Judges: Minnesota customers should bear full $660M in costs from February 2021 storm

Minnesota natural gas utilities acted "prudently" during a historic February 2021 storm, so they should be allowed to fully pass on $660 million in extra gas costs to their customers, according to two administrative law judges.

The judges' conclusions, released Tuesday, rejected contentions from two state agencies that because of utility mismanagement during the storm, ratepayers should not be charged the entire $660 million tab.

The Minnesota Public Utilities Commission (PUC), which has the ultimate say on the matter, last year ordered an investigation into the prudency of the charges — 62% of which were run up by the state's largest gas utility, CenterPoint Energy.

The state Department of Commerce and Attorney General's Office concluded that CenterPoint, Xcel Energy, Minnesota Energy Resources Corp. (MERC) and Great Plains Natural Gas made critical mistakes in their gas procurement procedures before and during the storm.

The Attorney General's Office argued that the utilities should not be allowed to collect any of the $660 million in extraordinary storm costs, the judges' report said. The Commerce Department says tens of millions of dollars in charges should be disallowed by the PUC.

But Jessica Palmer-Denig and Barbara Case, the administrative law judges, ruled that the utilities' strategies were sound and the $660 million in extra costs were "prudently" incurred.

"Prudence is not evaluated using the benefit of hindsight," the judges wrote in their report on CenterPoint. "Instead, the gas utilities' actions and decisions must be judged on the basis of whether each action and decision was reasonable at the time ... and based on the information that was or should have been known."

Administrative law judges' decisions are not binding, but they are influential on the PUC. Still, the PUC, which is slated to decide the matter this summer, also takes into account the positions of the Commerce Department, the Attorney General's Office and other parties.

The judges' decisions were "definitely disappointing," said Annie Levenson-Falk, executive director of the Citizens Utility Board (CUB) of Minnesota, a watchdog group for residential ratepayers. "The judges' recommendations failed to hold the utilities accountable."

CUB also recommends that the PUC disallow tens of millions of dollars in charges to ratepayers due to alleged utility mismanagement.

CenterPoint, which has nearly 900,000 customers in Minnesota, said it appreciates "the judges' thorough review and conclusion that CenterPoint Energy acted prudently."

Wholesale gas prices in Minnesota and many other states soared in February 2021 when a storm hit Texas and other natural gas-producing states. Temperatures plunged, gas field equipment froze up and supply cratered just as demand soared.

At the same time, Minnesota and the Upper Midwest was locked in its own deep freeze. The state's gas utilities ended up scrambling for gas supplies as Midwestern wholesale prices rose at least 4,500%.

In Minnesota, like most states, wholesale commodity gas costs are passed through directly to consumers, without a markup from the utility. Consumers benefit when the market rate is lower, but in a case such as February 2021, are hit with higher bills.

The PUC allowed utilities to start billing ratepayers for the extra gas costs last fall, even though it has not yet decided if the full $660 million can be recovered. CenterPoint says that its average customer will pay about $305 for extraordinary storm-related costs.

Due to pressure from the PUC to lengthen the payback period, CenterPoint's customers — and Xcel's residential customers — will pay the tab over about 63 months. Customers of MERC and Great plains have a 27-month repayment period.

CenterPoint incurred $408.8 million in extraordinary gas costs from the storm; Xcel, the state's second largest gas utility, $179 million; MERC, the third largest, $65 million; and Great Plains Gas, a small gas utility in western Minnesota, $8.8 million.

The Commerce Department concluded that the PUC should disallow about $10 million of MERC's extraordinary charges, and around $40 million for CenterPoint.

But it has taken particular exception to Xcel, asking that $122 million or 68 % of the utility's charges be disallowed. About $85 million of that stems from issues with Xcel's "peaking plants," which were inoperable during the February storm.

Peaking plants, which are run on liquid natural gas or propane, are fired up to provide vital reserves during emergencies.

Xcel's largest peaking plant in Inver Grove Heights was mothballed in early January 2021 after it malfunctioned and twice leaked gas. A cautious Xcel then closed two smaller peaking plants.

The Commerce Department maintained that Xcel did not properly operate or maintain the peaking plants. But the judges disagreed.

The Attorney General's Office found widespread mismanagement by the utilities, and took particular aim at their strategies for hedging gas supplies.

While the Attorney General's Office recommended the full $660 million in costs be denied, it said a reasonable disallowance based on the utilities' hedges alone would be between $71 million and $92 million, the judges' report said.

But the judges supported the utilities' hedging practices.

"The record shows that the [AG office's] hedging proposals would not have been feasible or reasonable as a real world strategy for CenterPoint Energy," the judges wrote.