Black Hills Power Rate Case| previous page
Separating Fact from Fiction
Questions to the South Dakota Public Utilities Commission
about the Black Hills Power Rate Case
Rate Case Basics
Regulatory Process
PUC Efforts
BHP's Request
Wygen III
Interim Rate
Update July 7, 2010
What's the status of the rate case?
The commission approved a 12.7 percent increase in electric rates for retail customers of Black Hills Power. The increase represents about $17 million less in annual revenues than the company requested. Because the approved increase is less than the interim rate increase that has been in effect since April 1, 2010, customers will receive a modest refund in their billings beginning in July.
For more information, see the PUC's news release at http://puc.sd.gov/News/2010/070710.aspx.
I've read about the settlement, but I've heard two different settlement rates: 12.7 percent and 19.4 percent. Which is it?
As we've stated before, rate cases are complicated. You've heard both amounts used to describe the settlement rate because both figures are correct. What you need to understand is what those figures represent.
BHP requested an increase in rates of approximately 26.6 percent. This increase applies to the rates filed "permanently" at the PUC.
All BHP customers are familiar with something called an "Energy Cost Adjustment," also known as a fuel clause, which appears on their monthly bill. When the price of fuel or purchased power paid by electric utilities in South Dakota change from the cost included in permanent rates, that change is allowed by law to be recovered in the fuel clause. Some utilities change this cost monthly, some change it quarterly; BHP changes the clause once a year. That means any difference between what is collected in permanent rates and what is actually paid must be made up in the following year. This pattern is repeated each year.
In 2009, BHP's permanent rates collected much less from customers than the actual fuel cost paid. Therefore, on March 1, 2010, the new fuel clause became effective and that new amount increased the total bill paid by customers by 6.7 percent. When this current fuel clause increase is added to the requested permanent increase of 26.6 percent, the rates would increase by approximately 34.2 percent if the total amount is billed. Because the fuel clause changes annually, the 34.2 percent can be considered a temporary increase.
The settlement shows a permanent increase of approximately 12.7 percent. When the recovery of the 2009 fuel cost shortfall of 6.7 percent (fuel clause) is added, it appears the rate increase is approximately 19.4 percent. Come March 1, 2011, virtually all of that 6.7 percent add-on may disappear, or may even decrease more than 6.7 percent because of other elements of the settlement.
Compared to the original application, the settlement shows a permanent increase of 12.7 percent as compared to the 26.6 percent request. Until the fuel clause is adjusted on March 1, 2011, the settlement shows a temporary increase of 19.4 percent compared to the original request of 34.2 percent.
Bottom line: the settlement rate increase would be 12.7 percent. The normal annual changes made to the fuel clause will continue as the years go by. The 12.7 percent rate increase will not change without another rate case.
In summary:
BHP Rate Request PUC Staff Settlement
Permanent Increase 26.6% 12.7%
Fuel clause (until
Feb. 28, 2011) 6.7% 6.7%
Total Increase 34.2% 19.4%
When will the fuel clause change again? What it the expected increase then?
On March 1, 2011, a new fuel clause will become effective based on costs paid in 2010. It is expected that will be a much smaller change than 6.7 percent.
Rate Case Basics
"What is going on here?"
Black Hills Power is a private, investor-owned utility providing a monopoly service. Therefore, by law, BHP and other investor-owned electric utilities can raise their rates only with permission from the state Public Utilities Commission, except for interim rates, that are explained below. Utilities that are not investor-owned are member-owned or
publicly-owned. Examples of these are rural electric cooperatives and municipal electric organizations. In these cases, the PUC does not approve rates, the members or
owners do.
On Sept. 30, 2009, BHP asked permission to raise their base rates by 26.6 percent. Since then, the PUC and other parties have been analyzing the request.
"Unbelievable! This must be a bad dream. How can this be happening?"
Actually, this process is not unusual. According to one regulatory consultant, there are currently 97 rate cases pending before state PUCs across the country. During the last 30 years, the South Dakota PUC has dealt with an average of a little more than one electric rate case a year.
"This is an unprecedented requested hike!"
This is a larger increase than the PUC has seen in recent years, but it is not unprecedented. Increases of more than 20 percent have been requested by regulated electric utilities 13 times since 1975, including one for 56.9 percent. For those rate cases related to major production-related capital expenditures (like power plants), the average rate increase requested has been 25.48 percent.
"Who's in charge here?"
South Dakota has three public utility commissioners, each elected statewide for a staggered, six-year term. After formal hearings covering all of the evidence, the commissioners will make a decision. That decision can be appealed to state circuit court and then to the state supreme court.
"I can't afford that. 26%, come on."
No one can ignore the impact higher electricity bills will have on real people. The PUC will consider the ability of families and businesses to pay higher rates, but must also consider what legitimate expenses BHP has incurred and has a legal right under existing law to recover.
