ST. PAUL — An administrative law judge recommended Tuesday, July 15, that the Minnesota Public Utilities Commission should not allow two private equity funds to buy Minnesota Power’s parent company, ALLETE.
The PUC asked the judge last October to evaluate the proposed sale to the Canada Pension Plan Investment Board — or CPP Investments — and Global Infrastructure Partners — or GIP, a fund controlled by BlackRock — which is the world’s largest asset management firm.
Central to the case is the question of whether the sale is “consistent with the public interest.” In other words, do the pros outweigh the cons?
Administrative Law Judge Megan J. McKenzie said no, opining the arrangement would result in net harm to the public interest. These harms include risks to the clean energy transition, ALLETE’s long-term financial health and ratepayers.
“This transaction carries real and significant costs and risks to Minnesota ratepayers and few, if any, benefits,” McKenzie wrote in her analysis.
In a news release in response to the recommendations, ALLETE strongly disagreed with McKenzie’s conclusions.
“The ALJ report mischaracterizes the parties, their agreements and plans, and the benefits and risks of the acquisition,” the company stated.
“It inadequately reflects ALLETE's recent comprehensive settlement agreement with the Minnesota Department of Commerce, which would deliver immediate and significant customer benefits upon [closure of the sale]. The record, including the settlement agreement, supports approval of the transaction.”
The company said it will file formal comments in response in the coming days.
ALLETE and its investors say the acquisition would provide the capital needed to make the clean energy transition, as necessitated by a 2023 state law requiring utilities to produce 100% carbon-free electricity by 2040.
But a unique opposition coalition emerged, including the Attorney General’s Office’s Residential Utilities Division, environmental groups, the nonprofit Citizens Utility Board of Minnesota and a group of 10 of Minnesota Power’s commercial customers. They include paper and mining companies, like UPM Blandin, Sappi, U.S. Steel and Cleveland-Cliffs, Enbridge Energy and USG Interiors.
Until recently, that coalition also included the Department of Commerce. But on Friday, it filed a settlement agreement with ALLETE, GIP and CPP Investments and withdrew its opposition.
The PUC does not need to follow the judge’s recommendations, and it is only one part of the record. Its findings can be different from the report, as long as they’re supported by substantial evidence.
The commission said Monday that it anticipates taking up the case in October but will have a better idea of the timeline after the administrative law judge’s report is out.
Value alignment or profit pursuit?
The acquisition must be approved by the PUC, according to Minnesota law. The federal and Wisconsin public utility regulators and ALLETE’s shareholders have approved the sale, leaving just the PUC to give the OK.
Duluth-based ALLETE announced its plan to sell to CPP Investments and GIP for $6.2 billion in May 2024. It officially sought PUC approval in July 2024.
GIP is a private equity fund that was acquired by BlackRock, the world's largest asset management firm, last year. The sale to BlackRock arose after ALLETE initially asked for PUC approval.
CPP Investments is one of the world's largest national pension fund managers and private equity investors. It oversees the investment of Canada Pension Plan funds, though it operates independently of the Canadian government.
Under the proposed transaction, CPP Investments would indirectly own 40% of ALLETE, and GIP would indirectly own 60%.
Minnesota Power has said it intentionally chose the buyers, “both for their alignment to our strategy and with their alignment to our core values,” said Jennifer Cady, vice president of regulatory & legislative affairs, at a public hearing in Cohasset in April.
But Judge McKenzie’s report states CPP Investments and GIP were the only bidders for the company and were selected, “based on their willingness to pay a stock premium.”
This was one of several examples where McKenzie found the investors and ALLETE’s public statements contradicted their agreements and private discussions.
“The nonpublic evidence reveals the Partner’s intent to do what private equity is expected to do — pursue profit in excess of public markets through company control,” McKenzie wrote.
ALLETE and its potential buyers have made numerous commitments to assure the public of the benefits of the deal, including that rates will not be impacted, Minnesota Power would remain in control of day-to-day operations, and they’re committed to a clean-energy future.
But according to McKenzie’s findings, the new owners plan significant rate increases, to actively manage many aspects of ALLETE and Minnesota Power, and significant spending on fossil fuels.
“Many of the commitments simply restate existing legal requirements and therefore do not provide additional protections to counterbalance new risks arising as a result of the acquisition,” McKenzie wrote. “Some of the proposed conditions may be unenforceable. And others offer little benefit to ratepayers or the regulatory compact.”
Department of Commerce says agreement addresses judge’s concerns
The Department of Commerce and ALLETE, CPP Investments and GIP announced a settlement agreement Friday, and the agency withdrew its opposition to the sale.
The agreement has numerous terms related to clean energy investment, customer rates, governance and labor protections.
The agreement would save ratepayers an estimated $5.5 million over the next two years and includes a one-year moratorium on rate increases, which would save customers $25 million over the next year.
Minnesota Power must also invest $50 million in a clean firm technology fund, follow new service-quality requirements, be governed by an independent board with at least two Minnesota residents and maintain pay for union and nonunion employees for the next two years.
The Department of Commerce told KAXE McKenzie’s report addresses the original proposal and the enhanced and additional commitments in the settlement are solutions to the issues raised.
