In the Matter of the Application of Otter Tail Power Company for Authority to Increase Rates for Electric Service in Minnesota.

This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2016).

STATE OF MINNESOTA
IN COURT OF APPEALS
A17-1300

In the Matter of the Application of Otter Tail Power Company
for Authority to Increase Rates for Electric Service in Minnesota.

Filed June 11, 2018
Reversed
Halbrooks, Judge

Public Utilities Commission
File No. E017/GR-15-1033

Bruce Gerhardson, Otter Tail Power Company, Fergus Falls, Minnesota; and

Richard J. Johnson, Patrick T. Zomer, Kelly C. McGinty, Moss & Barnett, P.A.,
Minneapolis, Minnesota (for relator Otter Tail Power Company)

Lori Swanson, Attorney General, Kathryn A. Fodness, Lisa Crum, Assistant Attorneys
General, St. Paul, Minnesota (for respondent Minnesota Public Utilities Commission)

Considered and decided by Halbrooks, Presiding Judge; Worke, Judge; and
Connolly, Judge.
U N P U B L I S H E D O P I N I O N
HALBROOKS, Judge
On certiorari appeal from a rate -case order, relator power company challenges
respondent commission’s decision to include costs and revenues for two of relator’s multi-
value transmission-grid projects when setting the retail electric rates charged to relator’s
Minnesota customers. Relator contends that 16 U.S.C. § 824s (2016) of the Federal Power

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Act preempts respondent from doing so. Relator also argues that respondent overstepped
its authority under Minn. Stat. § 216B.16, subd. 7b (2016), by directing relator to put those
projects’ costs and revenues into a transmission-cost recovery rider. Because we conclude
that 16 U.S.C. § 824s of the Federal Power Act preempts respondent from trapping
federally approved interstate-wholesale revenues, we reverse.
FACTS
Relator Otter Tail Power Company, headquartered in Minnesota, provides retail
electric service to 161,000 customers in Minnesota, North Dakota, and South Dakota. It is
the second smallest investor -owned utility company in the United States. Otter Tail
projects that it will invest $858 million between 2016 and 2020, representing its “largest
capital expenditure program in its history.”
To offset those expenditures, Otter Tail filed a general rate case with respondent
Minnesota Public Utilities Commission (MPUC) seeking to increase its annual retail
electric rates. In its rate-case filing, Otter Tail proposed to exclude costs and revenues for
two multi-value transmission-grid projects. Otter Tail reasoned that those projects are not
subject to MPUC’s intrastate retail ratemaking authority because they are instead subject
to the Federal Energy R egulatory Commission’s (FERC) interstate wholesale ratemaking
authority, and FERC has authorized Otter Tail through a federal tariff to recover a fixed
rate of return on its investments in those multi-value transmission-grid projects.
MPUC referred the case to the Office of Admini strative Hearings , and a n
administrative law judge (ALJ) held four public hearings and three evidentiary hearings .
Otter Tail, the Minnesota Department of Commerce, the Min nesota Chamber of

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Commerce, the Office of the Minnesota Attorney General, and two other companies
appeared.
During the contested-case proceedings, the attorney general’s office supported Otter
Tail’s treatment of the projects’ costs and revenues, explaining that such treatment “would
be most consistent with traditional principles of co st allocation and separation.” The
commerce department and the chamber, however, opposed Otter Tail’s treatment, pointing
to three other projects in Otter Tail’s portfolio —subject to the same federal tariff—that
Otter Tail had not excluded before. The commerce department and the chamber argued
that Otter Tail should treat all projects the same and put the costs a nd revenues into a
transmission-cost recovery rider under Minn. Stat. § 216B.16, subd. 7b.
Following the proceedings, the ALJ issued an order recommending that MPUC not
include the projects’ cos ts and revenues because it was preempted by the Federal Power
Act. The ALJ explained that, under the commerce department and chamb er’s approach,
Otter Tail would not recover $13.8 million in revenues that have already been approved by
FERC under a federal tariff. The ALJ also recommended that MPUC not direct Otter Tail
to include the costs a nd revenues in a transmission -cost recovery rider , reasoning that
Minn. Stat. § 216B.16, subd. 7b, did not authorize MPUC to do so.
MPUC adopted most of the ALJ’s findings and conclusions, but declined to adopt
the ALJ’s recommendation that it exclude the multi-value transmission-grid projects’ costs
and revenues, reasoning that the Federal Power Act reserves for state ratemaking
commissions the authority to control intrastate retail rates. Under a theory of ratemaking
policy referred to by MPUC as “all-in allocation,” MPUC ordered Otter Tail to amend its

