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on Energy: Turmoil and Transition?
Contents
Viewpoint on Energy: Turmoil and Transition?
People’s Republic of China Boulder
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London 50 Regulated electricity businesses: maximizing shareholder value
123 Buckingham Palace Road
London SW1W 9SR Madison through active management, by Edward Kee
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Cambridge Technology Centre 63 ‘Double down or fold’: utility retail at a crossroads, by Derek HasBrouck
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Lon~9246
Energy:
Turmoil and
Transition?

“ This is a challenging time for the

industry and we believe that electric
power companies across the globe

“
must get back to basics: bearing down
on the fundamentals to get through this
troubled time and build a platform for
future success.

1
 Regulated electricity
businesses:
Maximizing shareholder value
By Edward Kee
through active management

Before the Enron meltdown, regulated companies appeared to be under-performing

holdovers, while unregulated generators and traders looked like big winners.
Regulated electricity companies missed the gains seen by generating and trading
companies prior to the Enron meltdown, but they also missed the losses that followed.

The recent financial performance of regulated electricity
companies is excellent in comparison to the market
losses suffered by unregulated generators and traders.
Regulated electricity companies are seen as sound
investments again, with the potential to build real risk-
adjusted value for shareholders.
The recent turmoil in the electricity industry may lead
some regulated electricity companies (along with
regulators, politicians, and investors) to adopt a do-nothing
strategy in the face of uncertainty. A significant part of the
electricity industry is – and will remain – regulated.
Transmission and distribution systems will continue to
operate under cost-of-service regulation even after industry
reforms are completed. Some vertically integrated utilities
will continue to be regulated during the transition period
to full competition in generation and retail.
Regulated electricity companies, however, are not
insulated from the effects of industry reform and face
significant opportunities and challenges. Regulated
electricity companies that adopt a do-nothing strategy are
likely to be less profitable than companies that actively
manage through this uncertainty. With much of the energy
industry in disarray, and investors re-thinking portfolios in
the midst of a widespread liquidity squeeze, this is a timely
and pivotal opportunity for financially sound utilities to
undertake a strategic review to:
• Assess and prioritize significant financial threats
and opportunities in your business and regulatory
environment
• Define corporate core objectives in light of your current
situation and the threats and opportunities
• Design, staff and implement responses to significant
threats and promising opportunities consistent with
core objectives.

