Xcel to PUC: Cut Boulder's benefits

Opening salvo in Boulder's municipalization effort?

Phil Carson | Mar 06, 2012


In yesterday's column, "Colorado Regulators: Hurdles for SmartGridCity," we discussed the criteria that the Colorado Public Utilities Commission established for final cost recovery and Xcel Energy's claims that it has already met those criteria.

One sentence in the regulators' interim order sets up today's column: "Public Service [of Colorado, i.e., Xcel] asserts that the value of SGC [SmartGridCity] is not diminished by Boulder's recent vote to explore utility municipalization."

We'll see how Xcel attempts to back up that statement, but on the surface it seems a tad premature. How could Boulder's exploration of municipalization not affect the value of SGC? First off, it's not a rousing endorsement of SGC that Boulder wants to sever ties with Xcel. Secondly, if Boulder elects to follow through and Xcel refuses to sell its Boulder assets, then the city condemns the related infrastructure and takes possession of it. Wouldn't that put a bit of a crimp in Xcel's plans to keep testing its "value propositions" to justify cost recovery?

We'll find out this summer. Meanwhile, I thought I'd simply share some of the public correspondence and media coverage relating to Boulder's municipalization effort.

For background, see "WANTED: Smart Grid from Scratch," "Boulder Seeks Divorce from Xcel" and "Xcel Energy and Boulder in Conflict."

On Feb. 6, David Eves, president and CEO of Public Service Co. of Colorado, Xcel Energy's local subsidiary (henceforth "Xcel"), wrote a letter to Boulder residents that noted  Boulder's "narrow" passage of two ballot measures last November. The first assesses residents about $1.9 million a year to fund exploration of a municipal utility and the second allows Boulder to condemn Xcel's infrastructure within city limits and issue bonds to finance a municipal utility. So far, that's a fair statement of the facts.

Xcel, Eves noted, opposed both measures because, he suggested, "a municipal utility would raise costs for Boulder customers, adversely impact service reliability and not deliver the benefits proponents claimed."

Of course, it's too early to argue that rates will rise, service will fall and benefits won't be delivered. Boulder has not articulated a plan or roadmap upon which to base those statements. So that's pure scare tactics, without a whiff of factuality.

Just to be helpful—"to help fill the information vacuum," he said—Eves asked himself four questions and provided the answers. Though this time-honored tactic has been used by salesmen, politicians and others eager to avoid genuine questions, let's look at a couple of them.

"What will happen to customer choice programs such as Solar*Rewards and other programs and rebates?"

These benefits are based on "the assumption of an ongoing, long-term service relationship with us," Eves answered himself, in part. "The limited customer funds we have for these programs are best invested with customers who intend to remain on our system."

In December, Eves continued, Xcel proposed a plan to Boulder to "avoid disrupting any current programs for Boulder customers." Xcel would like to reimburse itself and non-Boulder customers (i.e., the remainder of Xcel's 1.4 million customers) for costs incurred in Boulder if municipalization proceeds. Xcel, Eves said, will likely ask the Colorado Public Utilities Commission to resolve the issue, "but our preference is to bring them a solution the city agrees with."

Former city councilman Steve Pomerance rebutted Xcel's December "demand letter" to Boulder in The Boulder Daily Camera last month, stating, "No surprise, Xcel's proposals ignore both legal and economic realities." It's worth a read.

Finally, Eves asked himself "Why will this go through the court system?"

Xcel, of course, would rather continue to serve Boulder, Eves averred. But if the city proceeds with municipalization, Eves wrote, "we have an obligation to obtain the fair market value" of existing infrastructure and ensure that investors and other Colorado customers don't pay for Boulder's decision. (Divide and conquer remains an appealing tactic.)

On Feb. 15, two Boulder residents responded, publicly, with a guest commentary in the local Boulder Daily Camera. Kate Clark and Brian Bernhardt suggested that Eves' letter contained "mischaracterizations and thinly veiled threats," which to them confirms that Boulder is moving in the right direction.

First, Clark and Bernhardt wrote, Boulder is only moving ahead if it can meet "criteria meant to safeguard costs, reliability and environmental objectives." As to the occupation tax that raises $1.9 million annually to fund exploration of municipalization, Xcel itself has raised rates 20 percent in four years, "largely due to increasing costs associated with fossil fuels." In 2009, they noted, Xcel opened the largest coal-fired power plant in Colorado at nearly $1 billion in costs. But coal costs are rising 5 to 10 percent per year, rather than Xcel's typical estimate of 2 percent.

Therefore, Clark and Bernhardt argued, Xcel is "socializing its risks, while privatizing its profits."

Further, Eves' letter implied that it will "punish Boulder by excluding ratepayers in our city from renewable energy and efficiency programs." Yet "both the [Boulder] city attorney and an Xcel spokesman have clarified the illegality of such action. It is, quite transparently, a bully's scare tactic."

