This story by Allen Best appeared on Big Pivots on February 6, 2023. We are sharing it in two parts.
Xcel Energy announced handsome profits in an earnings call for investors just as Colorado’s PUC commissioners and consumer advocates were fielding what some said were unprecedented calls and complaints.
“I have not seen this before,” said Cindy Schonhaut, director of the Colorado Office of the Utility Consumer Advocate, when I talked with her on February 2. “Our office has had so many communications from consumers in the form of emails or voice mails, we can’t keep up,” she said.
She reported 150 messages in just the two previous days in the wake of television coverage. “In the last nine years, we have gotten a few each year.”
The agency that Schonhaut supervises has a staff of seven, including herself, responsible for representing the millions of Coloradans when Xcel and other utilities file requests with the PUC. Schonhaut describes an imbalance between Xcel, in particular, and consumer advocates.
“It is not a level playing field between consumers and investors in the company,” she said.
To illustrate this imbalance that she contends exists, she points out that Xcel asked the PUC to allow it to recover the $2.2 million it spent on attorney fees and expert witnesses when making the case that it deserved to raise rates for gas consumption by its consumers. The PUC allowed the company to be able to pass along $2 million of those costs.
That amount, says Schonhaut, is the total budget for her office. But it also represents two other elements of what some believe is a flawed system of utility regulation.
One of those elements is this ability of utilities to pass along costs to consumers. This gets back to the original compact struck by Samuel Insull in Chicago so long ago. In this model, utilities get what is deemed a reasonable rate of return on investments, and consumers get reliable and affordable power.
In a January earnings call, Minneapolis-based Xcel’s Brian Van Abel, the chief financial officer, said the company remains confident it can “continue to deliver long-term earnings and dividend growth within the upper half of our 5% to 7% objective range as we lead the clean energy transition and keep bills low for our customers.”
Many critics say it gives utilities incentives to build things they don’t necessarily need and to get off scot-free if they make bad decisions.
In the current debates, you hear Xcel being accused of building Comanche 3, the billion-dollar coal plant, with this goal. And it comes up in discussions about Xcel’s insistence on going slow in the transitioning of buildings from gas to electricity. In this view, Xcel is motivated to keep putting pipelines into the ground because it can depreciate that infrastructure far into the future. On the other hand, Xcel has expressed worries that rising demand for electricity for transportation and buildings will outpace its capacity to deliver that electricity.
Many saw their bills through the optics of Xcel earnings for investors and compensation to executives. In the earnings call on January 25, the company reported net income of $1.74 billion in its operations across eight states.
Xcel investors had earned a return on equity of 8.23% in Colorado, somewhat less than the 10.76% for the company altogether.
Channel 9 also dug out the compensation for Bob Frenzel, the chief executive, who in 2021 earned $8.3 million.
Schonhaut contends the profits of Xcel should be shaved by about a percentage point. That would save Colorado consumers more than $100 million a year, she says.
Is what Schonhaut describes as “outrage” broad enough and deep enough to trigger substantial changes?
Rebecca Cantwell, who has been monitoring the PUC in various capacities for several decades, sees the ingredients for redefined regulation of Xcel. There is the anguish about the winter bills that has in turn generated broad media attention, and a Legislature more progressive than she has ever observed. On top of these ingredients is a PUC that she describes as being “more responsive to consumers and more cognizant of the climate crisis than almost any PUC I have seen,” she says.
“That should be a recipe for some real change,” she says. “What that change should be,” she said, “should be determined by an inclusive public process.”
Many have puzzled over how best to redefine not only the energy that is used but also the business models for delivering energy. One of those models is community choice energy. Legislators mandated a study of what this looks like, which was completed last year. That model seeks to introduce greater competition into the public sphere.
In November, Leslie Glustrom compiled a list of possibilities. They range broadly from using discount rates differently to conducting what she called “prudence reviews for stranded assets
She also argues that the fuel costs reflect market and supply perturbations that will become increasingly common as the fossil fuel era ends.
Jeff Ackermann, a former chair of the PUC, emphasizes that allocation of risk lies at the core of varying perspectives on this winter’s heating bills – but more broadly the arguments about whether regulatory reform is needed.
“The core issue is how risk is being allocated or apportioned between the rate-payers and the utility,” he says. “Right now, the utility is able to sidestep a lot of the risk of dealing with the volatile markets,” he says. “Trying to change that dynamic is one way to deal with long-term costs. It won’t necessarily push today’s prices down.”
Risk can be more broadly shared through the device of performance incentive mechanisms, disconnecting electric utilities from pursuing increased sales. Also, gas utilities should carry some of the risk associated with overbuilding to meet project demand.
But Ackermann also sees much bigger, broader questions about the future of electricity and gas utilities. That is whether the federal government will see fit to absorb much of the stranded investment costs that may result from promoting more customer choice, in the form of self-generation and storage, community-owned projects or customer demand aggregation.
“Not allocating this cost to customers will both keep bills more stable and reduce one major utility impediment to tolerating these changes,” he says.
Hansen, the state senator from Denver, can see many big pictures in energy and resources. He intends to work on legislation that will provide a small step to protect consumers from getting slammed with pass-along fuel costs.
Xcel and other utilities need to use two financial tools, called securitization and hedging, to limit the exposure to volatile fuel costs. Xcel, he says, typically hedges — it’s a form of insurance — its fuel costs, leaving an exposure of 35% to 40%.
“Right now, we have only partial hedge, and a huge amount of price exposure to the customers,” he said. “I would like to take legislative action to make sure both of those things get addressed.”
Hedging can be seen as an insurance policy, and of course insurance costs money.
“Hedging is not free,” said Hansen. “I don’t ever pretend that it is a free lunch. It costs money to hedge your gas supply with forward contracts. But it is a small price to pay compared to the huge amount of upside risk on the commodity price markets.”
While some have talked about municipalization or other models of public-power, as opposed to the investor-owned utility, fuel costs would have to be passed along to consumers in all cases.
As for the idea that Xcel needs “more skin in the game,” it’s useful to note that Colorado’s PUC commissioners have moved that bar somewhat in recent years. Xcel has been getting a little less of what it wants.
Polis, in his op/ed in The Denver Post, suggested Xcel and other utilities need to get a little less:
“We must ensure that they lose profits over failure to protect consumers from increased gas prices.”
Then there was his statement:
“We simply must end our reliance on costly fossil fuels and improve energy security. When I took office, I made putting our state on the path to 100% renewable energy by 2040 one of my bold goals. Had we gotten there faster, and shifted more heating from gas to electricity, we wouldn’t be facing price spikes that are costing all of us more this winter.”
Some might wonder why Polis would oppose the new pollution reduction goals proposed by Hansen for 2035 and yet call for more building electrification. That tidy matter aside, what this tells me is that the PUC will be telling Xcel to pick up the pace.
When I worked on the railroad track crew in my 20s, the Mexican-American crews often said this: Andale! Andale!
It means hurry, hurry!
And that’s what he’s saying to Xcel, which has fallen behind on demand-side management and other elements of the energy transition.
Andale! Andale!
Allen Best publishes the e-journal Big Pivots, which chronicles the energy transition in Colorado and beyond.