50
Figure 1: From ‘do nothing’ to active management
Active management
Selectively outsource
Develop and introduce new technology
Take opportunities for horizontal consolidation
Upgrade and replace existing infrastructure
Invest in new infrastructure
Actively manage regulation
Regulatory Structural Competitive
change change threats
This article reviews the potential threats and opportunities
in the regulated electricity business, explains why passivity
in the face of a changing environment may not represent
the best approach, and presents some alternatives for
active management (see Figure 1). My goal is to stimulate
discussion about the need for a strategy review at this
critical point in the industry.
Environmental threats and opportunities
While each company’s strategy must reflect its unique
situation, this article reviews the three areas of strategic
threat and opportunity and later offers some responses.
These threats and opportunities fall into three broad and
interrelated categories:
• Regulatory change
• Structural change
• Competitive threats.
Regulatory change
Regardless of the pace or direction of electricity industry
reform, significant portions of the electricity industry will
remain regulated. Electricity transmission and distribution
systems are critical links in the delivery of power from
generators to consumers and will be regulated for the
foreseeable future. Transmission will increasingly fall
under the jurisdiction of the US Federal Energy Regulatory
Commission (FERC) through the Regional Transmission
Organization (RTO) process, while distribution will remain
regulated by state or local jurisdictions.
Generation and retail, already partially deregulated, will
eventually be unregulated competitive businesses.
However, vertically integrated utilities will remain regulated
until the shift to markets and accompanying de-integration
is complete. Also, deregulation may be implemented
gradually by the use of transition arrangements, rate-freeze
agreements, or vesting contracts that keep these
companies under limited regulation for some time.
In the US, decades of experience with regulation have
provided a solid basis in law to support a fair return to the
owners of regulated assets. This relatively stable legal and
regulatory environment in the US should enable a smooth
transition to new regulatory regimes and new industry
structures as compared with countries (eg, Australia and
the UK) where legal and regulatory precedent on fair
compensation is much more limited.
Regulation will change over time as industry reform
is implemented. Past regulatory regimes were far
from perfect and were developed to control bundled
rates from vertically integrated electricity companies.
Regulatory regimes will be modified to correct the
mistakes of the past (eg, incentives for over-investment
and insufficient incentives for performance) and to fit
a vertically de-integrated industry structure.
51
 Regulatory transition may present financial risks
As the US electricity industry moves slowly into competitive
markets, the potential exists for extreme financial risk that
may make regulation and ratemaking difficult or impossible.
Regulation is not an ironclad guarantee of cost recovery
and a fair return on investments, as an earlier generation
of utility executives learned in the nuclear plant
disallowance proceedings in the 1970s and 80s.
The regulatory bargain has become even more uncertain,
with recovery of all operating expenses at risk, especially
those arising from spot market exposure, as seen
in California.
In California, regulated utilities relied on the traditional
regulatory bargain in 2000 when selling at low fixed prices
to customers while buying at high spot prices in the
wholesale electricity market. The magnitude of the
resulting financial losses pushed the California utilities to
the point of financial distress. In spite of the lessons of
California, some regulated utilities expect regulators to
make good on any losses from unhedged fixed-price
retail sales obligations in volatile wholesale electricity
spot markets.
Allowed rates of return are uncertain
As the electricity industry is de-integrated, regulators may
re-examine the current modes of economic regulation and
the level of allowed rates of return. As generation and
retail are divested, regulated utilities companies become
pure wires companies and may be perceived as having
lower risk, justifying lowered rates of return. This may be
the case even when industry uncertainty regarding the
regulatory bargain and a shifting of risks to regulated wires
companies (eg, liability limitation removal) may actually
increase risk and provide a valid argument for a higher
allowed rate of return.
In Australia, for example, the initial implementation
of electricity sector reform has had mixed results.
State regulators and the ACCC1, eager to contribute
to the success of electricity sector reform, developed
some innovative approaches2, but have typically allowed
relatively low returns, below those sought by the regulated
companies. These low allowed returns may present future
1
The Australian Consumer and Competition Commission, the regulator for transmission companies.
52 2
These innovations include links between allowed return and specific performance against operational targets such as frequency and duration of line outages.
problems with financial viability and lowered incentives for
additional investment.
Regulated transmission companies will increasingly see a
shift toward RTOs that will act as a regional collector of
transmission and congestion tariffs that are allocated to
transmission owners. The transition arrangements from
past ‘wheeling’ tariffs to full network service will be
important to transmission companies. In the longer term –
after the transition arrangements are gone – transmission
owners should expect to earn revenues from a return on
assets, with the potential existing for stranded assets even
in transmission.
Structural change
Regulated electricity companies will inevitably face some
restructuring as a part of industry reform. As with
regulation, those companies that actively develop a
strategy to participate in this restructuring are more likely to
profit as compared to those that passively respond. In
some instances, this restructuring may present temporary
opportunities to grow through acquisition.
Industry will face vertical dis-aggregation
Transmission will be required to be independent of the
competitive sectors of generation and retail that participate
in the electricity market. In other market, such as Australia
and the UK, transmission and distribution were completely
separated from the generation and retail sectors to
facilitate competition and open access. The recent FERC
RTO initiatives have increased the pressure to make the
transmission business independent from the competitive
links in the electricity value chain. Transmission will also be
separated from distribution. Distribution utilities will remain
regulated at the state level while transmission will move to
FERC regulation, raising the costs to manage separate
regulatory regimes. The business of distribution is focused
on dense low-voltage networks serving local customers,
a fundamentally different business from transmission
with high-voltage lines serving the bulk power market.
If distribution companies remain in the retail business (even
as default suppliers), the independence of transmission
from market participants may be compromised.
A more pervasive issue in the US is the continued bundling
of retail commodity sales and distribution. Unlike industry
reform in other countries, such as Australia and the UK,
most regulated distribution utilities in the US also provide
retail electricity service to the customers they serve even
after retail competition is implemented. US distribution
companies often have retail provider-of-last-resort (POLR)
obligations. This preference for bundling regulated wires
and retail in a single company may result in a slower and
more difficult transition to a fully reformed electricity
industry in the US.
While properly separating distribution and retail is not
trivial, there are a number of compelling reasons why it
should be done. Distribution companies with POLR
obligations at regulated rates may face significant financial
risk, as discussed above. Competitive issues also arise in
a functioning competitive retail market with a distribution
company acting as a competing retailer. Even if rules and
regulations allow competition with this bundling, the
difference in the critical success factors in distribution and
retail suggest that it is unlikely that a single company will
succeed in both simultaneously. Finally, retailers will likely
be in direct competition with distribution companies by
selling products such as on-peak and off-peak power,
controllable appliances, non-interruptible power, and
curtailment discounts that may be specifically aimed at
reducing customer exposure to regulated transmission and
distribution charges.
Non-core functions should be divested
Regulated companies once built internal capabilities for
almost all activities, in response to the incentives of cost-
of-service regulation. As regulatory regimes are fine-tuned
and regulated companies become more focused on a
single vertical sector, the incentives for efficient operation
and improved performance of regulated companies should
become more pronounced. As unregulated companies
have learned, outsourcing can reduce costs and improve
performance. Regulated companies should seek to
enhance value through the de-integration and outsourcing
of some internal functions and activities.
In the distribution and transmission sector, these activities
may include: billing and collections; construction and heavy
maintenance (eg, replacement of major equipment);
regular operation and maintenance (eg, cleaning and
inspection, vegetation clearing).
Competitive threats
The traditional monopoly supplier status of regulated wires
companies may be diminished under industry reform.
Transmission is increasingly viewed as a substitute for
properly located generation and there is emerging
competition from new entrants. Regulated electricity
companies should examine the threat from competition to
their regulated business and prepare a strategy to counter
these threats.
Merchant transmission companies appear
A significant number of new non-regulated merchant
transmission projects are being developed in the US, many
of which are based on high-voltage DC technology. The
controllable nature of HVDC technology creates property
rights that facilitate recovery of investments through market
transactions. Merchant, unregulated, transmission projects
using this technology are operating or under development
in Australia and North America. Merchant transmission
projects, targeting the most lucrative bottlenecks, compete
for investment with regulated transmission assets.
On-site and near-load generation will expand
Generation located at customer sites, near load centers
or in areas of high locational prices, effectively competes
with investments in transmission. On a smaller scale,
such generation can even compete with distribution
investments. In some instances, on-site generators may
allow customers to operate with only minimal use of the
transmission/distribution system. Widespread use of
locational spot prices might lead to generation
development that would significantly reduce the use
of some existing transmission or even distribution lines,
raising issues of stranded assets.
Private distribution companies are considered
There is an additional threat to distribution companies in
the form of private distribution companies that take high-
value areas from a larger regulated distribution company.
53
 Regulated distribution rates that are high (eg, due to
stranded cost and other transition charges collected
through ‘wires’ charges, plus normal distribution charges)
may lead to the formation of a new private distribution
utility, bypassing the regulated distribution utility. Private
distribution companies may, due to financing flexibility, use
of new technology, and a focus on high-density areas, be
able to achieve lower costs for end-use customers
compared to traditional regulated distribution utilities.
Defining corporate objectives in
the new environment
Having identified the strategic threats and opportunities
presented by the new environment, most companies move
directly to mapping previously identified responses with
powerful internal constituencies onto the new game board.
This approach may result in a plausible story for the annual
report or analyst conference call, but may lack a proper
screening of corporate strengths, weaknesses and goals in
light of the new strategic environment. Critical self-
assessment within a defined and open process can help
build an internal consensus and common understanding of
corporate priorities and the means and resources that will
be required to attain them.
Institutional strengths and weaknesses are difficult to
objectively assess, because measurement tools are
ad hoc, inconsistent or biased. Benchmarking is a
common and useful utility approach to introducing objective
measures of competence and performance. However,
benchmarking can be inadvertently subverted by the
definition of the relevant comparative universe. As noted
above, competitive challenges are emerging from new
directions. The upper decile of performance or cost control
among similarly sized electric utilities may not be the most
relevant measure of your relative ability to enter into new
ventures or repel the competitive advance of new market
entrants. New standards of performance from non-
traditional quarters may also be introduced by regulators
and legislators.
3
For more on the retail marketing dilemma, see the following article by Derek HasBrouck.
54
Similarly, corporate objectives may reflect decreasingly
relevant standards of success. For example, measures of
retail scope and scale based on the traditional utility
business model of vertical integration may no longer apply
in an era of horizontal specialization.3 Financial structures
and capital resources that proved ideal in one operating
environment may prove inadequate or inefficient in another.
Therefore, a crucial internal first step in evaluating
and prioritizing corporate objectives is to establish
– through structured debate, consensus and articulation –
a corporate ‘view of the world’. A well-articulated view of
the world places corporate strengths and weaknesses in
the context of future challenges and opportunities and
illuminates conflicts and limitations among established
corporate goals and individual agendas.
Organizations unaccustomed to this process, or those
seeking independent perspective on goals and capabilities,
often turn to outside consultants to provide a roadmap and
challenge internal assumptions. PA’s approach to
facilitating corporate strategy development is described in
the ‘strategic mapping’ panel overleaf.
Strategic response to environmental change
The changing face of regulation, industry structure and
competitive threats outlined above strongly suggest that
any complacency by regulated utility management
(resulting from the serious problems affecting their
more aggressive industry brethren) is misplaced.
What follows is more of an enumeration of, rather than
a recommendation for, possible actions and responses
in light of these developments.
Actively manage regulation
US regulated electricity companies, with decades of
experience in managing regulation (and regulators), should
be able to successfully make the transition to new forms of
regulation that will be developed as a part of industry
reform. Managing this transition well may be the single
most critical activity for a regulated company.

