Analysis: Xcel Energy fails to meet Minnesota price goals while seeking rate increase

Xcel Energy's residential prices are about the national average, but industrial customers are paying about 20% more, a new state analysis found.

They also are higher than the state's energy goals. The state wants electricity rates for all Minnesotans — from households to factories — to be at least 5% below the national average.

The analysis comes as Xcel's rate case, which requests another increase in rates, is in front of state utility regulators.

Xcel, by far the state's largest electricity provider, has exceeded the goal for several years, both for residential and industrial customers. But the gap between the benchmark and industrial prices has particularly grown.

"Electricity prices used to be a competitive advantage for Minnesota business," said Brian Cook, director of energy and elections policy for the Minnesota Chamber of Commerce. "It has turned into a disadvantage."

Xcel says its rates are competitive and that its customers' bills — which reflect Minnesotans penchant for energy conservation — are low relative to national averages. "We provide all of our customers with great value," said Chris Clark, Xcel's president for Minnesota and the Dakotas.

"When you look at the investments we have made in Minnesota, we are on the front edge of the clean energy transition, and there have also been investments made that have made our system more reliable."

Xcel, with 1.3 million electricity customers in Minnesota, is by far the state's largest power provider. The Minneapolis-based company is currently before the Minnesota Public Utilities Commission (PUC) requesting a 15.4% total rate hike over three years. That would include 17.5% and 14% increases respectively for residential and industrial customers.

As is typical, the rate case is contentious, with ratepayer advocates, including the Minnesota Department of Commerce, saying Xcel should get considerably less than it wants.

Capital investment is a key driver of electricity rates, and Xcel has poured billions of dollars over the past decade-plus into new wind farms, new transmission lines, nuclear power plant upgrades and other system improvements.

Clark said that Xcel has been a U.S. leader in renewable energy investments — which are critical to tackling climate change — and that other utilities will have to catch up. "We are making investments that are flowing into customers' rates before other companies make investments that will flow into their customers' rates."

Wind and solar farms have zero fuel expense while their construction costs have fallen. But they still entail significant investments to build — and increased spending on transmission lines.

"In the last five to 10 years we have seen more spending on generation, much of which is carbon free," said Andrew Moratzka, an attorney with Stoel Rives representing large industrial power users in rate cases for Xcel and Minnesota Power.

"It is the right thing to do, but it is not free. We are not going to be able to address climate change without having an effect on folks' pocketbooks."

Minnesota's carbon-free electricity transition is about half completed. Renewables comprised 29% of the state's power generation in 2021, and nuclear — which is carbon-free — about 24%. The rest came from gas and coal.

Bills pending in the Legislature would require that 100% of the state's electricity come from carbon-free sources by 2040, 10 years ahead of Xcel's goal.

Until 2013, Xcel's residential electricity prices were in line with the state's statutory goal that rates should be no more than 95% of the national average, according to a recent report by Robert Manning, a PUC rate analyst.

(The report used price and sales data from the U.S. Energy Information Administration, which is based on filings by electric utilities.)

The gap between Xcel's residential prices and the state's 95% threshold grew in the later 2010s before narrowing in 2021, the last year for which data is available. Xcel's 2021 residential price — 13.92 cents per kilowatt hour — was a hair below the U.S. average.

Residential electricity prices for Minnesota's other two investor-owned utilities, Minnesota Power and Otter Tail Power, remained below the state's 95% goal from 2001 through 2021, Manning's analysis showed.

Duluth-based Minnesota Power's industrial prices rose above the state's goal in 2020; Xcel's have exceeded it since 2005. The difference between Xcel's industrial prices and the U.S. average grew particularly wide in the late 2010s.

Electricity price increases in Minnesota — relative to the national average — have largely reflected the state's energy transition over the past two decades, Manning told PUC commissioners at a meeting in December.

Historically, Minnesota relied heavily on coal, "and coal in 2001 was by far the cheapest fuel available and so we had cheap electricity," he said.

Since then "we have been one of the best in the country in moving forward — having a very environmentally friendly generation mix," Manning said. "It is, however, not the cheapest mix in the country anymore."

At the meeting, PUC Commissioner Matt Schuerger called Manning's assessment "really overly simplistic." In an interview later, Schuerger said other factors have influenced price increases, notably that utilities have needed investment in upgrading the state's electricity system.

"We can't freeze the system as it was because reliability and safety are critically important, and our infrastructure is aging."

Schuerger said that "electricity rates are critically important." The PUC, "as economic regulators, are concerned about rates and rate impacts every single week."

But he noted that Minnesota ratepayers' monthly bills are well below the national average. "The average bill is arguably a better measure of the impacts to consumers," Schuerger said.

In 2021, the average residential bill nationally was $116.70 a month, while Xcel's and Minnesota Power's bills were respectively $90.72 and $89.03, the PUC's analysis shows. Otter Tail's was $106.80, even though the Fergus Falls-based utility's electricity prices are lower than both Xcel's and Minnesota Power's.

Electricity bills are driven by consumption along with price — and Minnesotans are a thrifty lot.

Plus, under state energy conservation program, Xcel and other utilities have long offered efficiency programs to reduce electricity consumption. Those include rebates for electric appliances and weatherization measures, along with energy efficiency audits for homes and businesses, including industrial customers.

Minnesota's relatively low bills "are the good news," said Annie Levenson-Falk, head of the Citizens Utility Board of Minnesota, a ratepayer advocacy group. "But on the flip side, [PUC] data shows a lot of people are behind on their bills — including 1 in 7 Xcel customers. In my opinion, that is high, and it is concerning."

Levenson-Falk said Xcel's rate hike request would only burden consumers further.

In October, Xcel petitioned the PUC for a rate increase of $677 million or 21.2% over three years. Two months ago, Xcel revised that downward to $498 million or 15.4% over three years.

The revision partly stems from the company's new revenue forecast. Xcel's sales are now expected to be stronger than first anticipated due to a robust economic recovery from COVID — thus reducing rate increase needs.

Still, Xcel's revised request is well above the $324 million over three years recommended by the state's Commerce Department.

In a recent PUC filing, the department said a significant part of Xcel's proposed rate hike is its bid to raise its allowed return on equity (ROE) from 9.06% to 10.2%. Commerce said that Xcel has been "flourishing" at its current ROE, though an increase to 9.25% is merited.

The difference between Xcel's requested ROE and Commerce's recommendation totals $201.9 million over three years, the department said. "That is, Xcel asks ratepayers to fork over $200 million, roughly one-fifth of its total request, simply so that Xcel can earn more money."

Xcel's Clark said it's important to raise the company's return so Xcel can be competitive in capital markets. "You don't want to fall into the group of utilities that are not regarded as an attractive investment."