A general rate case is the formal process used to determine the amounts to charge customers to recover the cost incurred in providing electricity and natural gas service by regulated utilities.
The Commission has the statutory authority to regulate rates for all public utilities in Minnesota except municipally owned utilities and member-regulated cooperatives. However, a cooperative electric association may elect to become subject to rate regulation by the Commission pursuant to Minnesota Statutes sections 216B.03 to 216B.23.
A regulated utility cannot increase its rates without Commission approval. A utility must file a request to increase rates through the Commission’s rate case process which provides Commission staff and other intervenors the ability to scrutinize requests through a contested case proceeding.
Similar to how a judge functions in court, an Administrative Law Judge (ALJ) presides over rate case proceedings – setting the schedule, hearing motions from parties to the case, and overseeing cross-examination of witnesses during the evidentiary hearing. Intervenors in the case are able to submit testimony and exhibits, cross examine witnesses, and file legal briefs on issues in the case. The ALJ reviews the evidentiary record and makes findings and a recommendation regarding the action the commission should take on the application- will involve rates, terms and conditions of service, and other matters relevant to the rates- in the form of a report, known as an ALJ Report. The Commission takes the ALJ Report under consideration and generally has 10 months from the date the utility filed the application to issue a final decision through an order.
1. What is a rate case?
One of the key functions of the Commission is to set rates charged by regulated electric and natural gas utility companies such as CenterPoint Energy, Xcel Energy, Minnesota Power, Otter Tail Power Company, and, Minnesota Energy Resources Company among others. This is done through a “rate case,” which is a legal proceeding conducted by the Commission to determine the amounts to charge customers through rates, based on a utility’s costs to serve its customers. To initiate a rate case, a regulated utility files an application with the Commission seeking authority to change its rates, based on a proposed deficiency in the revenues needed to adequately compensate the utility for costs it reasonably and prudently incurs to serve its customers. The rate case also determines how different classes of customers (e.g. residential, commercial and industrial) would be affected by the potential rate change.
2. Do utilities have to file a rate case to increase base rates charged to customers?
Yes, pursuant to Minnesota Statute § 216B.16, an electric or natural gas utility must receive approval from the Commission to increase its rates and charges.
3. What's included in a rate case application?
In general, a utility must provide the rationale for its request to change rates charged to customers. This must be supported by factual evidence provided through expert witness testimony and exhibits. Pursuant to Minnesota Rules 7825.3100, etc. utilities are also expected to provide a plain language listing of the types of schedules required (e.g., rate base schedules, operating income schedules, rate of return cost of capital schedules, rate structure and design schedules, and other information) to facilitate review by the Commission and parties to the case. The Commission can reject an application if it is found to be incomplete and not conforming to the filing requirements. Minnesota Statutes and Rules set forth the rate case filing requirements applicable to rate cases.
4. What standards does the Commission use to review rate case applications?
The Commission is required by law to set rates that are just and reasonable and has flexibility in the methods it uses to exercise this function. Based on longstanding legal precedent, the Commission is required to balance the interests of the utility and ratepayers, taking into consideration the revenue utilities need to cover the reasonable and prudent costs incurred to provide utility service, including a reasonable return for investors, and sets rates that are intended to recover these costs. The utility has the burden to prove that the amounts it is seeking to recover in rates are needed, reasonable, and prudent. If the utility fails to meet this burden of proof on any item in a rate case, such as costs related to tree trimming, employee pensions, or a new capital investment, the Commission excludes those amounts from being recovered in rates. Such adjustments or “disallowances” are fairly common.
5. How to participate in a rate case?
Parties who may be affected by the utility’s proposed rate change are allowed to file a petition to intervene. An administrative law judge (ALJ) determines if the petitioning intervenor meets the legal requirements to participate in the case. Typical intervenors include individuals, businesses, organizations, and government agencies representing a wide spectrum of interests, such as environmental considerations, residential, commercial, or industrial ratepayers, or consumer advocates. Intervenors are represented by attorneys and typically file expert witness testimony or present other evidence to be considered by the Commission.
6. Can I participate in a rate case without intervening?
Individuals or groups who wish to provide input in a rate case without being formal intervenors may do so by submitting comments to the MN PUC or making statements at public meetings. Such participation does not require the assistance of legal counsel, but is generally limited to making position statements on the issues. Although statements become part of the record that the Commission reviews in making its decision, those who make statements do not ordinarily have the right to submit evidence, cross-examine witnesses, or appeal MN PUC decisions in court.
