Wyo utility rate spikes loom
Students walk past the football field after school last week at Sheridan High School. Sheridan County School District 2 Superintendent Craig Dougherty says the district will have to find another $134,000 in its annual budget if Montana-Dakota Utilities Co.'s proposed electric utility rate hike is approved. (Dan Cepeda/Star-Tribune) DAN CEPEDA

The economy continues to lag, and Wyoming's unemployment rate is at its highest in 26 years. Gasoline prices are edging upward once again. And yet Wyomingites face serious new increases on their utility bills.

Regulated utilities Rocky Mountain Power and Montana-Dakota Utilities Co. have proposed a pair of electric utility rate hikes in the range of 13.7 percent to 25.1 percent, respectively, to go into effect within the year.

Earlier this month, SourceGas Distribution LLC filed a rate request with the Wyoming Public Service Commission that could result in an 11.6 percent increase for its average residential and small commercial customers.

The current increases don't even calculate a potential carbon tax for the two coal-heavy utilities, or even planned multibillion-dollar electrical transmission projects targeting Wyoming's energy resources.

"I think it's an outrage," said Casper resident Allen Mott, a customer of both SourceGas and Rocky Mountain Power. "You can only get so much blood out of a turnip. These are hard times."

Both MDU and Rocky Mountain Power's rate cases are in settlement negotiations, and details are rapidly changing.

In and around Sheridan, the MDU rate hike -- if approved as originally proposed -- would force businesses, schools and the hospital to completely reconsider their budgets.

"We have an extremely tight budget as it is," said Sheridan County School District 2 Superintendent Craig Dougherty.

The school district would have to find another $134,000 in its annual budget on short notice.

"We'll try to do that without impacting instruction," Dougherty said.

Rocky Mountain Power's proposed rate increase would hit hardest its big commercial customers, including trona mines and other major employers in southern and central Wyoming.

In response to Rocky Mountain Power's rate case, several companies formed a group called Wyoming Industrial Energy Consumers and filed as an intervening party. Some of the largest members would end up paying an extra $5 million to $10 million annually, according to Holland & Hart attorney Robert Pomeroy, who represents the group.

"They are being asked to pay on the order of half of the $70 million rate increase," Pomeroy said.

Cost justification

The regulated utilities say their requested rate increases are based on real costs of meeting customer demand.

In fact, as regulated utilities, they are required by law to meet customer demand, and they are required to provide their services with a high level of reliability.

"We talk to our customers every day, and they talk to us about how they feel about the cost of their electricity," said Rocky Mountain Power spokesman Dave Eskelsen. "We then have to defend the cost of our energy to regulators in each state. They then have authority to disallow some costs."

Much of Rocky Mountain Power's proposed rate increase would cover investments to meet an overall growth rate of 3.9 percent among its Wyoming customers -- mostly among its large industrial customers such as natural gas operators, according to the utility.

Additionally, the utility must replace several expiring contracts for coal supply and for some electrical transmission. Those markets have increased significantly in recent years, making certain that the next round of contracts will be more expensive, according to Rocky Mountain Power.

In the case of Montana-Dakota Utilities Co. and its Sheridan-area customers, the utility chose to buy a 25-megawatt portion of the new Wygen III coal-fired power plant in Gillette. The utility rationalized that having ownership in the new electrical generation facility would protect its customers from volatility in the purchased power market.

Currently, all of the power serving MDU customers in the Sheridan area comes from a power purchase agreement. That power purchase contract ends in 2016, according to MDU.

"When the power contract comes up, you don't know what you're going to get," said MDU spokesman Mark Hanson.

Rather than being at the mercy of the power purchase market, the utility will be able to meet 68 percent of its Sheridan-area customer demand with its 25-megawatt portion of Wygen III.

"Of course, the economy changed drastically" since MDU first decided to invest in Wygen III, Hanson said.

MDU recently reanalyzed the study it used to make its case for a "certificate of public convenience and necessity," and it still suggested the Wygen III investment was the utility's best option financially, according to Hanson.

For SourceGas, the rationalization for its proposed $7.47 million increase might seem counter-intuitive from the customer's perspective. Demand for natural gas among its customers actually declined 7 percent since SourceGas' last major rate filing in 2006.

Yet the utility continues to add customers, and SourceGas officials say the cost of doing business only increases.

"We are now trying to recover our costs over a smaller volume of gas," spokesman Len Mize said.

Return on investment

A lot of negotiating goes into setting rates for a regulated utility.

For example, MDU's original proposal would have increased rates for its customers by an average of more than 30 percent, according to the Wyoming Office of Consumer Advocate. The Office of Consumer Advocate suggested 7.8 percent. MDU came down to about 25 percent.

Last week, MDU signed a settlement, which awaits approval by the Wyoming Public Service Commission, that would trim the increase to 16 percent, representing an overall annual rate increase of about $3.25 million.

Each utility is different, and all of the numbers must reflect the actual cost of doing business -- the steel, the concrete, the labor. But another part of doing business is earning a profit.

Ivan Williams, senior counsel for the Office of Consumer Advocate, said it's important to remember that a regulated utility is provided the opportunity to earn a reasonable rate of return on investment.

"Part of the cost of doing business is earning a fair or reasonable return to their investors," Williams said.

When a regulated utility spends capital to expand or improve its facilities -- be it power generation, transmission, distribution or administration -- it is allowed to earn a certain rate of return on that investment.

To determine the rate of return, which, for regulated utilities, applies only to the equity portion of their financing, state regulators conduct an analysis of current market conditions and take a look at the profits of comparable companies.

For its part-ownership investment in Wygen III, MDU used a finance ratio of 50 percent equity/50 percent debt, and asked the Wyoming Public Service Commission to allow it a 12.75 percent rate of return for the equity portion.

"It's outrageous," said Kim Love, owner of Sheridan Media.

For a regulated utility with a captive market, investing capital into its own facilities is hardly a risky venture, Love said. In MDU's pending settlement signed last week, the utility agreed to a 10.9 percent rate of return.

Love said 10.9 percent is still outrageous. Love serves on the board of a charitable organization, and he said any organization or company would be ecstatic to earn a rate of return of 10.9 percent.

"I think members of the Public Service Commission are clueless when it comes to the kinds of rates and returns in the real world," Love said.

And the trend is for regulators to allow regulated utilities to earn bigger and bigger profits.

"But they're reflective of market conditions," said Williams from the Office of Consumer Advocate.

Contact energy reporter Dustin Bleizeffer at (307) 577-6069 or dustin.bleizeffer@trib.com. Go to http://tribtown.trib.com/DustinBleizeffer/blog to read Dustin's energy blog.

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