To influence the outcome of last fall's ballot measures, Xcel outspent local proponents by 10 to 1, donating more than 99 percent of the $1 million anti-municipalization drive, Clark and Bernhardt noted.

"Xcel has the discretion and the resources to make this split as amicable and as painless as possible," Clark and Bernhardt concluded. "Their decision to pursue the opposite approach counts as confirmation that separating from Xcel is in our community's best interests."

Two days later, The Boulder Daily Camera reported that Xcel had just asked the Colorado PUC to "limit Boulder residents' ability to apply for energy efficiency rebates and block Boulder residents from participating in future solar gardens and long-term wind purchasing programs."

Shots across the bow, at least, and, perhaps, an attempt to "head them off at the pass." Battle lines are being drawn. Frankly, with these tactics, Xcel may well have lost the opportunity to further divide the already split Boulder community, whose business sector had urged caution around municipalization. Strong-arm tactics typically lead to a circling of the wagons rather than facilitating a strategy of divide-and-conquer. From what we've seen in the cost recovery case for SmartGridCity and a concurrent rate case, however, it would appear that Xcel has little or no concern for its brand in Colorado. What successful strategy can emerge from that miasma, I'll be fascinated to learn.  

Phil Carson
Intelligent Utility Daily

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There is no rational way out of this

Anybody looking for a businesslike solution to this is mistaken. It will have to settled in the courts after a long, hard-fought battle. Boulder has put itself on a path from which there is no turning back, no matter what the economics turn out to be.

Say the economics look bad, and Boulder decides to turn back. After all the antagonistic words from Boulder's leaders towards Xcel, will they return like whipped dogs with their tails between their legs? At that point Xcel will have ALL the power (literally). Boulder will have to accept a 20 year (or longer) contract on Xcel's terms since their own exploration of alternatives would have just eliminated any other possibility. In the meantime, much of the town would be in open revolt and many councilpersons would lose their jobs.

So make no mistake. Municipialization will go through. The costs will be justified no matter what, any necessary rationalizations of what Xcel owes Boulder will be made, and court cases will be fought until there is no where left to go. Anybody not seeing how egos enter in to this should just look at the Denver Metro area's FasTracks transit project, in which the only response by government leaders to massive cost overruns of over 100% is to push forward and ask for even more money.

Boulder municipilization: who owns what?

It is going to be very interesting to watch this play out.  I will acknowledge that Xcel has one point (those who know me will find this to be quite rare): Xcel, more precisely, its ratepayers, should not have to pay for ongoing benefits to customers in Boulder who become part of a new municipal utility.   It is how this benefit is calculated and how much Xcel should be compensated is the key. But, I really don't think this should be terribly difficult.

True that under Solar Rewards, payment for future RECs already received by the customer should allow Xcel to keep those RECs.  But, for those early customers in Solar Rewards, only part of the up front payment was for the value of future RECs and part was a true rebate.  Here is where it get's tricky.  Under Colorado's RES, the life span of a REC is 5 years. So, if a Boulder customer's solar system produces a REC in, say, 2020, after Boulder has split off, who gets the REC?  The REC could stay with Xcel, in which case the company gets to use it for its RES obligation.  Under the RES, utilities are allowed to cash in RECs from outside their system.  Or, if Boulder wants to consider that solar system as part of its green energy supply, then the new Boulder utility should reimburse Xcel for the value of the RECs generated after the cut-over date.  This is not a hard calculation to make.

But there is another consideration.  Part of the incentive payment is actually a rebate, not a REC payment.  That rebate must be amortized over the 20 year life of the contract with Xcel being compensated for the unamortized portion after the cut-over date.  This is also not a difficult calculation but it does highlight the value in moving away from an up-front incentive and to a pay for performance incentive.  I might say that the same is true for rebates provided as part of the various DSM programs.

Now, if both parties can agree to the principles just described, there seems to be no reason why Xcel should alter the programs presently available to Boulder customers.  Everyone simply needs to agree that the unamortized value of the incentives paid to Boulder customers represents an asset for which Xcel should be reimbursed when that asset shifts to the new muni utility.  In that case, there is no need to modify the programs for any group of customers.  If, on the other hand, Boulder thinks they should continue to receive the benefit of the solar or DSM asset that has been entirely paid for by Xcel ratepayers without reimbursing Xcel, that too would be wrong.

This just doesn't need to be that difficult and the threats and puffery add nothing ot the discussion.  Hopefully, the PUC will acknowledge the seemingly logical approach I've described if the decision does come to them for a decision.

Rich Mignogna, Golden, Colorado 

Thanks Rich

I would look to the Colo. PUC for its take on the possible calculations involved in this seemingly peripheral issue.

I guess the astonishment comes in when it gets to the "puffery" you refer to. Why not make this a simple business matter, rather than elevate it as an antagonistic ploy in public correspondence?

I'm still laying 50-50 odds on whether Boulder proceeds, potentially making much of this moot. But how long time will elapse and how much money will be spent for Boulder to arrive at a bona fide decision point is anyone's guess.

Regards, Phil Carson