NorthWestern Energy to pay $3.5 M back to customers

The Montana Public Service Commission has reduced NorthWestern Energy customers’ rates by $3.5 million, which comes to a 14-cent monthly reduction over this next year.

Representatives of each party say no one has done anything wrong.

The PSC “resolved an error in the way NorthWestern Energy allocates property tax expense among its customers,” a Jan. 30 PSC press release said.

NorthWestern spokesperson Butch Larcombe said Monday the company hasn’t erred in any way.

“We don’t think there has been an error. We have been using a method established by the PSC in 2009. The PSC just recently decided to change the methodology. By no means has there been any effort by NorthWestern to overcharge customers for property tax expenses.”

PSC spokesperson Chris Puyear said the same. The methodology established by the PSC is no longer valid, he said.

“The bottom line is, the commission did approve this methodology. And so it’s not so much an error in the sense that NorthWestern has done something wrong, or failed to follow the commission’s direction. It’s just that this methodology does not do as good of a job of tracking expenses to those customers that are actually causing the expenses,” Puyear said.

The error, Puyear has said, was with methodology the PSC developed regarding how NorthWestern can pass property tax expenses on to their customers.

NorthWestern uses a state law called a tax tracker to pass through an increase in their property expenses to customers. Montana law allows them to pass up to 60 percent of their property taxes to retail customers, Puyear said.

In 2014, NorthWestern bought 11 dams in Montana for $800 million.

On the other hand, sale to wholesale, or transmission, customers such as oil refineries or lumber companies, are regulated by the Federal Regulatory Energy Commission.

The problem, Puyear said, is that Montana taxes for NorthWestern have increased 60 percent between 2012 and 2016, with a lot of those increased expenses passed on to retail customers.

“So taxes on utility properties are going up extremely quickly, much more quickly than other costs on the transmission system. That created a gap where retail customers have been soaking up excess tax expense, just like a sponge off the wholesale customers. The percentage of tax expense to wholesale customers has not increased,” Puyear said.

The error, or faulty methodology, was noticed in early 2017, when NorthWestern failed to answer PSC questions about how it passed on expenses to retail customers and those large transmission customers regulated by the Federal Energy Regulatory Commission, the PSC press release said.

“The way Montana handles property taxes for utility customers is extraordinarily unusual in that it allows these costs to pass through with virtually no review or oversight by the PSC,” Puyear said.

Typically, when a rate increase happens or is being considered, the PSC takes nine months to review that application, unlike in this case.

“I think that’s a huge part of why this error has not been caught by the PSC or the utility,” Puyear added. “Both parties are under extraordinary pressure to get these filings processed. The 45-day deadline is extremely strenuous and it’s allowed this error to be perpetuated from year to year.”

Taxes are at the heart of the issue.

The methodology developed by the PSC became faulty because property taxes for NorthWestern rose at a very high rate. When the methodology was implemented, Puyear said, it made sense. Now it doesn’t.

“I’m not sure that the PSC that was there in 2008 could have ever foresaw this massive increase in property taxes,” he added.

Larcombe said the utility company is allowed by law to recover the costs of doing business.

“As is the case with any other enterprise, property taxes are a cost of doing business for NorthWestern. All businesses include such tax costs in what they charge customers. We disclose the amount of property taxes paid by customers on monthly bills,” Larcombe said.

NorthWestern has worked to reduce the amount of property taxes paid by the company and its customers through formal and informal protests of property valuations, Larcombe said, adding that NorthWestern has saved customers about $108 million since 2005.

“While customers pay the majority of our property tax bill, the company and its shareholders are also deeply affected. From 2011 through 2018, NorthWestern’s share of the Montana property tax bill will be about $45.5 million,” he said.

“We and our customers will pay about $150 million in Montana property taxes for 2017 through 2018,” Larcombe continued. “This is approximately 36 percent of all centrally assessed property taxes in Montana. It is our largest single expense each year and is more than we pay our entire Montana workforce in wages and benefits.”

Larcombe said the company is concerned about the amount of property taxes the company and their customers pay each year. NorthWestern wants to work with the Montana Legislature, the state Department of Revenue and others to develop a tax system that leads to more transparent, predictable and equitable valuations, “which would benefit us all.”

Puyear said there seems to be little rhyme or reason as to how the Department of Revenue assesses property taxes.

“The way the Department of Revenue values NorthWestern property appears from the outside to be very volatile and, at times, even arbitrary. They essentially assess property and they attribute kind of an enterprise value to NorthWestern and then divide that up among the various properties,” Puyear said.

Over the years, the Department of Revenue has used the same factors to value property, “but they shift the factors around a little bit, and they haven’t provided a good explanation as to why things have changed from year to year,” Puyear added.

The Department of Revenue has frequently revised their evaluation of NorthWestern property after being challenged by the utility by at least tens of millions of dollars, which begs the question, Puyear said.

“If you’re willing to back down and lower the tax bill by that much, what was that tax bill based on in the first place?” he asked.

The Department of Revenue’s tactics have “been a real point of concern for the commission and for NorthWestern,” Puyear said.

Public Information Officer for the Department of Revenue Mary Ann Dunwell said Tuesday that the department has nothing to do with property tax rates. That’s up to counties and cities.

The department’s job includes assessing the value of property, not establishing tax rates. A swath of property with a dam on it is clearly going to have a lot of value, Dunwell said.