Opinion: Rates, reliability and reality


Investor owned utilities, like Xcel, that own their own generation, transmission and distribution, make money by investing their equity capital and borrowed debt in hardware (power plants, transmission lines, etc.) and earning a regulated rate of return on these investments. This rate of return is determined by the Public Utilities Commission and is ultimately set by looking at other utilities in similar circumstances. This somewhat circular process, together with the ability of utilities to spend large sums on legal and accounting staff, has led to a double whammy of high returns on equity (over 10 percent/year) with very low risk, witness the PUC allowing Xcel to recover $29 million back on its SmartGridCity debacle. So these monopolies are completely unlike normal companies, which must perform competitively to make any money at all. That’s the regulatory “bargain” we all have had to live with.
Because the return on equity is so certain, it becomes in effect a relatively fixed obligation for their ratepayers. So, for example, for a power plant with a 50-year life, each year the ratepayers will have to pay the PUC-determined rate of return on the outstanding equity, plus the interest on the outstanding debt, plus pay off 1/50th of the equity and 1/50th of the debt.
Xcel, like other utilities, has a huge amount of equity and debt invested in its power plants, transmission lines, distribution systems, etc. This runs into the many billions of dollars. Xcel also has plans to invest billions more in the coming years. So if Boulder continues with Xcel, we will be stuck with paying off all these investments. Of course, even a Boulder municipal utility would have debt, but according to my calculations, unless Xcel is able to extract a huge amount for “stranded assets” , Boulder would almost certainly have less debt as a muni than the combined debt plus equity obligation to Xcel. Also, regarding “stranded assets” , any normal business would renegotiate a contract well before expiration if it was worried about losing a customer, unlike Xcel, which waited until the last moment with the franchise, and then refused to budge on any of Boulder’s significant requests.
Of course, a utility has many more costs than just its capital equipment. But with regulated monopolies, almost all these costs (maintenance, fuel, etc.) are passed through to the ratepayers, so these IOUs do not have a strong structural incentive to save money in these areas.
A municipal utility, on the other hand, is a non-profit enterprise. Moreover, Boulder’s charter limits the amount of revenue that can go to the City’s general fund to approximately what Xcel was paying in franchise fees and taxes. And as a nonprofit, a muni has no equity to pay off at high rates of return. So a muni has no incentive to excessively invest or charge high rates. This structure has worked — munis, on the average, charge lower rates than IOUs.
To ensure fairness between industrial, commercial and residential customers, the equity rules in the city charter were taken directly from the state statutes. But more critically, rate issues will be hashed out in public in the city council chambers. This is unlike the PUC where to be effective, you have to hire a lawyer, submit lengthy briefs, and still have very limited ability to hold the unelected commissioners accountable.
Regarding reliability, the fundamental fact is that Boulder will be hooked up to the regional grid. So our “backup” power supply will be equally reliable whether with Xcel or a Boulder muni. Thus, any differences are a function of the local distribution system’s design and operation. Unless Xcel can extract an exorbitant amount for “stranded costs” , a Boulder muni will have both more incentive and more money to make reliability improvements. (By the way, Xcel’s “going concern” claims appear bogus; the relevant state law applies to rural electric coop takeovers, not to muni’s.) Because we can coordinate with neighboring muni’s in Longmont, Loveland, Fort Collins, Lyons, and Estes Park, handling storm events shouldn’t be a problem. Integrating large amounts of distributed generation (solar, biomass, etc.) is being done successfully elsewhere, so Boulder will not have to innovate to succeed in this area.
But in the long term, with coal costs rising and cap-and-trade or carbon taxes on the horizon (even China is considering one), the most cost-effective utility will be the greenest one.

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