XML 33 R11.htm IDEA: XBRL DOCUMENT

Note 3 - Rate and Regulatory Matters

3 Months Ended

Mar. 31, 2020

Public Utilities Disclosure [Text Block]

3. Rate and Regulatory Matters

Below are descriptions of OTP’s major capital expenditure projects that are expected to have a significant impact on OTP’s revenue requirements, rates and alternative revenue recovery mechanisms, followed by summaries of specific electric rate or rider proceedings with the Minnesota Public Utilities Commission (MPUC), the North Dakota Public Service Commission (NDPSC), the South Dakota Public Utilities Commission (SDPUC) and the FERC, impacting OTP’s revenues in 2020 and 2019.

Major Capital Expenditure Projects

Merricourt Wind Energy Center (Merricourt)—On November 16, 2016 OTP entered into an Asset Purchase Agreement (the Purchase Agreement) with EDF Renewable Development, Inc. and certain of its affiliated companies (collectively, EDF) to purchase the development assets and assume certain specified liabilities associated with Merricourt, a 150-megawatt (MW) wind farm in southeastern North Dakota, for a purchase price of approximately $34.7 million, subject to adjustments for interconnection costs. Also on November 16, 2016, OTP entered into a Turnkey Engineering, Procurement and Construction Services Agreement (the TEPC Agreement) with EDF-RE US Development, LLC (EDF-USD) pursuant to which EDF-USD will develop, design, procure, construct, interconnect, test and commission the wind farm with a targeted completion date in 2020 for consideration of approximately $200.5 million, subject to certain adjustments, payable following the closing of the Purchase Agreement in installments in connection with certain project construction milestones. In connection with action by the FERC, OTP and EDF-US agreed, in the First Amendment to the Purchase Agreement and the TEPC Agreement dated June 11, 2019, to change the purchase price to $37.7 million and to make a related reallocation of responsibility for interconnection costs and liabilities. On July 16, 2019 OTP closed on the purchase of substantially all of the development assets and assumed certain specified liabilities from EDF related to Merricourt pursuant to the Purchase Agreement, as amended, for a purchase price of approximately $37.7 million, subject to certain adjustments, and issued the notice to EDF-USD to begin construction in August 2019. The agreements contain customary representations, warranties, covenants and indemnities for this type of transaction. The Merricourt generator interconnection agreement with MISO was approved by the FERC in April 2019.

With the NDPSC’s March 18, 2020 approval of OTP’s annual update to its North Dakota Renewable Resource Cost Recovery rider, OTP is now earning a return in all three states served by OTP on amounts invested in Merricourt while the project is under construction. Returns are recovered in Minnesota under the Renewable Resource Adjustment rider and in South Dakota under the Phase-In Rate Plan rider. As of March 31, 2020, OTP had capitalized approximately $95.8 million in project costs and allowance for funds used during construction (AFUDC) associated with Merricourt. OTP has received Notices of Force Majeure from EDF-USD claiming a delay of production and project completion due to COVID-19 impacts. While details regarding this claim and the related impact to the project schedule are not yet finalized, OTP has adjusted its expectation for completion and currently expects Merricourt to be completed before December 31, 2020. If not completed by December 31, 2020, OTP risks the potential loss of federal production tax credits (PTCs).

Astoria Station—OTP is constructing this 245 MW simple-cycle natural gas-fired combustion turbine generation facility near Astoria, South Dakota as part of its plan to reliably meet customers’ electric needs, replace expiring capacity purchase agreements and prepare for the planned retirement of its Hoot Lake Plant in 2021. A final order granting an Advanced Determination of Prudence for Astoria Station was issued by the NDPSC on November 3, 2017, subject to certain qualifications and compliance obligations. On August 3, 2018 the SDPUC issued an order granting a site permit for Astoria Station. In a September 26, 2018 hearing the NDPSC established a GCR rider for future recovery of costs incurred for Astoria Station. On March 6, 2019 the SDPUC issued an order approving a settlement that allows a phase-in rider which includes recovery of Astoria Station costs. The interconnection agreement for Astoria Station was executed by MISO in December 2018 and accepted by the FERC in January 2019. Site preparation and excavation began in May 2019, and construction is occurring on the site. As of March 31, 2020, OTP had capitalized approximately $78.0 million in project costs and AFUDC associated with Astoria Station. OTP currently expects this project will be completed in late 2020 or early 2021.

