IPL-SMEC Transaction Approved

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IPL-SMEC Transaction Approved

May 4, 2015

The Minnesota Public Utilities Commission April 30 approved the sale of Interstate Power and Light Company electric utility assets and customers in Minnesota to the Southern Minnesota Energy Cooperative (SMEC), a group of 12 electric co-ops. Despite voicing several concerns, the Commission adopted the transaction, as proposed by the utilities, on a 4-0 vote.

The transaction involves approximately 42,600 IPL electric customers in 84 communities. The purchase price is estimated at $122 million. Under terms of the agreement, SMEC will buy power from IPL at wholesale for a period of 10 years.

The Minnesota Office of Attorney General (OAG) and the Minnesota Chamber of Commerce recommended the sale only be approved with significant conditions.

The OAG argued that the transaction would not benefit ratepayers. It said the record demonstrates that if any benefit exists, it is in IPL's favor due to guaranteed recovery of an acquisition premium and the Wholesale Power Agreement’s increased return on equity. Claims that IPL ratepayers would benefit were based on multiple hypothetical rate increases, said the OAG. It recommended conditions to any sale, including IPL forego the gain on sale of its distribution assets.

The OAG's conditions would "imperil" the transaction, said IPL-SMEC. They argued that the sale does not require a showing of affirmative benefits, and that state law does not require that a proposed merger benefit ratepayers or the public or promote the public interest.

The Chamber said there was a lack of prudency review, no certainty of cost impacts and that near-term projected rate increases disproportionately would affect commercial and industrial customers. It recommended that, if the sale were approved, conditions be attached, including denial of the distribution asset acquisition premium of $16.9 million. The Chamber also sought a stipulation that the return on equity for generation infrastructure be set at 9.8 percent (less than the ROE granted by the Federal Energy Regulatory Commission).

The Chamber said the deal hadn't been analyzed from the IPL ratepayers' perspective and that the bulk of benefits go to SMEC, while former IPL ratepayers would eventually see significant rate increases.

The Department of Energy Resources (DER) had initially asked for a contested case hearing to study the proposed transaction, but later supported the sale, arguing that the transaction's benefits are greater than its costs. DER said it was convinced of the transaction's benefits for customers due to cooperative financial advantages, particularly low-cost federal financing and exemption from federal and state income taxes.

Harold P. LeVander, Jr., representing SMEC, said separate rates were "very likely" for rural and city customers, due to different revenue requirements based on cost of service studies. LeVander noted the deal was the result of negotiation. SMEC hired a consultant who brought back statistics and information on other sales around the nation. In the end, that was "the price we were willing to pay." It was a "fair value," he said.

Commissioner John Tuma made the motion to recommend the sale, in part, he said, because the Legislature has stipulated that cooperative utilities are effectively regulated at the local level.

Commissioner Nancy Lange said the sale was a "good deal for cooperatives," enabling them to build load and achieve other goals important to them, but that the Commission's primary consideration was to protect IPL ratepayers. Those ratepayers were not represented fully in the negotiations, she said.

Commission Chair Beverly Jones-Heydinger said aspects of the deal were troubling to her, but that "there is a belief in this state" in cooperatives and the cooperative governance model. The cooperatives have assured the MPUC that they will act in good faith and treat all members fairly, she said, and the Legislature did direct the regulators to accept cooperative regulation. She said she would support the sale, in part, on the representations of the petitioners.