Crunch time for Xcel electricity rate hike request

Electricity rates for Xcel Energy's residential customers could hold steady next year or rise appreciably depending on a decision expected this week by Minnesota utility regulators — one complicated by COVID-19 and the utility's flagging commercial power sales.

Xcel, Minnesota's largest electricity provider with 1.3 million customers, has two proposals pending before the Minnesota Public Utilities Commission (PUC). One is a new rate case that calls for a Jan. 1 "interim" rate hike of 7% for all customer classes, including residential.

The other proposal is a one-year "stay-out" from a new rate case, which would hold base rates steady for everybody, but would lead to significant electricity surcharges for larger commercial customers.

Consumers would prefer the stay-out, as would Xcel itself and the Minnesota Attorney General's Office.

But larger businesses, livid about Xcel's stay-out surcharge, want a full rate case. And the Minnesota Department of Commerce said the surcharge's size is unreasonable and that Xcel should pay for part of it.

The PUC conducted two days of hearings last week on the complicated but critical rate issues, and it's scheduled to convene again Thursday to make a decision. The PUC's position is far from clear.

"I would agree there is a lot that is attractive in the stay-out proposal, but it is problematic unless Xcel makes some movement on (the commercial class surcharge)," PUC Commissioner Matt Schuerger said Tuesday, echoing other commissioners' concerns.

Xcel's rate proposal — particularly that first year — drew a chilly reception from the PUC. "That is a pretty shockingly large number in terms of the current economic situation," PUC Chairwoman Katie Sieben said.

Big rate cases can take 18 months to complete, so utilities always ask the PUC for an interim rate hike. Xcel initially proposed an interim rate hike for all customers on Jan. 1 of $309 million or 10.6%.

The PUC almost always grants interim rate increases in full, and if an actual rate hike later ends up being lower, customers receive refunds.

But commissioners blanched at Xcel's interim proposal given the weak economy. "We could find exigent circumstances here and substantially lower the proposed interim rate increase," Sieben said Tuesday. The next day, Xcel lowered its proposed interim rate increase to $207 million or 7%.

Xcel's last rate case, which covered three years, was approved in 2016. In November 2019, Xcel proposed a new rate case — a 15% hike over three years — but also presented a rate case stay-out.

"We did not contemplate a stay-out this year, but then the pandemic came along," Ryan Long, an Xcel attorney, told the PUC last week.

Base rates don't change under a stay-out, but customer costs can still rise, primarily through what is known as a "sales true-up:" an adjustment of Xcel's current sales to its sales in the first year of its last rate case (2016).

Since then Xcel's sales, like those of many U.S. electric utilities, have been falling, making it harder to cover fixed costs. Sales declined primarily because customers — particularly businesses — increased energy conservation. This year, commercial sales nose-dived even further as COVID-19 hobbled the economy.

Xcel originally asked for a $171 million sales true-up, but the company reduced it last week to $116 million as criticism mounted. The true-up's cost would fall on about 48,000 larger commercial customers, not residents. Xcel said its sales declines are attributed to those larger customers.

The Minnesota Attorney General's Office favors the stay-out because of its minimal impact on strapped consumers. "The pandemic is the reason we are supporting the stay-out," Ian Dobson, an assistant attorney general, told the PUC. "Xcel's current proposal is frankly a very good proposal for where we are at now."

"Given Xcel's current earnings, a case has not been made for a significant shift of risks to customers from shareholders," Nancy Campbell, senior financial analyst at the Commerce Department, told the PUC. Xcel's per-share earnings for 2020's first nine months were up 8% over a year ago.

"The kind of 'woe is me' argument from Xcel Energy — I don't buy it," Campbell said.

Initially, the Commerce Department proposed a 50-50 split of the sales-true up between Xcel and its larger commercial customers. Prodded by the PUC, the department is now proposing that Xcel and its commercial and residential customers each pay one-third.

However, the residential share would actually be covered by excess deferred tax balances that Xcel owes to its customers already. The surplus tax money was created by President Donald Trump's 2017 corporate tax cut.

Xcel's last-minute plan to reduce its interim rate hike or its sales true-up also would be funded by the already-owed taxes.

Xcel has made some concessions with the stay-out, including an "earnings test": Profits above a certain regulatory benchmark would be credited back to customers. "I don't want the commission to think the company was overearning at the expense of customers," Long said.

Two groups are pushing the PUC for a full rate case, saying they would be better off with that than Xcel's proposed stay-out. One group is made up three huge customers: Koch Industries' Flint Hills oil refinery in Rosemount; Marathon Petroleum, which owns a refinery in St. Paul Park; and USG Interiors, owner of building products plants in Red Wing and Cloquet.

The other group, Minnesota Energy Consumers, had seven members, including the Minnesota Chamber of Commerce, the University of Minnesota, the Metropolitan Airports Commission and the Metropolitan Council, according to a Tuesday PUC filing. The latter two dropped out Wednesday.

The business groups are irked that Xcel's stay-out surcharge levied last year for 2020 — $157 million — turned out to be about twice what it was estimated to be. The actual surcharge turned out much higher largely because COVID-19 slashed commercial power demand.

Beyond that, the businesses argue that Xcel's industrial electricity prices in Minnesota are already higher than the U.S. average. They said, too, that Xcel's own costs fall when its sales fall, and that Xcel's declining revenue is a long-term issue that must be addressed in a rate case.