May 21, 2015
The Honorable Governor Mark Dayton
The Office of the Governor
116 Veterans Service Building
20 W 12th Street
St. Paul, MN 55155
RE: Veto Request – H.F. 1437 – Unfair Energy Rate Increases
Dear Governor Dayton:
I am writing to express AARP Minnesota’s grave concerns about language that was inserted into the omnibus agriculture and environment budget bill, H.F.1437, in the final minutes of the legislative session. This legislation would lead to significantly higher energy rates for residential households by undermining important cost controls that are inherent to the way Minnesota utilities are currently regulated by the Minnesota Public Utility Commission (“PUC”). AARP urges you to veto this anti-consumer legislation.
Procedural irregularities allowed these provisions to be amended onto an unrelated piece of legislation, and press accounts report that many representatives did not understand the subject matter of the final version being voted upon, and many had not had the opportunity to even read the provisions before a vote was taken. 
The product of this imperfect process is a bill would significantly change the way that energy rates are regulated, in a direction that is detrimental for ordinary consumers. The following is a summary of some of the more radical changes:
PERFORMANCE BASED RATES
Performance-Based Ratemaking (“PBR”) is a controversial method of setting utility rates that was trendy in the 1990s, during the transition that many electric utilities went through on the way to a “restructured” marketplace (essentially, the deregulation of electric power generation).  Minnesota did not follow the restructuring trend nor the PBR trend, and consumers are better off due to Minnesota’s common sense resistance to those ideas.
The version of this legislation which passed would transform Minnesota’s recently adopted “multi-year rate plan” law  into a radically different Performance-Based Ratemaking (“PBR”) law. The current law allows the approval of multiyear rate plans, but the Minnesota PUC is still required to tie energy rates to the cost of providing service when setting rates; and the traditional cost control incentives developed over many years are predictable and protect consumers from unnecessary or excessive charges. This current multiyear law has its challenges, and it has been approved for the first time last month for Xcel Minnesota electric rates. It should be given time to work and then be reviewed for effectiveness after it has been implemented.
Minnesota should not adopt the radically new scheme, which would override the current cost controls that guide “cost of service regulation” and would invariably lead to unjustifiably higher energy rates. We remain concerned that basic affordability for residential consumers would take a back seat to the panoply of new “performance metrics and incentives”, as permitted by this pending legislation. Specifically, these subsections of the PBR part of the legislation would allow the current consumer protections to be overridden:
- Subsections 19(a)(1) and (2) would permit a “fixed escalation rate” or by a “price index or other formula”, apparently without a rate case review or full audit of whether that formula rate would be in excess of the utility’s actual cost to provide safe and adequate service. This provision could allow automatic rate increases without proper PUC oversight. Utility rates need to be audited regularly and should be tied to the cost of service.
- Subsection 19(a)(1) would permit rate increases based upon a “budget forecast", rather than an audit of investments that are being used to serve current consumers. This approach would appear to allow the pre-approval of the recovery of costs for future projects, even if those projects are not completed or those projects are ultimately found to be imprudent.
- In addition to the broad privileges a utility would be allowed by the PBR rate plan, Section 19(a)(4) would allow additional "adjustments" on top of base rates for the "cost of operating its nuclear facilities or other significant investments not contemplated by the plan".
- Section 19(c), which would allow a utility would to charge interim rates in advance for the first two years of any performance based multi-year plan. AARP does not favor interim rates at all, and there is no justification for granting interim rates so far into the future.
MASSIVE SURCHARGE EXPANSION
The version of this legislation would expand the current “Transmission Cost Adjustment”  mechanism to include "distribution planning" and “grid modernization” along with “all reasonable labor, material, and capital costs”. This would result in a dramatic expansion of surcharge ratemaking, as these additional costs could be enormous. Distribution planning and modernization costs should not simply be passed onto consumers without a full and thorough audit of the utility’s entire books and records. If rates are to be reasonable overall, then the cost of such projects must be reviewed by the PUC in the context of all other aspects of the cost of service, in order to ensure that all offsetting factors are considered simultaneously. Only then can consumers be sure that they are not being overcharged.
AARP opposes such pass-through surcharges, or other mechanisms for increasing utility rates without a general rate case audit and review by the PUC. Such surcharge mechanisms are unfair to consumers because overall rates are allowed to increase without taking into account all of the factors into account. Furthermore, such surcharges weaken the incentive for a utility to be cost efficient, leading to rates that are higher than necessary.
A 2010 report to the Minnesota Legislature by the PUC found that “allowing automatic cost recovery in some functional areas but not others could also create contrary incentives for cost‐minimizing activities”.  The report further stated:
For example, their use can have an adverse effect on incentives. By eliminating regulatory lag and allowing immediate pass‐through of certain types of cost increases, meaningful and binding incentives to control costs could be substantially eroded. Contrast this with business entities that are not protected from competition by regulation but are subject to robust competitive pressures. These entities have little or no ability to pass through cost increases, but must constantly find ways to cut costs to stay competitive. In addition, the greater the number of cost categories subject to automatic recovery, the greater the effect on cost containment incentives. 
The availability and use of a special recovery mechanism lightens utilities’ responsibility to manage the risk associated with the specific cost category and shifts some of that burden to ratepayers. In theory, this would be expected to erode incentives for efficiency and cost control, creating upward pressure on rates. 
Minnesota already allows nineteen such special mechanisms. These should be scaled back, rather than expanding such unfair ways to increase rates.
SUBSIDIES FOR BIG COMPANIES BY RESIDENTIAL CUSTOMERS
AARP is opposed to permitting subsidies to be granted to selected large industrial customers through increases to residential consumer rates. The proposed EITE rate procedure (Section 22 of the legislation) create the possibility of big subsidies on the backs of ordinary consumers.
AARP members have a critical interest in any proposed changes to the way Minnesota regulates electric utility providers. The combined impact of all of the energy-related provisions inserted into H.F. 1437 would lead to dramatically higher monthly utility bills for ordinary residential consumers. As noted, the legislative procedure did not allow these provisions to be fully vetted. Other issues over-shadowed a discussion of the actual impact of the proposed language changes. These provisions can lead to dramatic energy rate increases and they deserved a full and fair debate.
Some proponents referred to this legislation as being related to the ongoing “e21” stakeholder process. However, that process is not yet finished and the final version of the legislation did not reflect the concerns raised by consumer advocates. AARP applauds the e21 Initiative and the stakeholders who have been working to rethink how utility regulation works in our state, and we are considering our level of participation in the upcoming Phase 2 of the process. We do not support radically altering the basic ratemaking system that has operated fairly well to promote cost efficiency and affordability for nearly 100 years, at least not until the e21 process has been allowed to be completed. Please take our concerns for energy affordability to heart as you consider a veto of this very anti-consumer legislation.
 See http://www.ksg.harvard.edu/hepg/Papers/Old_Papers/Costello_FutureTrends_1999.pdf
 Minn. Statute 216B.16, Subdivision 19. Enacted in 2010, and implemented for the very first time by the Minnesota PUC this year in the Xcel Minnesota rate case, Docket No. 13-0868.
 Section 216B.16, subdivision 7b.
 Report To The Legislature: Utility Rates Study As Required By Laws Of Minnesota, 2009, Chapter 110, p. 6.
 Ibid., p. 7.
 Ibid., p. 12.