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In a defeat for struggling northern Minnesota industries, state regulators on Thursday rejected a proposal to cut electric bills for iron mines and pulp mills that would have significantly increased rates for residential customers of a Duluth-based power company.

Minnesota Power proposed to give a 5 percent rate cut to mines and slightly less to pulp mills to help them compete in world markets. But the state Public Utilities Commission, which regulates investor-owned utilities, concluded the company didn't present enough evidence of the plan's benefits.

That leaves open the door for Minnesota Power to submit a revised plan or additional information to back up its original one. The Minnesota Legislature last year authorized electric rate relief for "energy-intensive, trade-exposed" industries, but left the details to the five-member commission.

Consumer advocates and two state agencies that represent ratepayers opposed the plan, which would boost residential electric rates up to 14.5 percent. A typical homeowner's monthly bill would go up about $11.45.

If rates went up that much, consumer advocates said, struggling customers probably couldn't pay bills, and would face debt collectors and electric power cutoffs.

"They are squeezed and they are squeezed in that area more than any other area of the state," said Pam Marshall, executive director of the Energy CENTS Coalition, an advocacy group for low-income ratepayers.

But industry representatives said the hard-hit companies need lower electric rates to compete.

They argued that the plan would correct a long-standing unfairness to large power users whose rates exceed their cost of service, subsidizing residential rates.

"These rates are artificially high and uncompetitive," said Larry W. Sutherland, general manager of United States Steel's Minnesota Ore Operations and chairman of the Iron Mining Association of Minnesota.

Most iron ore mines in northern Minnesota have cut production because of a worldwide crash in steel prices. Craig Pagel, president of the mining industry group, said 2,000 mine workers currently are laid off, with an almost equal number of people furloughed at mine-related vendors.

The rate relief would only have kicked in when big mines and mills operated about two-thirds of their power load. In a sign of the region's distress, five of the mines are not operating at a sufficient level to qualify for the proposed discounts, the utility said.

Minnesota Power, a unit of Allete Inc., serves 143,000 customers, but sells half of its electricity to big power users. That's why a 5 percent discount to a small number of large companies triggers an even bigger boost in residential rates. The utility wouldn't profit from the change.

Margaret Hodnik, Minnesota Power vice president for regulatory and legislative affairs, said the company will need to reflect on the concerns raised by opponents and regulators during Thursday's seven-hour hearing.

Some commissioners sharply questioned whether the industrial rate relief offered a net benefit to Minnesota — a litmus test in the law. It led to a testy exchange between Commissioner John Tuma and an industry attorney over what legal precedent should guide the commission.

"The very reason this commission was created back in 1870 was because of sweetheart deals by large corporations with railroads," Tuma said. "It is looking pretty similar to me right now."

It's not clear when the rate relief plan could be resubmitted or revised. The industries had hoped to have lower rates in place in March.

"It is an urgent question — you can't just let this hang out there," said David Moeller, attorney for Minnesota Power.

David Shaffer • 612-673-7090 • @ShafferStrib