Shelved power plant may cost ratepayers

North Dakota utility cost recovery law enables MDU and Otter Tail Power to bill ratepayers for Big Stone II development costs, with PSC preapproval, deferred accounting, financing benefits, and return on equity protections.

More than $20 million in expenses for the defunct Big Stone II power plant may show up on ratepayers’ electric bills, even though the project won’t illuminate a single light bulb, state regulators say.

In North Dakota, a state law intended to lower utilities’ financing costs will help Montana-Dakota Utilities Co. and Otter Tail Power Co. recoup their development costs for the plant, which was scrapped last November after Otter Tail withdrew from the project.

North Dakota’s Public Service Commission ruled in August 2008 that the $1.6 billion Big Stone II project was a prudent investment. It included a new electric generating station in northeastern South Dakota and an upgraded regional power transmission network.

The North Dakota commission’s decision will make it easier for MDU and Otter Tail to include the defunct project’s development costs in customers’ future electric bills, even though both utilities are now asking the PSC to reverse its earlier decision and conclude the project wasn’t a good idea after all.

MDU, which is based in Bismarck, has more than 70,000 North Dakota electric customers. Otter Tail Power, a Fergus Falls, Minn.-based utility operating amid debate over a Minnesota carbon tax that could affect regional projects, serves about 59,000 North Dakota ratepayers.

When it was announced in June 2005, the Big Stone II project was a partnership of seven utilities, with a Big Stone II hearing planned in Minnesota that drew regional interest. Two withdrew in 2007. Otter Tail, the group’s managing partner, followed suit in September 2009, causing the project to collapse three months later.

Otter Tail Power has spent about $13 million developing Big Stone II, spokeswoman Cris Kling said. MDU has spent about $16 million developing electric generation options, most of which went to the Big Stone II project, spokesman Mark Hanson said.

The two utilities will seek electric rate increases later that allow them to recoup their Big Stone II costs. Hanson said Montana-Dakota is expected to file a request to raise its North Dakota electric rates, with MDU rate hearings to follow within a month.

In North Dakota, MDU and Otter Tail have a state law on their side that allows them to charge customers for their Big Stone II expenses, including interest and the utilities’ normal return on equity. They may do so “even though the project may never be fully operational or used by the public utility to serve its customers,” the law says.

North Dakota’s Legislature unanimously approved the law five years ago, when state officials were hoping to encourage development of a coal-fueled new power plant in North Dakota. That has not happened.

Public Service Commissioner Tony Clark said he believed the legislation is still sound. By making it less expensive for utilities to finance electric generation projects, it can provide substantial benefits to ratepayers, he said.

However, the law also makes it easier for utilities to hit up ratepayers for their development costs, regardless of whether a project is built, he said.

“It’s not without some risk, there’s no doubt about it,” Clark said. “In this case, you basically had some musical chairs in Washington, a new direction from the administration, evolving energy regulations across the country, and a financial meltdown on Wall Street.”

Charles Gray, director of the National Association of Regulatory Utility Commissioners, a group based in Washington, D.C., said several states have endorsed a preapproval process for large utility projects.

Investors have “some assurance that the commissions won’t come back and disallow costs because it wasn’t the right choice,” Gray said.

Otter Tail Power and MDU have also asked state regulators to allow them to defer their accounting for Big Stone II expenses until they file their next electric rate increase request in each state. The move would allow utilities to spread their development costs over a number of years and relieve them of a possible large expense hit to their balance sheets.

The South Dakota Public Utilities Commission has granted both utilities’ requests. MDU’s application for deferred accounting is pending in North Dakota and Montana, while Otter Tail’s request is awaiting a decision in North Dakota and Minnesota.

Mike Diller, a commission analyst, said North Dakota law was “tight” in favor of allowing the utilities to recover their development costs.

“Basically if the commission issues an order that says (stopping the project) is prudent, then ratepayers are on the hook for all of (development costs), plus interest,” Diller said. “And it’s going to be hard for me to say, ‘Well... you have to build it anyway.’ That is really swimming upstream.”

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