Strategic mapping
PA’s Strategic Mapping Process (SMP) is a three-step process designed
to help energy utility organizations address the central strategic
challenges that they face:
• How to take advantage of current market trends and create
sustainable revenue and income streams?
• What type of business model to adopt to achieve the best portfolio
of regulated and unregulated assets?
• How to implement the new business model?
SMP can be used at a subsidiary level, but is generally better applied at
a corporate level to design a strategic course of action which
accomplishes the best trade-off and migration path between legacy and
new (often unregulated) businesses and assets.
Step 1 involves a strategic-issue analysis to achieve agreement on the
current situation of the organization (strengths, weaknesses, business
philosophy preferences and corporate risk attitudes), followed by a
codification of the organization’s view of the world (generally for the next
5–7 years) to help rank the most attractive market and value-chain
segment opportunities.
Those regulated companies that actively participate in the
regulatory process have an opportunity to shape regulation
and to tailor company structure and strategy to reflect
current and expected regulatory regimes. Such an active
approach to regulation is likely to yield higher and more
certain profits.
Incentive regulation may be seen as a way to improve the
efficiency of the regulated parts of the electricity industry.
The CPI-X approach used in the UK is an example.4
Performance-based rate-making regimes, with a return on
assets adjusted for performance against specific
performance targets, have been suggested. Incentive
regulation may present the potential for significant profit
improvement for some companies, depending on the
details and the timing. Other companies may face sub-
standard returns and higher risk. Utilities that actively
participate in the development of incentive regulation
regimes are more likely to benefit from them, especially in
the early period.

