Attached files
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8-K - MP RATE CASE RESPONSE - ALLETE INC | mpratecaseresponse.htm |
Exhibit
99
30
west superior street / duluth, minnesota 55802-2093 / 218-723-3958 /
www.mnpower.com
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David
J. McMillan
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Executive
Vice President
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Fax
218-723-3989
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Cell
218-590-4287
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E-mail
dmcmillan@allete.com
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January
6, 2010
Burl W.
Haar
Executive
Secretary
Minnesota
Public Utilities Commission
121
7th
Place East, Suite 350
St. Paul,
MN 55101
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Re:
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December
30, 2009 Interim Rate Decision
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In
the Matter of the Application of Minnesota Power
for
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Authority
to Increase Electric Service Rates In
Minnesota
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Docket No. E015/GR-09-1151
Dear Dr.
Haar:
This
letter addresses the Commission's December 30, 2009 Order Setting Interim Rates
("Order"), which reduced Minnesota Power's interim rates by $24.8
million. Minnesota Power is aware that state law prevents the Company
from seeking reconsideration of the decision until the Commission has issued a
final order on general rates. Accordingly, this letter is not a
motion for reconsideration; rather it is intended to express the Company's
concerns with the Order. The Commission can, however, reconsider the
decision on its own motion and we believe that it should do so.
In the
Order, the Commission found the timing and magnitude of the rate case and the
poor economy to be exigent circumstances justifying a reduction of interim
rates. But these do not qualify as exigent circumstances under the
interim rate statute. Instead, denying $24.8 million of the
Company's interim rate request violates: (1) due process of law
because it prejudges the merits of the Company's rate request before any
evidentiary hearing has occurred; (2) the interim rate statute because it relies
on factors that are irrelevant to the rate making formula and is thus
confiscatory; and (3) environmental policy directions from Minnesota's Governor
and the Legislature because it denies a mechanism to fully recover capital
expenditures that are mandated by statute. The basis for our belief
that the Commission’s Order violates fundamental policy objectives and legal
requirements is detailed in the attached memorandum.
The
Company recognizes that the Commission is apprehensive about the impact a rate
increase may have on ratepayers given the difficult economic situation in
northeastern Minnesota. Minnesota Power shares this apprehension and
understands that there is never a good time for a rate increase of any size, but
those factors do not override the need to recover the millions of dollars of
mandated infrastructure investments. Over half of the Company's rate
increase relates to monies already spent or committed to be spent in 2010 on
infrastructure that will improve the environmental performance of the Company's
largest generating station. Another 15% of the increase is for
incurred or committed costs for reliability and renewable energy
infrastructure. These investments will allow the Company to continue
to provide low-cost energy for decades to come by extending the reliability of
generating units and reducing the risks the Company and our ratepayers face from
current and future environmental regulations.
Capital
investments in infrastructure that are mandated or necessary for system
reliability and environmental compliance require hundreds of millions of dollars
of investment in projects that may take years to complete. The
magnitude of this rate case is simply the product of such accumulated capital
investments over several years. The Commission has stated its general
preference that utilities recover for such investments in a rate case when the
facilities are in service instead of through a rider. In effect, the
Commission's Order penalizes the Company for investing in its system, as
required by law, and then complying with all statutory and Commission filing
requirements to timely recover that investment.
Finally,
the Commission’s use of past rate case results to calculate a reduction in
interim rates before examining the merits of this case, is arbitrary and a
prejudgment of the Company’s rate case in violation of due
process. Awarding 60% of the Company’s rate request based on amounts
awarded in three prior cases disregards the fact that this case is predominantly
based on capital spending and rate base growth, whereas the prior
three cases were related mainly to changes in operating revenues and
costs. In fact, the more comparable cases involving significant
capital investment in 1977 and 1980, resulted in final rates that were 69% and
93% of the Company’s request.
