Regulators approve rate hike for Xcel electric customers

Minnesota customers of Xcel Energy might get a slight refund on last year's 4.6 percent interim electric rate hike, but any savings potentially will get eaten up by a second increase that kicks in later this year.

State utility regulators on Thursday approved most of the financial details in Xcel's request for back-to-back rate hikes for 2014 and 2015.

But the complexity of the 17-month rate case, and the need for last-minute review of electric sales trends, left uncertain for a few weeks the most important question: how much customers' rates ultimately will go up.

"We don't know what the final rate will be," said Minnesota Public Utilities Commission Chairwoman Beverly Jones Heydinger.

Customers probably won't know the effect on their bills for several weeks. Regulators still must make several rate-related decisions before a final rate is set.

It will be the fifth successive annual rate hike for Xcel's 1.2 million Minnesota electric customers, and follows a 3.8 percent permanent increase in 2013.

Xcel officials also said they may seek another rate hike in 2016 — a step they hoped not to take — because the commission rejected the utility's financial proposal aimed at avoiding yet another increase.

Despite the uncertainty Thursday over the final amount of this year's increase, some key decisions were made in an all-day PUC meeting in St. Paul.

Regulators rejected Xcel's request to raise the $8 monthly basic rate, which customers pay regardless of how much power they use. Consumer advocates had opposed a change, saying it would penalize those who use the least energy.

But the commission by 3-1 approved another rate-related adjustment, known as decoupling, which for the first time in Minnesota untethers a power company's profits from how much electricity it sells. The new system won't take effect until 2016.

This was the first time a Minnesota utility has sought a multiyear rate hike. The process, used in some other states, including Wisconsin, is supposed to be more efficient. But Commissioner Betsy Wergin said this effort was not "a great success."

In setting Xcel's regulated profit level, commissioners authorized a 9.72 percent return on equity, the lowest of any recent rate case, but slightly higher than some utility commissioners favored. Even small adjustments in that rate can translate into millions of dollars in profits.

In its original rate hike request, Xcel wanted a $291 million, or 10.4 percent, increase in two steps starting in 2014. But the utility later scaled that back. And the amount dropped further when state regulators denied Xcel any profit from cost overruns on its Monticello nuclear power plant upgrade.

U.S. electricity prices have been growing — though at a slower pace than Xcel's. The U.S. Energy Department reported last week that average U.S. residential electric prices rose 3.1 percent in 2014 over the previous year. The agency forecast that U.S. rates would rise 1 percent this year.

Customers are feeling the pinch. "It's a hardship for people who aren't fortunate enough to have good incomes," said the Rev. Henry Brown, pastor of the First Trinity Church of God and Christ in St. Paul. "People are going to have to let other things go to meet this obligation."

Brown was among many who signed an AARP petition opposing an "unfair and unreasonable" rate increase. In an interview after Thursday's vote, he said families, businesses and even his church are being hurt by Xcel, which he said "looks like a utility company that doesn't have any mercy."

Minnesota business interests closely tracked the Xcel rate case, and pushed back against the increases. The Minnesota Chamber of Commerce said companies are leaving or shifting production elsewhere because of rising power costs. Xcel's industrial rates exceed other Minnesota integrated utilities, and are in the top third of U.S. utilities, said Andrew Moratzka, an attorney for large customers.

But the 2014-2015 rate hikes could have been even worse. At Xcel's request, regulators moderated the rate hike by tapping into excess depreciation-related dollars that had accrued on the utility's balance sheet.

That's possible because some utility assets, such as transmission and distribution lines, are lasting longer than envisioned. This represents surplus value to Xcel's customers, whose rates include the expenses for depreciation, or using up, of those assets. So regulators applied the depreciation surplus to reduce the rate hikes, saving ratepayers $104 million.

One reason the rate case was complex is that utility regulators approved a new way to reward the utility — for delivering electricity rather than selling it.

The change, called decoupling, aims to further promote energy efficiency, and will result in customers' bills being adjusted up or down over time. Regulators capped any adjustment-related increase at 3 percent. There is no cap on how much bills could go down.

Conservation groups supported the idea, but the advocacy organization for seniors, AARP, opposed it, arguing it will ­protect Xcel's profits and boost customers' electric bills during economic downturns.

On another conservation-related policy, regulators decided to further study a proposed billing structure that would set lower rates for average or below-average electricity users. Consumer and environmental groups proposed the plan, similar to one in place at Duluth-based Minnesota Power. Big power users would risk paying higher rates unless they could reduce electric demand to average levels.