Step 2 starts with a review of possible business models. Each candidate
model is articulated along five key dimensions: base value proposition
(ie, value chain positioning, underlying risk/reward choices, and level of
differentiation sought); overall scale and scope (mix of regulated and
unregulated activities, geographies, etc); core asset selection (type,
breadth and depth of both regulated and unregulated assets
emphasized, asset flexibility and migration potential by class of assets);
overall success/risk factors (top factors and risk mitigation approaches
on both the regulated and unregulated sides); and targeted durability
and scalability (replication and expansion potential of unregulated and
regulated activities, ability to achieve economies of scale or repeat
technology improvements, scalability of business processes).
Next, candidate business models are ranked against key criteria that
reflect the organization’s strategic position determined in Step 1. The
result is a preferred business model.
In Step 3, the implementation path for the winning model is specified in
detail (including timing, offerings, customers’ priorities, geography
targets, delivery system, growth avenues and risk mitigation for both
regulated and unregulated activities). Finally, the resulting likely
financial performance of the organization under the new model is
simulated to plan the desired level of investments, organization and
competence growth and types of alliances/mergers to be considered.
In the UK, a recent report suggests that the incentive
regulatory regime adopted there may have some flaws,
including inability of regulated companies to generate ever-
increasing efficiency gains under the CPI-X regime.
Importantly, incremental new investments in infrastructure
may not occur because of uncertainties in the likely return,
or because of disagreements between regulators and
regulated companies on the amount and timing of such
investments.
A proper understanding of the contextual distinctions is
useful in deciding which lessons are applicable from
regulatory reform in other countries. US utility executives
would be well advised to familiarize themselves with past
regulatory successes and failures in other nations while
devising their individual corporate responses to state and
federal regulatory initiatives.
Respond to structural and competitive issues
While the industry is undergoing reform, there are some
opportunities for organic growth through building more
assets, replacing and upgrading existing assets, and

