State: Cut Xcel’s Proposed Rate Increase by 54%

Xcel said that it needs to raise electricity rates by $198 million over the next two years to cover the cost of nuclear power plant and other upgrades, but the state contends that the company has overestimated its costs.

Xcel Energy, Inc., wants to raise its electricity rates by $198 million over the next two years-but the Minnesota Department of Commerce recommended a sum equal to less than half of that amount.

The increase requested by Minneapolis-based Xcel amounts to 7.4 percent over two years-2011 and 2012. But the Commerce Department's Office of Energy Security (OES), which provides recommendations to the Minnesota Public Utilities Commission (PUC), wants to see Xcel's request cut by $107 million, or about 54 percent.

“We believe the considerably smaller rate increases recommended by our staff will protect ratepayers from undue burden but still allow Xcel Energy to provide safe, reliable service and make needed improvements to distribution, transmission, and generation facilities,” Commerce Commissioner Mike Rothman said in a statement.

One of the major reasons Xcel wants to increase its rates is to cover the cost of improvements to its nuclear power plant in Monticello. The OES doesn't object to an increase that covers those improvements, but it does take issue with the “other costs” that the utility has tacked on to its rate increase proposal.

Xcel spokesman Steve Roalstad defended the company's request. “When you look at the investments that we have made in the past few years since our last rate case and what we're going to do be doing in the next several years . . . we think it's reasonable,” he told Twin Cities Business on Thursday.

Roalstad said that the “other costs” include upgrades to Xcel's Prairie Island nuclear power plant, transmission and distribution upgrades to improve reliability, and the replacement of aging equipment. He said the company has determined that upgrading existing power plants will save customers $1 billion over 20 years as compared to building new power-generating capacity and using a higher-cost fuel source.

The Commerce Department said that the OES considered a number of factors when analyzing Xcel's proposed rate increase, including cost of capital, employee compensation costs, income taxes, and legal costs. OES determined that all costs are lower than what Xcel has estimated. “In addition, OES concluded that Xcel's revenues will be higher, diminishing the need to increase rates,” the department said in a statement.

In letters to regulators, some customers objected to Xcel's proposed rate increase and to the compensation of its CEO, Richard Kelly, who earned $11.3 million in 2010, mostly from vested stock.

“Our CEO, like every employee from top to bottom, is compensated at the market average,” Roalstad said. “In order to receive the incentive that he receives, he has to set forth and achieve objectives that benefit not just the shareholder, but the customer. We've got some of the cleanest air we've ever seen over the Twin Cities, largely due to his leadership there.” Roalstad added that Kelly also led system upgrades that have improved reliability and said that he deserves much of the credit for the fact that Xcel is the country's largest provider of wind power.

Both Xcel and the OES will get another chance to officially make their cases to the Minnesota Utilities Commission. The PUC is expected to make a decision at the end of this calendar year-and an increase would take effect in January 2012.

Last year, Xcel got approval for a $123 million interim rate increase, which took effect on January 2 and applies for this calendar year as Xcel's official rate requests are determined. If the 2011 rates that the PUC approves are lower than the interim rates, customers will receive refunds with interest.

Xcel is Minnesota's ninth-largest public company based on revenue, which totaled $10.3 billion in 2010.