Holy Cross Energy expects to surpass 90% in carbon-free energy in 2024. It hasn’t had a rate increase since 2018. Why the higher rates by Xcel Energy and Black Hills?
by Allen Best
Bryan Hannegan, the chief executive of Holy Cross Energy, was nearly the last witness to testify before the Colorado Joint Select Committee on Rising Utility Rates after a long afternoon on March 14, but he had both significant news to impart and thoughts to share central to why the committee had been formed.
By the end of 2022, he told the legislators, Holy Cross Energy was delivering more than 50% emissions-free electricity to members of the electrical cooperative in the Vail, Aspen, and Rifle areas.
“We are half-way on our journey to 100%,” said Hannegan, a reference to the decision made by directors of Holy Cross more than two years ago to aim for emissions-free energy by the year 2030.
“With contracts and projects we have already secured and things that are being built, signed agreements—by this time next year we will be in excess of 90% clean and renewable energy in our portfolio.”
(Editor’s note: in a presentation to the Avon Town Council two weeks later, Hannegan said his cooperative would achieve “92% by the end of 2024.” )
(Editor’s noThat alone puts Holy Cross into uncharted territory within Colorado. Nearly every utility has agreed to aim for 80% carbon emissions reductions by 2030 as compared to 2005 levels. That puts them at about 70% to 80% emission-free energy.
If Holy Cross has not yet made any details available about how it can go this far, this deep without significant natural gas, it’s nonetheless a sobering announcement.
Later, in response to questions, Hannegan and Jeff Baudier, the chief executive of CORE Electric Cooperative, described how their enterprises operate. Their descriptions might have legislators thinking hard about the regulatory compact between the state government and its investor-owned utilities.
The special committee was formed in February after an uproar during the winter caused by spiked utility rates. The sharpest increase was for natural gas used for heating. But because the utilities burn natural gas to produce electricity, those rates were impacted, too.
Robert Kenney, the chief executive of Xcel Energy’s Colorado operation, earlier in the afternoon had told committee members that the increases had been caused by far colder weather in November and December even as prices for natural gas surged. By February, rates had started coming down, he said.
“Even with the price spikes, we are still able to maintain some of the lowest bills in the United States,” he said.
For two hours, Kenney and a representative of Black Hills Energy, Nick Wagner, the company’s vice president for regulatory affairs, had made their case and responded to the questions of legislators.
Steve Fenberg, the Senate president and chair of the committee, had asked probing questions, citing $8 million that Xcel had spent on expert witnesses and other elements in making the case for rate increases. “Just something feels wrong to me about this whole setup,” he said, although he did not cite the context for his number.
Kenney, new as of last summer in this top-tier Colorado position, had worked the other side of the table previously as a regulator in Missouri before going to work for an investor-owned utility in California. He defended the current regulatory model that has been in place for investor-owned utilities since Samuel Insull engineered what is called the regulatory compact in Illinois early in the 20th century. Xcel and other private companies submit to state regulators in return for monopolies in their service territories.
That model has always had its critics, but it has particularly taken a battering in recent years. Analysts have said that utility monopolies have clung to old models and resisted innovation. Xcel can correctly point out that in 2018 it embraced what was then the nation’s most ambitious goal of any major utility, the 80% reduction in emissions by 2030 and 100% by mid-century. It said it had a reasonably good idea about how to get to 80%, but assumed the way would become clear to achieve its mid-century goal.
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But Xcel has never been shy about asking for the ability to pass along cost to its 1.5 million electric and 1.4 million gas customers in Colorado. In the case of the natural gas spikes of winter 2022-23, it was not making money, said Kenney, only passing along the costs it had incurred because of the volatility of the market. But the regulatory compact was fundamentally sound.
“There is always room for modifications. There are things that we can look at,” Kenney told committee members. “Structurally, I think the bones are very sound. Public regulation is very sound. I don’t think you need a wholesale transformation.”
Fenberg wanted to know about the rate of returns for Xcel and Black Hills Energy.
“The better your credit rating, the lower the interest you pay on that credit,” said Kenney. That, in turn, means lower cost to customers.
If the company is not an attractive place for capital to go, he explained, Xcel “would not be able to run a safe, reliable system, and we would not be able to make the investments in renewables. It is that ability to attract capital at favorable rates to pursue policies that we all agree that we prioritize.”
Fenberg persisted, broadening his questions to Xcel’s investments in the natural gas infrastructure, both in its delivery to buildings and in the plants to generate electricity.
“Are we just creating huge stranded assets for the next generation or the next generation beyond?” he asked, referring to the future of his two daughters, one 6 months old and the other 7 years old.
Kenney said he believed, based on observed evidence, “that we will continue to evolve and technologies will continue to evolve, and I think we will be able to use this infrastructure in exciting ways.”
Fenberg wasn’t persuaded. In the normal world, he said, markets change.
“Then some companies go away. And that’s incredibly hard for a lot of people,” he said. But he suggested his daughters will be forced to “pay off our mistakes.”