General Rates

Minnesota—The MPUC rendered its final decision in OTP’s 2016 general rate case in March 2017 and issued its written order on May 1, 2017. Pursuant to the order, OTP’s allowed rate of return on rate base is 7.5056% and its allowed rate of return on equity (ROE) is 9.41%.

The MPUC’s order also included: (1) the determination that all costs (including FERC allocated costs and revenues) of the Big Stone South–Brookings and Big Stone South–Ellendale MVPs will be included in the Minnesota TCR rider and jurisdictionally allocated to OTP’s Minnesota customers (see discussion under Minnesota Transmission Cost Recovery Rider below), and (2) approval of OTP’s proposal to transition rate base, expenses and revenues from ECR and TCR riders to base rate recovery, which occurred when final rates were implemented on November 1, 2017. Certain MISO expenses and revenues remain in the TCR rider to allow for the ongoing refund or recovery of these variable revenues and costs.

North Dakota—On March 23, 2018 OTP made a supplemental filing to its initial request for a rate review, reducing its request for an annual revenue increase from $13.1 million to $7.1 million, a 4.8% annual increase. The $6.0 million decrease included $4.8 million related to tax reform and $1.2 million related to other updates.

In a September 26, 2018 hearing the NDPSC approved an overall annual revenue increase of $4.6 million (3.1%) and a ROE of 9.77% on a 52.5% equity capital structure. The NDPSC’s approval established a GCR rider for future recovery of costs incurred for Astoria Station. The net revenue increase reflected a reduction in income tax recovery requirements related to the 2017 Tax Cuts and Jobs Act (TCJA) and decreases in rider revenue recovery requirements. Final rates were effective February 1, 2019, with refunds of excess revenues collected under interim rates applied to customers’ April 2019 bills, including $0.8 million for amounts collected reflecting the higher tax rates under interim rates in effect in January and February 2018.

South Dakota—On April 20, 2018 OTP filed a request with the SDPUC to increase non-fuel rates in South Dakota by approximately $3.3 million annually, or 10.1%, as the first step in a two-step request. Interim rates were effective October 18, 2018. The second step in the request was an additional 1.7% revenue increase to recover costs for Merricourt when the wind generation facility goes into service. The SDPUC approved a partial settlement on March 1, 2019 on all issues of the rate case except ROE. The partial settlement included approval of a phase-in plan to provide for a return on amounts invested in Astoria Station and Merricourt, which addressed the second step of the request for increased rates in South Dakota. The partial settlement also included a moratorium on filing another general rate case in South Dakota until the new generation projects have been in service for a year. The partial settlement also allowed OTP to retain the impact of lower tax rates related to the TCJA from January 1, 2018 through October 17, 2018 resulting in the reversal of an accrued refund liability and recognition of $1.0 million in revenue in the first quarter of 2019. The SDPUC approved the ROE portion of the rate case on May 14, 2019 and pursuant to the SDPUC’s May 30, 2019 order, OTP’s allowed ROE was set at 8.75%, resulting in an annual revenue increase of approximately $2.2 million. Final rates went into effect August 1, 2019. An interim rate refund for the lower ROE going back to October 18, 2018 was applied to South Dakota customers’ October 2019 bills.

On July 9, 2019 the SDPUC approved a stipulation agreement entered into by OTP with SDPUC staff. The revenue requirement stated in the SDPUC’s final order dated May 30, 2019 understated the amount of OTP's South Dakota share of electric transmission plant in service, resulting in an annual revenue requirement shortfall of approximately $341,000. To address the shortfall, the parties agreed that OTP would file an update to its South Dakota TCR rider. OTP was authorized full recovery of the transmission rate base correction reflected in the TCR rider tracker beginning as of the first date of interim rates, October 18, 2018, with the TCR rider rate update going into effect on October 1, 2019.