4
CPI-X is a form of price cap regulation that links tariffs to a measure of inflation such as the Consumer Price Index (CPI) in the US or the Retail Price Index (RPI)
in the UK. In general, CPI-X regulation works by allowing tariffs to increase at the same rate as general inflation, less some amount (the ‘X’ factor) to reflect
expected/projected productivity gains by the regulated company. Regulated companies can realize the benefits of cost reduction efforts in excess of the X factor
until the next review. This form of regulation typically has a multi-year (eg, every 3 to 5 years) review cycle, where the tariffs and the X factor are reset. For the
next period, the regulator is able to pass to consumers some of the benefits of the realized efficiency gains in excess of the X factor.
55
 through investment in new technology. Careful
examination of, and investment in, these opportunities will
allow regulated electricity companies to achieve profitable
organic growth even during this period of uncertainty.
A decade of uncertainty about impending reform and
restructuring in the electricity industry has resulted in low
investment in transmission and distribution infrastructure.
Companies facing uncertain regulatory regimes and
potential corporate restructuring have postponed or
cancelled new infrastructure projects. Much existing
infrastructure is in need of extensive refurbishment or even
replacement. Little investment has been made in new
technology in the electricity transmission and distribution
business.
Invest in new infrastructure
During the last decade, growth in demand, the shift to
electricity markets, and ageing of existing assets has
created a need for considerable additional investment
in transmission and distribution infrastructure.
The transmission network was designed when its primary
purpose was to move power from power plants to load
centers within a single utility. Now, additional transmission
capacity is needed to facilitate emerging competitive
markets. Also, an increase in electricity demand over the
last decade has not been matched by a corresponding
increase in transmission.
The FERC has initiated incentive programs for
transmission infrastructure development. It remains to be
seen if these programs will spur additional investment, or
simply provide enhanced economics to projects that were
already under development. Regulatory certainty for the
long term will be a more significant driver of investment.
Other issues that will shape the investment in transmission
infrastructure include:
• Reliability requirements and responsibilities and
associated system planning responsibilities under new
RTO arrangements
• The use of ‘rate-freeze’ periods as a means of
extracting shareholder value, with the obvious limits on
increased investment under such arrangements
56
• The extent to which the extremely difficult and lengthy
process of obtaining siting and permissions for
transmission lines will be eased, perhaps through FERC
jurisdiction and eminent domain powers
• The allocation of transmission rights and revenues
flowing from new transmission investments.
The need for increased distribution and transmission
infrastructure will provide large investment opportunities for
companies that effectively manage the regulatory process.
Upgrade and replace existing infrastructure
Much of the US distribution network is old and in need of
replacement, with inner-city distribution systems
experiencing outages, fires, and manhole explosions due
to old and degraded wiring. In some cities, there is a
desire to move from overhead distribution wires to
underground systems for aesthetic, safety and other
reasons. Upgrading and replacing the existing distribution
systems will take an enormous amount of capital
investment. Even more will be required if lines are shifted
to underground.
On the bright side, recent initiatives by the FERC aimed at
providing incentives for participation in electricity industry
reform may mean higher returns for companies in some
instances. Incentive returns were offered to companies
that made near-term investments in transmission
infrastructure and to those transmission companies that
turned over control of assets to an approved RTO.
Participation in these incentive schemes can provide a
boost to profits for regulated electricity companies.
Take opportunities for horizontal consolidation
During the 1980s and 1990s the trading, generation and
retailing businesses underwent considerable consolidation.
The transmission and distribution sectors will also undergo
consolidation as the industry reform proceeds.
In the regulated wires sectors, some companies are
pursuing focused single-segment strategies, including
National Grid and Trans-Elect. Fundamentally, there is
little that prevents significant consolidation of the
transmission and distribution sectors and continued
consolidation will be facilitated by the divestiture (perhaps
 forced) of transmission assets. Transmission is a small
percentage of an integrated utility’s asset base, when
compared to generation or distribution. Anticipating that
transfer of transmission ownership will be encouraged to
facilitate the electricity markets, some utilities are exploring
the divestiture of transmission assets.
The consolidation of distribution companies within states
may be the first move, with consolidation across state lines
being a little more difficult. However, there are several
utilities that acquired distribution assets in multiple states
as a result of the merger of integrated utilities or through
historic growth.
Develop and introduce new technology
The reform of the electricity industry may have the
unintended consequence of reducing R&D spending and
the development of new technology. Technologies such as
superconductors and more sophisticated transmission
metering and control systems could add capability to the
network without adding more power lines. Although the
Electric Power Research Institute remains in place, its
funding and ability to undertake fundamental research is
greatly impaired.
It remains to be seen if regulated companies will take on
additional risks and costs to develop or invest in new
technologies and approaches. Those that develop new
products for the industry could earn returns from their
intellectual property. The investment may also be an
effective way to increase regulated assets outside
traditional investment in poles and wires.
Selectively outsource
Contracting with outside providers can lower investment,
reduce operational risk, enhance flexibility, and lower
costs. Outside contractors can develop flexible
approaches to labor management, adopt new techniques
and approaches to lower cost, and develop economies of
scale that may not be easily attainable by the utilities they
The author, Edward Kee, is a Member of PA’s Management Group, and specializes in electricity industry restructuring
and market reform
serve. A regulated electricity company might only keep
critical activities such as financing, investor relations,
regulatory process management, and the management
of outside contracts. The lowered operating risk and cost
savings from outsourcing non-core activities will help
regulated utilities meet the demands of regulation and
create additional value for shareholders.
Conclusion
A significant segment of the electricity industry will remain
regulated even after industry reform is completed. These
regulated companies are not immune to the changes from
industry reform and are presented with significant
opportunities and challenges in the next few years.
Regulated electricity companies can maximize their
shareholder value by actively managing these opportunities
and challenges.
With most of the non-regulated portions of the energy
industry in disarray, there is no better time for regulated
utilities that kept to their core business and maintained
a healthy balance sheet to re-examine their strategic
plans. A systematic review of the threats, opportunities
and available resources, preferably using an established
and demonstrated protocol, could prove the most valuable
allocation of your time and those of your management
team during this period of broad retrenchment, redefinition
and revised expectations.
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Case study

