REGIONAL— Financial analysts with the state’s Department of Commerce (DOC) are recommending a sharp reduction in Minnesota Power’s request for higher electrical rates for its …
REGIONAL— Financial analysts with the state’s Department of Commerce (DOC) are recommending a sharp reduction in Minnesota Power’s request for higher electrical rates for its customers in northeastern Minnesota.
In a detailed brief submitted to the state’s Public Utilities Commission (PUC), DOC officials are recommending trimming Minnesota Power’s $108.3 million rate increase request by more than half.
If that recommendation is ultimately approved by the Public Utilities Commission, it would reduce the company’s total rate increase to $47.7 million.
The DOC’s recommendation is in line with a number of consumer groups and the state’s Attorney General’s office, which have also pushed back against the Minnesota Power request, particularly over its impact on residential customers. The company’s proposed increase of nearly 18 percent, if approved, would increase the typical residential customer’s annual electric bill by about $180. That’s according to the Citizens Utility Board, a non-profit that is opposed to the rate increase, at least as proposed. General service customers, such as most small businesses in the company’s service territory, would pay about $660 more per year, on average.
Locally, the company’s proposed increase would affect ratepayers in Tower, Soudan, and parts of Lake Vermilion’s Pike Bay, which are served by Minnesota Power. It would not affect ratepayers in the city of Ely, which purchases electrical service from Minnesota Power under a separate contract.
In assessing a rate increase request, DOC officials stated that the PUC is supposed to use a two-part test that balances the interests of ratepayers for adequate, efficient, and reasonable service, with the company’s need for sufficient revenue to meet its cost of service.
As the DOC points out, the burden of proof lies with the company requesting a rate adjustment.
In the case of Minnesota Power’s latest request, the DOC found that the evidence the company provided failed to make the case.
Minnesota Power has argued that the rate increase is needed to offset higher costs associated with the company’s transition to renewable sources of energy as part of its EnergyForward initiative. During a hearing held Tuesday, Josh Skelton, the company’s COO, noted that customers have demanded cleaner energy and that the proposed rate increase reflects the cost of that investment. “We’ve grown our renewable sources to 50 percent today and plan to meet 100 percent by 2050,” said Skelton.
Yet, as DOC officials delved into the details, it turns out that much of the company’s proposal appears unrelated to the company’s energy transition.
The DOC analyzed a long list of projected revenues and expenses that Minnesota Power had provided as part of its rate filing. The DOC analysis found that the company had consistently underestimated future revenues, in part through demand projections for the taconite industry that the DOC found to be unreasonably pessimistic. Minnesota Power relies heavily on a number of large, industrial customers, like wood products plants and taconite processing facilities, so changes in demand from those sectors can significantly impact the company’s revenues.
But the DOC didn’t buy the company’s claims of a sizable decline in taconite production and cited other sales forecasting methods that agreed with the department’s higher, alternative revenue forecast.
The DOC also found that the company had forecasted higher costs in several areas, including wage compensation, health benefits, pension obligations, and depreciation, which the DOC did not see as credible. While Minnesota Power suggested a rate increase would allow for additional, needed hiring, the DOC noted that similar claims by the company had not panned out in the past. “The company made similar hiring claims during the 2017 rate case, but instead of hiring additional employees, it reduced its workforce and pocketed $67.9 million,” noted the DOC in its brief to the PUC. “Given this history of overpromising and underspending, the best predictor of Minnesota Power’s actual 2022 test year compensation expense is the company’s past behavior.”
At the same time, the DOC concluded that the shift to renewable energy may not be as big a driver of the company’s cost increases as it suggests. The DOC noted that Minnesota Power has recently reduced its own generating capacity by 33 percent, in part by retiring the expensive and labor-intensive Boswell Energy Center in Cohasset, one of Minnesota Power’s few remaining coal-fired power plants, which helped the company trim its workforce. The company is currently transitioning away from burning fossil fuels to produce electricity and, in so doing, is relying more on third parties, like Manitoba Hydro and independent wind-energy producers for its generating capacity. “The upshot is that Minnesota Power is serving less demand, and doing so using less labor-intensive resources,” noted the DOC.
In addition, the DOC found that Minnesota Power was requesting 100-percent recovery of the expenses it incurs to promote economic development in its service territory. The DOC noted that such a request is contrary to past practice, since the PUC has typically only allowed 50 percent recovery of such costs. While expenditures to promote economic development can provide a public benefit, such efforts also benefit utilities by growing their customer base.
At the same time, the DOC urged rejection of a Minnesota Power proposal to adjust rates automatically based on the company’s sales to large industrial users, an idea the company is calling its “large power true-up plan.” The DOC found that the plan would have provided no savings to residential customers over the past ten years and said the idea runs counter to the purpose of a rate case to ensure stable rates that meet the needs of both customers and the company. The DOC analysis called the true-up plan “bad policy and a bad deal for customers.”
In total, the department found that Minnesota Power had underestimated revenues and overstated its expenses by just over $60 million, which prompted the DOC’s recommendation to trim the proposed rate increase by approximately 55 percent.
As part of the rate filing, Minnesota Power and its regulators are required to hold public hearings to allow ratepayers to comment on proposed adjustments. A hearing held Tuesday attracted only a single brief comment from a member of a local electrical workers union, who thanked Minnesota Power for past employment.
The PUC has received some written comments, the vast majority from older customers on fixed incomes, who are adamantly opposed to the rate hike. Virtually all of the dozen or so comments cite the current inflation and the impact of the COVID pandemic as reasons to oppose the rate increase. Such reasons prompted the PUC late last year to reduce Minnesota Power’s interim rate hike for residential customers from 14 percent to seven percent when it took effect in January.
All of the hearing comments plus the reports from intervenors like DOC or the Citizens Utility Board will become part of the case record and will factor into further recommendations from administrative law judge James Mortenson, who is overseeing the rate case proceeding. The PUC will ultimately take the entirety of the record into account in determining their final order in the case, which could come sometime later this year.
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