To ensure rates are appropriately set under the stipulation, the parties agreed to establish an earnings sharing mechanism to share with customers any weather-normalized earnings above the authorized ROE of 8.75%. OTP's annual weather-normalized earnings are reported each year by June 1 in its jurisdictional annual report, which will be used to determine the earnings level for purposes of calculating any refund. The earnings sharing mechanism requires that OTP will refund to customers 50% of any weather-normalized revenue that corresponds to the earnings in excess of its authorized ROE, up to a maximum of 9.50% ROE for a particular year. OTP will refund 100% of any earnings above 9.50% each year. In the event a refund is due under this provision, OTP will notify the SDPUC of the refund amount and plan for crediting customers within 30 days of filing its South Dakota jurisdictional annual report.

Rate Riders

In addition to general rates, OTP has several rate riders in place in each of its state jurisdictional service areas. These rate riders are designed to recover expenses, costs and returns on rate base investments not currently being recovered in base, or general, rates. In addition to fuel cost recovery riders in each state, OTP has recovered costs and earned incentives or returns on investments subject to recovery under several rate riders, including:

●

In Minnesota: Transmission Cost Recovery (TCR), Environmental Cost Recovery (ECR), Renewable Resource Adjustment (RRA), Energy Intensive Trade Exposed and Conservation Improvement Program riders.

●

In North Dakota: TCR, ECR, Renewable Resource Cost Recovery and Generation Cost Recovery (GCR) riders.

●

In South Dakota: TCR, ECR, Phase-in Rate Plan and Energy Efficiency Plan (conservation) riders.

Following is a brief summary of recent proceedings of riders in place in each state served by OTP, followed by tables showing revenues recorded under rate riders for the three-month periods ended March 31, 2020 and March 31, 2019 and a listing of rate rider updates impacting revenues in 2020 and 2019. Additional information and background on these rate riders is provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Minnesota

Minnesota Conservation Improvement Programs (MNCIP)—On May 1, 2020 OTP filed a request for approval of its 2019 energy savings, recovery of $2.7 million in accrued financial incentives and recovery of 2019 program costs not included in base rates.

Transmission Cost Recovery Rider—In OTP’s 2016 general rate case order issued on May 1, 2017, the MPUC ordered OTP to include, in the TCR rider retail rate base, Minnesota’s jurisdictional share of OTP’s investment in the Big Stone South–Brookings and Big Stone South–Ellendale Multi-Value Projects (MVPs) and all revenues received from other utilities under MISO’s tariffed rates as a credit in its TCR revenue requirement calculations. In doing so, the MPUC’s order diverted interstate wholesale revenues that have been approved by the FERC to offset FERC-approved expenses, effectively reducing OTP’s recovery of those FERC-approved expense levels. The MPUC-ordered treatment resulted in the projects being treated as retail investments for Minnesota retail ratemaking purposes. Because the FERC’s revenue requirements and authorized returns vary from the MPUC revenue requirements and authorized returns for the project investments over the lives of the projects, the impact of this decision can vary over time and be dependent on the differences between the revenue requirements and returns in the two jurisdictions at any given time. On August 18, 2017 OTP filed an appeal of the MPUC general rate case order with the Minnesota Court of Appeals to contest the portion of the order requiring OTP to jurisdictionally allocate costs of the FERC MVP transmission projects in the TCR rider.

On June 11, 2018 the Minnesota Court of Appeals reversed the MPUC’s order related to the inclusion of Minnesota’s jurisdictional share of OTP’s investment in the Big Stone South–Brookings and Big Stone South–Ellendale MVPs and all revenues received from other utilities under MISO’s tariffed rates as a credit in OTP Minnesota TCR revenue requirement calculations. On July 11, 2018 the MPUC filed a petition for review of the MVP decision to the Minnesota Supreme Court, which granted review of the Minnesota Court of Appeals decision.