Case study

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 Case study
WPS Resources
A regulated electricity company that got it right
– providing shareholders with 43 years
of increasing dividends
Our thought-piece discussed the activities that a regulated electricity company should
undertake to maximize shareholder value. Our case study looks at WPS Resources (WPSR),
a regulated electricity company that has succeeded by actively managing its
regulated businesses.

Background Active management brings results

WPS Resources Corporation is a holding company based
in Green Bay, Wisconsin, with the following operating
subsidiaries:
• Wisconsin Public Service Corporation (WPSC) is a
regulated electric and gas utility serving Northeast
and Central Wisconsin and an adjacent portion
of Upper Michigan.
• Upper Peninsula Power Company (UPPCO) is a
regulated electric utility that serves approximately
50,000 customers in two-thirds of Michigan’s Upper
Peninsula. UPPCO’s corporate headquarters are
located in Houghton, Michigan.
• WPS Energy Services, Inc. (ESI) is a diversified non-
regulated energy company that targets retail energy
sales and related services. Principal operations are
located in Illinois, Maine, Michigan, Ohio and Wisconsin.
• WPS Power Development, Inc. (PDI) develops
and owns non-regulated electric generation projects
and provides services to the electric power
generation industry.
WPSR is an excellent example of a regulated utility
company that sought to maximize shareholder value by
active management. In response to the liberalization of
the utility industry, WPSR went through a long and
detailed strategic planning process. The company started
with a deep commitment to a core vision and strategy and
developed a consistent detailed plan and budget.
In response to the changes taking place in the industry,
WPSR formed a holding company and set up two
unregulated subsidiaries, ESI and PDI, to take advantage
of new markets. Senior management constantly reviewed
the risks associated with the market and prescribed
the limits of their unregulated activities with a rigorous
process to approve investments. Careful investment
in the unregulated businesses kept WPSR from over-
extending itself.
A strategy that balanced regulated and unregulated
activities has produced significant value for the
shareholders. WPSR is one of the few ‘A’-rated companies
among the US utilities. Five years ago, WPSR common
stock was around $22. Two years ago it was $30.
The stock price currently stands at $36 after having gone

