Opinion: Electric rates 101


The Boulder City Council recently voted to approve the “metrics.” These will measure whether the city has met the minimum standards specified in the charter for authorization to create a municipal electric utility, or “muni.” Even if these requirements are met, the council will still need to decide if the muni’s “value added” is sufficient; that decision is further down the road.
One metric requirement has to do with the rates that the muni can charge. The charter says, “The City Council shall establish a light and power utility only if it can demonstrate, with verification by a third-party independent expert, that the utility can…charge rates that do not exceed those rates charged by Xcel Energy at the time of acquisition and that such rates will produce revenues sufficient to pay for operating expenses and debt payments, plus an amount equal to twenty-five percent (25 percent) of the debt payments.”
Determining rates is generally done in two steps — first, figuring out how much money it will cost in total to run the utility, and second, deciding how to allocate that total among the various customers.
In brief, the total cost is the sum of the costs of generation, transmission, distribution, and customer service, with each area involving both capital and operating expenses. Boulder’s focus is on increasing energy efficiency and renewable energy over time. So renewables will become an increasingly significant capital cost in the generation portfolio, but will decrease operating costs as fossil fuel consumption drops. Efficiency investments will likely peak and then slowly decrease as the most cost-effective ones are completed. Although the costs of buying the distribution system, etc. will create a debt burden on the new muni, in balance we would be relieved of Boulder’s portion of the obligations to Xcel for hundreds of millions on dollars of their debt and equity currently invested. How these two items balance out will probably the crux of the “muni” evaluation process.
An operating line item is taxes/fees. Under the charter amendments adopted by the citizens last fall, for example, the city is obligated to the school district to make up taxes lost because the muni, unlike an investor owned for-profit utility, is not required to pay property taxes. On the other side, the muni is not allowed to pay to the city’s general fund more than what an investor owned utility would have paid in taxes plus franchise fees. This prevents the muni from being used as a “cash cow,” as has occurred in other cities.
A fundamental goal in rate setting is fair cost allocation among classes (e.g. residential, commercial, industrial.) The charter follows state law on this matter, saying in part, “The utility shall not establish or maintain any unreasonable differences or undue preferences as to rates, charges, service, facilities, or any respect as between any class of services.”
Even within classes, there are tensions. For example, all electric utilities make large, long-term investment decisions, e.g. signing a power purchase agreement, or building a power line. Any individual customer uses only a small portion of these investments, pays on a month-to-month basis, and may disappear or expand or shift their usage based on their changing economic situation. And the accumulation of many of these changes can affect the viability of the larger decisions.
Other examples: Two businesses may have their peak loads at different times, requiring less power plant capacity. But what if one suddenly shifts to being coincident with the other? Who should bear the cost of the additional power plant needed to meet the increased peak? This type of issue has been studied to death, and the general conclusion is that whatever the result, someone thinks it is unfair. Or a large solar photovoltaic system will still impose costs on the utility’s distribution system even if the customers’ net consumption is zero, because they will still use power off the grid at night. Exactly how best to charge for this has been a bone of contention.
A huge advantage of a muni is that all these tough cost and allocation issues will be completely transparent. So they can be inspected and critiqued by citizens and businesses. And, there is an accessible forum — the City Council meeting — where complaints and suggestions actually influence the outcome, unlike the difficult and sometimes opaque process at the Public Utilities Commission.


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