Wednesday, April 28, 2010

Contractor seeks $485 million more for power plant project

By Thomas Content of the Journal Sentinel
Posted: Dec. 30, 2008

Costly Construction

Completion of the Oak Creek coal-fired power plant project is three months behind schedule, and Bechtel Power Corp. has submitted claims to Wisconsin Energy Corp. for $485 million.

Original project cost: $2.191 billion, as established by state Public Service Commission

Added costs because of pre-construction litigation delays: $50 million-$55 million

Revised project cost: $2.24 billion

Weather and labor cost claim submitted in December: $413 million

Project delay costs claim submitted by Bechtel: $72 million

Damages Bechtel may be forced to pay for the project being late: $250,000 a day, or $22.75 million, based on the revised schedule.

We Energies is being asked to pay $485 million more to Bechtel Power Corp., the company building two new coal-fired power plants in Oak Creek, because the most expensive construction project in state history is running late and over budget.

Bechtel blamed severe weather conditions and labor problems for construction delays that have put the $2.2 billion project three months behind schedule.

The dispute between the two companies could take a year to 18 months to resolve, utility spokesman Rick White said, but a victory by Bechtel could boost the cost of the project for both utility ratepayers and shareholders.

The claims were disclosed in a filing with securities regulators by Wisconsin Energy, which says the claims are "without merit" and that the utility aims to shield customers from any added costs.

Under a cap imposed by state regulators, customers of We Energies and two utility partners in the project can be charged just $110 million, or 5%, more than the $2.2 billion they're already bearing for the project, as approved by the state Public Service Commission in 2003.

But if Bechtel's claims are upheld and the commission agrees the added costs were out of the utility's control, it's possible that regulators could approve even more price increases.

Since 2004, We Energies customers have seen electricity bills jump by 28%, or more than $225 a year for the typical residential customer, primarily for both new power plants and higher fuel costs.

Also on the hook if Bechtel's claims are granted are Madison-based MGE Energy Inc. and WPPI Energy of Sun Prairie. Those companies each have a 7.5% ownership stake in the project.

Who bears the risk?

It's far too early to tell what kind of exposure the utility and its customers would see, White said, but the utility is confident Bechtel's claims are unwarranted.

"The issue is, who bears the risk?" White said. "We believe that the contract states very clearly that Bechtel should bear the risk, not Wisconsin Energy or We Energies or anybody else."

Bechtel has told the Milwaukee utility it would miss the September 2009 deadline for completing the first of the two coal plants. That plant is now projected to be running by the end of 2009.

"Bechtel strongly believes that its claim for schedule extension and compensation is fully supported by our contract and the facts," Francis Canavan, a Bechtel spokesman, said in a statement. "We are currently engaged in the dispute resolution process provided for under our contract, and we will respect the confidentiality that is inherent in this process."

Bechtel said severe weather and labor issues led to $413 million in higher costs, while other delays in the start of construction in 2005 account for $72 million in higher costs.

Although it has committed to building the first plant by the end of 2009, Bechtel is requesting schedule relief, according to the filing. Wisconsin Energy has agreed to conduct a study to determine whether severe weather during construction played a role in the project's being delayed.

A schedule extension would mean Bechtel wouldn't face damages of $250,000 a day for every day the project is delayed. The damage amounts were set in the contract the two companies negotiated.

Based on the current project timeline, Bechtel would face damages of $22.75 million. But its request for schedule relief seeks to avoid three more months of damages for the first coal plant and another three months for the second one, in case it also is delayed. All told, Bechtel is looking to avoid paying total damages of almost $70 million.

Rain, snow and high winds

Bechtel's claim notes last winter's severe weather, when southeastern Wisconsin experienced 99 inches of snow, four feet more than an average winter. The company also says high winds from September 2006 through April 2007, and rain in June, caused delays.

Factors causing higher labor costs, Bechtel said, include "a significant shortage in the availability of craft labor . . . significant increases in competing projects," and higher overtime and per-diem costs needed to attract construction workers to the project.

White said Wisconsin Energy is protected from the claims based on the terms of the contract, which allow Bechtel relief from higher labor costs only if wage rates escalate by at least 4% a year, which has not occurred.

While agreeing that last winter's weather was severe, White said that doesn't entitle Bechtel to its claim.

"This is Wisconsin," he said. "We've known about Wisconsin weather. If you're going to build a project in Wisconsin and you accept it on a lump-sum contract basis that you can do this in Wisconsin, then you agreed to do that."

Under a process outlined in the companies' construction contract, the companies have agreed to keep this dispute out of court, White said. The contract calls for informal negotiations between the companies, which have now begun. After that, they would try to resolve the dispute through mediation. If that fails, the matter would be resolved in binding arbitration.

That entire process is expected to last until mid-2010, about the time both coal plants are expected to be generating electricity.

Under construction are two 615-megawatt power plants. Together, they will generate enough power for more than 300,000 homes.

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