The South Dakota Public Utilities Commission, in a March 6 order, approved a settlement stipulation concerning Otter Tail Power’s proposed rate change.
As noted in the order, the commission in April 2018 received an application from Otter Tail Power for approval to increase rates for electric service in its South Dakota service territory. Otter Tail proposed a two-step increase to base rates, with the first step increasing revenues by a net approximately $3.4m annually or 10.10% based on Otter Tail’s 2017 test year.
The order added that the company states that a typical residential customer will see an increase of $11.29 per month under the rate design proposed by the company. The second step proposed is an additional $629,107, or 1.72% increase to revenues, effective Jan. 1, 2020. Otter Tail states that a typical residential customer will see an additional increase of $1.75 per month as a result of the step increase, the order added, noting that the proposed rates may potentially affect about 11,700 customers in the company’s South Dakota service territory.
Otter Tail and commission staff in February filed a joint motion for approval of settlement stipulation and settlement stipulation resolving all issues except for return on equity, the order said.
As noted in the settlement stipulation, the requested net increase reflected transitioning costs currently recovered through the company’s Environmental Cost Recovery Rider (ECRR) and Transmission Cost Recovery Rider (TCRR) to base rates. Without accounting for the corresponding reduction in rider revenues caused by the transition of rider recoveries to base rates, the company’s application sought a non-fuel revenue increase to base rates of about $6m, or 19.50%. The proposed step increase, to be effective on Jan. 1, 2020, would facilitate recovery of the Merricourt Wind Project, the stipulation added, noting that if granted, the step increase would result in an additional net increase of non-fuel revenues of $629,107, or 1.72% over current rates.
While the parties are unable to reach a resolution regarding return on equity and will notice that one unresolved item for commission consideration, the stipulation identifies the operating revenue, operating expense, and rate base components of the cost of service based on the agreed-upon issues, exclusive of impacts related to return on equity.
The stipulation also noted that the precise revenue requirement value of certain settled issues will be impacted by the commission’s decision on the unresolved issue of return on equity. All recalculation necessary and resulting from the commission’s decision on the return on equity will be completed and presented for review in compliance with the commission’s order after hearing. The stipulation also said that the parties agree that these financial elements cannot be determined until the return on equity is known: synchronization, cash working capital, and tax collections available.
The position described in Otter Tail’s initial filing on return on equity, along with the issues resolved in the settlement stipulation, result in an overall rate of return of 7.91%, and a final net revenue deficiency of about $3.1m, adjusted to reflect prudent, actual rate case expenses through resolution of the non-settled issue of return on equity.
The stipulation added that the position of commission staff on return on equity, along with the issues resolved in the settlement stipulation, result in an overall rate of return of 6.83% and a final net revenue deficiency of about $1.9m, adjusted to reflect prudent, actual rate case expenses through resolution of the non-settled issue of return on equity.
The parties agree that in lieu of the company’s requested step increase for the Merricourt Wind Project, the company will file for commission approval a phase-in rate plan – Phase-In Plan – for cost recovery of the wind project and the company’s Astoria Natural Gas Project, with the Phase-In Plan continuing until the projects’ costs can be included in base rates following the company’s next rate case filing.
The stipulation added that the parties agree that the Phase-In Plan revenue requirement shall include adjustments reflecting the net benefit of the additional load in the Lake Norden area – New Load Adjustment – and net savings associated with Otter Tail’s retirement of its Hoot Lake Plant – Hoot Lake Adjustment.
The New Load Adjustment will begin with the effective date of the phase-in rates and will reflect the incremental base rate revenues calculated by comparing the customer’s estimated increased sales to the proforma test year sales from the rate case. The stipulation added that for the year 2019, sales will be compared, in total, for the months the phase-in is effective; for each year thereafter, sales will be compared annually.
The Hoot Lake Adjustment will begin upon the retirement of the Hoot Lake plant and will be trued-up each year.
The rate of return for the Phase-In Plan will incorporate the return on equity to be determined at hearing, the stipulation added, noting that while the projects are under construction, the rate of return for the Phase-In Plan will include Otter Tail’s weighted average cost of debt calculated at year-end levels in a manner consistent with that used in the stipulation, including short-term debt costs, the return on equity set by the commission in this proceeding, and the equity ratio calculated at year-end levels in a manner consistent with that used in the stipulation.
Once the projects are in service, the rate of return for the Phase-In Plan will include Otter Tail’s weighted average cost of long-term debt calculated at year-end levels in a manner consistent with that used in the stipulation, the return on equity set by the commission in this proceeding, and the equity ratio calculated at year-end levels in a manner consistent with that used in the stipulation. The stipulation also noted that the company will continue to file annual earnings reports while the Phase-In Plan is in effect.
The parties agree that the Phase-In Plan for the wind project will reflect production tax credits (PTCs) based on Merricourt’s actual production. If recovery for the wind project under the Phase-In Plan remains in effect after Oct. 1, 2022, because the company has not filed an application for an increase in base rates to be effective by that date, then the Phase-In Plan will reflect PTCs based on a Merricourt capacity factor of 50.7% until updated in Otter Tail’s next rate case, the stipulation added.
Among other things, the stipulation noted that if the company’s Merricourt Wind Project and Astoria station are in service by Dec. 31, 2020, then Otter Tail will not file a rate case before April 1, 2022.