Gov. Scott Walker’s plan to put the state’s 37 power plants up for sale to fund road projects might bring in hundreds of millions of dollars, but it would short-change taxpayers in the long run, critics of the plan say.
“The whole idea of selling has to do with short-term money gain because we sell the right to bleed the taxpayer in the future,” says Peter Carstensen, a professor at the UW Law School who specializes in utilities regulation.
Walker scrapped plans in his budget repair bill two years ago to sell off the plants after opposition emerged even from some Republicans over a provision that would have allowed the state to sell them on a no-bid basis, and with no oversight from the state Public Service Commission. According to the Milwaukee Journal Sentinel, the new plans would include a bidding process.
Walker has billed the sales as a way to pay down debt on road projects, the most costly of which is Milwaukee's Zoo Interchange reconstruction.
Walker's budget lays the groundwork for the sale of the plants, authorizing the state Department of Administration or the Building Commission "to sell or lease any state-owned real property unless prohibited by the state or federal constitution or federal law." The budget eliminates the requirement that certain sales of state-owned property be subject to approval from the legislative Joint Finance Committee.
The budget states that if the state Department of Administration or the Building Commission sells or leases a "state-owned heating, cooling or power plant that is under the jurisdiction of a state agency, the agency must convey all personal property associated with the plant to the purchaser or lessee on terms specified by DOA or the Building Commission."
Proceeds from the sales would have to be used to retire any public debt associated with the state property, with the remaining proceeds to go to the budget stabilization fund.
The budget also gives entities that co-own property with the state the right of first refusal to purchase that property, which would clear the way for Madison Gas and Electric to buy out the state's portion of the UW-Madison's West Campus Cogeneration Facility, says Charlie Higley, executive director of the Citizens Utility Board.
"This provision would give MGE the right to buy the facility before anybody else," says Higley.
A 2006 report by American Appraisal Associates found that the 32 power plants assessed at that time were worth $270 million at fair market value.
“Fair market value, as stated above, is not intended to represent the amount that might be realized from piecemeal disposition of the property in the open market,” the report cautions.
Since that appraisal, the state has spent $150 million to convert the UW’s Charter Street plant — assessed in the 2006 appraisal at $67 million — from coal to natural gas in response to a Sierra Club lawsuit. And last year the state Building Commission approved $9 million for upgrades to the state's power plants, which included $7 million for a natural gas conversion at the Waupun Correctional Institution plant.
But Carstensen says those improvements don’t necessarily mean that the costs would be offset in a sales price.
“What you put in has no relevance in terms of what somebody will pay for it,” he says. “It’s all about what you can get out of it in the future.”
Past efforts to privatize the plants have garnered interest from utilities. Walker’s proposal in 2011 drew interest from We Energies and Madison Gas and Electric, and in 2008 Johnson Controls, Weston Solutions and MGE drew up proposals for privatizing the Charter Street plant, the Walnut Street plant and the state Capitol plant in response to a state survey.
Higley says there's talk in the industry that utilities interested in buying state-owned plants are looking at options that would avoid passing the purchase price onto ratepayers, but notes "We haven't seen the details of that."
But he adds that the rates paid by the state, which ultimately fall to the taxpayers, will undoubtedly rise.
"Costs for taxpayers will go up for sure because not only are improvements needed for many of these facilities, but if they're owned by for-profit entities, the taxpayers will have to pay the profits, too," he says.
Assuming there is support in the GOP-led Legislature, Walker’s plan caps a nearly two-decade-long Republican effort to privatize the plants.
In 1995 former Assembly Speaker Scott Jensen, then Assembly majority leader, proposed selling off the plants, calling them a remnant of the state’s “neo-socialist” political tradition. At that time Jensen said the sales could bring in $150 million for the cash-strapped state government.
According to a news account in The Capital Times, a 1997 study found that private companies would likely end up charging the state more for heat, cooling and power because state workers made 30 percent less than their private-sector counterparts, the companies would pay higher interest rates than the state for capital improvements, and corporate owners would have to pay off stockholders and pay corporate taxes.
Offsetting cost-saving measures like scaling back staff, the report said, could reduce reliability as well.
In 2005, Republicans, again led by Jensen, inserted a proposal to sell off the plants in the 2005-07 budget, which was vetoed by Democratic Gov. Jim Doyle.
Carstensen says the issues cited in the 1997 report remain today. And unless the state works out some sort of rate regulation, which would reduce the potential selling price, the state would be dealing with plant owners who could hold heating and cooling of prisons, student dorms and campus classrooms, and the state Capitol hostage if the state doesn’t go along with inevitable rate increases.
“It’s a terrible situation,” he says. “It’s an endless cycle of stuff that you really don’t want to have to deal with. The administrative costs of negotiating these contracts, even if everybody were to behave in good faith and non-strategically, is extraordinary. This makes no sense.”
Higley says that talk in the industry points potentially to a scheme that would, indeed, force the state to the negotiating table for heating and cooling contracts.
Such a structure exists at two We Energies coal-fired power plants south of Milwaukee, he says. A subsidiary called We Power owns the plants, and We Energies has a contract to operate them and buy the power back from We Power. While the rates are regulated, the PSC approved the lease agreement, which locks in a 12.7-percent profit, "which is outrageous," Higley says.
That lease arrangement was approved by the Legislature in 2001, he says, so similar leases could probably be arranged with only PSC approval.