"Do we have to pay for BHP's mistakes?"
If a company makes a mistake, that's their problem, not yours. State law only allows utilities to recover costs that are reasonable.
"Is this a done deal?"
Absolutely not. The review of the rate increase request is ongoing. The parties have agreed to hold a formal hearing on the case in Pierre beginning June 28, 2010.
Regulatory Process
"What is the PUC process?"
The PUC is a court of administrative law and their dockets are contested cases under state law. A rate case docket is handled much like a civil or criminal case. Parties conduct discovery, data and responses are analyzed, evidence is introduced, witnesses testify under oath, attorneys conduct cross-examination, legal briefs are filed, and ultimately a decision is made.
"What will the decision be based upon?"
The facts. The commissioners serve as administrative law judges and don't get to do whatever they want. Their decision must be supported by the facts in evidence and based upon principles defined by statute and case law. PUC decisions can be appealed to state circuit court and then to the state supreme court so the commissioners take great pains to be accurate and fair.
"Who else is involved?"
Other than BHP (the applicant) and the commissioners (the decision makers), there are three other parties involved. First, the PUC staff is a separate party to the case and carefully analyzes the request. Their job is to advocate for the public interest. Second, a group of large industrial energy users has intervened and are seeking to have their concerns addressed. Third, a group of residential ratepayers has intervened and are seeking to have their concerns addressed.
"All of this is being done in the dark."
No, it's not. All of the information filed for this case is placed almost immediately on the Web for your review at http://puc.sd.gov/Dockets/Electric/2009/el09-018.aspx. The application by BHP, transcripts of PUC meetings and public input hearings, and correspondence can be accessed at that site. State "ex parte" and open meeting laws ensure the commissioners only discuss the merits of the case with the parties in an open meeting, all of which are broadcast live over the Internet and are recorded and later linked to the PUC's Web site.
PUC Efforts
"Why are you people just sitting on your hands doing nothing about it?"
The commission has been very busy on this case. Six regulatory experts on the PUC staff have been assigned to this case and have collectively spent more than 1,300 hours on it (the cost of that time will be billed back to BHP). In addition, two outside regulatory consulting firms have been hired to evaluate specific highly-technical portions of BHP's application. Together, they have been analyzing all aspects of the request and have asked BHP literally hundreds of detailed follow-up questions. Keep in mind this is not the only docket the PUC is processing. The commission is at work on more than 70 dockets in addition to this one. Some dockets have timeframes set in law, defining how long the commission has to process them.
"Why is this taking so long?"
This is a technical legal proceeding. Think about how long most court cases and legal processes take. The discovery process can take months, as can preparing testimony and getting ready for hearing. To make sure the PUC makes the right decision, the process can't be rushed. BHP's application must be subjected to full and complete scrutiny. There is much work to be done in that time.
"When will this be done?"
It is reasonable to expect a PUC decision by August 2010.
"Are the PUC Commissioners getting money to put through this rate hike?"
No. Neither commissioners nor staff members have directly or indirectly received any compensation from BHP. No commissioner or staff member has ever been employed by BHP.
"It appears that the PUC is nothing but a pawn in the pockets of BHP." and "Politicians these days only look out for themselves and their special interests, not the people who elected them" and "Either do your job (and stop this insanity) or abdicate your position."
Everyone at the commission wants your electric rates to be as low as reasonable in order to provide safe and reliable energy. None of the commissioners or staff members got into utility regulation to hurt their friends, family, or fellow South Dakotans. The PUC is working hard to ensure the final outcome of this proceeding will serve the public interest. The commissioners aren't elected by BHP; they are elected by the people of the state, and that's who they work for.
BHP's Request
"26.6%? Why?!"
According to BHP's application, one-third of its request is attributed to operating costs that have increased during the last few years, like health insurance, labor, and supply costs. Most of the requested increase results from the company's decision to construct a new power plant in Wyoming. BHP claims that power plant (Wygen III) is needed to meet the growing demand for electricity among its South Dakota customers. BHP claims electric usage in their South Dakota territory has increased 40 percent since 1995.
"Are you just taking BHP's word for it?"
No, not at all. BHP must prove their case. The company's claims are being reviewed very carefully by the PUC staff, the commissioners, and the industrial and residential intervenor groups.
"Are these made-up costs and guesstimates?"
No. Actual historical costs are the basic building blocks of a rate case. Utilities like BHP must submit a rate request based on the actual costs of the previous year (the "test" year). They can ask for more than those historic actual expenses only for "known and measurable" changes, and have to defend those requested changes.
"Why is the requested increase so huge?"
