MADISON - St. Croix Valley Natural Gas Company, Inc. is seeking a 4.5% overall rate increase to expand system capacity and improve reliability this year, according to an application filed last week with the Public Service Commission.

Last winter's severe temperatures boosted company profits but also exposed some areas where service needed to be improved, said Donald Piepgras, company president.

"We've known about pressure issues for years...but it hasn't been a real issue because we haven't had the temperatures like last winter since 1996. That was a real test, a wakeup call to

our system," he said.

During the extreme cold snap, a 20-year-old gas main in River Falls lost complete pressure on two consecutive mornings for about two hours each, which affected about 10 customers, according to Piepgras.

The company is looping or connecting gas mains in the Hammond and town of Troy areas it serves to prevent pressure problems from reoccurring.

Also, after 20 years of growth, the gas distribution system no longer has sufficient capacity to meet peak usage periods, Piepgras acknowledged.

The PSC ordered St. Croix to increase system capacity in October 2017 for the next two heating seasons, which it did by increasing its supply from Viking Gas Transmission Co. To be able to use the extra gas, St. Croix had to add to its facilities in the town of Hammond at an expense of $169,914. How the company will be able to recover the expense will be decided in the pending rate case, Piepgras said.

The capital projects and other equipment purchases will cause the company to take on debt for the first time in two years, as it spends $783,350 this year and $398,000 next year, according to Piepgras.

Ongoing expenses also will be boosted by a 3.5% wage increase for employees and a 2.2% inflation factor is projected for non-payroll expenses.

St. Croix's wholesale gas supplier, Northern Natural Gas, is expected to file a rate increase this year with the Federal Energy Regulation Commission. That increase, the first Northern has filed in about 15 years, can be passed on to customers without further PSC action.

The company wants to recover more of its fixed costs from the monthly customer charge, a recent trend in utility regulation. The residential customer monthly charge was increased about $5 in the 2016 rate case to $12.76. St. Croix hasn't requested a specific increase in the current case, but wants to discuss it with the PSC.

Last year's colder temperatures pushed up revenue and resulted in an 11.87% rate of return on

the utility's infrastructure investment, which was above the 11% rate of return authorized in the

2016 rate case. Rates increased overall by 1.08% in the 2016 rate order.

Piepgras doesn't expect this coming winter to be as harsh, and next year's projected revenue and expenses are expected to cut the rate of return to 3.44%.

The company is requesting a 12% rate of return which would increase annual revenue by $369,200.

"We think it's justified," Piepgras said.

While the PSC has been authorized a 10.5% rate of return for larger investor-owned utilities, smaller utilities face relatively bigger risks than larger utilities and their stockholders personally pledge their assets in order to get financing.

"I pledge my personal assets to the bank as guarantee against the loan. That's common for smaller businesses," he said.

Corporate officers in utilities the size of Xcel Energy don't have to pledge their personal assets; those utilities issue bonds instead of seek bank financing, Piepgras said.

PSC staff will review St. Croix's rate request, recommend a revenue amount it deems will keep the utility financially viable, which the company and consumers can comment on at a public hearing date to be set.

St. Croix will notify customers of the hearing date and how the requested rates are expected to impact their bills.