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Commitments and Contingencies | 9 Months Ended
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Sep. 30, 2024
Commitments and Contingencies Disclosure [Abstract] |
Commitments and Contingencies | Commitments and Contingencies Commitments Solar Development. On October 30, 2024, OTP entered into an agreement to acquire the assets of a solar facility currently under development. The assets to be acquired include real property rights and interests, interconnection agreements, state and local permits, and other development assets. Per the agreement, the purchase price is equal to $23.6 million, plus the reimbursement of certain interconnection costs and costs to purchase and store the main power transformer. Closing of the transaction is expected to occur in the second half of 2025, and remains subject to certain conditions to close, including regulatory and other approvals. OTP would be subject to a termination fee of up to $5.0 million if the seller has satisfied all required conditions to close but the transaction is not consummated. Contingencies FERC Return on Equity (ROE). In November 2013 and February 2015, customers filed complaints with the Federal Energy Regulatory Commission (FERC) seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including OTP, may collect under the MISO tariff rate. FERC issued an order on November 19, 2020, which adopted a revised ROE methodology and set the base ROE at 10.02% (10.52% with an adder) effective for the fifteen-month period from November 2013 to February 2015 and on a prospective basis beginning in September 2016. The order also dismissed any complaints covering the period from February 2015 to May 2016. On August 9, 2022, the U.S. Court of Appeals for the District of Columbia Circuit vacated the FERC order citing a lack of reasoned explanation by FERC in its adoption of its revised ROE methodology as outlined in its November 2020 order and remanded the matter to FERC to reopen the proceedings. On October 17, 2024, FERC issued an Order on Remand modifying its ROE methodology and establishing a base ROE of 9.98% (10.48% with an adder) effective for the fifteen-month period from November 2013 to February 2015 and on a prospective basis beginning in September 2016, and required MISO transmission owners to provide refunds to customers for collections in excess of the base ROE of 9.98% for the applicable period, plus interest. In addition, FERC concluded the evidentiary record continues to support the ROE established for the period from February 2015 to May 2016. Prior to FERC's Order on Remand, we had deferred recognition of certain revenues and recognized a refund liability which reflected the amount previously collected under the MISO tariff rate that we anticipated would be refunded to customers. Our previous estimated refund amount was larger than the actual amount ordered by FERC in the Order on Remand. Accordingly, the balance of the recorded refund liability was reduced to $0.5 million as of September 30, 2024, and resulted in a pre-tax benefit of $2.5 million recognized in our consolidated statements of income for the three and nine months ended September 30, 2024. Regional Haze Rule (RHR). The RHR was adopted in an effort to improve visibility in national parks and wilderness areas. The RHR requires states, in coordination with the EPA and other governmental agencies, to develop and implement plans to achieve natural visibility conditions. The second RHR implementation period covers the years 2018-2028. States are required to submit a state implementation plan to assess reasonable progress with the RHR and determine what additional emission reductions are appropriate, if any. Coyote Station, OTP's jointly owned coal-fired power plant in North Dakota, is subject to assessment in the second implementation period under the North Dakota state implementation plan. The North Dakota Department of Environmental Quality (NDDEQ) submitted its state implementation plan to the EPA for approval in August 2022. In its plan, the NDDEQ concluded it is not reasonable to require additional emission controls during this planning period. In June 2023, a coalition of environmental organizations filed a lawsuit against the EPA for failing to enforce the RHR. In response, the EPA proposed, through a consent decree filed in the U.S. District Court for the District of Columbia in March 2024, a timeline for it to act on 34 outstanding state implementation plans. Under the consent decree, which was issued on July 12, 2024, the EPA would approve, deny, partially approve or issue a federal implementation plan at assigned dates between 2024 and 2026, including a final decision on the North Dakota state implementation plan by November 2024. In July 2024, the EPA published its proposed rule for North Dakota’s state implementation plan, in which the EPA proposed to approve certain aspects of the state implementation plan and disapprove of other aspects of the plan. The EPA proposes to find that North Dakota failed to submit a long-term strategy that includes enforceable emissions limitations, compliance schedules, and other measures necessary to make reasonable progress on national visibility goals. Specific to Coyote Station, the EPA contends North Dakota relied on non-statutory visibility modeling to reject the installation of emission controls. The EPA also proposes to find the North Dakota plan does not adequately demonstrate that existing limits for nitrogen oxides (NOx) and sulfur dioxide (SO2) at Coyote Station are sufficient to ensure progress towards the national visibility goals. We continue to anticipate the EPA to issue their final rule in November 2024. If, in its final rule, the EPA finds the state implementation plan is incomplete or disapproves of it, in whole or in part, the EPA must promulgate a Federal Implementation Plan within two years from the issuance of its final decision. The Federal Implementation Plan may include emission controls required to satisfy the requirements of the RHR. We cannot predict with certainty the final resolution of regional haze compliance in North Dakota and specifically the impact, if any, on the operations of Coyote Station. However, significant emission control investments could be required and the recovery of such costs from customers would require regulatory approval. Alternatively, investments in emission control equipment may prove to be uneconomic and result in the early retirement, or sale, of our interest in Coyote Station, which would be subject to regulatory approval. We cannot estimate the ultimate financial effects such a retirement or sale may have on our consolidated operating results, financial position or cash flows, but such amounts could be material and the recovery of such costs in rates would be subject to regulatory approval. Self-Funding of Transmission Upgrades for Generator Interconnections. The FERC has granted transmission owners within MISO and other regional transmission organizations the unilateral authority to determine the funding mechanism for interconnection transmission