Failing
to address these issues raised by the Order sooner rather than later has
negative ramifications for both ratepayers and the Company. While a
future remedy is possible, it may be more difficult for customers than
implementing full interim rates from the beginning. And a post-rate
case remedy would be too late to restore a year of lost investor confidence that
will negatively affect the Company's ability to raise capital at a reasonable
cost, to the ratepayers' detriment.
We hope
that the Commission will reconsider its decision and grant the full interim rate
request. In any case, the Commission should make clear that it has
not prejudged the merits of our rate case and spell out how the Company can
recover the lost interim rate revenue. Absent this, Minnesota Power
will be irretrievably harmed by the Commission's interim rate
decision.
Sincerely,
/s/ David J.
McMillan
David J.
McMillan
c: Attached
Service List
MEMORANDUM
DATE:
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January
6, 2010
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RE:
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December
30, 2009 Order Setting Interim Rates
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The
Commission's December 30, 2009 Order Setting Interim Rates
("Order") reduced Minnesota Power's interim rates by $24.8
million. The Order based the reduction on a finding of "exigent
circumstance" and calculated the amount based on the percentage of rate increase
requests allowed in three prior rate cases. But denying $24.8 million
of the interim rate request is a violation of (1) due process because it
prejudges the merits of the Company’s rate request before any evidentiary
hearing occurs; (2) the interim rate statute which prohibits ratemaking
decisions that are confiscatory; and (3) the environmental policy directions of
the Governor and the Legislature which mandate many of the capital investments
that drive this rate case.
1. The Decision Violates Due
Process
The
regulatory compact balances the rights of utilities and its
customers. In exchange for the exclusive right to provide service in
its designated territory, the utility is obligated to serve all customers,
including those that it would not otherwise be economical to
serve. In exchange for the inability to set its own rates, the
utility is assured that the procedure for seeking approval of its rates will
comport with due process — decisions on rates will be based on specific evidence
relevant to the ratemaking formula,1 determined after a full evidentiary
hearing.
The Order
is not based on any evidence presented in the rate filing, and no evidentiary
hearing has yet been provided. The Order nevertheless concludes that
the Commission can reduce the Company’s interim rate request to a level the
Commission implies it will likely approve for Minnesota Power’s final rates in
this case based on prior history. Specifically, the only "evidence"
cited by the Order in support of the calculation of the reduction in interim
rates is the historical relationship between the amount of Minnesota Power's
rate requests and the rates actually approved in three prior
cases. Basing its interim rate decision on a prejudgment of the level
of final rates it will eventually approve in this case is a violation of due
process. Minn. Stat. § 216B.16, subds. 5 and 6 (the Commission may
only modify a utility’s proposed change in rates after a hearing, and
the modification must be based on consideration of the utility’s need to meet
the costs of furnishing service and earn a fair and reasonable return on its
investments). Because each of those prior cases involved different
test years with different rate bases, revenues and expenses they cannot
legitimately be used as a proxy to determine the level of just and reasonable
rates for the 2010 test year.
Further,
the Order only considers three Minnesota Power cases – 1987, 1994, and 2008. But
those cases primarily involved increases in operating expenses. The
more relevant cases are 1977 and 1980 where, like the present case, the
increases were largely driven by capital investments (Boswell 4 and Square
Butte). The final rates allowed in those two cases were 69% and 93%
of the amounts requested.
1 Rates
are to be set to produce revenues that will recover reasonable expenses and
provide a fair rate of return on rate base. Minn. Stat. § 216B.16,
subd. 6.
2. The Decision Is Not
Authorized By the Statute
Because
the Commission made no specific adjustments to Minnesota Power's proposed rate
base, revenues, and expenses, the unprecedented $24.8 million across-the-board
interim rate reduction violates the interim rate statute, Minn. Stat. Section
216B.16, subd. 3. As the Order acknowledges, the principles governing
interim rates are clear: interim rates are calculated using existing rate design
and the last authorized rate of return on common equity, but otherwise
reflecting the proposed test year cost of capital, rate base and
expenses. The courts have recognized that interim rates must be
calculated to allow Minnesota Power the opportunity to earn its authorized rate
of return pending the results
of the rate case: "The purpose of the interim period is to prevent
the 'potentially confiscatory effect of regulatory delay.'" In re Petition of Minnesota Power
& Light Co., 435 N.W.2d 550, 556 (Minn. Ct. App. 1989).
