BISMARCK-Citing "fundamental disagreements" between regulators in North Dakota and Minnesota, Xcel Energy has proposed creating a separate company to serve its North Dakota electric customers.

In documents filed with the North Dakota Public Service Commission in July, the utility recommended a "legal separation" to create an operating company that would still be part of Xcel Energy but would be a separately regulated utility in North Dakota. A consultant for the three-member PSC, however, predicted this week the move would result in higher rates for customers and recommended the commission deny the request.

The Northern States Power System serves more than 1.6 million electric customers in Minnesota, the Dakotas, Wisconsin and Michigan. The new company, known as NSP-Dakota, would be an electric distribution company, and gas operations would continue as they are today.

"We're committed to working with stakeholders in both states to resolve past disputes and to provide a framework into the future that continues to provide safe, reliable power and good economic value to all of our customers," Minneapolis-based Xcel Energy said in a statement. "This proceeding allows stakeholders to provide input on our proposals and we appreciate the engagement we have received to date."

In testimony filed with the PSC in July, Aakash Chandarana, Xcel's regional vice president for rates and regulatory affairs, said the "regulatory paradigm in North Dakota will apparently no longer permit the company to recover certain costs that are incurred for the NSP System that are incompatible with North Dakota's energy priorities."

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An application attached to Chandarana's testimony also pointed to legislative mandates like Minnesota's renewable energy standard as one source of disagreement between the two states. He said Xcel's move to create a "cleaner and nimbler fleet," including the closure of two coal-fired units in Minnesota, is in the best interest of its customers and is consistent with its business plans.

"We also recognize that this path is consistent with Minnesota's legal and regulatory priorities," Chandarana said. "We appreciate, however, that this path may not be embraced in North Dakota."

North Dakota regulators have called into question several Xcel investments or initiatives, the company said, including the Aurora solar energy project in Minnesota. The PSC previously said North Dakota customers shouldn't have to help pay for the project to help Xcel meet a mandate from Minnesota policymakers.

Xcel is the largest utility in North Dakota, according to Chandarana's testimony, but North Dakota customers only make up about 5 percent of the NSP System. Minnesota customers, meanwhile, make up about 75 percent of the system.

Xcel believes it could form a new operating company and receive regulatory approvals by 2020.

James Heidell, a Denver-based consultant for the PSC, argued against allowing the separation in testimony filed Monday. He said there "are no long-term benefits for the service and convenience of the public in North Dakota and there is substantial likelihood of increased costs."

The one-time cost of implementing a legal separation was pegged at between $8 million and $15 million, according to Heidell's testimony.

Brian Kroshus, the North Dakota public service commissioner whose portfolio includes the Xcel proposal, said there's a hearing planned for January. He declined to say whether he or the commission would oppose the proposal.

"We have to weigh out the pros and cons for North Dakota ratepayers," Kroshus said.