The Minnesota Public Utilities Commission on Thursday approved a proposal to lower rates for taconite plants and paper mills served by Minnesota Power in a move that is likely to raise rates for homeowners and small businesses across the utility’s service area.

The commission voted 3-2 for the rate cut which was ordered by the 2015 Minnesota Legislature to help reduce operating costs for Northeastern Minnesota's largest industries, both hard-hit by foreign imports.

The rate shift will give 11 of the utility's largest customers - all taconite plants and paper mills - a 5-percent rate reduction.

The PUC is expected to approve a rate recovery plan in coming weeks that would allow Minnesota Power to recover the money by raising homeowner rates about 10 percent and rates for other businesses between 1.8 and 5 percent, although those numbers aren’t set.

A 10-percent hike amounts to about $8 per month more for most homeowners served by Minnesota Power, raising the average monthly bill from $79.44 to $87.44, just under $100 per year.

Many low-income customers would be exempt from the increase.

The new rates will be in effect for at least four years, but the PUC said it reserved the right to annually review the situation to see if the shift had spurred both the benefit intended or caused undue burdens for homeowners.

The PUC turned down a similar proposal in February, saying Minnesota Power didn't fully demonstrate how the move would be in the best interests of the state or the utility. That plan would have raised homeowner rates 14.5 percent to pay for a nearly 5-percent cut in electric costs for paper mills and taconite plants.

This time three commissioners agreed that the rate shift would indeed help Minnesota Power.

The new reduction will save those big employers millions of dollars annually on their electric bills. Electricity makes up nearly 30 percent of the cost of producing taconite iron ore pellets, industry supporters noted, and about 25 percent of papermaking costs.

The approved rate shift will collectively save the 11 big customers between $13 and $19 million annually, according to testimony during Thursday’s nearly daylong hearing.

Supporters say the rate shift helps eliminate a de facto subsidy that the big electric customers have been paying to keep homeowners' rates down. And they say that homeowners would end up paying much more of the cost to produce and deliver electricity if the big industrial users close shop because they can't compete in the global economy.

Jack Croswell, general manager of Hibbing Taconite, operated by Cliffs Natural Resources, said the 5-percent cut would help keep the company competitive.

“It will have an impact on our success in the future,” Croswell testified to the commission Thursday.

Larry Sutherland, manager of Minnesota operations for U.S. Steel, said lowering electric rates would be the “main factor’’ for the company returning to full production and employment at both its Minntac operation in Mountain Iron and Keetac facility in Keewatin. Keetac has been idled for more than 18 months.

Lowering electric rates would be the “biggest component that would move the bar for the Keetac facility,” Sutherland told commissioners. The company has said Keetac’s future depended on increased production of oil pipeline at a U.S. Steel mill that remains idled.

But Commissioner John Tuma argued that the rate shift was a subsidy of large companies by homeowners and small businesses.

“What you’re asking for is a subsidy,” Tum a scolded taconite industry officials, later adding that the companies had provided no guarantee of added employment or production if they get the rate cut at homeowner’s expense. “We’re buying a pig in a poke.”

Buddy Robinson, staff director of the Minnesota Citizens Federation Northeast, said the proposal was based on “lots of wishful thinking” but no hard evidence that the lower electric rates would lead to any new employment or production at the plants. He said the crisis of the U.S. iron and steel industry that spurred the 2015 legislation appears to already have waned.

If most of the “companies that would get the discount are already at full production, how can the discount lead to increased employment?” Robinson asked.

Bob Tammen of Soudan, a frequent critic of the mining industry, said the rate shift produces no net benefit for Minnesota.

“I don’t believe there’s going to be a happy ending if we take resources from local homeowners and give them to global corporations,” he said.

While the rate shift would essentially be revenue neutral for investor-owned Minnesota Power, the company could stand to make more money if the big plants used more electricity in coming years - potentially up to $40 million annually, company officials said. Minnesota Power has a clear stake in supporting the big industrial customers. Mining companies alone account for more than 47 percent of Minnesota Power's revenue. Add in paper mills, and heavy industry accounts for nearly 60 percent of the utility's customer load, far different from most utilities, such as Minneapolis-based Xcel Energy, which are tilted toward residential customers.

Another rate hike coming?

Thereate shift approved Thursday comes just months before Minnesota Power plans to return to the PUC and ask for a general rate increase for all customers.

In its most recent quarterly report, officials of Allete, the Duluth-based parent company of Minnesota Power, told investors they would ask for the rate increase in the fourth quarter of 2016.

The general rate increase would be the first in nearly seven years for Minnesota Power. The company said it will ask for the rate increase to be imposed on an interim basis as early as 2017, with final approval coming later. The company said the size of the proposed rate increase will be disclosed when it's filed with state regulators.

Company officials said the general rate increase request will focus on "seeking recovery of investments that have enhanced and added resiliency to the region's electric system, including upgrading thermal-generating units, repairing and strengthening our hydroelectric-generating resources, investments in new and existing transmission assets to improve reliability."

Even higher bills in Duluth?

Duluth residents could see another 2-percent hike in their monthly electric bills under a proposal by the city of Duluth.

City officials want to increase the fee the charged Minnesota Power for the right to provide service across the city from 1 percent each month to 3 percent. Minnesota Power simply passes that fee onto its customers each month and you see it listed on your bill.

That 2-percent fee increase might amount to only $1 or so for the average homeowner. But an extra 2 percent on monthly electric bills would mean thousands of dollars to industrial electric customers.

For the Western Lake Superior Sanitary District, for example, which spends about $3 million a year on electricity, the city’s franchise-fee hike would cost them an extra $50,000 per year. That would have to be passed on to everyone who sends sewage to the WLSSD treatment plant.

For Verso Paper Co. in West Duluth, which spends millions annually on electricity, the 2-percent fee hike would cost nearly $600,000 annually.