Four Things to Know About NorthWestern Energy's Newest Rate Hike Request

If you struggle to understand the charges and formulas incorporated into power companies’ electricity and natural gas rates, you’re not alone. Utility ratemaking is a notoriously technical undertaking that even professionals working in related fields can find difficult to decipher. It’s also an important component of the “pocketbook economics” that influence Montanans’ finances, whether they’re paying their monthly power bills or budgeting for goods and services affected by swelling energy costs.

For example, when NorthWestern Energy, the state’s largest monopoly utility, last raised its rates, it estimated its residential customers’ electricity bills would climb 28% — a significant amount in a state where cold snaps and heat waves spur wallet-straining spikes in energy usage.

To help Montana power consumers make sense of NorthWestern’s most recent request to raise its customers’ rates, Montana Free Press has identified four especially noteworthy elements of the proposed increase NorthWestern submitted to the Montana Public Service Commission, the board of elected officials that regulates shareholder-owned utilities, in July.

NorthWestern is asking for a $193 million annual rate increase for electricity and natural gas service: In its application to the PSC, NorthWestern said it needs to increase the revenue it receives from electricity and natural gas customers by $193 million annually to cover the utility’s costs and earn a 10.8% return on equity for shareholders. A significant portion of that $193 million (in utility parlance, it’s called a revenue requirement) pertains to infrastructure NorthWestern has invested in since the commission approved its most recent rate increase in October 2023.

The infrastructure at play in the new rate request, including new power poles, natural gas pipelines and a recently constructed gas plant, is utility-owned. Per standard practice, monopoly utilities are afforded the opportunity to recover their costs for these investments, plus some profit (typically in the neighborhood of 10%), if they can demonstrate to the PSC that the expenditures are prudent and will be “used and useful.”

Most of the utility’s recent investment has occurred on the electricity side of its business, and the largest individual addition is the Yellowstone County Generating Station, a contested 175-megawatt gas-powered plant that NorthWestern recently built near Laurel, but has not yet incorporated into customers’ bills. NorthWestern puts the price tag for that plant at $310-$320 million and anticipates keeping it in service for 30 years. Largely as a result of having that plant in its portfolio, NorthWestern said it needs to collect another $164 million from electricity customers and $29 million from gas customers annually. Incorporated in those numbers are both infrastructure investments and an estimated $8 million annual increase in the company’s property tax bill.

NorthWestern’s most recent rate case can help to put that increase in context. In that case, filed in 2022 and approved in 2023, PSC commissioners unanimously authorized NorthWestern to recover an additional $82 million for its electricity service from its 406,000 electricity customers annually. As a result of that increase, NorthWestern anticipated that the average NorthWestern residential customer using approximately 750 kilowatt-hours of electricity would see a $25 jump in their monthly bill.

A reduction in another component of the utility’s electricity rates later ended up moderating that number, which reflects a component of the dynamic nature of energy markets in Montana we’ll explore in more detail below.

NorthWestern plans to sell more power to other companies: NorthWestern’s filing suggests that the Laurel gas plant will soften the blow of the $164 million increase in electricity revenue it’s seeking from customers. According to NorthWestern, having that plant online will allow the company to significantly increase the amount of power it sells to other utilities.

Those projections are outlined in portions of the rate case filing dealing with the Power Costs and Credits Adjustment Mechanism, or PCCAM. The PCCAM is a type of rate that’s calculated by adding the amount that NorthWestern estimates spending to purchase power from other suppliers and on fuel for its own plants and then subtracting the excess electricity it anticipates selling on the regional market. Both fuel costs and market purchases are considered pass-through costs, meaning the utility more or less sends them straight through to customers without earning a profit on them.

According to NorthWestern’s calculations, if you take into account the $94.5 million reduction in the PCCAM incorporated in the filing — more than half of which NorthWestern attributes to its new gas plant — the final restructuring will result in an 8% increase on residential customers’ electricity bills, raising the average residential bill by $9.10 per month.

The reduction in the PCCAM is largely driven by the fact that NorthWestern anticipates substantially increasing its electricity sales to other utilities, and power it sells to other utilities lowers ratepayer bills. (That’s the “credits” piece of the PCCAM acronym.) NorthWestern forecasts that it will sell $190 million worth of electricity to utility power purchasers annually.

Gary Duncan, a former rate analyst for the PSC who came out of retirement to oversee the rate case the PSC approved last year, questions the assumptions underlying that $190 million in market sales figure. Duncan described NorthWestern’s proposed sixfold increase in power sales as a “black hole” in its rate case application.

“I don’t know how they got to that number,” he told MTFP. “I don’t have a clue how that [increase] could possibly happen.”

Asked for comment on that component of the filing, NorthWestern did not respond to MTFP’s request by deadline.

Duncan said NorthWestern’s customers should pay attention to such forecasts because if NorthWestern fails to hit that market sales target, customers are going to end up responsible for much of the shortfall. Per Montana statute, NorthWestern can pass 90% of an under-collection of supply costs on to customers in a true-up process designed to keep the utility’s projections roughly aligned with its incurred costs. In practice, that means that if NorthWestern’s PCCAM forecasts are off, it can recover most of the money it’s short from ratepayers.

