Customers paying for scrapped Big Stone II project
North Dakota customers of two utilities aren't only paying for $13.7 million in costs to develop a power plant that never was built.
As part of that sum, consumers are paying more than $1 million in pseudo profits for the phantom Big Stone II project, scrapped last year.
The reasons for the payouts are embedded in North Dakota laws sought by the energy industry and lignite energy industry that were sold as consumer friendly.
Both laws came into play when the North Dakota Public Service Commission decided two years ago to make what is called an advance determination of prudence.
In effect, commissioners gave the controversial Big Stone II project in South Dakota an early seal of approval by deeming the investment "prudent" before it was built, allowing the utilities to come back later, as they did, to recover their costs for developing the plant.
The prudence law, which passed the North Dakota Legislature unanimously in 2005, was intended to reduce the financial risk for taking on costly utility projects. A prudent plant is found to be the most cost-effective, which benefits consumers.
But the effect of the law, as it was implemented in the case of North Dakota's share of Big Stone II, was to shift the risk of developing the plant onto ratepayers instead of shareholders.
The upshot: Montana-Dakota Utilities Co.'s 75,300 North Dakota electricity customers will pay monthly residential rates that will be, on average, $1.49 a month higher for about three years beginning in August.
Similarly, Otter Tail Power Co.'s 57,000 electricity customers in North Dakota will pay an average of 62 cents more on their monthly bill for about three years.
Since the Public Service Commission's decision last week to allow the utilities to recover their development costs, North Dakota's prudence law has come under attack.
Commissioner Kevin Cramer, who voted to bestow Big Stone II with an advance determination of prudence, complained that the law was in the utilities' favor - criticism his challenger, Brad Crabtree, said was too late in coming.
Environmental opponents in North Dakota and Minnesota argued unsuccessfully to regulators that coal-fired Big Stone II placed too much financial risk on consumers, given uncertainty about future costs in the event of a tax on carbon dioxide emissions.
In North Dakota, a law passed in the 1990s prohibits regulators from even considering potential costs of so-called "externalities," costs associated with pollution that aren't reflected in the cost of electricity but are borne indirectly by society.
In the 1990s, Minnesota wanted to assess costs for mercury pollution from coal-burning power plants in North Dakota. In response, the North Dakota Legislature passed the law prohibiting state regulators from considering "externality costs."
Crabtree said Cramer and his fellow commissioners failed consumers when they granted the prudence determination by ignoring economic uncertainty from potential carbon costs - even after a major Big Stone II partner pulled out of the project and many other coal plants were being scrapped for that reason.
"Now they're trying to pretend someone else was responsible for their decision," Crabtree said. "They're trying to hide behind the law."
For his part, Cramer said his hands were tied. He favors "cleaning up the language" of the externalities law, and has drafted legislation to give the Public Service Commission discretion whether to grant utilities a return on money spent for a failed project.
In the case of Big Stone II, the prudence law allowed MDU a 9.18 percent return on its expenses for the failed project, or $952,000, and Otter Tail Power is entitled to a return of 7.65 percent, or $285,000, according to PSC estimates.
"People understand recovering costs of something you tried to do," Cramer said. Automatically earning a return, however, and saddling customers with the entire burden is bad policy, he added.
Cramer's bill draft would require utilities to request a return on development costs, with the decision left to public service commissioners, instead of granting it automatically by statute.
Meanwhile, Otter Tail is trying to recover its Big Stone II development costs from its 60,700 Minnesota electricity customers in a rate case pending before the Public Utilities Commission.
Otter Tail has filed for a $10.6 million electricity rate increase in Minnesota, or about 8 percent. It seeks to recover Big Stone II development costs of about $5 million, compared to about $4 million that it can recover from its North Dakota customers.
A consumer advocate for the Minnesota attorney general has filed notice that the office will oppose allowing Otter Tail to charge consumers to recover its development costs.