Electricity customers of Otter Tail Corp. may have a lot at stake today, when state utilities regulators consider its rate hike request, but shareholders, not so much.
That's because 74 percent of the Fergus Falls-based company's revenue now comes from everything but its electric utility -- including medical equipment rentals, Idaho potato dehydration operations and an Illinois ironworks. The share is up from 10 percent in 1991.
Otter Tail calls the diversification essential to the kind of growth it owes its shareholders. Its rural utility base -- across western Minnesota, eastern North Dakota and a corner of South Dakota -- offers little possibility for expansion, the company said. And Minnesota law puts no limits on the size of a regulated utility's outside holdings.
But concerns are surfacing from two directions: business owners who find themselves competing with the local utility, and consumer advocates who worry about ratepayers subsidizing other holdings. Indeed, while its electric operations were 26 percent of $1.24 billion in revenue in 2007, they accounted for 45 percent of its $54 million profit.
There have been no formal allegations against Otter Tail for commingling money between the utility and its other holdings. Still the utility in recent years faced a string of accusations that irregular accounting hurts ratepayers. Whiste-blowers first raised the issue four years ago, which led the Minnesota Public Utilities Commission to call Otter Tail in for its first comprehensive rate and operations review in 20 years.
Otter Tail, which has about 130,000 customers, almost half of them in Minnesota, has denied any improprieties in its bookkeeping, and an administrative law judge last month told the commission that he found no evidence of inaccurate financial reporting. Still, some advocates are nervous about its growing diversification.
"Between 70 and 80 percent is a very high number -- outside the norm," said John Howat, an energy policy analyst at the National Consumer Law Center, based in Boston. "If they have all these disparate holdings and all these opportunities for mistakes, all the more reason for scrutiny. I see that as a red flag."
'An exception'
Usually outside holdings are a "minuscule" portion of a utility's assets, said Jim Owen, spokesman for Edison Electric Institute, a Washington-based trade group of the utility industry. Otter Tail is an "exception" to that general rule, he said.
Xcel Energy, the state's largest electric utility, owns just one unregulated subsidiary, a rental housing investment firm called Eloigne Co. At CenterPoint Energy, Minnesota's largest natural gas utility, all the holdings are either regulated utilities or other energy-related operations.
Duluth-based Allete, parent company of Minnesota Power, is a similarly sized utility to Otter Tail that's going in the opposite direction. In 2004, about two-thirds of its revenues came from a used-car auction company, vice president Tim Thorp said. Allete chose to spin it off as a separate company, with shares distributed to all Allete stockholders.
"It got so large, it changed the mix of what the company was," Thorp said. Utilities appeal to people seeking stable earnings; the car auctions, people looking for growth. "So, we had some investor tension," he said. Now, Allete's outside holdings, in Florida real estate, provide about 6 percent of its operating revenues.
Otter Tail increased its outside holdings to 11 businesses over the past 20 years, said Amy Richardson, director of corporate communications in Fargo. Such holdings provide growth and allow the company "to balance risk more effectively, to weather any economic swings within a single business or industry," she said. Otter Tail's interests are spread among plastics, manufacturing, health services and food ingredient processing, doing business in all 50 states and internationally.
A competitor
The growth in Otter Tail's outside holdings prompted its request last month to the Public Utilities Commission to approve a new corporate structure. Now, legally, Otter Tail Power owns all the businesses. The change would establish a separate, holding corporation, and make Otter Tail Power one subsidiary, and Varistar, as owner of everything else, the other subsidiary.
That won't make Dan Berdass any happier. Berdass heads Bermo, a family-owned company in Circle Pines that makes metal components for manufacturers of agricultural and garden equipment. Otter Tail's BTD Manufacturing competes with Berdass. And last month, Otter Tail acquired another direct competitor, Miller Welding and Iron Works in Illinois.
"If they take work away from me, I may have to lay off Minnesota jobs because of an Illinois company owned by a Minnesota utility," he said.
Otter Tail's Richardson said its companies are all stand-alone, and they have no competitive advantage because there is no cross-subsidy from ratepayers.
The rates
At today's hearing in St. Paul, the Public Utilities Commission will consider Otter Tail's request for a rate increase of 6.7 percent, Otter Tail Power Vice President Tom Brause said. An administrative law judge has recommended an overall increase of 5.25 percent, or $6.89 million, Brause said. That includes a 7 percent increase for residential customers, an average of about $5.50 a month, he said.
In a brief to the commission, the staff did call attention to two recent regulatory issues with Otter Tail. An anonymous letter in April alleged the utility may have been selling low-cost power from its plants to wholesale customers while charging its retail customers for higher-cost purchases. Otter Tail denies it, but both the Minnesota attorney general's office and the Minnesota Office of Energy Security have asked for an investigation. Also in May, Otter Tail agreed to pay $546,832, as the result of a Federal Energy Regulatory Commission audit of its transmission practices.
H.J. Cummins • 612-673-671