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petition “to incorporate into its f iling the costs and revenues related to [those projects].”
This appeal follows.
D E C I S I O N
On appeal from a contested-case proceeding, we may affirm or remand MPUC’s
decision; or we may reverse or modify the decision if the substantial rights of Otter Tail
have been prejudiced because MPUC’s decision violates a constitutional provision,
exceeds its statutory authority or jurisdiction, is made upon unlawful procedure, is affected
by other error of law, is unsupported by substantial evidence in view of the record as a
whole, or is arbitrary or capricious. Minn. Stat. § 14.69 (2016); see N. States Power Co. v.
Minn. Pub. Utils. Comm’n, 344 N.W.2d 374, 377 (Minn. 1984). S tatutory interpretation
and federal preemption are questions of law, which we review de novo. Gretsch v. Vantium
Capital, Inc., 846 N.W.2d 424, 428 (Minn. 2014).
I.
The Supremacy Clause provides that the laws of the United States are “the supreme
Law of the Land; . . . any Thing in the Constitution or Laws of any State to the Contrary
notwithstanding.” U.S. Const., art. VI, cl. 2. A state law or regulatory scheme is preempted
if, under the circumstances presented, “the challenged state law stands as an obstacle to the
accomplishment and execution of the full purposes and objectives of Congress .” Hughes
v. Talen Energy Mktg., LLC , 136 S. Ct. 1288, 1297 (2016) . Congress’s purpose “is the
ultimate touchstone of any preemption inquiry.” Id.; accord Gretsc h, 846 N.W.2d at
432-33.

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A. Federal Law—the Federal Power Act
The Federal Power Act, 16 U.S.C. §§ 791a-828c (2016), grants FERC the exclusive
authority to regulate “the transmission of electric energy in interstate commerce” and “the
sale of electric energy at wholesale in interstate commerce.” 16 U.S.C. § 824(b)(1);
F.E.R.C. v. Elec. Power Supply Ass’n, 136 S. Ct. 760, 767 (2016). The Federal Power Act
provides FERC jurisdiction “over all facilities for such transmission or sale of electric
energy” and charges FERC with ensuring that “all rates and charges” as well as “all rules
and regulations affecting or pertaining to such ra tes or charges” are just and reasonable.
16 U.S.C. §§ 824(b)(1), 824d(a).
At the same time, the Federal Power Act maintains a regulatory zone in which the
states enjoy exclusive jurisdiction. 16 U.S.C. § 824(a), (b); Elec. Power Supply Ass’n, 136
S. Ct . at 767. The Federal Power Act provides states with the exclusive authority to
regulate intrastate retail sales of electricity. 16 U.S.C. § 824(b); Elec. Power Supply Ass’n,
136 S. Ct. at 768.
1. Regional Transmission Organizations
In response to indu stry restructuring, FERC authorized seven non -profit
associations known as “regional transmission organizations” to take control of large-scale
transmission grids that distribute power across a wide geographic footprint. Reg’l
Transmission Orgs., 89 FERC ¶ 61285, 1999 WL 33505505 , at *10-11 (Dec. 20, 1999) .
Regional transmission organizations are operated by an independent system operator.
Cent. Iowa Power Co -op. v. Midwest Indep. Transmission Sys. Operator, Inc. , 561 F.3d
904, 907 (8th Cir. 2009). The Midcontinent Independent System Operator, Inc. (MISO) is