The
Commission's reliance on the "exigent circumstance" exception is
misplaced. Although a significant economic downturn is a concern to
everyone, it is not a "circumstance" that would authorize reductions to what are
reasonable and necessary interim rates. A "circumstance" that
triggers the exception must be one that is relevant to the ratemaking formula in
the statute, i.e. one that impacts the Company's cost of capital, rate base,
revenues, or expenses. To base a reduction of interim rates on a
circumstance wholly collateral to that formula is unlawful as
confiscatory. Bluefield Waterworks Improvement Co.
v. Public Serv. Commission, 262 U.S. 679, 690 (1923) ("Rates which are
not sufficient to yield a reasonable return on the value of the property used,
at the time it is being used to render service, are unjust, unreasonable, and
confiscatory, and their enforcement deprives the public utility company of its
property in violation of the Fourteenth Amendment."). Thus
consideration of the general financial impact on customers of interim rates that
are presumptively fair and reasonable, because they meet the requirements of the
interim rate statute, is a circumstance collateral to the statutory ratemaking
formula and not an "exigent circumstance" that would permit an across-the-board
reduction of interim rates.
Similarly,
a circumstance cannot be "exigent" if it is affirmatively permitted by the
statute. The proximity between this 2009 rate case filing and the
Company's 2008 rate case cannot constitute an "exigent circumstance" because the
statute expressly permits a utility to file successive rate cases so long as
each case is filed at least 12 months after its previous rate
case. Minn. Stat. Section 216B.16, subd. 3(e)(2). As
Commissioner Reha noted, in the late 1970s and early 1980s nearly annual rate
filings were made because then, as now, utilities were increasing their rate
bases at significant annual levels. Because the Legislature
specifically authorized these successive rate filings, it is clear that the
Legislature did not consider successive filings to be an
“exigency.”
Furthermore,
the Order makes an invalid comparison related to the timing of the 2010 rate
case. The Order compares the filing of the 2009
case with the implementation of the
new rates from the 2008 case. This ignores the more than 16 months
consumed by the administrative process for the 2008 case. A valid
comparison would be the filing of the 2009
case on November 2, 2009, with the filing of the 2008
case on May 2, 2008 – a gap of 17 months. Further, the Order
mistakenly states that the 2009 case was filed "one day after the increase approved in
the last rate case went into effect." Actually, the "increase" from
the 2008 case went into effect on August 1, 2008, based on the 2008 Interim Rate
Order, and the final rates that went into effect November 1, 2009, were a decrease from those
interim rates.
Finally,
the sheer magnitude of a rate request cannot be an exigent circumstance under
the interim rate statute. The size of the rate request is a product
of the statutory provisions that govern the timing of rate
recovery. Here, the bulk of the rate request is related to capital
investments that began in 2006 and will continue until 2012. There
was some consideration by the Commission that the Company could use rate riders
to mitigate the interim rate reduction. Commission policy has long favored
placing completed capital projects into ratebase in a rate proceeding. Recent
Commission policy has also favored rate cases as the more appropriate vehicle
for ratebase additions in place of rate riders. The possible availability of
rate riders to recover disallowed interim rate costs ignores two fundamental
issues: the delay inherent in the Company recovering no earlier than mid-year
the legitimate costs of rate base additions placed into service prior to January
1, 2010, and the fact that not all of the capital additions are rider eligible
under existing statute. Also, because the interim rate reduction was
across the board, it would not now be possible to separate out some of the
investments for rider treatment.
