The Minnesota Department of Commerce is recommending that Minnesota Power reduce its overall electricity rate by 2.9 percent, a stark contrast to the utility’s request for a 6.1 percent increase.

The commerce department’s recommendation, announced Thursday, is based on its review of Minnesota Power’s revenue forecast and its proposed level of profitability as measured by return on equity.

The Minnesota attorney general’s office also has called for a lower return on equity for Minnesota Power — and no increase in rates, said Ben Wogsland, a spokesman for the attorney general’s office.

Not surprisingly, Minnesota Power said its request was “appropriate.”

Duluth-based Minnesota Power, the state’s second largest investor-owned utility, in November filed for an overall 9.1 percent rate increase. The utility, the primary business of Allete Corp., cut the requested increase to 6.1 percent after the iron mining industry picked up.

Return on equity (ROE) is a critical number in rate cases, essentially establishing a profitability goal. The commerce department concluded that Minnesota Power’s return on equity should be 8.73 percent, not 10.25 percent as the company has requested.

“We respectfully disagree with the [commerce department’s] views on equity return, as our ROE request is appropriate and fairly reflects our unique customer mix and investments,” Minnesota Power said in a statement. “In addition, our proposed annual review mechanism will protect both ratepayers and shareholders from unforeseen issues.”

The attorney general’s office has recommended an ROE for Minnesota Power of 8.38 percent. The attorney general and the commerce department are both charged with looking out for the public interest in utility rate cases.

Industry-dependent

Minnesota Power, which serves 145,000 customers in northeastern and central Minnesota, is heavily dependent on industry, particularly mining. Iron Range taconite mines have increased production and brought back workers since Minnesota Power’s original rate filing.

Currently, the utility is asking the Minnesota Public Utilities Commission (PUC) to grant a total rate increase of $39 million. The commerce department concluded that Minnesota Power’s rates should be reduced by $16.7 million.

The agency didn’t break out how those rate reductions should be allocated among residential and industrial customer classes. Under Minnesota Power’s current proposal, residential rates would rise at least 10 percent, while rates for business and large commercial customers would climb 4.5 to 8 percent.

The agency concluded that Minnesota Power should increase its net revenue forecast by $1.8 million, primarily due to rising sales to iron ore mines.

“Since MP has not shown the reasonableness of its proposed sales forecast, my adjustment is intended to reflect reasonable sales,” a commerce department rate analyst said in a filing with the PUC.

Minnesota Power said iron mines and its other large industrial customers historically have cyclical ups and downs in energy usage. The company and the commerce department differ “on what to assume for a base level of future sales.”

The PUC will eventually weigh input from the commerce department, attorney general’s office and several other parties intervening in the rate case, which likely won’t be decided until next year.