Big power users benefit from competitive pricing law

The state's Public Utilities Commission blessed a proposal last week to boost some big industrial operations in northeastern Minnesota by cutting their electric bills, which would be a far better story if advocates had made a convincing case this action makes the state better off, too.

They didn't fail at that for lack of trying.

You can tell that the commission didn't have much enthusiasm for giving price breaks to big power users in northeastern Minnesota, approving it last week on a divided vote. It's also worth noting that this wasn't a traditional decision on electric rates that the commission makes.

The commission had to respond to a request now permitted under a curious law that passed last year when the Minnesota taconite industry was suffering. It basically says that it's now the policy of the state "to ensure competitive electric rates for energy-intensive, trade-exposed customers."

All businesses seem to deserve competitive electricity prices, but as to who deserves special treatment under the new law, it's really the big industrial customers of Otter Tail Power Co. and Minnesota Power, a unit of Duluth-based Allete, Inc. First up for consideration was a proposal to help 11 customers of Minnesota Power, including the taconite mining operations on the Iron Range and a handful of big paper producers.

Taconite plants use a lot of electricity to run their rock crushing machines and other heavy equipment, and pulp and paper mills are big users, too. One observation that came out of a brief conversation with Minnesota Power is that U.S. Steel's mining operations in northeastern Minnesota use more electricity than the city of Duluth and its nearly 90,000 people.

These relatively few industrial companies took more than 70 percent of Minnesota Power's retail kilowatt-hours of electricity sold in 2015. A cut of 5 percent in the price of electricity, based on an assumption of these 11 customers running pretty much at full capacity, is worth about $19.2 million per year, although at the current estimated production rate the discount would be less.

The price break proposed here wouldn't kick in until a minimum level of electricity is bought, but for amounts above that the discount works out to be worth about 57 cents per ton of taconite production, according to this economic study.

This might not seem like much of a difference maker when the cash cost to produce taconite might be $55 per ton, but that kind of an electric cost reduction can lower the break-even point for the operator. That means it can make sense to keep the plant operating at lower selling prices for taconite than what would have made sense with higher-cost electricity.

The theory on how that turns out to be good for the state and not just for the taconite producers is that the companies spend money locally, including for the working hours of their employees, money that in turn gets spent on other things.

The staff of the commission, in its briefing paper, didn't think much of this argument. It wrote that "the record provides little to no support for [Minnesota Power's] claim that its proposed … discount meets the state-level net-benefits test."

One big problem, of course, is that the up to $19 million per year handed over to the 11 industrial companies in the form of lower electricity prices has to be made up by someone. The power company's corporate parent sure isn't planning on cutting its shareholder dividend to pay for it.

That clearly will have an economic impact, too, a negative one. An average of $8 a month in higher electricity bills for the average household won't kick families out of the middle class, but it will be $8 every month that won't get spent on something else.

That's why when looking at the benefits of things like this idea, unless proved otherwise it's safe to assume any program that takes a dollar from one person's pocket and drops it into the pocket of a neighbor is basically a wash.

"In isolation it'll be hard to point, with this discount, to a specific job saved or a specific job created," said Pat Mullen, vice president with Minnesota Power. "But this discount, in combination with all the other vendors that are pitching in to reduce the costs of these large industries in our region, this is a big deal. We need to do this to keep them sustainable in north east Minnesota."

It's clear the utility really believes that, too, but what's also clear is that the utility is one of the winners here. A boost in production by Minnesota Power's big industrial customers will help absorb fixed costs and bring other financial benefits to Minnesota Power worth about $40 million annually, according to the utility's analysis.

PUC staff was skeptical about this claim, too, but one of the oddest aspects of the 2015 law is that the PUC had to greenlight this proposal even if it only could find that it helps the utility and not the state as a whole.

It's hard to believe that's what the Legislature wanted.