3. The Decision Is Not Good
Public Policy
No
business likes to raise its prices and Minnesota Power is no
exception. Accordingly, Minnesota Power would not be seeking a rate
increase at this time or of this magnitude if the long term benefits to our
ratepayers did not outweigh the short term costs. In this context,
the Commission's decision will have significant adverse consequences for those
who rely on Minnesota Power's system for environmentally sound, reliable, and
competitively priced electricity. It will also likely have adverse
consequences for the Commission's future ratemaking proceedings for other
utilities.
Well over
half of the rate increase requested by Minnesota Power is necessary to recover
money that has already been spent or is committed to be spent in 2010 on
infrastructure that will improve the environmental performance of the Company's
largest generating station. These infrastructure upgrades will
provide benefits to northeastern Minnesota, to ratepayers, and to the
communities served for years to come. Another 15% of the increase is
related to the costs for reliability and renewable energy infrastructure that
have already been incurred or are committed to be incurred in
2010. In making these investments, the Company was (a) following the
environmental policy directions of the Legislature and Governor Pawlenty, and
(b) expecting to recover these capital expenditures through rates as authorized
by statute.
Minnesota
Power does not believe that the Commission intended to signal that the Company
should not proactively pursue these policy directives. Similarly, the
Company does not believe that the Commission intended to create doubts as to
whether a utility can rely on the regulatory compact to obtain fair cost
recovery of investments that were prudently made to achieve reliability, add
renewable resources, or make environmental
improvements. Unfortunately the financial community may assume
otherwise. Without certainty that expended capital can be recovered,
the investment community will have less confidence in the Company's ability in
the future to recover the costs of long-term investments that are necessary to
provide customers with the low cost, reliable, and environmentally responsible
electricity. Such lack of confidence makes the Company's future
access to debt and equity more costly and potentially more difficult to
obtain. In fact, the Commission's December 15 deliberations led to an
immediate drop in the value of the Company's existing shares because it meant
that current shareholders will receive inadequate returns during the 2010 test
year in compensation for the capital they provided.
The
Company realizes that the Commission is faced with a very difficult situation as
it balances state policy mandates with the affordability of those
mandates. Unfortunately, the Commission's December 30 Order could be
viewed as having effectively prejudged the merits of the Company's case, even
though no examination of that case has yet been made. The Company
cannot take back the capital that it began deploying more than three years ago
to retrofit Boswell 3. Nor can it undo the commitments it has made to
replace the 30 year old turbine at Boswell 4 or to reduce emissions at Boswell
1, 2 and 4. The Commission can, however, make clear that it has not
yet evaluated the merits of the Company's case and that such evaluation will
only occur after all parties have had the opportunity to develop a record on
which the Commission can make an informed decision considering all interests,
including legislative objectives to reduce emissions and increase renewable
energy resources, and ratepayers' need for reliable and affordable
service.
Finally,
the Company is concerned that the decision risks turning every interim rate
decision into a mini-contested case proceeding, which would inject uncertainty
into the process and impose additional work-load burdens on utilities,
Commission staff, the OES, and all other participants. The goal of
the interim rate statute was to avoid this very burden by allowing the utility
to recover its increased costs according to a well-defined and time-tested
formula, subject to refund with interest, while the Commission evaluated the
appropriateness of its rate change request.
Minnesota
Power has implemented, effective January 2, 2010, the Commission's interim rate
decision that the Company collect $48.5 million in interim rates. But
absent reconsideration of the Order by the Commission, the Company will have no
mechanism to collect during the 2010 test year the additional $24.8 million
justified under the interim rate statute. In the meantime, the
failure to recover that amount will mean that the Company’s revenues will not be
sufficient to provide a fair rate of return on investment, investor confidence
will decline, and the Company’s cost of capital will increase. That
cost will have long term adverse impacts on ratepayers. It is not
unprecedented for the Commission, on its own motion, to revisit an issue if it
has concerns that should be addressed. Minnesota Power believes that
the Commission should revisit the interim rate decision in this
case.
###
This
exhibit has been furnished and shall not be deemed “filed” for purposes of
Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed
incorporated by reference in any filing under the Securities Act of 1933, except
as shall be expressly set forth by specific reference in such
filing.