Industrial customers served by Minnesota’s second-largest power company are complaining that its rates are the highest in the state and heading higher because of questionable management.

Great River Energy, a nonprofit wholesale power supplier to 28 Minnesota cooperative electric utilities, stands accused of poor planning for future power needs and wasteful spending, including its $437 million coal-burning Spiritwood, N.D., power plant completed in 2011. It sits idle because it would lose money producing power in today’s market, the company says.

Two ethanol companies whose power comes from the cooperative have challenged Great River before the Minnesota Public Utilities Commission, which is reviewing a 15-year plan by Great River to supply future customer needs for power.

All utilities are required to get regulators’ approval of such plans, which mainly address generation capacity, not rates. But for Great River Energy, that process has been turned into an unusual confrontation over its rate hikes, which total 58 percent over seven years.

“The companies are simply no longer able to sit on the sidelines in light of the massive spike in their rates over the last few years,” said Minneapolis attorney David Aafedt, who represents ethanol makers Al-Corn Clean Fuel of Claremont, Minn., and Green Plains Renewable Energy, an Omaha-based company with a plant in Fergus Falls, Minn.

Great River Energy, based in Maple Grove, denied making poor business decisions, and said that even though its wholesale rates have gone up and are expected to rise another 1 percent next year, they have been consistently lower than weighted regional averages. Wholesale power costs represent a major share of customers’ bills, which also include a local utility’s distribution charges.

Great River executives said decisions in the mid-2000s to add now-unneeded generation took place amid rapidly growing electrical demand that went slack in the recession. On the positive side, they say, the excess generating capacity allows the utility to easily meet future power needs. The utility now serves 645,000 customers spread from the Arrowhead region to the Iowa border.

“We project no need for new generation for at least the next decade,” said Jon Brekke, Great River Energy’s vice president of member services, and that allows Great River to “go lean” on capital investments. “We are in a good position for shaping our future in a competitive way.”

But the utility’s past overbuilding contributed to rising rates, and there is no guarantee that power demand will soon catch up, critics say. The utility also faces higher costs for its coal-fired power plants — the backbone of its generation.

“[Great River’s] highest-in-the-State of Minnesota electric rates have been … largely driven by significant, questionable, and in some cases wasteful, costs and projects,” Aafedt wrote in a filing.

Co-ops are a new concern

The Minnesota Chamber of Commerce also has worried about rising electricity costs, fearing the state is losing its competitive edge, especially for commercial-industrial customers. A chamber analysis found that Minnesota dropped from being the 15th-best state for industrial power rates in 1990 to 25th in 2011.

“We are clearly losing ground,” said Bill Blazar, the chamber’s senior vice president for public affairs. Until now, much of the concern was focused on rates at investor-owned utilities, such as Xcel Energy and Minnesota Power, which serve mines and other power-hungry industries. But their rates, on average, are lower than cooperatives’, according to U.S. Energy Department data.

That’s not surprising because cooperatives grew out of need to serve widely spaced, expensive-to-wire rural customers like farms. Most distribution co-ops focus on distributing power purchased from wholesalers like Great River Energy, which is owned by 28 co-ops.

Blazar said the growth of ethanol and other rural businesses means that more industrial customers rely on co-ops than in the past. “The challenge they have is making sure their rates are competitive,” he said.

At Lake Region Electric Cooperative, Green Plains’ ethanol plant is the largest and the only industrial customer, said the utility’s CEO Tim Thompson. Unlike many utilities, Lake Region doesn’t publish its industrial power rate because it has just one customer. But 2011 Energy Department data on 35 Minnesota co-ops indicate their industrial rates, on average, exceeded those of investor-owned companies.

That’s been obvious to Mic Ryan, who manages ConAgra Foods Lamb Weston/RDO in Park Rapids, Minn. The 470-employee potato processing plant straddles the service territories of Duluth-based Minnesota Power and the local Itasca-Mantrap Cooperative Electrical Association, so the company is served by both. The cooperative’s power, which comes from Great River Energy, once was cheaper, but rates have gone up steadily and now exceed Minnesota Power’s, he said.

“The trend is not favorable to business,” said Ryan, whose plant has responded with aggressive energy conservation efforts that have earned it awards. Even so, he said, “when you look at the energy fraction of our costs, it has surpassed other cost categories.”

Co-op’s rates not regulated

Under state law, the PUC has no authority to set electric rates for Great River Energy or local cooperatives unless their customers vote to be regulated, and most haven’t. The law assumes that co-ops, whose customers elect their boards, can set fair rates on their own. But the PUC, when reviewing utilities’ 15-year plans, can influence what power plants are built, retained or retired.

Great River Energy has blamed recent rate hikes on investments in new and existing power plants, higher coal costs, slack demand and other factors. The mothballed Spiritwood plant produces no revenue, but Brekke said it will begin operation in November 2014.

In an unusual alliance, ethanol producers are making the same argument as four environmental groups that also have questioned Great River Energy’s business decisions. They say the utility’s forecasted growth is too optimistic and doesn’t consider that higher electric rates will cause customers to curb their use of power, further reducing the need to generate it.

“We have been trying to point out these cost risks,” said Beth Goodpaster, an attorney for the Minnesota Center for Environmental Advocacy, a St. Paul-based nonprofit whose goals include cutting greenhouse gases from fossil fuels. Goodpaster said Great River Energy could save money — and cut emissions — by retiring a 47-year-old coal-fired power plant in Stanton, N.D.

The company defends its forecasts, which have been cut to just 1 percent annual growth over the next five years, a fraction of the pace in recent years. “I wouldn’t say we are overly optimistic,” Laureen Ross McCalib, the company’s manager of resource planning, said of the predictions.

Great River Energy also says the Stanton plant is efficient and worth keeping. Yet the utility recently disclosed its desire to retire as uneconomical an even-larger coal power plant in Genoa, Wis. The utility gets half the plant’s output under contract, but doesn’t own or operate that plant. Its partner and operator of the 44-year-old plant, Dairyland Power Cooperative, doesn’t agree it should be shut down. The dispute over retiring it has gone to arbitration, the utilities said.

Price concerns over the past decade have separately caused some of Great River Energy’s local co-ops to seek alternative wholesale power suppliers. Yet the company still has support from co-op members who believe that economic challenges in recent years, not bad business decisions, brought on rate hikes.

“All the distribution co-ops were growing,” said Syd Briggs, general manager of Steele-Waseca Cooperative Electric, which serves the Al-Corn plant in southern Minnesota. “The economy was doing great. … Then, not only did we stop growing, but we started to retract. Now we have too much capacity. We have to wait to catch up.”