PIERRE, S.D. — The South Dakota Public Utilities Commission approved a return on equity rate for Otter Tail Power Co. that paves the way for the company to increase base rates charged to its 11,700 customers in northeastern South Dakota.
Return on equity is a measure of profitability a company can generate on its shareholder investments. The commission approved an 8.75 percent rate of return on equity at its regular meeting in Pierre on Tuesday. Otter Tail Power Co. argued for a rate of 10 percent; the PUC staff recommended a rate of 8.25 percent.
The commission’s action came after a year-long analysis of Otter Tail Power Co.’s request to increase customer base rates to generate approximately $5.98 million in additional annual revenues. The final revenue requirement as a result of Tuesday’s decision is expected to be presented jointly by Otter Tail Power Co. and the PUC staff for commission approval on May 28.
Most of the issues surrounding the rate increase request were settled in an agreement between Otter Tail Power Co. and the PUC staff that the commission approved on March 1, except for the rate of return on equity, on which the two sides did not agree. Further information about the rate of return on equity was presented to the commission at an evidentiary hearing in Pierre on March 26. Otter Tail Power Co. and the PUC staff filed briefs with the commission before today’s decision.
As part of the approved comprehensive rate increase, the company will move the recovery of some costs related to investment and operating expenses into base rates. These specific costs had been collected through mechanisms known as transmission cost recovery and environmental cost recovery riders. Both riders were previously approved and reviewed annually by the commission.
The settlement approved by the commission included a phase-in rider to recover appropriate costs related to the company’s Merricourt wind project in North Dakota and its Astoria Station simple-cycle natural gas-fired energy conversion facility near Astoria. The negotiated settlement also included a provision to offset the phase-in revenue requirements associated with these plant investments with adjustments to reflect the net benefit of additional load in the Lake Norden area and the net savings associated with the retirement of the Hoot Lake plant in Minnesota. The company further agreed to wait until 2022 to file its next request to increase base rates, at which time the phase-in rider is expected to be discontinued.
Otter Tail Power Co.’s last general rate increase was approved by the commission in April 2011. Since then, the company cited significant system investments and increased operations and maintenance costs as the reason for seeking an adjustment now. Among the projects and improvements, Otter Tail Power Co. has implemented are an extensive customer information system, replacing a decades-old program.
PUC Chairman Gary Hanson noted the depth and breadth of the facts, data, and evidence presented in the case. “I found this docket to be fascinating. There was a tremendous amount of work and thought committed to this process by PUC staff and Otter Tail. Both sides presented strong cases. I appreciate the acumen of all participants that led to the information that helped us make our determination today,” Hanson said.
“The commission works hard to make sure the rates we set are reasonable for ratepayers in South Dakota,” PUC Vice Chairman Chris Nelson said. “We also have an obligation to ensure Otter Tail is financially sound. I’m comfortable that the decisions this commission has made are fair to the ratepayers and the investors,” he concluded.
Commissioner Kristie Fiegen made the motion to set the rate of return on equity. “I have made a thorough review of the filed material, direct and cross-examination, and briefs. I believe with Otter Tail’s forthcoming expansion and its track record of service, a return on equity of 8.75% achieves a fair balance of ratepayer and investor interests while still giving substantial consideration to the factors that supported the PUC staff’s recommendation,” Fiegen stated.
On Oct. 18, 2018, as allowed by state law, Otter Tail Power Co. implemented interim rates based on their initial request, which resulted in a 10.1% rate increase across all customer classes. Today’s action by the commission will result in a lower rate. Company representatives will work with the PUC staff to present a refund plan for commission approval at a later date.
The Otter Tail Power Co. rate increase request docket can be viewed on the PUC’s website at www.puc.sd.gov, Commission Actions, Electric Dockets, 2018 Electric Dockets, EL18-021 – In the Matter of the Application of Otter Tail Power Company for Authority to Increase Its Electric Rates.