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a FERC-approved public utility that is both a regional transmission organization and an
independent system operator. 1 Id. at 908. MISO’s footprint covers 15 states, including
Minnesota, and one Canadian province. Otter Tail is a member of MISO.
2. Section 219—Incentive-Based Rules to Attract Transmission Investment
In 2005, Congress enacted section 1241 of the Energy Policy Act of 2005, which
added section 219 to the Federal Power Act, in order to encourage investment in interstate
transmission-grid infrastructure. Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat.
594, 961-62 (2005) (codified at 16 U.S.C. § 824s (2016)). Section 219 charged FERC with
establishing rules for “incentive -based . . . rate treatments for the transmission of electric
energy in interstate commerce by public utilities.” 16 U.S.C. § 824s(a). The rules must
(1) “promote reliable and economically efficient transmission and generation of electricity
by promoting capi tal investment in the enlargement, improvement, maintenance, and
operation of all facilities for the transmission of electric energy in interstate comm erce”;
(2) “provide a return on equity that attracts new investment in transmission facilities”;
(3) “encourage deployment of transmission technologies . . . to increase the capacity and
efficiency of existing transmission facilities and improve the operation of the facilities ”;
and (4) allow recovery of “all prudently incurred costs necessary to comply with mandatory
reliability standards . . . [and] all prudently incurred costs related to transmission
infrastructure development.” 16 U.S.C. § 824s(b).

1 MISO changed its name from Midwest Independent Transmission System Operator, Inc.
to Midcontinent Independent System Operator, Inc. Ass’n of Buss . Advocating Tariff
Equity Coal. of MISO Transmission Customers v. Midcontinent Indep. Sys. Operator, Inc.,
156 FERC ¶ 61234, 2016 WL 5799957, at *1 (Sept. 28, 2016).

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3. Multi-Value Transmission-Grid Projects
In 2010, MISO sought and received FERC approval to fund and const ruct multi-
value transmission-grid projects. Ill. Commerce Comm’n v. F.E.R.C., 721 F.3d 764, 771
(7th Cir. 2013). A multi-value project is a high-voltage transmission-grid project that must
have “an expected cost of at least $20 million, must consist of high -voltage transmission
lines (at least 100kV), and must help MISO members meet state renewable energy
requirements, fix reliability problems, or provide economic benefits in multi ple pricing
zones.” Id. at 774. MISO has 17 multi-value projects in its portfolio.
Otter Tail owns 50% of two MISO multi -value projects. The Brookings project is
a transmission line extending approximately 70 miles between two substations in South
Dakota. The Ellendale project is a transmission line extending 160 to 170 miles between
a substation in South Dakota and a substation in North Dakota. Otter Tail is investing
approximately $134.5 million in the Brookings project and $182.5 million in the Ellendale
project—a total of $317 million. The projects together are referred to as the Big Stone
Area Transmission projects, or the BSAT Lines.
Otter Tail is also a part-owner of a third multi-value project known as the Hampton
Line, which is located in Minnesota. In addition, Otter Tail owns two other transmission
lines located in Minnesota—the Fargo Line and the Bemidji Line—that are not multi-value
projects.
4. MISO Tariff—Cost Allocation and Return on Equity
MISO imposes on its members an open-access transmission tariff (MISO tariff) that
dictates how multi -value-project costs are allocated. Multi-value projects have such

