The South Dakota Public Utilities Commission, on May 14, approved a return on equity rate for Otter Tail Power Company 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 PUC approved an 8.75% rate of return on equity during its regular meeting in Pierre. Otter Tail argued for a rate of 10%, while PUC staff recommended a rate of 8.25%.
The action came after a year-long analysis of Otter Tail ’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 today’s decision is expected to be presented jointly by Otter Tail and PUC staff for commission approval on May 28.
Many of the issues surrounding the rate increase request were settled, and approved on March 1. A remaining issue was the rate of return on equity.
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, S.D. 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, South Dakota, 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’s last general rate increase was approved in 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 has implemented are an extensive customer information system, replacing a decades-old program.
“I found this docket (case) to be fascinating,” said PUC Chairman Gary Hanson. “There was a tremendous amount of work and thought committed to this process by PUC staff and Otter Tail. Both sides presented strong cases.”
“The commission works hard to make sure the rates we set are reasonable for ratepayers in South Dakota,” said PUC Vice Chairman Chris Nelson. “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.”
“I have made a thorough review of the filed material, direct and cross-examination, and briefs,” said Commissioner Kristie Fiegen. “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.”
On Oct. 18, 2018, as allowed by state law, Otter Tail Power Co. implemented interim rates based on their initial request, that 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.