were or are unreasonable.” Evaluating a utility’s decision to enter a FERC approved
contract after it has been entered would not implicate federal law. One of the cases on which the
applicants rely in support of the Commission’s authority to issue the declaratory ruling, Kentucky
West Virginia Gas Co., 837 F.3d 600 (3d Cir. 1988), involved a state commission disallowing
costs incurred by a retail gas utility purchasing under a FERC approved contract. The court
stated that a state commission “may legitimately inquire into whether the retailer prudently chose
to pay the FERC-approved wholesale rate of one source, as opposed to the lower rate of another
source.” Id. This inquiry can occur “without impugning the reasonableness of the wholesale

5

 Docket 5-DR-112
rate.” Id. Together, these sources provide support for the Commission’s authority to reevaluate
the reasonableness and prudence of the applicants’ decision to enter the storage contracts. Such
reevaluation is plainly a matter of state law, not federal law.
Despite the applicants’ protest to various conditions, the Commission also has the
authority to reopen any order under Wis. Stat. § 196.39, regardless of whether that order is a
declaratory ruling, a rate order, or an order under Wis. Stat. § 196.52. The plain language of
Wis. Stat. § 196.39(1) is extremely broad and provides, in its entirety, that “[t]he [C]ommission
at any time, upon notice to the public utility and after opportunity to be heard, may rescind, alter
or amend any order fixing rates, tolls, charges or schedules, or any other order made by the
[C]ommission, and may reopen any case following the issuance of an order in the case, for any
reason.” It is also well-established that under Wis. Stat. § 196.395, the Commission has broad
authority to issue conditional orders. When an order is issued upon certain conditions, any party
acting upon any part of the order is deemed to have accepted and waived all objections to any
condition contained in the order.
Third, I am uncomfortable with the term of the proposed transaction. While I appreciate
the applicants’ willingness to move to a shorter, 30-year term, that does not go far enough. As
Commission staff noted, the longer the contract term, the greater the financial risk to the
applicants, and in turn, their ratepayers. No matter how robust the applicants’ economic model
may have been, even a 30-year term presents certain challenges. 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

6

 Docket 5-DR-112
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.
Through the requested declaratory rulings, the applicants have sought to take a proactive
approach to managing their gas supply portfolio, which I believe is important. Indeed, I have
recently expressed an interest in the Commission’s approach to overseeing utility management of
gas supply portfolios. While the proposed transaction is intended to serve as a hedge, the manner
in which it is structured does not balance risk and reward equally among ratepayers and
shareholders. Based on that and the length of the contract term of the proposed transaction, I
would have declined to issue the declaratory ruling. The decision would not have, however,
ceded the Commission’s ratemaking authority or authority under Wis. Stat. § 196.52 over any
contracts the applicants may enter. The decision to issue a declaratory ruling is entirely
discretionary, and where WEC requires no approval to acquire Bluewater, the requested
declaratory ruling appears to seek assurance for WEC. On the other hand, the Commission
protects the ratepayers through its ratemaking authority and authority under Wis. Stat. § 196.52,
not through the declaratory ruling process.
The action taken today in this docket runs the risk that a future Commission wishing to
evaluate alternatives to these storage arrangements or adjust cost recovery will, as a result of this
predetermination of reasonableness and prudence, be limited by and possibly estopped from
taking actions necessary to address initial misjudgments and future economic changes
notwithstanding the Commission’s general authority otherwise available to it to take action in a
gas supply plan proceeding and rate case or to exercise its authority to review, approve, and
continue to supervise affiliated interest agreements.
DL:01549465

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