Paying off the coal plants

How much should Xcel’s customers have to pay for Hayden, Craig and Pawnee as the coal era winds down? Opinions vary—and widely so!

by Allen Best

Xcel Energy will be retiring its coal plants in Colorado. That is without doubt. It retired Comanche 1 last December and, by the end of 2031, will retire the two remaining Comanche units, the two units at Hayden, and its share of the second unit at Craig.

Before the Colorado Public Utilities Commission is the question of how much money should Xcel be able to earn on some of these coal plants as they go doddering into the sunset of Colorado’s coal-burning era? Unamortized balances and decommissioning costs must yet be paid.

Shocking to nobody, opinions vary. Those differences were evident in a public hearing conducted by the PUC on Tuesday, March 21.

A dozen or so people, most from Boulder, testified that Xcel should not be able to ding ratepayers at all to retire the debt and pay for decommissioning costs of these shuttering coal plants or, in the case of Pawnee, that portion of it that will be retired from coal.

Those making this argument point to Xcel’s history of considerable profit for its investors, just shy of 10%. With risk comes reward, they said, but Xcel’s strategy was generally without risk. So why send investors handsome checks—checks cut from the payments of Xcel’s customers?

Xcel, of course, sees it very differently. In its testimony in this case, it has argued for using what is called the “regulatory asset approach.” This method capitalizes costs and depreciates them over time.

Then there’s another approach, one that would deliver Xcel a lesser rate of return but still much better than nothing. This third path would use a financial process called securitization. It was authorized by Colorado legislators in 2019. Ron Lehr, a PUC commissioner in the 1980s and 1990s, spoke on behalf of this approach at the public comment session.

Why does this matter to the general public? Lehr points to a $130 million difference between his favored securitization approach and that of Xcel’s favored approach. That’s roughly a third of the rate hike that Xcel wants the PUC to approve.

On late Friday afternoon, after this report was substantially completed, a proposed settlement agreement was filed by Xcel and other key parties: the trial staff of the PUC, Colorado Energy Consumer, the Natural Resources Defense Council and Sierra Club, and the Colorado Office of the Utility Consumer Advocate. The PUC is not obligated to accept this proposed settlement, although it usually does in such cases.

The proposal would represent a compromise of Xcel’s preferred cost-recovery and the bundled securitization that was Lehr’s proposal during the public testimony.

Regardless, the testimony reveals larger talking points and might best be understood as an adjunct to the story on page 1 of this issue of Big Pivots about the Colorado legislative committee conversation about rising utility rates.

The four coal-burning units in question began operations between 1965 and 1982. Three of the units—Hayden and Pawnee—were extensively retrofitted as a result of the Clean Air, Clean Jobs Act of 2010 to reduce emissions that were causing violations of federal air quality standards.

Colorado’s last-built coal plant, Comanche 3, which was commissioned in 2010, is not a focus of this proceeding. Xcel has separately agreed to use securitization to recoup the debt on the plant, which was built with the expectation of burning coal until 2070 but is now scheduled for retirement no later than 2031.

The public session was full of allegations about motivations.

“It’s time for the investor-owned utilities to have some skin in the game,” said Steve Whitaker. He was challenging the business model by which Xcel’s allowed rate of return is based on how much it has invested.

“They can choose the most expensive solution to a problem because it gets them the most amount of dollars in their bottom line,” said Jan Rose. “Consider reworking the model of risk and reward.”

Ratepayers, said Marie Venner, “should not be forced to pay off Xcel’s mistakes.”

Leslie Glustrom cited “abuses” that she said the PUC was obligated to correct. “And we have had so many abuses in this state. Xcel spent all-told well more than $1.5 billion on coal plants in the first decade of this century, and now they have privatized all of the profits and they want to socialize the risks.”

Instead of 9% or 10% return on equity, said Steve Pomerance, a former Boulder City Council member, Xcel should be rewarded with 3% to 4%. Others cited similar figures.

Xcel has laid out its case primarily through the testimony of Jack Ihle, who oversees the company’s regulatory policy in Colorado. His testimony filed last November, as this proceeding began, pointed to the accomplishments of the company in Colorado, “one of the most aggressive trajectories for power sector emissions in the United States.”

While some on the environmental side of the fence might disagree with his history, he traces Xcel’s retreat from coal to 1998. He is on firmer ground in defining milestones since 2016, leading to the company’s remarkable declaration in 2018 to march toward 2030 and 2050 decarbonization goals. The company is now on track to deliver 55% renewable energy by 2025.

The specific issue here is how will Xcel recover the net book value of its remaining investments of the three units in the Yampa Valley and the retired portion of Pawnee.

