CUB testifies on House bill meant to bolster energy affordability

On February 11, the Minnesota House of Representatives held a committee hearing on House File 9, authored by Energy Committee Chair Chris Swedzinski (R). CUB was among more than two dozen who offered testimony on the bill.  

Chair Swedzinski called this bill a “mini omnibus,” with multiple provisions that would provide exemptions to recently passed decarbonization standards and preserve fossil fuel generators.  

The bill would: 

• Delay a utility’s requirement to meet renewable and carbon-free electricity standards if rates for each customer class are not at least 5% below the national average;
• Prohibit unused fossil fuel plants from being demolished if the utility that owns the facility does not have rates that are at least 5% below the national average for each customer class;
• Repeal the state’s moratorium on new nuclear power;
• Allow new large hydropower facilities to count towards a utility’s renewable energy requirements;
• Prioritize carbon capture and sequestration above other means of generating carbon-free electricity; and
• Make electricity or gas tax exempt year-round for households that use those fuels as their primary heating source (extending an existing tax exemption that covers the heating season, only).  

What would this mean for ratepayers? 

Energy affordability 

CUB appreciates the author’s focus on energy affordability, which remains a challenge in Minnesota. Utility data indicates that people who struggle with energy costs have fallen farther behind on their utility bills since 2020. We believe this is due to a combination of factors – including inflation, the cost of housing, and a period of very high natural gas prices. The total amount of past-due balances has declined somewhat since its peak -- helped by gas prices coming back to a more normal range -- but past-due bills remain far higher than before the pandemic, and disconnections for non-payment hit a new high last year. 

However, this bill is based on an incorrect assumption that affordability challenges are due to utility decarbonization efforts. CUB regularly scrutinizes investor-owned utility rate increase requests. Requested rate hikes are being driven by a desire by utility companies to increase shareholder returns, inflation across the economy, the need to replace aging infrastructure, and a number of other factors completely separate from decarbonization efforts. Climate change and air pollution have costs to Minnesotans, too, and should be part of the consideration.  

Capping utility rates at 5% below the national average 

While CUB welcomes the focus on energy costs, comparing rates for each customer class to the national average is a poor measure of energy affordability. Enforcing that goal could motivate utilities to increase rates in order to avoid regulation, shift costs caused by business and industry onto residential ratepayers, and encourage utilities to reduce essential spending on reliability and customer service. 

Rate setting involves balancing multiple priorities. For example, a utility can lower rates by investing less in customer service, to the detriment of its ratepayers. The utility could defer investments, but that may make the system less reliable. It’s not useful to compare Minnesota’s rates to states with power grids that routinely fail during extreme weather.   

Directing the Public Utilities Commission (PUC) to set rates based on a comparison to other states, rather than careful consideration of the facts relevant to each utility, may increase rates for Minnesotans. Minnesota’s average residential electricity rates have been more than 5% below the national average in recent years, while commercial and industrial rates have not. Rate setting is a careful process informed by the actual cost to serve a utility’s unique customers, and the cost to serve customers in one utility or one state may be different from another. The PUC also carefully considers affordability and customers’ ability to pay for any rate increases that are proposed. Arbitrarily requiring the PUC to reduce rates to large businesses in order to beat the national average would require an increase to residential rates. 

Finally, comparing energy rates ignores the cost savings that Minnesota has achieved through energy efficiency. Minnesota utilities’ energy conservation programs have saved hundreds of millions of dollars in energy costs while dramatically reducing greenhouse gas emissions and air pollution from power generation. While the cost of these programs is reflected as a small part of energy rates (the cost per unit of energy used), the efficiency gains allow people to use less energy overall, resulting in cost savings.  

Rather than comparing Minnesota energy rates to other states, a better measure of affordability is energy burden, the percent of household income paid in energy bills. An energy burden that exceeds 4 to 6% is considered excessive. Regulated utilities regularly report on the percentage of customers who are unable to pay their bills, the levels of unpaid balances, and shutoff trends. These measures, too, provide a way to gauge affordability that accounts for income, benefits to households from energy efficiency, and other meaningful variables. 

Exempting heating fuels from sales tax year-round 

Electricity or natural gas that is used as a household’s primary heating fuel is already exempt from tax between November and April. This bill would extend the sales tax exemption to apply year-round.  

This would provide a welcome discount on utility bills, saving households at least 6.875% and nearly 10% in some areas. However, it would come at a cost to the state budget – according to an estimate shared at the hearing, about $100 million per year. It would also reduce revenues to cities and regional authorities that impose local sales taxes.  

Representative Larry Kraft instead suggested that expanding Energy Assistance is a more targeted and much less expensive way to provide relief to energy-burdened households. Representative Kraft is carrying a bill to do so, which CUB supports, alongside a coalition of more than two dozen organizations.  

Additionally, if the Legislature expands the sales tax exemption – or even if it doesn’t – it would be worth considering how to better make sure that people receive the tax exemption they are due. Many people who qualify for the electricity tax exemption currently do not receive it. Gas utilities generally assume that a home with natural gas service uses gas as its primary heating fuel, so the tax exemption is applied automatically. However, people who heat their homes with electricity generally have to notify their utility, so many people with heat pumps or electric baseboard heat pay tax that they should not be charged. 

Prohibiting the demolition of fossil fuel plants 

Minnesota utilities have and continue to retire aging coal plants, replacing their generation mainly with lower-cost renewable power and gas generation that can fill in during peak hours and periods without wind and sun. This transition is happening primarily because coal power costs more than cleaner alternatives.  

The PUC approves power plant retirements in comprehensive proceedings (integrated resource plans) that consider anticipated customer demand for electricity as well as reliability, affordability, economic and environmental impacts, and other factors.  

If expensive power plants can be retired without risking grid reliability, they should be – and utilities should be permitted to demolish unused power plants and repurpose the properties. Utilities who were required to keep unused plants around would pass the maintenance and other costs onto ratepayers, unnecessarily increasing rates. And keeping unused plants in place prevents the sites from being redeveloped, blocking job growth, economic activity, and tax revenue for local governments and school districts. 

What’s next 

HF9 passed the House Energy Committee on a party-line vote and was referred to the Committee on Taxes, where it awaits a hearing. After that, it could go to the House floor for a vote. However, while the bill can pass committees that currently have Republican majorities, bills need at least one Democratic representative to vote in support in order to pass off the House floor. It is unclear if any Democrats support the bill at this point.  

A March 19 special election is expected to return a Democrat to the one remaining empty House seat. If that happens, both the full House membership and committees will be split evenly between the two parties. Any legislation that passes will likely be worked out in large negotiations this spring – and all or parts of this bill could be in the mix.