Minnesota Authorizes State's First-Ever Multiyear Rate Plan

The Minnesota Public Utilities Commission has invoked for the first time a 2011 state law allowing energy utility rates to be established for a multiyear period of time rather than be prosecuted on a straight annual basis alone. At the center of the case was Northern States Power Company d/b/a Xcel Energy, which in late 2015 had submitted a three-year electric rate plan that would raise its rates by $194.6 million in 2016, $52.1 million in 2017, and $50.4 million in 2018. In the end, the commission adopted a partial settlement encompassing a four-year deal. The agreement was made retroactive to 2016 since the parties had reached a consensus on most terms back in August of 2016. Under the schedule set forth in the stipulation, Xcel was awarded $74.99 million in rate relief for 2016, $59.86 million for 2017, and $50.12 million for 2019. However, the company's rates will not rise in 2018. 

Acknowledging the growing need for investments in infrastructure as existing utility systems age and as both federal and state energy policies continue to evolve, the Minnesota legislature passed a bill in 2011 that permitted the commission to consider the use of multiyear rate plans (up to a limit of five years). The idea was that by assuring more funding for plant expansions and improvements up-front, and by eliminating costly and repetitious rounds of rate-making proceedings, utilities could engage in more cohesive long-term planning. That is, the lawmakers reasoned, by changing the rate-making protocol from a strictly backward-looking review process to a more forward-looking approach, utilities and customers alike would benefit from the cost savings associated with reduced regulatory lag, lower financing fees, more consistency in billing, and less exposure to rate shock. 

Following passage of the multiyear rate plan law, the commission unveiled a set of guidelines for the development of such plans. The commission entered a final order on that matter in 2013 in which it emphasized that multiyear rate schedules may be deemed appropriate provided the sponsoring utility is able to show a definitive link between its planned capital projects and the level of additional revenues sought over the time frame covered by the plan. To that end, the commission said that any multiyear rate proposals tendered must relate to specific, clearly identified capital undertakings within a carefully forecasted design window. For Xcel, the new four-year plan is intended to address ongoing investments in transmission facilities and electric generating plants, although the plan does not extend to the utility's announced goal of constructing a new natural gas-fired power plant and developing additional wind farms. The commission related that those particular capital activities are to be examined within the context of a separate docket. 

Observing the broad support the proposed settlement enjoyed among the utility, consumer advocacy groups, customer representatives, and state agencies alike, the commission accepted as generally reasonable most of the terms in the agreement. However, the commission noted that the parties had not reached an accord on every issue. It listed customer charges and rate of return on equity (ROE) as among the matters not covered by the stipulation. 

In working toward a decision on such issues, the commission admitted that it felt somewhat disoriented in trying to craft a solution without the benefit of a fully developed evidentiary record. The commission elaborated that while rate plans that are the product of settlement negotiations can mean savings in terms of both time and money, they also mean that a complete and transparent record is not available to the commission as it deliberates those matters on which the participants were unable to agree. 

Turning to the issues most in dispute, the commission first looked at ROE. The parties had presented widely divergent positions on the matter, with Xcel advocating for a 10.0% ROE, the state's Department of Commerce recommending a ROE of 9.06%, and the state attorney general arguing that a ROE no higher than 7.38% could be justified. 

An administrative law judge (ALJ) had deemed a 9.20% ROE to be reasonable, in keeping with the value most of the signatory parties had agreed upon. Concurring with the ALJ that the attorney general's suggested ROE was too much of an outlier and inconsistent with ROEs awarded around the country, but also concluding that present market trends did not support a 10% ROE, the commission ruled that the 9.20% ROE level was appropriate. 

The commission remarked that the new ROE represented a reduction from the company's existing ROE of 9.72% yet was still high enough to assure access to capital at a reasonable cost. The commission added that because multiyear rate plans offer utilities long-term revenue assurance, approval of such a plan for Xcel militated against a higher ROE for the company in the instant proceeding. 

As to customer charges, the commission denied Xcel the ability to increase its fixed monthly charges for residential and small commercial customers. Those charges currently stand at $8.00 and $10.00 per month, respectively, with the utility seeking to raise each by $2.00 per month. According to the company, the requested increase would better align the customer charges with actual marginal costs, thereby promoting economic efficiency. 

But, again alluding to the dearth of record evidence, the commission held that it simply had no basis for ascertaining whether Xcel's customer charge claims could be substantiated. The commission agreed that a primary objective of rate making is to implement rates that send proper price signals to customers. In Xcel's case, however, the commission said that it would be preferable to modify the company's customer charge schedules only after "a rigorous calculation of marginal cost," something which had not occurred because of the settlement discussions. 

The commission told the utility that because there was insufficient data on the company's marginal costs, and because higher customer charges tend to discourage rather than encourage conservation and reduced consumption, it saw no reason to adjust Xcel's residential and small commercial customer charges upward, especially since the company already has peace of mind knowing what its authorized revenue requirement will be for the next few years. 

Underscoring its cautious acceptance of a multiyear rate plan without a more detailed record to support it, the commission stated that it remains concerned that multiyear plans could cause a company to be less diligent in meeting various performance metrics. It therefore informed the utility that the commission expects to open a new proceeding within the rate-effective period to consider additional or enhanced metrics by which to adjudge the company's service. 

In particular, the commission said that it was interested in further inquiring into whether Xcel's current performance standards are adequate for driving satisfactory service. Observing that the company's present metrics rely solely on a series of penalties for failure to achieve predetermined operational targets, the commission queried whether they might be improved by adding a schedule of positive reinforcement, as through financial incentives, instead. Re Northern States Power Co., Docket No. E-002/GR-15-826, June 12, 2017 (Minn.P.U.C.).