Opinion: How the regulated electric utility business really works

Some Camera readers have asked me questions about how regulated monopoly investor-owned utilities like Xcel work in practice. Here is some background information.

Xcel Energy is a holding company that owns regulated monopoly utilities in eight states, including Public Service Company of Colorado, which is regulated by our Public Utilities Commission. Xcel makes money by investing their own cash equity (plus money derived from bond sales) in building power plants, power lines, etc. These investments are then added to the “rate base” on which Xcel is granted a rate of return by the PUC. This return is calculated based on the bonds’ interest rates and a rate of return on the equity, which, per the relevant case law, is supposed to be, “commensurate with returns on investments in other enterprises having corresponding risks.” The bonds are paid off as they come due. The invested equity is paid off in equal payments over the lifetimes of the power plants and other infrastructure.

In reality, Xcel faces minimal risks. For example, in 2008, Xcel decided to spend millions on SmartGridCity; it was technology that was supposed to give Boulder customers access to real time usage data. Xcel promised that SGC would cost ratepayers nothing (much of the hardware was donated), but it didn’t figure in the cost of digging through Boulder’s boulders. So Xcel went to the PUC and extracted $29 million. Then Xcel shut SGC down in 2013, apparently because it was so poorly designed that almost no one was using it. But the PUC never asked for our money back.

Or consider the misnamed 2010 Clean-Air-Clean-Jobs Act. Xcel got to invest $400 million in coal plant fix-ups so they could run for decades longer and persuaded the Legislature to declare that these investments were “prudent.” That effectively prevented the PUC from ever denying repayment, even though investing in coal plants (like these and Comanche 3 five years earlier) was grossly irresponsible given the clear and present danger from climate change. And — no surprise — the PUC has failed to adjust Xcel’s rate of return relative to the lowered risk.

Given these circumstances, the PUC should only be granting Xcel close to risk-free return levels on its equity and should minimize the amount of higher-cost equity relative to lower-cost debt. But the PUC allows exactly the opposite. As of last year, Xcel’s investments were 56% equity at 9.83% and 44% debt at 4.67%. For comparison, Boulder utilities’ capital costs around 3-plus%.

An additional issue shows up with regard to Xcel’s poles and wires that Boulder needs to create a municipal utility. Equitably, we should already “own” the significant portion that we ratepayers have already paid off, but we don’t. And we should only have to pay Xcel its remaining investment for the rest. But because the Legislature has failed to address this situation, we end up in condemnation court.

Much has been made of Xcel’s “commitment” to clean energy. But Xcel should be way further along. Renewables require more capital than fossil fuels, so Xcel could make plenty (even if the PUC reduces the per-dollar earnings). It’s the excessive returns that Xcel makes from the equity already invested in its existing coal plants that makes them resist bidding out more renewables. (Operating costs, like fuel for fossil plants, are just expenses for the utility that get paid back but make no money for the stockholders.)

Xcel has also abused its renewable opportunities. In September 2016, Xcel pushed through an expedited settlement that allowed it to invest $1 billion in the 600-megawatt Rush Creek wind farm, on which it will earn its usual returns. The excuse for failing to go through the normal bidding process was that federal tax credits would be dropping. In the March 2017 Denver Business Journal, Xcel CEO Ben Fowke asserted, “With wind energy at historic low prices, we can secure savings that will benefit customers now and for decades to come.” The Xcel spokeswoman then stated that power from new wind farms is about 2 cents per kilowatt-hour.

But in the Sept. 18, 2018, Denver Post, Kent Larson, Xcel’s executive vice president, revealed that electricity from just-completed Rush Creek would cost 3 cents per Kwh, 50% more. In contrast, Xcel’s own “2017 All-Source Solicitation” (per its June 2018 report) stated, “The Preferred (Colorado Energy Plan Portfolio) includes unprecedented low pricing across a range of generation technologies including wind at levelized pricing between $11-18/MWh.”

That’s 1.1 to 1.8 cents per Kwh, about half the cost of Rush Creek.