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significant costs and system -wide benefits that “MISO provides for their costs to be
recovered from all of MISO’s load -serving entities . . . based on each entity’s share of
energy consumed within the MISO footprint.” Because Otter Tail’s retail customers in
Minnesota, North Dakota, and South Dakota collectively consume 0.98% of all the energy
consumed in the MISO region, the M ISO tariff allocates 0.98% of all multi -value project
costs to Otter Tail’s retail customers.
The MISO tariff also sets out FERC -approved wholesale rates for electricity
delivered through MISO’s transmission grid, including electricity generated by and
purchased from Otter Tail’s multi-value projects. Id. at 771 -72. Based on its 50%
ownership in the BSAT Lines, Otter Tail receives wholesale revenues at fixed interstate
wholesale rates approved under the MISO tariff, which in turn guarantees Otter Tail a fair
and reasonable level of return on equity in its investment and ownership in the BSAT Lines.
Midcontinent Indep. Sys. Operator, Inc., 156 FERC ¶ 61234, 2016 WL 5799957, at *3.
B. State Law—Minnesota’s Retail-Ratemaking Authority
MPUC has the authority to regulate Minnesota public utilities. Minn. Stat.
§ 216B.08 (2016). If a public utility wants to increase Minnesota retail rates, the utility
must file the proposed rate change with MPUC for approval. See Minn. Stat. § 216B.16,
subd. 1 (2016 ). MPUC determines if the new rates are just and reasonable, giving due
consideration to “the public need for adequate, efficient, and reasonable service and to the
need of the public utility for revenue sufficient to enable it to meet the cost of furnish ing
the service, . . . and to earn a fair and reasonable return upon the investment in such
property.” Minn. Stat. § 216B.16, subd. 6 (2016).

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C. MPUC’s Decision—All-in Allocation
MPUC, under a theory of ratemaking policy called “all-in allocation,” included the
FERC-approved MISO -tariff wholesale revenues for the BSAT Lines in determining
whether Otter Tail’s proposed rate change was just and reasonable. MPUC explained that
Otter Tail’s proposal to exclude the revenues would have financial consequences for Otter
Tail’s shareholders and Minnesota ratepayers; it would benefit shareholders “by permitting
them to retain earnings calculated on the basis of MISO’s higher return on equity, rather
than having those revenues assigned to the state jurisdictions in which Otter Tail operates
to offset the utility’s other costs.” In effect, MPUC used the FERC-approved MISO-tariff
wholesale revenues for the BSAT Lines to reduce the retail rate s paid by Otter Tail’s
Minnesota customers.
II.
Otter Tail contends that MPUC’s decision to include the BSAT Lines FERC -
approved wholesale revenues in setting Minnesota intrastate retail rates is preempted by
section 219 because Congress has expressly mandated that FERC establish rule -based
incentives for investing in the interstate power grid, including multi-value projects like the
BSAT Lines. We agree.
Congress’s intent under s ection 219 is clear: FERC must create incentive -based
wholesale rate treatments that attract capital investments in regional transmission -grid
projects, like the BSAT Lines . 16 U.S.C. § 824s(b) ; see Promoting Transmission Inv.
Through Pricing Reform , 117 FERC ¶ 61345, 2006 WL 3792941, at *4 (Dec. 22, 2006)
(“Section 219 does not simply ‘codify’ [FERC’s] legal authority; it requires [FERC] to

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take affirmative action to promote new investment.”). Section 219 authorizes Otter Tail to
recover, through mechanisms such as the MISO tariff, fixed interstate wholesale returns on
their investments in the BSAT Lines. 16 U.S.C. § 824s(b).
Under United States Supreme Court and Minnesota Supreme Court caselaw, MPUC
must give effect to FERC-approved wholesale rates. Hughes, 136 S. Ct. at 1297; see Miss.
Power & Light Co. v. Miss. ex rel. Moore, 487 U.S. 354, 371, 108 S. Ct. 2428, 2439 (1988)
(“FERC has exclusive authority to determine the reasonableness of wholesale rates .”);
Nantahala Power & Light Co. v. Thornburg , 476 U.S. 953, 966, 106 S. Ct. 2349, 2357
(1986) (“Once FERC sets [an interstate wholesale rate], a State may not conclude in setting
retail rates that the FERC-approved wholesale rates are unreasonable.”); N. States Power,
344 N.W.2d at 3 81 (determining that the reasonableness of a FERC -approved wholesale
rate cannot “be relitigated in a retail rate proceeding before [MPUC]”).
Here, the ALJ found that under “the FERC -authorized cost recovery mechanism,
Otter Tail estimate[d] that it would recover approximately $67.8 million” between 2016
and 2020. But under MPUC’s “all-in allocation” scheme, the ALJ found that Otter Tail
would recover only $54 million, thereby preventing Otter Tail from recovering $13.8
million that has already been approved by FERC under the MISO tariff . As the ALJ
explained, applying “all-in allocation” traps $13.8 million in FERC-approved wholesale
revenues. MPUC cannot use its state retail -ratemaking authority to trap FERC -approved
costs and revenues. Nantahala, 476 U.S. at 971, 106 S. Ct. at 2359. By applying “all-in
allocation,” MPUC has, in effect, “chose[n] an allocation . . . that differs from the

