Has the perfect recipe arrived to provoke even more rapid decarbonization of Colorado’s economy? The governor, a careful reader of political tea leaves, seems to be saying andale! Andale!

 

by Allen Best

People have been stomping mad about the bills from Xcel Energy that, in many cases, doubled in November and December compared to the previous years. Will this outrage spur tweaking of the relationship between consumers and Colorado’s largest utility—or even trigger a wholesale revamping of that relationship?

The evidence – if still a bit fuzzy – for a more decisive revamping came on Sunday, after this story was substantially written, when Gov. Jared Polis got price space in The Denver Post to announce a list of measures in concert with several state agencies and the utilities. He fell short of spelling out long-term policies of consequence, but he did hint at multiple possibilities with this statement: “We simply must end our reliance on costly fossil fuels and improve energy security.”

My take-away? He is saying hurry-up, hurry-up to building decarbonization. More on this at the bottom.

Several days before, a substantial recalibration was suggested in a Boulder County forum on Jan. 31 when Colorado Senate President Steve Fenberg was asked about the rate increases. The cost of natural gas was the main problem, he answered. He suggested that this will provide a strong argument for accelerating the transition to renewables. He did not say it, but this would seem to take you to a discussion about the pace of decarbonization of buildings.

Then there’s Xcel’s business model, a regulated utility that has a monopoly within its service territories. It has 1.5 million electric customers and 1.4 million gas customers in Colorado.

The relationship between the monopoly utility and consumers is mediated by the state through the Public Utilities Commission. This hews to the compact forged more than a century ago by Samuel Insull in Chicago. Investor-owned utilities get assured profits, but state regulators hold them in check.

That’s the theory, and it’s worked well enough. Always there are questions about the balance between corporate interests and consumer interests.

In this case, we have a giant increase in natural gas prices at a time that the company has been delivering giant returns to its shareholders.

Anguish and anger have erupted. One fundamental question, as Fenberg said during the Zoom gathering of three legislators sponsored by Empower our Future,  is whether Xcel “needs more skin in the game.”

In describing the “bigger structural problems” with utilities, he said they “figure out how to nickel and dime people” even as the company’s profits have risen to record levels during a time that people have struggled to pay their bills.

“The business model for them, of continuing to pass their costs off to their customers, won’t work anymore. There will be continued volatility (in the natural gas market). They need to have some skin in the game. They need to be involved more in the market and hedge at times.”

As utilities advance into renewables, as required by state law, the less risk there will be from the volatility of the natural gas market.

As his daughters made cameo appearances, Fenberg suggested the need for measures “so that consumers are not on the hook for investments made by utilities.”

State Rep. Judy Amabile, who was also on the Zoom session, suggested that PUC members need to adjust the line between company and consumer interests.

“We need to be more careful about the PUC and what they are charged with doing. That balance needs to flip a little more to protect consumers. It does not seem like they have leaned in that direction as much as they should.”

Neither explicitly suggested that legislation will be forthcoming that will tweak the regulation of Xcel.

On Saturday, State Sen. Chris Hansen, told me that he had consulted with Fenberg about legislation that will require both hedging and securitization by Xcel and other utilities to avoid giant pass-through costs as occurred here.

Earlier on Jan. 31, before the Boulder County Zoom session, the PUC commissioners had heard from 50-plus individuals, their testimony filled with anger and angst. The next morning, at the weekly meeting of the PUC commissioners, Eric Blank, the chair, described what they heard as a “bit of a wakeup call. I think there are a lot of customers struggling now, (and) we didn’t have the answers to some basic and legitimate questions.”

Blank outlined specific concerns, first being the potential for a tsunami of disconnects as Xcel customers fall behind in their bills.

Another annoyance expressed in the session has been Xcel’s laggard pace in hooking up people with rooftop solar.

Even more piercing had been the testimony, described by Blank as “sort of unbelievable,” of customers on” life-support systems freezing in the dark because they couldn’t pay for the energy.” Their testimony, he added, poses the question of “how we as a community provide for those types of customers.” It was becoming clear, he said, that needs extended “beyond income-qualified customers into moderate-income customers.”

“I sensed a level of frustration I have never seen before. We have a lot of work to do,” said John Gavan, a commissioner serving his last week of a four-year term.

Megan Gilman, the third commissioner, expressed some frustration, too—and in response to statements from a utility. She objected to comments made by the utility that described natural gas as the “most reliable and cost-effective way to heat your home.” The affordability, as had been documented in a presentation to the PUC commissioners a week before, was “primarily driven by high gas costs. Period,” she said. She called the statements—she did not identify which of Colorado’s four investor-owned natural gas utilities had said this—confusing, potentially misleading, and fundamentally unhelpful.

The next afternoon, the PUC commissioners heard more unhappiness. It was a listening session about Xcel’s demand-side management and beneficial electrification strategies. Some speakers took the opportunity to vent about Xcel.