The PUC doesn't know what portion (if any) of the requested increase is warranted. Historically, however, when rates do go up in a capital-intensive business like electricity, they often go up in steps, because new power plants, transmission lines and wind farms are so expensive. Even when amortized out over decades, those investments can have a substantial effect on prices. None of that means the Black Hills Power request is appropriate, however.
"Why can't you reduce the wages of the 'upper crust' of BHP?"
Historically, much of the compensation packages of utility executives are not funded with ratepayer dollars. PUCs usually require substantial portions of executive salaries not be paid by revenues from the regulated business, so those costs are not picked up by consumers. Those portions are typically paid for by investors' or other funds.
"Would we boycott the local gas station for a 26% increase, would we change supermarkets if they instituted a 26% price increase? The answer is yes, of course we all would."
It actually isn't unusual to see price spikes of greater than 26 percent over the course of months or years for gasoline, produce, or other items we purchase weekly. That doesn't mean BHP's request is warranted, however. This price increase must be approved by regulators. The public is invited to comment and be involved in the process. That makes it much different than most goods or services that increase in price without approval or allowing you, the consumer, a chance to be heard during the decision-making process.
"This unreasonable request will get denied, right?"
The commissioners don't yet have enough information to determine whether or not BHP's request is "unreasonable." Such a determination will have to be based on hard facts and evidence in the record. The requested increase is significant and the PUC is in the process of analyzing it.
Wygen III
"This increase is because BHP wants to increase the production of electricity in order to sell it elsewhere and increase profits."
BHP ratepayers won't be paying to ship power elsewhere or to provide BHP with unreasonable profits. The complex PUC proceeding is focused on determining what costs should be passed onto ratepayers. BHP ratepayers are only going to pay for the portion of the Wygen III plant that serves BHP ratepayers.
"Why are we paying for this plant all at once?"
Even if rates go up, you won't be. Usually, large generation units are amortized out over decades. In its application, BHP proposed that Wygen III be depreciated over its 45-year useful life.
"Why didn't BHP start gradually raising their rates years ago?"
Traditionally, PUCs have only allowed utilities to charge consumers for assets that are providing them benefits. Starting to raise rates a decade ago to give BHP advance funding for the Wygen III plant would have imposed unfair costs onto people who never received any benefit from that plant. You make a mortgage payment on a house when you are living in it, not on the one down the street you may move into four years from now.
"Why doesn't BHP ask the investors to bear some of the costs of Wygen III?"
They are. Large capital investments are usually funded by issuing debt, acquiring additional equity (investors), or through a combination of both. Each of those options costs money. Borrowing money requires paying interest on those funds, and investors have a reasonable expectation of a fair return on their investment. If the building of Wygen III was a sensible decision, the PUC will decide what a fair return would be for that asset.
"Why should we pay for something that was built in another state?"
It doesn't matter where Wygen III is located. What matters is who receives the benefit of that plant. That is something the parties have been scrutinizing.
"Why are they being allowed to use coal and not forced to use wind?"
Black Hills Power has stated that a coal plant was their least-expensive way to provide new generation to their customers. The PUC will certainly be testing that claim during our proceeding.
"Why do the people in South Dakota have to pay for the whole ballpark when parts of the plant have been sold to other utilities?"
You won't be charged for costs associated with facilities that aren't serving you and other BHP customers. South Dakotans won't have to "pay for the whole ballpark." Portions of the plant, as well as output from the plant, have been sold to another company and those costs won't be included in BHP customers' rates.
Interim Rate
"Why is the PUC allowing them to put a rate increase into effect before a final rate has been approved?"
State law allows a utility like BHP to put into place, on an interim (temporary) basis, their entire requested rate if the commission has not acted on the docket within 180 days. Once the commission makes its final decision, however, the utility must refund any payments received by the utility that are greater than the final rate increase allowed by the commission.
In March 2010, BHP indicated it intended to put its 26.6 percent increase into effect on April 1, 2010, (as state law allows) unless the PUC approved a smaller 20 percent increase. Faced with raising bills 20 percent or 26.6 percent, the PUC chose the smaller amount for the interim (temporary) rate.
"Why didn't this case get handled in the 180 days?"
The BHP request is tremendously complex and has taken an incredible amount of effort to review. That is not unusual for a rate increase request. In fact, the PUC is unaware of any state in the country where the law indicates rate cases must be completed within six months. South Dakota law allows one year for the commission to process a rate case. For BHP's request, there have been thousands of pages of evidence reviewed, hundreds of questions asked of Black Hills Power, and millions of dollars in expenses scrutinized. That type of due diligence should not be rushed.
All parties, including the industrial and residential intervenors, wanted additional time to prepare for hearing and agreed that a decision could not be made properly within 180 days.
Note: The questions above are actual questions received by PUC commissioners and staff members. In a number of cases they have been slightly modified for formatting, clarity, spelling, or grammatical reasons.