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allocation . . . adopted by [FERC] in a wholesale ratemaking proceeding.” Id. at 955, 106
S. Ct. at 2351.
MPUC argues that using all -in allocation is not preempted because under what is
known as the “ Narragansett principle,” MPUC can investigate Otter Tail’s financial
structure to see if Otter Tail will experience savings in other areas that would justify
lowering retail rates paid by customers in Minnesota. Narragansett Elec. Co. v. Burke ,
381 A.2d 1358, 1363 ( R.I. 1977). In Narragansett, the Rhode Island Supreme Court
determined that the Rhode Island state utilities commission was required to treat a power
company’s purchased power costs as an actual operating expe nse. Id. at 1362. In doing
so, the Rhode Island Supreme Court concluded that the state utilities commission “may
treat [a] proposed rate increase as it treats other filings for charged rates under [Rhode
Island’s public utilities statute] and investigate the overall financial structure of [the power
company] to determine whether the company has experienced savings in other areas which
might offset the increased price for power.” Id.
The Eighth Circuit applied Narragansett in Arkansas Power & Light Co. v. Missouri
Pub. Serv. Comm’n , 829 F.2d 1444, 1451 (8th Cir. 1987). In Arkansas Power, a power
company filed to increase interim electric rates charged to its Missouri retail customers
after FERC had approved a cost -allocation system between multiple power companies.
829 F.2d at 14 46-47. The state commission suspended the requested rate increase
proceedings, advising that it needed time to “study the effect of the proposed tariffs and to
determine if they are just, reasonable and in the interest of the pub lic.” Id. at 1447. This
narrow question was presented: whether the Missouri commission was “obliged, by the

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preemptive force of the Federal Power Act, to allow an immediate pass -through of these
costs, without regard to the ordinary process of suspension and investigation provided by
state law.” Id. at 1450. The Arkansas Power court agreed with the state commission,
explaining that “[a]lthough the FERC order clearly contemplates that costs will have to be
passed on to retail customers, it also clearly recognize[s] the role of the States in regulating
retail electric rates and the need to balance overlapping State and Federal electric rate
jurisdiction.” Id. (alteration in original) (quotation omitted).
MPUC maintains that Narragansett and Arkansas Power authorize it to use FERC-
approved wholesale revenues to reduce Minnesota retail rates. We are not persuaded. Even
if a state commission can investigate a power company’s financial structure to see if it has
experienced savings in other areas, under bin ding Supreme Court caselaw, a state
commission must nevertheless give effect to FERC-approved wholesale revenues and cost
allocations. See Hughes, 136 S. Ct. at 129 7; Miss. Power, 487 U.S. at 3 71, 108 S. Ct. at
2439; Nantahala, 476 U.S. at 972, 106 S. Ct. at 2359. State commissions cannot use their
state retail-ratemaking authority to trap FERC -approved wholesale revenues, like MPUC
has done here. Nantahala, 476 U.S. at 971, 106 S. Ct. at 2359.
MPUC also argues that Otter Tail cannot pick and choose which projects it wants
to subject to Minnesota’s retail-ratemaking authority, reasoning that it did not exclude the
Hampton, Fargo, and Bemidji Lines from state retail -ratemaking authority in prior rate
cases. We do not agree that Otter Tail’s treatment of those lines dictates its approach here.
First, Otter Tail’s investment in the BSAT Lines is significantly greater than its investment

