Electric bills for Black Hills Power residential customers will rise by an average of $18 a month beginning next spring, if regulators grant a rate hike which BHP officials say is needed to pay for a new power plant, and rising demand and business costs.

Black Hills Power is seeking a 26.6 percent increase in annual utilities revenues through the rate hike. The increase will help pay for a new $247-million coal-fired electric plant near Gillette, Wyo., that could serve BHP and its customers for 40 or 50 years, according to Chuck Loomis, BHP vice president for operations.

"I think the key is that the new plant is needed in response to a growing demand for electricity," Loomis said. "It has been a number of years since we added base-load generation. With the new plant and other infrastructure investments that we've made. We're now asking that they be reflected in our rates."

It would be a substantial rise in rates, however. And the BHP proposal will be scrutinized by the South Dakota Public Utilities Commission, chairman Dusty Johnson said.

"I'll say this, 26.6 percent does seem like a large request," Johnson said. "Any time we raise rates, there's a lot of scrutiny. And this is a larger request than we've had in recent years before the commission. They're going to have to get lots of questions answered in my mind before I'd be comfortable with that kind of an increase."

Johnson did say that higher rates come naturally with expensive investments, such as BHP's new Wygen III power plant. And customers shouldn't confuse the requested increase of 26.6 percent in annual utilities revenues for 26.6 percent annual company profit. It's not, Johnson said.

"People sometimes assume these increases result in huge profits for utility companies," he said. "Nationally, most utilities commissions allow annual rate of returns in the 8-percent to 10-percent range. And that's not generally considered excessive profits."

The requested rate hike would increase the electric bill for a typical BHP residential consumer in South Dakota from about $60 a month to about $78 a month, Loomis said. It's harder to figure the cost to commercial customers, whose consumption rates vary greatly, he said.

Kyle White, a vice president for BHP's parent corporation Black Hills Corp., said the power company recognizes the difficult financial times and is sympathetic to the reaction of customers asked to pay more for their power. He said BHP has limited pay raises and travel, and has cut expenses on materials and equipment as much as possible to save money and delay the rate-increase request.

But rising costs and energy demands in an increasingly electric-dependent society have made both the new plant and the rate hike inevitable, he said.

"We've worked hard to avoid both the frequency and the amount of rate filings," White said. "But there's a bit of catch-up that's happened."

When adjusted for inflation, the proposed rate increase is the equivalent of rates paid by BHP customers in 1995, he said. The proposed rate increase must be approved by utility regulators in Wyoming and South Dakota, since the company has customers in both states.

The request comes shortly after a PUC-approved rate increase of 7.8 percent for Black Hills Power that was based on 2005 costs, but took effect in January 2007.

"What makes this a little different is this is the first time in recent years we've seen two rate increases happen this close together," Johnson said. "It is worth noting, however, that there was a decade of rate stability before the last rate increase by Black Hills Power."

Prior to the 7.8 percent rate hike for BHP, the company's last rate increase was in 1995. It's common for the PUC to approve smaller rate hikes than utilities request, as it did for BHP in 2005. The review process is intense, detailed and expensive for the company, but it helps regulators make decisions that are fair to the utilities company and its customers, Johnson said.

"For a company, going through a rate case is a little bit like having a proctology exam," he said. "Every corner of your operation is subject to scrutiny."

Contact Kevin Woster at 394-8413 or kevin.woster@rapidcityjournal.com