On November 30, 2018 OTP filed its annual update and supplemental filing to the Minnesota TCR rider. In this filing two scenarios were submitted based on whether the Minnesota Supreme Court affirmed the original decision by the Minnesota Court of Appeals to exclude the MVP projects from the TCR rider or overturned the Minnesota Court of Appeals decision and includes the two MVP projects in the TCR rider. In addition, on April 1, 2019, the MNDOC filed comments in OTP’s TCR rider docket, opposing OTP’s proposal for TCR rider recovery of these costs. The Minnesota Supreme Court issued its opinion on April 22, 2020, concluding that the MPUC lacked authority to amend an existing transmission cost-recovery rider approved under Minnesota state law to include the costs and revenues associated with the Big Stone South–Brookings and Big Stone South–Ellendale MVPs and affirming the decision of the Minnesota Court of Appeals. The MPUC is not expected to act on the TCR rider until additional briefing has occurred in the docket. After OTP has filed its comments in response to the Minnesota Supreme Court opinion with the MPUC and the MNDOC has filed reply comments, OTP will make a supplemental filing to the TCR docket to revise its revenue requirements under the TCR update request to exclude the MVP projects and to include additional recoverable costs incurred since the initial annual update request was filed. The estimated amount credited to Minnesota customers through the TCR rider through March 31, 2020 is approximately $2.6 million, which OTP will now seek to recover through its annual update and supplemental filing to the TCR rider.

Renewable Resource Adjustment—On June 21, 2019 OTP filed its annual update to the Minnesota RRA requesting approval for recovery of the difference in PTCs in base rates and the actual PTCs generated, as well as recovery of Merricourt. On December 19, 2019 the MPUC approved a revised request which included changes related to Merricourt capitalized costs.

Fuel and Purchased Power Costs Recovery—In a December 2017 order, the MPUC adopted a program to implement certain procedural reforms to Minnesota utilities’ automatic fuel adjustment clause (FAC) for fuel and purchased power cost recovery. With this order, the method of accounting for all Minnesota electric utilities changed to a monthly budgeted, forward-looking FAC with annual prudence review and true-up to actual allowed costs. On October 31, 2019 the MPUC approved the forecasted monthly fuel cost rates submitted by OTP for 2020 and the rates became effective on January 1, 2020. This mechanism could result in reductions in Electric segment operating income margins, increase variability in consolidated net income in future periods if costs per kwh vary from forecasted costs per kwh, and cause an increase in working capital and short-term borrowings in the event recovery of all or a portion of excess costs is delayed or denied by the MPUC.

North Dakota

Renewable Resource Adjustment—On December 31, 2019 OTP filed its annual update to the North Dakota RRA requesting approval for recovery of the difference in PTCs in base rates and the actual PTCs generated, as well as a return on Merricourt costs incurred while under construction. This update also included a credit for the remaining unrefunded credit balance in the North Dakota ECR rider tracker on November 30, 2019. On February 25, 2020 OTP filed a revised request which was approved by the NDPSC on March 18, 2020. Part of the NDPSC’s approval included adopting a levelized utilization of PTCs from the Merricourt project over the expected 25-year life of the project for rate-making purposes. PTCs on prior projects were passed back to customers through lower rates as they were generated over 10 years.

Generation Cost Recovery Rider—On May 15, 2019 the NDPSC approved OTP’s request to establish an initial GCR rider rate for recovery of OTP’s North Dakota jurisdictional share of the revenue requirements on its investment in Astoria Station, effective on bills rendered after July 1, 2019.

South Dakota

Phase-In Rate Plan Rider—On May 31, 2019 OTP petitioned the SDPUC for approval of its initial rate for the Phase-In Rate Plan Rider as described in OTP’s most recent South Dakota general rate case settlement stipulation and was approved by the SDPUC’s order in that rate case. The petition was OTP’s initial filing for the rider to recover OTP’s South Dakota share of actual and forecasted costs for Astoria Station and Merricourt, and to refund forecasted net benefits associated with additional load growth in the Lake Norden area. On August 21, 2019 the SDPUC approved OTP’s supplemental filing for its South Dakota Phase-In Rate Plan Rider effective September 1, 2019.