Other committee members also asked questions that Sen. Barbara Kirkmeyer, one of two Republicans on the six-member committee whose district is bisected by I-25 north of Denver, said were beyond the bounds of the committee. The committee’s mission, she said, was to “find strategies, to evaluate long-term reform to stabilize rates. That is why we are here. I will not tell you how to run your business.”
Costs of fuel lie at the center of this debate.
“About 50% of what customers pay for is fuel supply,” said CORE’S Baudier. His electrical cooperative has 400,000 residents within its service territory stretching from Woodland Park and Conifer to Castle Rock and east to Bennett.
Baudier tried to describe a sharp distinction between electrical cooperative such as his and investor-owned utilities. In a cooperative, the members elect representatives to the board of directors, he explained. If the members/customers are dissatisfied, they can elect new board members. If board members don‘t like managers, they can get rid of them.
(In fact, turnout for coop elections tends to be very, very low, less than 10%. Some, including, Holy Cross, have tried to beef up the turnout. The jury remains out).
CORE has $340 million in annual revenue and $1.2 billion in capital investment. “We think of ourselves as a company,” said Baudier.
Daniel Hodges, executive director of the Colorado Association of Municipal Utilities, also emphasized the direct accountability of municipal utilities to customers. Colorado has dozens of them, most very small, less than 2,000 customers. Colorado Springs Utilities is by far the largest.
Hannegan took issue with what he said were suggestions earlier in the afternoon that clean energy transition will come at a significant cost to our customers.
“Respectfully, we could not disagree more. Our experience has shown quite the contrary. Over the last five years we have avoided more than $28 million in power supply costs by working with different suppliers and different projects that have focused on the development of clean energy here in Colorado,” he said.
Power supply constitutes half to two-thirds of its members’ electric bills. Saving on fuel costs by switching to renewables saves money for consumers.
Holy Cross, he said, has used that saved money to reinvest in grid modernization with such things as smart switches and technologies that allow integration of distributed resources, protecting against the growing threat of cyberattacks, and addressing the threat of wildlife to transmission and distribution lines.
“All of this without a rate increase since 2018,” he said.
Prices of electricity rose during Winter Storm Uri in February 2021, and Holy Cross—which still buys the bulk of its power from Xcel—had to swallow $2 million in added cost, which it absorbed within its operating budget.
It could have been much worse, Hannegan said, if not for the increasingly diversified portfolio of Holy Cross.
“This example speaks to the value of maintaining a portfolio of low-cost, increasingly clean power resources utility portfolio,” he said.
“When utilities are highly reliant on natural gas as their go-to fuel, higher electricity bills follow,” he said. “It’s pretty straight-forward.”
By embracing wind and solar–plus now increasing storage, he said, rates remain stable and low. “If you think about renewable energy projects, they are mostly capital and less fuel. And in the case of wind and solar, the fuel is essentially free.”
For evidence, he pointed to the latest survey of electric rates published by the Colorado Association of Municipal Utilities. Holy Cross’s rates ranked second lowest among Colorado’s 22 electrical cooperatives—and were 5% less than those of Xcel, “despite our small size and the economies of scale that utilities like Xcel usually have,” Hannegan said.
Then came the questions about access to capital. Hannegan explained revenues and also something called patronage capital, which in theory can be distributed to customers much as customers of REI get credit toward future purchases. Or, said Hannegan, the cooperative can plow the money back into upgrades, which it has been doing.
The rest comes from the private market, in the case of Holy Cross through the Cooperative Finance Cooperation, which works exclusively with cooperatives. Rates there are in some cases a full percentage point less than the private sector.
Baudier also described ease of utilities in obtaining loans.
“It’s the safest money you can invest, because people generally pay their utility bills, so it is not hard for a utility to get capital, and there is so much money out there now trying to invest in infrastructure and utilities that the competition is not for you… the competition is for the banks to loan money to utilities.
Hannegan then had his turn. “We don’t suffer from what is called the capital bias. As not-for-profit entities, it doesn’t matter whether we build a little or a lot. More important is that we build enough to serve our customers with the reliability they have come to expect.”
The challenge among investor-owned utilities, he went on, is to create a larger denominator, even if the return on equity is the same. In other words, more infrastructure costs mean more costs passed along to consumers—with the utility taking its cut along the way,
“We don’t have that incentive,” said Hannegan. “We have a bit more of a free hand in ways that are not capital intensive. Do we build bigger wires on the transmission system or do we invest in demand-response to obviate the need for that larger infrastructure? In our minds, those are the same because they accomplish the same goal.”
The committee has now met three times, hearing from Erin O’Neill, the chief economist on the Public Utilities Commission staff, and Joe Pereira of the Office of the Utility Consumer Advocate, along with Meera Fickling from Western Resource Advocates and Albert Lin from Pearl Street Station Finance Lab and a dozen others.
Whether legislation will emerge yet from these hearings in this session or perhaps another, cannot be said with any certainty.
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