The Montana Environmental Information Center, an environmental nonprofit and longtime NorthWestern Energy watchdog, therefore cautions NorthWestern’s customers against putting too much stock in the utility’s PCCAM base, arguing that the variability and unknowns incorporated into it make it an unreliable benchmark. The number MEIC instead focuses on in its critique of the filing is 26%, which is the increase in electricity revenue the utility is seeking from residential customers related to its infrastructure investments and property taxes.

MEIC also argues that the market sales and purchases components of NorthWestern’s PCCAM filing don’t pencil out.

“The numbers themselves show that they are going to be spending more on market purchases, but they also simultaneously are going to be making a bunch of money from these market sales,” MEIC Energy Transition Engineer Nick Fitzmaurice said. “It’s misleading.”

Fitzmaurice said MEIC plans to closely examine that component of NorthWestern’s filing in the coming months as one of the 10 entities that have asked to intervene in the rate case. Other parties that have intervened include the Montana Consumer Counsel, the Northern Cheyenne Tribe, a small cohort of NorthWestern’s largest industrial customers, and NW Energy Coalition, a collective of businesses and nonprofits that support renewable energy development.

NorthWestern is asking for authority to levy new charges on customers related to Colstrip upgrades: In a not-unexpected turn of events, NorthWestern is asking the PSC for authorization to factor expensive upgrades for Montana’s largest power plant, Colstrip, into customers’ bills.

The upgrades in question will soon be required to keep the nearly 40-year-old coal plant, which NorthWestern co-owns with other utilities, in compliance with tighter pollution regulations the U.S. Environmental Protection Agency adopted earlier this year. The regulations in question aim to clamp down on toxic air pollution associated with coal combustion and substantially decrease power plants’ release of carbon dioxide, the most common greenhouse gas.

The Mercury and Air Toxics Standard, which has an earlier compliance date than the CO2 rule, would require an investment in a plant upgrade that’s estimated to top $600 million, an amount the utility has previously suggested would make continued operation of the plant uneconomical.

At this point, details about NorthWestern’s proposal to create what it’s calling a Reliability Compliance Balancing Account are scarce, but the company describes it as a tariff that would be submitted to the PSC on an annual basis for its review. NorthWestern spokesperson Jo Dee Black wrote in an email to MTFP that there is no upper limit on the amount of money NorthWestern could seek to recover through this account.

Duncan described that component of NorthWestern’s request as “atrocious.”

“There would be no cap on it. They provide no estimate of costs. They don’t provide anything. It’s sort of like ‘trust us.’

PSC Chief Legal Counsel Lucas Hamilton said it’s unclear if NorthWestern is proposing to submit the tariff to the commission for approval or mere review, but he expects to learn more about the utility’s proposed process in the coming months.

The commission will likely approve a smaller interim increase in the coming weeks or months: In recognition of the fact that the PSC can take more than a year to issue a final decision on a rate case, regulated utilities can recover a portion of their larger requested rate hike while the utility, intervening parties and commission staff make their way through a mountain of filings in the time-consuming quasi-judicial process, which is subject to some of the same evidentiary standards common in legal proceedings. Interim rate increases are smaller than the full request, and the commission can require utilities to refund them if they’re later found to be too high.

NorthWestern has written that it has filed an interim rate request “because the rates presently in effect are no longer just and reasonable as they do not allow NorthWestern an opportunity to recover in rates its total cost of providing electric and natural gas service to customers.” The utility is therefore asking the PSC to allow it to recover $51 million in electricity revenue and $21 million in natural gas revenue under an interim rate increase that it would like to go into effect Oct. 1.

In addition to the interim rate increase, NorthWestern is asking for a “bridge rate” to start recovering $58 million for its new gas plant for the period between when the plant is put into service — a milestone NorthWestern plans to reach by the end of October — and the conclusion of the larger rate case.

It’s also unclear if NorthWestern would refund its bridge rate collections if the commission later finds those collections unjustified. Duncan said that if refundability is part of NorthWestern’s plan, the company has not made that explicit in its filing, and NorthWestern did not directly answer MTFP’s question about the issue. However, Hamilton said Montana law allows regulators to require utilities to refund any overcollections associated with temporary rates, and he considers the proposed bridge rate to be a temporary rate.

Regardless, Duncan said he’s opposed to the commission authorizing tens of millions for a gas plant that hasn’t been exposed to the rigors of the commission’s standard review processes in the way that other assets, such as the Dave Gates Generating Station, have.

“There is going to be a huge battle in the upcoming rate case about if it’s ‘used and useful’ and if it’s prudent,” Duncan said, adding that he anticipates the Laurel gas plant to be the utility’s most expensive power producer on a cost-per-megawatt basis “by far.”

As of Sept. 24, it’s uncertain whether the commission will issue a decision on the interim rate or the bridge rate by Oct. 1 as requested by NorthWestern, in part because it took NorthWestern a couple of months to submit all the documents the commission requires to formally initiate its review.

The commission has, however, laid out a proposed schedule for the larger (read: non-interim) rate review. If the new rate case unfolds like the most recent one, energy consumers can anticipate a legally enforceable agreement between NorthWestern and at least one intervening party sometime in March. Any settlements reached between the parties must go before the commission for approval.

Keep an eye on Montana Free Press for continuing coverage of NorthWestern Energy’s latest rate hike request. To learn more about how NorthWestern divvies its revenue requirements between various charges incorporated into customer bills, read “How to decode your NorthWestern Energy power bill.”