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in the Hampton line. Second, the Fargo and Bemidji Lines were constructed not to meet
the needs of the entire MISO-region power grid but instead for localized Minnesota needs.
MPUC also asserts that allowing Otter Tail to assign the BSAT Lines to FERC
jurisdiction will unbundle electric rates in Minnesota. But as Otter Tail argues, “excluding
Otter Tail’s interstate wholesale earnings from intrastate retail rates will have no effect on
the structure of the intrastate retail rate, although the level of the rate is affected.” Just as
the Minnesota Supreme Court’s decision in N. States Power did not unbundle rates, neither
will our decision here. 344 N.W.2d at 376.
We acknowledge that “[w]hen FERC sets a wholesale rate, when it changes
wholesale market rules, when it allocates electricity as between wholesale purchasers —in
short, when it takes virtually any action respecting wholesale transactions —it has some
effect, in either the short or the long term, on retail rates.” Elec. Power Supply Ass’n, 136
S. Ct. at 776. We also recognize that states “may regulate within the domain Congress
assigned to them even when their laws incidentally affect areas within FERC’s domain.”
Hughes, 136 S. Ct. at 1298. But the Supreme Court has made clear that “States interfere
with FERC’s authority by disregarding interstate wholesale rates FERC has deemed just
and reasonable, even when States exercise their traditional authority over retail rates.” Id.
at 1299. Here, MPUC has invaded FERC’s jurisdiction by trapping $13.8 million in FERC-
approved MISO-tariff interstate wholesale revenues. We conclude that MPUC’s decision
is preempted by section 219 of the Federal Power Act because it prevents Otter Tail from
recovering $13.8 million in revenues, which in turn prevents it from receiving the FERC -
approved and section 219-mandated return on equity for its investment in the BSAT Lines.

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III.
Otter Tail argues that MPUC exceeded its statutory authority under Minn. Stat.
§ 216B.16, subd. 7b, by directing Otter Tail to include the BSAT Lines’ costs and revenues
in a transmission-cost recovery rider. See Minn. Stat. § 14.69(b) (providing that we may
reverse or modify decision if agency exceeded its statutory authority).
Upon filing by a public utility, MPUC may approve, reject, or modify a tariff that
(2) allows the utility to recover charges incurred under
a federally approved tariff that accrue from other transmission
owners’ regionally planned transmission projects that have
been determined by the Midcontinent Independent System
Operator to benefit the utility or i ntegrated transmission
system. . . .

(3) allows the utility to recover on a timely basis the
costs net of revenues of facilities approved by the regulatory
commission of the state in which the new transmission
facilities are to be constructed and determined by the
Midcontinent Independent System Operator to benefi t the
utility or integrated transmission system[.]

Minn. Stat. § 216B.16, subd. 7b(b).
Under the statute’s plain language, MPUC cannot direct Ot ter Tail to file a
transmission-cost recovery rider. Id. The transmission-cost recover y-rider statute is
limited to “ Minnesota jurisdictional costs net of associated revenues .” Minn. Stat.
§ 216B.16, subd. 7b(a). As Otter Tail argues, t he BSAT Lines “were not designed or
approved to meet the local needs of Otter Tail’s retail customers” but rather “to meet needs
throughout the MISO region. ” For those reasons, we reverse MPUC’s order that directs
Otter Tail to file a transmission-cost recovery rider.

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IV.
MPUC argues that we should invoke the doctrine of primary jurisdiction and refer
this case to FERC to d etermine the jurisdictional divide between FERC and MPUC. The
supreme court has articulated at least two factors in determining whether to invoke the
doctrine: “(1) whether the legislature explicitly granted the agency exclusive jurisdiction;
and (2) whet her the issues raised are ‘inherently judicial.’” Hoffman v. N. States Power
Co., 764 N.W.2d 34, 49 (Minn. 2009). In deciding whether an issue is inherently judicial,
courts look to whether the case “rais[es] issues of fact not within the conventional
experience of judges or whether the case require[s] the exercise of administrative
discretion.” Id. (alterations in original) (quotation omitted). Because MPUC has authority
to regulate intrastate retail rates, and because the parties are disputing a legal conclusion,
we decline to invoke the doctrine of primary jurisdiction.
Reversed.