How much should Xcel’s customers have to pay for Hayden, Craig and Pawnee as the coal era winds down? Opinions vary—and widely so!

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Ihle, in his November testimony, said the company performed a comparative analysis of multiple potential cost-recovery methods. It found that the “tried-and-true regulatory asset approach” be used. “It is more cost-effective for customers than separately securitizing each plant, avoids the potential for relatively large near-term rate increases associated with accelerated depreciation, and appropriately considers the need to keep Public Service (the name of Xcel’s Colorado Division) financially whole for its Commission-approved investments” as it accelerates emission reductions.

“Put simply, it provides regulatory support for actions taken to advance State of Colorado energy policy,” he wrote.

A back-and-forth between the various parties, including the Sierra Club and Natural Resources Defense Council, the Office of Utility Consumer Advocate, and a number of others continued through winter. By February, Xcel had retreated.

In Ihle’s rebuttal testimony, Xcel insisted on the “utility’s right to a return on its invested capital. He referred to SB19-236, the law that set the target of 80% emission reductions of electrical utilities. Nothing in that law “suggests that the opportunity to invest in replacement generation should lead to inadequate cost recovery treatment for retiring generation,” he wrote. “Indeed, negative ratemaking outcomes that function to penalize utilities for voluntarily committing to early retirements to support clean energy transition would run counter to the policies and incentives that Colorado’s emissions reduction statutes were enacted to advance.”

In his rebuttal testimony, Ihle promised the company would evaluate the potential for a 2030 bundled securitization in conjunction with that of Comanche 3. It wanted to kick the decision down the road. But it also noted that Colorado’s securitization law passed in 2019 left the decision to the sole discretion of the utilities.

Lehr, the former PUC commissioner in the 1980s and early 1990s, says he was responsible for introducing the concept of securitization to then State Rep. Chris Hansen. Hansen failed to get the law passed in 2018 but in 2019, with Democrats in control of both the House and the Senate, it went through.

As defined by the Rocky Mountain Institute, securitization is a financing tool that creates the possibility for a win-win-win that uses low-cost bonds. Power magazine explains that it involves issuing a new loan, collateralized by the (government-backed) promise of future payments from customers of the utility.

New Mexico, which also passed securitization legislation in 2019, has now used it, as have Michigan and Missouri, says Lehr. It has also been used in California but even Oklahoma and Texas.

“It’s a tool that can be used for all sorts of bad debt,” he says. That can include cost recovery from hurricanes or nuclear power plants. In this case, it’s coal plants.

Hayden Generating Station, March 2020. Photo/Allen Best

The two units at the Hayden Generating Station will both be retired earlier than originally scheduled. Top, the Pawnee plant near Brush will be converted from coal to gas in the next several years. Photos/Allen Best

In an interview after the PUC hearing, Lehr identified two major questions before the PUC. One is how much bad debt should be recognized as debt to be paid by ratepayers. That, he says, is the issue identified by the speakers primarily from Boulder at the PUC hearing. “It’s a good issue. But it’s not what this docket is about,” he says.

Second, whatever the amount that must be paid off, how should it be paid off? He wants to see the securities from each of the coal plants in question securitized and bundled.

Xcel, in its filing, had argued that such a maneuver is expensive and complicated. Lehr insists that is not the case.

“Every place we have gone through this in the country, there are rather larger savings to consumers from paying through securitized debt. There are two reasons. One is the difference between the company’s authorized rate of return, which I believe is 9.25%. That is a generous return on equity, especially for a plant that doesn’t exist.”

The interest from the Xcel approach would be 9.25% as compared to the bundled securitization, which would be 4.8%.

“If your house mortgage was at 9.25% and you could get a loan for 4.8%, you would refinance your mortgage.”

In the public session, Lehr and Glustrom disagreed about process if not the underlying issues. Lehr said that the commissioners were legally bound to consider only the question based on the evidence in front of them.

Glustrom announced that she had expanded the scope by filing evidence that very afternoon that called into question Xcel’s decisions from past decades.

“This docket is a chance for a comprehensive view of how to deal with the particulars of Brush and Craig and Hayden. You do have the power. The statues do give you the power,” she said. She pointed to the $238 million that Xcel had spent at Pawnee, the plant at Brush, to retrofit it in order reduce emissions from coal combustion and hence keep it in operation.

It came down to risk, she said, Xcel has no risk when it has a monopoly and can pass along costs to its customer. As such, lower rates of return would be in order. “You are not required by statute to keep Xcel in a no-risk position.”

Glustrom also shared some frustration.

“We have been right, and (we have been) right time and time again,” she said. “And all the big, expensive attorneys have been wrong time and time again.”

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