upgrades that are necessary to accommodate new generation facilities connecting to the electrical grid. Under existing FERC orders, transmission owners can unilaterally determine whether the generator pays the transmission owner in advance for the transmission upgrade or, alternatively, the transmission owner can elect to fund the upgrade and recover over time from the generator the cost of and a return on the upgrade investment (a self-funding). FERC’s orders granting transmission owners this unilateral funding authority have been judicially contested on the basis that transmission owners may be motivated to discriminate among generators in making funding determinations. In the most recent judicial proceedings, the petitioners argued to the U.S. Court of Appeals for the District of Columbia that FERC did not comply with a previous judicial order to fully develop a record regarding the risk of discrimination and the financial risk absorbed by transmission owners for generator-funded upgrades. In December 2022, the Court of Appeals ruled in favor of the petitioners remanding the matter to FERC, instructing the agency to adequately explain the basis of its orders. The Court of Appeals decision did not vacate transmission owners’ unilateral funding authority. In June 2024, FERC issued an Order to Show Cause proceeding against four Regional Transmission Organizations (RTOs), including MISO. Within its order, FERC indicates that the transmission tariffs of the RTOs appear to be unjust, unreasonable, and unduly discriminatory or preferential because they allow transmission owners to unilaterally elect transmission owner self-funding, which may increase costs, impose barriers to transmission interconnection and result in undue discrimination among interconnection customers. The order requires each RTO to submit filings to either 1) show cause as to why the transmission tariff remains just and reasonable and not duly discriminatory or preferential, or 2) to explain what changes to the tariff it believes would remedy the identified concerns. The RTO filings are due 90 days after the order was issued and interested entities may file within 30 days thereafter to address the RTOs filings. The order also stipulates that if no final decision is reached by the conclusion of a 180-day period from the issuance of the order, FERC shall state the reasons why it did not act and provide its best estimate when it expects to issue a decision. FERC contemporaneously issued an order suspending the pending remand on the related case. In July 2024, a group of utilities, which did not include OTP, submitted a request to FERC for rehearing of the order on the basis of the legal and statutory authority of the order. In the alternative, the utilities also requested FERC rescind or withdraw the order. In August 2024, FERC denied the request for rehearing, and certain MISO transmission owners filed a petition for review of FERC’s show cause order in the U.S. Circuit Court of Appeals for the Eighth Circuit. In September 2024, in separate filings, MISO and transmission owners within MISO, including OTP, filed responses to FERC’s show cause order. In their filing, the MISO transmission owners outlined the reasons why the self-funding option remains just and reasonable and not unduly discriminatory or preferential. OTP, as a transmission owner in MISO, has exercised its authority and elected to self-fund previous transmission upgrades necessary to accommodate new system generation. Under such an election, OTP is recovering the cost of the transmission upgrade and a return on that investment from the generator over a contractual period of time. Should the resolution of this matter eliminate transmission owners’ unilateral funding authority on either a prospective or retrospective basis, our financial results would be impacted. We cannot at this time reasonably predict the outcome of this matter given the uncertainty as to how FERC may ultimately decide on the matter after RTO's filings in response to the Order to Show Cause. Class Action Lawsuit. On August 23, 2024, George Bavolak, individually and purportedly on behalf of a putative class consisting of all purchasers of PVC municipal water or electrical conduit pipe purchased through a distributor, filed a class action complaint against certain PVC pipe manufacturers, including Otter Tail Corporation, in the U.S. District Court for the Northern District of Illinois alleging violations of antitrust laws. Specifically, the complaint alleges, among other things, that beginning in at least January 2021 the defendants conspired and combined to fix, raise, maintain, and stabilize the price of PVC municipal water and electrical conduit pipe in violation of United States antitrust laws. The plaintiffs are seeking treble damages, injunctive relief, pre- and post-judgment interest, costs, and attorneys’ fees. On September 3, 2024, September 11, 2024, and September 26, 2024, additional class action lawsuits, making similar claims and seeking similar relief, were filed in the U.S. District Court for the Northern District of Illinois by Blake Wrobbel, TC Construction and Bill Wagner & Son, Inc., respectively and individually, and purportedly on behalf of others similarly situated. Bill Wagner & Son seeks to recover on behalf of a putative class of direct purchasers of PVC pipe from the defendant manufacturers. These actions have been consolidated for pretrial purposes. Bill Wagner & Son filed an amended complaint and the indirect plaintiffs filed a single amended complaint on October 30, 2024. In addition, on August 27, 2024, the Company received a grand jury subpoena issued by the U.S. District Court for the Northern District of California, from the U.S. Department of Justice (“DOJ”) Antitrust Division. The subpoena calls for production of documents regarding the manufacturing, selling, and pricing of PVC pipe. The Company is responding to the subpoena and intends to comply with its obligations under the subpoena. At this time, we are unable to determine the likelihood of an outcome or estimate a range of reasonably possible losses, if any, arising from the class action complaints or the DOJ investigation. However, if an antitrust violation by the Company is found, it could have a material impact on the Company’s financial condition, operating results, and liquidity. The Company believes that there are factual and legal defenses to the allegations in the complaints and intends to defend itself accordingly. Other Contingencies. We are party to litigation and regulatory matters arising in the normal course of business. We regularly analyze relevant information and, as necessary, estimate and record accrued liabilities for legal, regulatory enforcement and other matters in which a loss is probable of occurring and can be reasonably estimated. We believe the effect on our consolidated operating results, financial position and cash flows, if any, for the disposition of all matters pending as of September 30, 2024, other than those discussed above, will not be material.

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