Revenues Recorded under Rate Riders

The following table presents revenue recorded by OTP under rate riders in place in Minnesota, North Dakota and South Dakota for the three-month periods ended March 31:

Rate Rider (in thousands)

2020

2019

Minnesota

Renewable Resource Recovery
$ 3,254 $ 1,316

Conservation Improvement Program Costs and Incentives
1,086 887

Transmission Cost Recovery
715 641

Environmental Cost Recovery
- (1 )

North Dakota

Transmission Cost Recovery
1,482 1,772

Renewable Resource Adjustment
1,129 729

Generation Cost Recovery
948 248

Environmental Cost Recovery
- 575

South Dakota

Phase-In Rate Plan
646 -

Transmission Cost Recovery
562 473

Conservation Improvement Program Costs and Incentives
344 244

Environmental Cost Recovery
- (4 )

Total
$ 10,166 $ 6,880

Rate Rider Updates

The following table provides summary information on the status of updates since January 1, 2018 for the rate riders described above:

Rate Rider

R - Request Date

A - Approval Date

Effective Date

Requested or
Approved

Annual

Revenue

($000s)

Rate

Minnesota

Conservation Improvement Program

2019 Incentive and Cost Recovery
R –
May 1, 2020

October 1, 2020
$ 8,247 $0.00485
/kwh

2018 Incentive and Cost Recovery
A –
December 27, 2019

January 1, 2020
$ 11,926 $0.00710
/kwh

2017 Incentive and Cost Recovery
A –
October 4, 2018

November 1, 2018
$ 10,283 $0.00600
/kwh

Transmission Cost Recovery

2018 Annual Update–Scenario A
R –
November 30, 2018

June 1, 2019
$ 6,475
Various

–Scenario B
$ 2,708
Various

2017 Rate Reset
A –
October 30, 2017

November 1, 2017
$ (3,311 )
Various

Environmental Cost Recovery

2018 Annual Update
A –
November 29, 2018

December 1, 2018
$ - 0%
of base

Renewable Resource Adjustment

2019 Annual Update – Revised
A –
December 19, 2019

January 1, 2020
$ 12,506 $0.00467
/kwh

2018 Annual Update
A –
August 29, 2018

November 1, 2018
$ 5,886 $0.00219
/kwh

North Dakota

Renewable Resource Adjustment

2020 Annual Update
A –
March 18, 2020

April 1, 2020
$ 5,762 5.637%
of base

2019 Annual Update
A –
May 1, 2019

June 1, 2019
$ (235 ) -0.224%
of base

2018 Rate Reset for effect of TCJA
A –
February 27, 2018

March 1, 2018
$ 9,650 7.493%
of base

Transmission Cost Recovery

2019 Annual Update
A –
December 18, 2019

January 1, 2020
$ 5,739
Various

2018 Supplemental Update
A –
December 6, 2018

February 1, 2019
$ 4,801
Various

2018 Rate Reset for effect of TCJA
A –
February 27, 2018

March 1, 2018
$ 7,469
Various

Environmental Cost Recovery

2019 Update
A –
October 22, 2019

November 1, 2019
$ - 0%
of base

2018 Update
A –
December 19, 2018

February 1, 2019
$ (378 ) -0.310%
of base

2018 Rate Reset for effect of TCJA
A –
February 27, 2018

March 1, 2018
$ 7,718 5.593%
of base

Generation Cost Recovery

2020 Annual Update
R –
March 2, 2020

July 1, 2020
$ 6,184 6.041%
of base

2019 Initial Request
A –
May 15, 2019

July 1, 2019
$ 2,720 2.547%
of base

South Dakota

Transmission Cost Recovery

2020 Annual Update
A –
February 19, 2020

March 1, 2020
$ 2,327
Various

2019 Rate Reset
A –
September 17, 2019

October 1, 2019
$ 2,046
Various

2019 Annual Update
A –
February 20, 2019

March 1, 2019
$ 1,638
Various

2018 Interim Rate Reset
A –
October 18, 2018

October 18, 2018
$ 1,171
Various

Environmental Cost Recovery

2018 Interim Rate Reset
A –
October 18, 2018

October 18, 2018
$ (189 ) -$0.00075
/kwh

Phase-In Rate Plan Recovery

2019 Initial Request
A –
August 21, 2019

September 1, 2019
$ 864 3.345%
of base

FERC

Wholesale power sales and transmission rates are subject to the jurisdiction of the FERC under the Federal Power Act of 1935 (Federal Power Act). The FERC is an independent agency with jurisdiction over rates for wholesale electricity sales, transmission and sale of electric energy in interstate commerce, interconnection of facilities, and accounting policies and practices. Filed rates are effective after a suspension period, subject to ultimate approval by the FERC.