“There will be additional filings at the PUC in the near future that further address these issues,” the department said in an email.
The public will have an opportunity to comment on the proposed settlement soon, according to a news release from CURE and the Sierra Club, two environmental groups who oppose the sale.
““We are steadfast in our commitment to providing excellent service to our customers, supporting our communities and meeting the policy goals of the State of Minnesota, and we are pleased to have reached an agreement that will deliver enhanced benefits for our customers, our employees and the communities we serve,” said ALLETE chair, president and CEO Bethany Owen, in a Friday news release.
“This agreement demonstrates our commitment to listening and working collaboratively with our stakeholders, and we’ve appreciated the close collaboration with the Minnesota Department of Commerce to address matters raised by the Department and others through this process.”
Labor groups have been supportive of the acquisition throughout the process, including those representing electrical workers, operating engineers, carpenters and construction laborers.
Local union representatives and members, leaders of nonprofits and businesses, Minnesota Power employees and residents showed up in support of Minnesota Power at a Cohasset hearing in April, part of the administrative law judges’ process.
“We are encouraged by the thoughtful planning that has gone into this transition and by the fact that both CPP Investments and Global Infrastructure Partners clearly understand what matters here in Northern Minnesota,” said Matt Shermoen, business development manager for the Itasca Economic Development Corp., at the hearing.
“They recognize the importance of reliable, sustainable and affordable energy, not just for our way of life but for the future of our economy.”
Energy CENTS Coalition, a nonprofit promoting affordable utilities for low-income Minnesotans, has also supported the acquisition.
McKenzie acknowledged that the original commitments do offer benefits to labor and low-income interests. But she also encouraged the PUC to scrutinize CPP Investments and GIP’s labor practices when considering their voluntary labor commitments.
Alarm raised on transparency, company governance
The largest motivating factor for ALLETE’s sale is acquiring money to fund Minnesota Power’s clean energy transition.
But McKenzie determined that ALLETE’s capital needs are “likely overstated,” noting that there are other opportunities to reduce spending and the company has overestimated its capital needs since 2019.
“The proposed acquisition will likely increase incentives for ALLETE to pursue more capital-intensive investments, because the Partners will likely pressure ALLETE to grow [its] rate base to maximize returns,” she wrote.
How CPP Investments and GIP would conduct business was also a concern raised by McKenzie and opponents, who argue that private equity tends to rely heavily on debt, which could hurt the long-term financial health of the company and ratepayers.
There is also concern over how the investors would govern the company. ALLETE says it would remain independently operated and locally managed.
The investors propose a 13-person board of directors, in which GIP and CPP Investments would have a majority. The Department of Commerce settlement includes the CEO on the board, bringing the total to 14.
“The partners have also agreed that six directors of the 14-member Board of Directors will be independent with several from Minnesota and Wisconsin, ensuring regional voices have a greater influence in utility decision-making,” ALLETE stated in a release.
McKenzie found the investors also plan to retain “consent rights,” meaning they maintain control over “certain material actions,” including budgets and assumption of debt.
“The record reflects that ALLETE does not understand key governance terms discussed in the term sheet,” the judge's opinion states. “ ... This demonstrated lack of understanding suggests ALLETE does not fully appreciate how much control the Partners will have over its post-transaction affairs.”
Finally, McKenzie also expressed concern over the transparency and cooperation of ALLETE’s potential new owners, which she said would make Minnesota Power harder to regulate.
As private funds rather than publicly traded companies, there would be less public information available about the business.
McKenzie said throughout the proceeding, CPP Investments and GIP objected to information requests and provided nonresponsive and heavily redacted answers.
“Once approved, the Commission cannot unapprove the Acquisition. The Commission can refer violations of its orders to the Attorney General’s Office and seek penalties of up to $1,000 per violation,” she wrote.
“Yet, the Commission lacks authority to force the Partners to take actions such as providing capital to Minnesota Power, retaining employees, making community investments, or withholding dividends. It is also unlikely that the Commission has the vast resources that would be required to monitor compliance with all of the commitments — meaning a violation would likely only become clear after a violation and substantial harm had already occurred.”
More approvals with upcoming public input
Minnesota Power is also in the process of getting a new integrated resource plan approved by the PUC. The document sets out the utility’s plan to meet customer demand for electricity through 2039.
Plans to convert Cohasset’s Boswell Energy Center from coal to natural gas and possibly biomass are part of the proposal, as well as the addition of wind, solar and energy storage resources.
McKenzie points to the plan and Boswell’s conversion as an example of ALLETE’s planned fossil fuel spending.
“If ALLETE and Partners over-invest in gas-fired generation, this could jeopardize ALLETE’s transition to clean energy and place ratepayers at risk of funding additional projects,” she wrote.
Public hearings for the plan are set for later this month, including:
- Noon to 2 p.m. Tuesday, July 22, at the Range Recreation Civic Center in Eveleth
- 6-8 p.m. Tuesday at the Inn on Lake Superior in Duluth
- 6-8 p.m. Wednesday, July 23, virtually
- 10 a.m. to noon July 28 at the Morrison County Government Center in Little Falls
- 5-7 p.m. July 28 at the Cohasset Community Center
