Judge rules Xcel’s negligence in costly coal plant accident merits refunds to customers

Xcel Energy’s negligence contributed to a 2011 catastrophic equipment failure at the company’s Sherco 3 power plant in Becker, meriting a refund of certain costs to customers, a state administrative law judge recently concluded.

The size of the proposed refund was not disclosed, but it would be less than $34 million, split among Xcel’s 1.3 million Minnesota customers.

The Minnesota Public Utilities Commission now must decide whether to accept the judge’s May 14 ruling and issue the refund.

The November 2011 accident at Sherco 3, a massive coal-fired power generator, ripped giant turbine blades off their mountings, hurled shards of metal across the plant and triggered a fire. No one was hurt, but Sherco 3 was closed for repairs for 22 months.

The $239 million in repair costs were mostly covered by insurers for Sherco 3, which is operated by and 59% owned by Minneapolis-based Xcel. (The Southern Minnesota Municipal Power Agency owns the rest).

While Sherco 3 was closed for repairs, Xcel had to find replacement power on the wholesale market or from its other plants. The PUC allowed Xcel to bill customers for the extra costs of replacement power.

However, the PUC deferred an ultimate decision on the responsibility for those costs until litigation between Xcel and General Electric, the turbine’s manufacturer, concluded.

Xcel sued General Electric in 2013, alleging that “stress corrosion cracks” in the turbine were caused by dangerous defects that GE had known about for decades. Xcel and GE settled in 2018, and the utility refunded settlement proceeds to customers. Xcel’s insurers, however, continued their suit against GE.

A jury found that Xcel was negligent in operating and maintaining Sherco 3, and thus at fault for 48% of the accident’s costs. GE was responsible for the other 52%. But the insurers collected nothing because they argued “wanton negligence” by GE; the jury found GE liable only for “ordinary negligence.”

Sherco 3 litigation concluded in 2020. Since then, a fight over replacement power costs has been winding through the PUC. The Minnesota Department of Commerce and the Minnesota Attorney General’s Office argued that ratepayers were due a refund; Xcel disagreed.

Earlier this month, Administrative Law Judge Ann O’Reilly recommended that the PUC follow the jury’s logic and refund Xcel customers 48% of replacement power costs from 2011 to 2013, plus interest. Those costs amount to $71.5 million, including $30 million in interest. Xcel’s 48% tab would be $34.3 million.

However, O’Reilly recommended that Xcel be allowed to use some of the GE settlement to lower any refund amount. The confidential settlement set-off is redacted in the judge’s ruling, and Xcel declined to provide the amount.

“We believe we have already appropriately paid for the event,” the company said in a statement.

Xcel said it disagreed with O’Neill’s conclusion that it operated Sherco 3 “imprudently.” Xcel has “a long track record of operating our power plants safely to deliver reliable electricity to customers while keeping bills affordable.”

O’Reilly in the ruling concluded that Xcel had deferred a full inspection of the generator’s turbines in 2011, against the recommendations of its own engineers and knowing it would “increase catastrophic risk.” Instead, the ruling said, Xcel invested in “discretionary” non-safety upgrades to increase turbine efficiency.