7. What is the process for a rate case?
A rate case is conducted as a contested case hearing under the Minnesota Administrative Procedures Act, and notice is required to be given to the public of a proposed rate increase. Similar to how a judge functions in court, the ALJ presides over rate case proceedings – setting the schedule in a case, hearing motions from parties to the case, and overseeing cross-examination of witnesses. Intervenors in the case are able to submit testimony and exhibits, cross examine witnesses, and file legal briefs on issues in the case. The ALJ reviews the evidentiary record and makes findings in the form of an ALJ Report.
8. What is the Commission's role in a rate case?
The Commission is made up of five commissioners appointed to staggered six-year terms by the Governor with the advice and consent of the Minnesota Senate. The Commissioners review the ALJ Report, evidence submitted on the record (e.g., testimony, exhibits), and additional arguments by the parties regarding their response to the ALJ Report known as “exceptions,” and ultimately decide whether to approve, modify, or reject the utility’s request for a rate change. The Commission can accept, modify, or deny each of the recommendations in the ALJ Report based on its review of the case. The Commission’s decision comes in the form of a legally binding document known as an order.
9. What is the Commission staff’s role in a rate case?
The Commission has professional staff that are technical experts with specialized training in accounting, auditing, economics, financial analysis, engineering, statistics, and other fields. Unlike intervenors, the Commission staff does not serve as a party in rate case proceedings. Rather, Commission staff oversees the case ensuring that all statutory timeframes are met and that the Commissioners are well versed on the particular issues of the rate case. Commission staff’s role is to provide impartial advice and analysis that the Staff believes, in its professional judgment, serve the public interest.
10. Is there a statutory deadline for rate case completion?
Yes, pursuant to Minn. Stat. § 216B.16, subd. 2, the Commission must make a final decision in a rate case within ten months of the original filing date of the application. There are a few exceptions which allow the Commission additional time to make its final decision such as ongoing settlement discussions, multiple rate cases under consideration at the same time, the inclusion of a request for a multi-year rate plan, etc.
11. What is rate base and what is included in it?
How is “rate base” different from “base rates”? A utility’s “rate base” is the book value of all its assets (property, equipment, etc.) that are considered used and useful. The “book value” represents the utility’s cost for capital investments less depreciation. “Base rates” is the technical term for the rates set by the Commission in rate cases. Base rates include the utilities’ return of and on the rate base, as well as operations and maintenance expense. In addition to the charges for base rates, utility bills include fuel and purchased power expenses. These charges are known as base cost of energy (for electricity) and base cost of gas (for natural gas). The Commission reviews these expenses to ensure they are reasonable, and only actual, verified costs are ultimately charged to customers. No profit or return on investment is recovered by the utility for such expenses.
12. What is a test year?
A “test year” is a period of 12 consecutive months used to establish representative levels of revenues, sales, expenses, rate base, and cost of capital in the rate-setting process. A utility may use a historical test year, based on actual revenue and expenses adjusted for known and measurable changes, or a projected test year, in which the utility forecasts its expected revenue and expenses. The costs and revenues for a test year are used by the utility for its proposed revenue requirement request in a rate case application.
13. What is the interim rate increase?
Under the interim rate statute, Minn. Stat. 216B.16, subd. 3, the Commission is directed to order an interim rate schedule into effect not later than 60 days after the initial filing date, ex parte without a public hearing. Interim rates are not subject to an application for rehearing or an appeal to court until the Commission has rendered its final determination on the main rate request. Interim rates are subject to refund if the interim rates exceed the rates in the final determination.
14. Does the Commission ever reject a rate increase request?
In the five-year period from 2015-2019, Minnesota utilities requested total rate increases of $932 million. The Commission approved increases of $656 million, or approximately 70% of the requested amount. This includes amounts approved through uncontested settlements agreed to by the parties in a case. While it is uncommon for the Commission to reject a rate case application outright, there have been instances in which a utility has withdrawn its rate case request prior to a final decision by the Commission (e.g., the utility no longer believes it can justify the proposed rate increase due to changing conditions in revenues or costs).
15. What recourse does an intervenor have if they do not agree with the Commission decision?
After the Commission issues a final order on a utility’s rate case application, all intervening parties have the right to request a reconsideration from the Commission. This is a request to have the Commission reconsider either parts or all of its final order. The request for reconsideration must occur within 20 days of the date the Commission’s order was issued. The Commission must take up the reconsideration request within 60 days or it is deemed denied. Intervening parties also have the right to appeal the decision to the Minnesota Court of Appeals. This also must occur no later than 30 days after the final order was issued.
Contact Jorge Alonso, Supervisor Financial Analysis