“They’re greedy,” said Elizabeth Smith of Wheat Ridge.

Kim Lynsobey also accused Xcel of greed—and the PUC of being accomplices.

“There is a special obligation of the PUC to protect us from monopolies. They have the ability to gouge.” She then drew attention to reports of the company’s record profits, more than $525 million in Colorado alone, and the income of the chief executive. “This is real greed at our expense.”

She also blamed Gov. Jared Polis for his appointments of the PUC members. “You allowed (Xcel) to pass along the result of its bad decisions to customers, and we are now carrying a pretty significant line item in our bills. And that will be there for awhile.”

Others stuck more closely to the topic du jour but were critical of Xcel and its business motives.

“In terms of demand-side management plans, if you asked 100 policy experts and engineers, you would get 100 different plans,” said Paul Culnan of Boulder. “Call me a cynic, but I think Xcel would choose the one that maximizes their profits.”

Leslie Glustrom, also of Boulder, told the commissioners that they have “all the authority you need to initiate proceedings to ask the question of whether Xcel should be held virtually harmless, no skin in the game, for Storm Uri.”

We will get back to Storm Ute, but first the advance warning about higher utility bills, “Utilities are paying more for natural gas, which means many Colorado customers will see higher bills starting Oct. 1, the Denver Post reported somewhat cautious in September.

In November, Vox explained in “Why Americans will pay higher natural gas prices this winter” that the United States had been exploring more natural gas, and not just because of the war in Ukraine. “Now that the US is increasingly at the whims of the global market, the pitfalls of running an economy on gas are becoming more obvious.”

But not everything could be foreseen, as was demonstrated in a deconstruction of a generalized bill of an Xcel customer by Erin O’Neill, chief economist at the Colorado PUC, and Gail Conners, chief of media relations for the PUC, at the PUC’s Jan. 25 meeting.

Examining a bill for a typical Xcel customer in December 22, they found that electric bills have increased 25% from the year prior and gas bills 75%.

They also found that four-fifths of the combined increase came from the gas bills. Natural gas prices—what some people prefer to call methane, the primary constituent—are most of the story. Here’s how it breaks down:

 

Natural gas prices

After years of being low, prices ratcheted up 40%, according to the January presentation by the PUC staff. These highest natural gas prices were responsible for 35% of the higher bills this winter.

(In January, Xcel announced that because of a drop in natural gas wholesale prices, customers would pay an average $18.19 less in February although the cost of gas remains higher than in recent years.)

 

Colder weather

It has been the coldest winter since 2000-2001 in thermometers at Denver’s Central Park, where temperatures have been monitored since the 1930s when the airport called Stapleton was established there.

Russ Schumacher, the Colorado climatologist, says the temperatures from November-January were 8 degrees colder than the same period last year—which, by the way, was the second warmest in the history of the station.

One way of illustrating this is through something called heating degree days, a measurement designed to quantify the demand for energy needed to heat and cool buildings.

“There were 30% more heating degrees days from November through January this year than the year before,” he explained via e-mail to Big Pivots.

“So weather can’t explain a doubling of people’s bills, but it does explain a pretty substantial part of the increase.”

Xcel reported that its customers used 35.5% more gas in November than they did in November 2021. In December, it was 31% more.

Useful, too, is understanding the longer-term trend. Just once in the last 30 years, in 2000-2001, have these winter months been colder. It was 3.7 degrees colder than the average of those three decades.

Go back further, and cold was more common. The period from 1949 to 2001 had seven three-month periods colder than this year, or one roughly every seven years.

“We’ve probably started getting used to the warmer winters of the last several years, so the extended stretches of cold weather we’ve experienced this winter feel especially harsh,” he said.

In northeastern Colorado, which has had even more snow, it’s been even colder —the chilliest since 1992-1993.

 

Storm Uri

Then there’s the aftermath of Storm Uri, the week of deep cold in February 2021 that swelled demand across the continent’s interior from Texas to Colorado and points beyond. Xcel, perhaps lulled from more than a decade of reliably low gas prices, had not hedged and paid through the nose for gas, both for heating use and for production of electricity. Winds died during the cold spell.

The company was permitted to pass along most of the increased costs to consumers, which have started showing up on bills now, explaining 11% of the higher costs, according to the analysis by the PUC’s O’Neill.

 

Base rates

This is basically Xcel’s overhead for fuel delivery. In the case of gas, it was 5%.

 

Electric rates

Electric rates were 20% of the total bills, and they were also split among effects of Storm Uri, base rates, and weather causes. Fuel costs, though, were only 2% (EGCRR, or extraordinary gas cost recover rider for Storm Uri)—a stark contrast to the natural gas portion of the pie seen on the previous page.

 

Xcel Energy announced handsome profits in an earnings call for investors just as the 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 Feb. 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 Jan. 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?

This is from Big Pivots 67, a reader-supported e-journal that chronicles climate change in Colorado and the necessary energy and water transitions.

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!