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Case study
as high as $42. For 43 years, WPSR has announced an
annual increase in the dividend, with the current dividend
at $2.14 per share.
A major source of these financial results is the WPSR
focus on its regulated businesses, with the company
undertaking a range of activities, detailed below.
Actively manage regulation. WPSR has, through careful
management and cost control, maintained a position as
a low-cost provider of electricity in the region and in the
US. This position has allowed the approval of rate
increases and provided them with significant goodwill with
the Public Service Commission of Wisconsin.
The company’s loyal customer bases in Northeast
Wisconsin and its excellent service ratings were also key
factors in maintaining an excellent relationship with the
Commission. Customer forums, fast response in
emergencies, and effective customer consultation
processes have enhanced the public image of WPSR in
the communities that it serves, further reinforcing its
goodwill with the PSCW.
Invest in new infrastructure. WPSR has made, or is
making, incremental investment in new regulated assets,
including transmission lines and power plants. This has
allowed it to grow the regulated asset base (in the context
of good relations with customers and regulations), while
maintaining the relative security of regulated earnings in
its home market.
Tom Meinz, Senior Vice President of WPSC, said:
“In spring of 2001, we announced our plans to meet the
future electric needs of our customers. We expected to
build generation in the state as well as complete
construction of the Weston-Duluth transmission line.
Both are needed. Some of our power plants are getting
old and are more difficult to maintain. That, along with
steady growth in electric demand, are major reasons this
is a much-needed addition to the system.”
Upgrade and replace existing infrastructure.
WPSR has also maintained and upgraded its existing
infrastructure to enhance reliability, maintain low production
cost, and add to its regulated asset base. Two recent
examples of this are the major refurbishment of an aging
60
hydroelectric generation facility and the replacement of
steam generators at the Kewaunee nuclear power station.
These investments will extend and enhance the operation
of low-cost electricity generation plants. The Kewaunee
investment, in particular, will allow the plant to operate
for a much longer period with fewer outages and
should greatly facilitate the approval of a 20-year life
extension application.
Take opportunities for horizontal consolidation.
WPSR has acquired distribution assets in the surrounding
region, including the Upper Peninsula Corporation and
Wisconsin Fuel And Light. The company has also
constructed a gas storage facility in Michigan. The
company purchased the share of the Kewaunee nuclear
plant held by Madison Gas & Electric, bringing the WPSR
ownership to 59%. Over the years the company has
established an excellent record of operating the unit that
allowed them to make an informed decision in the
purchase.
Develop and introduce new technology. WPSR has
initiated a program to install new meters with automatic
meter reading (AMR) systems at all customer locations
for both gas and electric meters. AMR systems will allow
WPSR to obtain customer use data faster, more accurately
and have fewer estimated bills. AMR will also lower the
costs of meter reading and allow fast detection of
customer outages.
WPSR also makes available a time-of-use rate.
Customers can opt to take this rate for a small fee.
Included in the time-of-use rate is the installation of new
metering that will allow customer use to be measured in
real time.
WPSR has invested in its computer and information
systems to allow customers to conduct many routine
activities through the Internet, including billing. This
investment has significantly enhanced the level of service
offered to customers and lowered the cost of providing this
service.
Selectively outsource. WPSR, along with the other
utilities in Wisconsin, transferred control of its transmission
assets to the American Transmission Company. This
 Case study
transfer allows WPSR to maintain its investment in
regulated transmission assets, while facilitating the
development of regional electricity markets and the
orderly development of the regional transmission system.
It also ensures that WPSR will have access to regional
power markets.

The management and operation of the Kewaunee nuclear

power station was transferred to the Nuclear Management
Company, LLC. Nuclear Management Company was
formed to allow single nuclear plant owners, like WPSR, to
obtain the benefits of purchasing, staffing, and maintaining
a larger fleet of nuclear power stations.

WPSR has also implemented an asset management

program to review all assets owned by the company.
As a part of this program, WPS transferred ownership of
land associated with the Peshtigo River hydroelectric
property to the Wisconsin Department of Natural
Resources in one of the largest land sales in recent
Wisconsin history. The land will be used for public
recreation purposes, and was sold at a price that provided
fair value to shareholders.

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