MVPs—MVPs are designed to enable the MISO region to comply with energy policy mandates and to address reliability and economic issues affecting multiple transmission zones within the MISO region. The cost allocation is designed to ensure that the costs of transmission projects with regional benefits are properly assigned to those who benefit from the MVP.

ROE—On November 12, 2013 a group of industrial customers and other stakeholders filed a complaint with the FERC seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including OTP, may collect under the MISO Tariff. The complainants sought to reduce the 12.38% ROE used in MISO’s transmission rates to a proposed 9.15%. The complaint established a 15-month refund period from November 12, 2013 to February 11, 2015. A non-binding decision by the presiding Administrative Law Judge (ALJ) was issued on December 22, 2015 finding that the MISO transmission owners’ ROE should be 10.32%, and the FERC issued an order on September 28, 2016 setting the base ROE at 10.32%. Several parties requested rehearing of the September 2016 order.

On November 6, 2014 a group of MISO transmission owners, including OTP, filed for a FERC incentive of an additional 50 basis points for Regional Transmission Organization participation (RTO Adder). On January 5, 2015 the FERC granted the request, deferring collection of the RTO Adder until the FERC issued its order in the ROE complaint proceeding. Based on the FERC adjustment to the MISO Tariff ROE resulting from the November 12, 2013 complaint and OTP’s incentive rate filing, OTP’s ROE went to 10.82% (a 10.32% base ROE plus the 0.5% RTO Adder) effective September 28, 2016.

On February 12, 2015 another group of stakeholders filed a complaint with the FERC seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including OTP, may collect under the MISO Tariff from 12.38% to a proposed 8.67%. This second complaint established a second 15-month refund period from February 12, 2015 to May 11, 2016. The FERC issued an order on June 18, 2015 setting the complaint for hearings before an ALJ, which were held the week of February 16, 2016. A non-binding decision by the presiding ALJ was issued on June 30, 2016 finding that the MISO transmission owners’ ROE should be 9.7%.

On November 21, 2019 the FERC adopted a new two-step ROE model and capital asset pricing model to determine whether a jurisdictional public utility’s rate of ROE is just and reasonable under section 206 of the Federal Power Act. Applying the new methodology in complaints against the MISO transmission owners, the FERC determined that the MISO transmission owners’ current base ROE should be 9.88%. The FERC also stated it will use ranges of presumptively just and reasonable ROEs in its analysis of whether existing ROEs have become unjust and unreasonable. This order also implemented the FERC’s new methodology in the two complaints against the MISO transmission owners’ base ROE. The order granted rehearing on the first complaint, found the existing 12.38% ROE unjust and unreasonable, and directed the MISO transmission owners to adopt a 9.88% ROE effective September 28, 2016, and to provide refunds. The order also dismissed the second complaint and found that the record in that proceeding did not support a finding that the 9.88% ROE established in the first complaint proceeding had become unjust and unreasonable.

OTP has accrued a MISO Tariff ROE refund liability of $3.0 million as of March 31, 2020. This includes provisions for:

●

a $0.2 million refund related to the first complaint as a result of reducing the reasonable ROE from 10.32%, established in the FERC’s September 28, 2016 refund order, to the newly established 9.88% ROE,

●

a $1.3 million refund for the period from September 28, 2016 through December 31, 2019 related to a reduction in the current ROE from 10.82% to 10.38% based on the newly established 9.88% reasonable ROE for the first complaint period plus the 50-point RTO adder granted by the FERC on January 5, 2015, and

●

a $1.5 million refund related to the second complaint period in response to requests for rehearing on the FERC’s decision to dismiss the second complaint based on a potential reduction in the reasonable ROE for that period from 12.38% to 9.88% plus the 50-point RTO adder.

In response to the FERC’s November 21, 2019 order, the MISO Transmission Owners (including OTP) and others filed requests seeking rehearing of the FERC’s November 21, 2019 order, and a group of parties filed with the United States Court of Appeals for the District of Columbia a protective appeal.