The South Dakota Public Utilities Commission heard competing testimony from rival experts Tuesday on a company’s application to raise electricity rates.
Otter Tail Power, based in Fergus Falls, Minnesota, contested the commission staff’s recommendation of an 8.25 percent return on equity.
The company argued the staff’s figure was lower than regulators had allowed for other utilities.
Otter Tail asked for 10.3 percent instead.
Return on equity is a company’s net income divided by shareholders’ investments.
Next step is the sides present post-hearing briefs no later than April 15. The commission will schedule another meeting to reach a decision. That will determine how much the company’s rates go up.
“Sometimes as a commissioner it’s hard to compare apples to apples,” Commissioner Kristie Fiegen said.
Otter Tail applied for higher rates April 20, 2018.
The company sought a 2018 increase of 10.10 percent that would have raised the bill by $11.29 per month for a typical residential customer.
That was to be followed by a second increase of 1.72 percent on January 1, 2020, and would add another $1.75 per month for a typical residential customer.
Otter Tail serves about 11,700 customers in northeastern South Dakota. Its last rate increase for electricity in South Dakota was 2.3 percent in 2011.
Otter Tail has the second-lowest rates in South Dakota, Bruce Gerhardson said Tuesday. He is the company vice president of regulatory affairs.
Gerhardson said he didn’t agree with the commission’s 9.25 percent return on equity granted to Xcel Energy in 2012.
The Xcel docket was the commission’s most recent previous decision about return on equity.
The company’s first witness Tuesday was consultant Robert Hevert from Westborough, Massachusetts.
Hevert recommended a 10.3 percent return on equity, based on several methods for determining risk.
“I would say utilities are lower risk than the overall market,” Hevert acknowledged to a question from Gary Hanson, the commission’s chairman.
The staff’s consultant, Basil Copeland Jr. of Maumelle, Arkansas, recommended an 8.25 percent return on equity.
Copeland reached his number based on several methods and contended that Hevert’s approach contained “fundamental errors.”
“I did not set out looking for a number that was low,” Copeland told the commission. He said customers would pay for short-term gains in Otter Tail stock price.
Hevert said a return at the level Copeland had recommended would raise concern among investors and make more difficult the company’s ability to attract capital.
Otter Tail lawyers declined to cross-examine Copeland. Commissioner Chris Nelson however challenged the commission staff’s consultant.
“What I fail to find is that’s the right number,” Nelson told Copeland about his 8.25 percent recommendation.
Copeland replied by referring to Hevert’s recommendation of 10.3 percent: “That’s too high. It has to come down.”
Nelson responded that Copeland was making a “judgment.”
In his opening remarks, Otter Tail lawyer Cary Stephenson told the commission, “In the end it’s the result that matters, not the methodology.”
Commissioner Fiegen asked Copeland about Otter Tail’s contention that methodology didn’t matter. Replied Copeland, ““You can’t avoid looking at methods. You have to have a method.”
The utility and the commission staff had reached agreement that the commission approved March 1 on all major points other than return on equity.
Since then the two sides disagreed over how much information Otter Tail could present at the evidentiary hearing.
But they reached compromise Tuesday morning and the staff’s attorneys withdrew their motion.
They had jabbed at each other in the past week.
“The fact that it was a negotiated agreement, a phrase even incorporated in the document, underscores the fact that any give on the part of one side was met with the same on the other,” commission staff attorneys Kristen Edwards and Amanda Reiss had written in their three-page motion filed March 21.
Otter Tail lawyer Stephenson filed a five-page reply the next day.
Stephenson said one of the points the company wanted the commission to consider was the fast pace and economic efficiency of air-quality modifications made in the past decade to the Big Stone power plant near Milbank.
Stephenson said South Dakota customers would receive cumulative savings of approximately $17.2 million, with a net present value of $7.8 million, as a result of the Big Stone modifications.
“To say that this commission may not weigh such performance means the commission may not incent behavior it deems appropriate or provide disincentives for unwanted behavior,” Stephenson wrote.