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Note 3 - Rate and Regulatory Matters

6 Months Ended

Jun. 30, 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.

OTP is 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 and North Dakota through RRA riders and in South Dakota through the Phase-In Rate Plan rider. As of June 30, 2020, OTP had capitalized approximately $131.7 million in project costs and allowance for funds used during construction (AFUDC) associated with Merricourt. While construction on site continues, OTP has received Notices of Force Majeure from EDF-USD claiming rights to an extension of guaranteed project completion dates and adjustments to the consideration agreed upon in the TEPC Agreement due to COVID-19 impacts. While details regarding these claims and the related impacts to the project remain uncertain, OTP currently expects Merricourt to be completed before December 31, 2020.

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 June 30, 2020, OTP had capitalized approximately $108.0 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:

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

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

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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- and six-month periods ended June 30, 2020 and June 30, 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.

On May 7, 2020 OTP filed reply comments in the docket within 15 days of the Minnesota Supreme Court ruling as required by the MPUC. OTP filed updated revenue requirements excluding the Brookings and Big Stone–Ellendale projects and including three projects previously requested in the Minnesota TCR rider eligibility petition. OTP requested new rates be implemented January 1, 2021 with the three new projects deemed eligible for TCR rider recovery effective January 1, 2020. OTP also requested one-half of the December 2020 tracker balance of $13.4 million be included in the January 1, 2021 revenue requirement with the remainder included in the next annual update. OTP also requested a carrying charge be included as of January 1, 2021. On June 4, 2020 the MPUC filed a Notice of Combined and Extended Comment Period for both the Minnesota TCR rider and TCR rider eligibility filing with the comment period closing on July 6, 2020 and the reply comment period closing on July 21, 2020. In the MNDOC's comments regarding eligibility for recovery of investments in the three new projects through the Minnesota TCR rider, the MNDOC recommended the MPUC reject OTP’s petition for inclusion of the three projects. In the matter of OTP’s petition for approval of a TCR annual adjustment, at the request of the MNDOC the MPUC extended the deadlines for filing initial and reply comments to August 14, 2020 and August 24, 2020, respectively. The estimated amount of higher MISO ROE revenues credited to Minnesota customers through the TCR rider through June 30, 2020, which OTP is now seeking recovery of through its Minnesota TCR rider update request, is approximately $2.6 million.

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. On June 10, 2020 the NDPSC approved the 2020 annual update request with an effective date of July 1, 2020.

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. On June 1, 2020 OTP filed its first annual update request to the rider with a proposed effective date of September 1, 2020.

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–Updated Request	R –	May 7, 2020	January 1, 2021	$	10,264		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	A –	June 10, 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
2020 Annual Update	R –	June 1, 2020	September 1, 2020	$	1,931		7.753%	of base
2019 Initial Request	A –	August 21, 2019	September 1, 2019	$	864		3.345%	of base

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.

	Three Months Ended June 30,						Six Months Ended June 30,
Rate Rider (in thousands)	2020			2019			2020			2019
Minnesota
Renewable Resource Recovery	$	3,088		$	1,317		$	6,342		$	2,633
Conservation Improvement Program Costs and Incentives		1,521			1,841			2,607			2,728
Transmission Cost Recovery		(314	)		(56	)		401			585
Environmental Cost Recovery		-			-			-			(1	)
North Dakota
Transmission Cost Recovery		840			874			2,322			2,646
Renewable Resource Adjustment		1,070			(93	)		2,199			636
Generation Cost Recovery		900			222			1,848			470
Environmental Cost Recovery		-			(12	)		-			563
South Dakota
Transmission Cost Recovery		371			371			933			844
Conservation Improvement Program Costs and Incentives		210			96			554			340
Environmental Cost Recovery		-			(23	)		-			(27	)
Phase-In Rate Plan		(670	)		-			(24	)		-
Total	$	7,016		$	4,537		$	17,182		$	11,417

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—In November 2013 and February 2015, customers filed complaints with FERC seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including OTP, may collect under the MISO tariff. OTP has deferred recognition and recorded a liability of $2.9 million as of June 30, 2020 as a result of the disputed ROE awaiting FERC action. The provision includes:

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a $0.1 million refund for the first complaint period of November 2013 to February 2015 resulting from the potential reduction of the base ROE from 10.32%.

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a $1.5 million refund related to the second complaint period of February 2015 to May 2016 resulting from a potential reduction in base ROE from 12.38%.

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a $1.3 million refund for the period from September 2016 through June 2020 resulting from a potential reduction in base ROE from 10.82%.

Various FERC orders have been made that remain under appeal. All or some of the current liability will be refunded to customers or reversed and recognized as revenue depending on various factors including MISO’s determination of refund amounts and FERC’s final determination of the reasonableness of base ROE over various periods.