Opinion: How Xcel franchise would work

I’ve heard many misconceptions as to what would happen if we sign this franchise with Xcel Energy. So I’ll try to try to clarify a few points.

Regulated for-profit monopoly investor-owned electric utilities (IOUs) like Xcel are not the norm. Competitive markets, including some multi-state, exist in many areas of the U.S.

Rural electric associations operate in other areas. And around 2,000 municipally owned utilities operate across the U.S., with 29 in Colorado, including Fort Collins, Loveland, Longmont, Colorado Springs, Aspen, Glenwood Springs, and Gunnison.

This current regulated for-profit structure was created about a century ago. The companies’ goal was to eliminate competition, and “capture” their regulators (public utilities commissions, or PUCs) by limiting them to operating in a reactive mode.

That way, the companies secured both market control and profitability. These IOUs then invest as much as the PUCs will allow in power plants, transmission lines, etc.

For example, Xcel’s equity portion of these investments is well over 50% of the total, with bonded debt funding the rest. Xcel receives an essentially guaranteed 9% to 10% annual rate of return, allegedly to duplicate market returns, even though there is no competition.

Each investment is paid back through the PUC-set rates over a fixed number of years, after which the IOU still owns the assets. The aggregate of these investments is called the “rate base.” Rates are calculated using that number.

The Colorado PUC is heavily involved in approving new investments, so the commissioners would have a very hard time declaring after the fact that an investment was “imprudent.” Thus, the IOUs face essentially no risk of not being paid back all their money.

So the excessively high proportion of equity and high returns on equity are completely unnecessary to inspire investors. It’s just a great deal for management and stockholders. The IOU also collects all its short-term “expenses,” like labor, fuel, etc., through the rates. So “regulatory capture” is basically a no-lose situation.

Obviously, this structure works only as long as IOUs keep control of their markets. So IOUs are quite happy to donate money to do-good groups, business associations, etc., to make friends, and to gain influence at the Legislature.

An upstart community like Boulder is therefore an existential threat, because the IOU might lose market control. Boulder’s struggle is in fact a double threat, because the Legislature just might do what it should have done decades ago – implement rules to make home rule cities’ exercise of their constitutional right to create their own utilities a short, simple, and much less expensive process.

But, in spite of this leverage, Boulder extracted almost nothing from Xcel in the almost 100 pages of the proposed franchise agreements. Here are some examples:

Franchise fee – This fee, 3% of sales, is tacked onto customers’ bills, so it costs Xcel nothing.

Undergrounding – Xcel will do an additional 10 years of undergrounding, worth about $1 million per year. But undergrounding expenditures are put in the rate base. Thus, all Xcel customers end up paying for them. So it’s basically a bribe that costs Xcel nothing.

Renewables – A fantasy is floating around that under this franchise Boulder can get to 100% renewable energy by 2030. I’ve read through these agreements multiple times, and found nothing that makes this assertion very realistic. And Xcel inserted terms that allow it to reject anything for which it cannot recover its outlays, so it costs Xcel nothing.

Emissions reduction – Xcel is already obligated under state law to reduce emissions by 80% below 2005 levels by 2030. So the duplicative obligation in the franchise costs Xcel nothing. And Xcel’s chief executive officer has stated that Xcel will only need around 65% to 70% renewables to meet this target, apparently because it was burning so much coal before.

Rates – Xcel is faced with making significant and potentially expensive changes in its resource structure to meet its state-mandated emissions goal. So I anticipate that rates will go up. Also, Xcel’s latest rate-based wind farm projects – Rush Creek and Cheyenne Ridge – cost significantly more than competitive wind, apparently an effect of “regulatory capture.”

Coal – I fully expect Xcel to try to keep some coal plants in operation as long as possible, unlike all the other utilities in Colorado, just to keep its rate base inflated and make as much money as the PUC allows.

Alternatives – Per the bids received from the 2018 and 2020 city solicitation, we could have 100% renewables by 2030 at about two-thirds of Xcel’s 2018 wholesale price. So why would we sign on to this losing deal?

 

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