Xcel Energy asked for its largest-ever Minnesota electric rate hike on Monday but offered ways to soften the pain, including spreading it over two years.
The increase of $291 million is slightly more than what Xcel sought in its 2013 rate-hike request, which utility regulators slashed by two-thirds. This time, Xcel proposed smaller, single-digit increases over two years for its 1.2 million electric customers in Minnesota.
“We are asking to moderate the increase on the front end,” said Chris Clark, regional vice president for rates and regulatory affairs.
Customers face a 4.6 percent interim increase in January, followed by a second interim hike of 5.6 percent a year later. By law, utilities have a right to charge interim rates while the state Public Utilities Commission decides on permanent rates. If the final rates are less, Xcel must refund the difference with interest.
The 2014-2015 rate hikes will be Xcel’s sixth and seventh increases since 2005, driven by a wave of capital investment in nuclear power plants, transmission and distribution lines and other projects including new wind farms.
“It truly reflects an investment cycle,” said Xcel’s Minnesota CEO Dave Sparby, who compared it to the period of rapid investment in the 1960s and 1970s when the company’s two nuclear power plants were built in Minnesota. “At this point those [nuclear] investments are being repowered and refurbished. We cross through that investment peak in 2016.”
Yet even after that, Xcel executives said they see a need for perhaps three additional annual rate hikes, from 2016 to 2018, but at levels below those proposed Monday. Those requests would be filed in late 2015, they said.
If the full 2014-2015 rate hikes take effect, the average Xcel residential customer would face an average increase of $10.29 per month or $123 per year, the utility said. Regulators, on average, have reduced Xcel’s rate requests by half in four rate cases since 2005.
Customers probably won’t notice an immediate blip because current bills haven’t yet been adjusted downward to reflect Xcel’s smaller-than-requested 2013 increase. That savings likely will appear in December, followed by a one-time credit in January that would happen just as the first interim rate hike takes effect, executives said.
“You have folks who are already devoting a significant percentage of their household income to pay the electric bill and who are now going to be expected to absorb multiple increases over several years,” said Pam Marshall, executive director of the nonprofit Energy CENTS Coalition, which assists low-income utility customers. “Those folks are the last to recover from the economic downturn, with stagnant wages and minimal increases in Social Security benefits.”
Marshall said only a fraction of low-income utility customers get government or utility energy assistance. “One of my biggest concerns is the extent to which these increases also increase service disconnections,” she said.
Bill Blazar, senior vice president for public affairs at the Minnesota Chamber of Commerce, said he is concerned about the effect of rising commercial-industrial electric rates on business development.
“Competitive electric rates are more and more essential to running a successful business and employing people,” he said.
Blazar applauded Xcel for its plan to spread out and soften what otherwise would have been an even bigger burden. He also supported Xcel’s plan to partly shift away from a commercial-industrial rate structure that subsidizes residential rates — something for which businesses have long lobbied.
Xcel said the 2014-15 rate hike request would have been even bigger without a customer-friendly change in depreciation related to transmission and distribution assets. Xcel also wants to tap part of a legal settlement with the federal government over nuclear waste storage to soften the rate boost. Together, those shifts return $117 million to ratepayers, according to an Xcel regulatory filing.
This reflects a different strategy by Xcel, which sought a 10.7 percent increase in 2013 only to have it chopped to 3.8 percent.
Morningstar analyst Travis Miller said phasing in smaller rate hikes make it easier on customers and can be good for investors, giving more certainty of a return. But he said utilities everywhere are struggling with slow growth or falling electric demand, in part because of conservation efforts.
“Weak demand puts more pressure on utilities to raise rates on customers to fund the capital investments to keep the systems running,” he said.
Minneapolis-based Xcel continued to predict flat electric sales in its home state. Xcel projects power sales in Minnesota will be down 1.6 percent this year, off another 0.6 percent next year and down 0.4 percent in 2015. That contrasts with 1998-2008, when the annual growth rate was 1.4 percent, Xcel said.
In its regulatory filing, Xcel attributed 37 percent of the requested increase to investments and expenses related to its nuclear power plants. The company’s oldest reactor in Monticello was recently refurbished and one of the two units at the Prairie Island nuclear plant in Red Wing, Minn., is now undergoing a major upgrade.
Xcel said 17 percent of the rate increase stems from transmission investments, 11 percent from wind and other generation projects and the remainder from an array of investments and expenses. Overall, Xcel said its been investing about $1 billion a year in Minnesota.
Xcel also asked regulators to raise its return on equity to 10.25 percent. Regulators had allowed Xcel a return of more than 10 percent starting in 2006, but reduced it to 9.83 percent in 2013.
Regulators likely will spend a year or more reviewing Monday’s request, a process that includes public meetings to hear ratepayers’ concerns and a financial review by an administrative law judge.