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Pollution rises from a power plant.
Xcel Energy's coal-fired Comanche Generating Station, located in Pueblo, is the largest power plant in the state of Colorado. The utility wanted to pass about $12 million in repairs to Unit 3, on the right, to customers. (Mike Sweeney, Special to The Colorado Sun)

In 2002, Xcel Energy had a near-death experience — or something close to it — as a failing subsidiary pulled its stock to a 21-year low, dipping to $5.66 a share on July 29 — a 78% dive in three months.

In the aftermath, the company, Colorado’s largest electricity and gas provider, charted a new path, or more accurately returned to an old one. It is a path that led to this past winter’s soaring bills and legislation at the statehouse.

The legislation, Senate Bill 291, aims to address some of the concerns around rising utility bills with short-term fixes, like putting a monthly cap on gas bills, and longer-term measures, including more transparency in utility rate requests and more scrutiny of new gas projects.

“Xcel posted $1.8 billion in profits last year and consumers have been suffering,” Sen. Lisa Cutter, a Littleton Democrat and co-sponsor of the bill, said in a Senate hearing. “We simply need to create a better balance.”

While the one element that has driven bills higher in the short-term has been volatile natural gas prices — passed directly onto customers — underlying the upward push in bills is the basic business model of an investor-owned utility or IOU, like Minneapolis-based Xcel Energy.

As much as from selling electricity and gas, Xcel Energy makes its money by building new power plants, pipelines and transmission lines — all necessary for keeping the lights on and the furnace running — and getting that money back plus a return on top.

And so, year after year, Xcel Energy is investing, sometimes at the behest of state mandates, in new infrastructure and seeking returns on those investments. The company got a $182 million electric rate increase in 2022 and was back seeking another $262 million increase before the year ended.

Lawmakers aren’t sure the century-old regulatory compact serves customers well

In exchange for getting an exclusive right to supply affordable electricity to an area — to avoid creating multiple sets of lines and plants — the company is regulated by a state utilities commission. That commission sets the rates and returns for the utility.

This is known as the “regulatory compact.” It is a system that has been in place for more than a century.

“If that’s the path we’re going to continue to go down then I think it is incumbent upon us to constantly be asking ourselves, is the system set up the right way? Are there appropriate guardrails?” said Senate President Steve Fenberg, D-Boulder, a co-sponsor of the bill.

In the go-go years at the turn of the millennium old-line utilities were venturing far afield from the regulator compact into energy trading and, in Xcel Energy’s case, wholesale power marketing. Then energy trader Enron Corp. — the icon of the new industry — was unmasked as a massive scam.

Enron collapsed, taking down other bettors on the new utility business. In 2003, Xcel Energy’s NRG Energy filed for bankruptcy with an agreement from creditors. “Xcel Energy is no longer in danger of being pulled in the bankruptcy of NRG,” an S&P Global credit analyst wrote at the time.

Chastened, Xcel Energy returned to its bread and butter of building power plants, transmission lines and pipelines, and selling electricity and gas. The strategy was dubbed “Building the Core.”

“We wanted to be back in the regulated business,” Richard Kelly, who became Xcel Energy’s CEO after heading NRG Energy, said in a 2016 interview. “We are a utility, that’s what we do well, and we are going to be regulated, and that’s all we are going to be.”

Since it cratered in 2002, Xcel Energy has steadily built up that core, with major projects such as the $1.3 billion Comanche 3 coal-fired power plant in Pueblo, and the company’s stock has risen, trading at $64.15 a share on May 30.

The compact, however, is out of balance in Colorado, critics say.  “We see that there’s a need for some recalibration,” Michelle King, an attorney representing Colorado Energy Consumers, a group of Xcel Energy’s major business customers, told a legislative joint select committee looking into utility bills.

“Part of the imbalance comes from the inherent tension between the public interest on one hand and the utility’s interest on the other,” King said. “Fundamentally at the core of its for-profit business, the utility’s interest is a fiduciary one to its shareholders.”

Robert Kenney, the CEO of Xcel Energy’s Colorado subsidiary, said “I reject the notion that customer and shareholder interests are automatically or inherently mutually exclusive. Having said that, you know, our owners, our investors do expect regular and predictable returns on their investment.”

The utility operates in eight states, but its two main profit centers are Minnesota and Colorado, which accounted for four-fifths of the record $1.74 billion in 2022 profits, with Colorado chipping in 42%.

The company is looking to offer an 8% to 10% return to shareholders. This is a standard industry target, said Travis Miller, an analyst with Morningstar, a financial services company.

“A shareholder wants two things: You want your money back and a little on top of that,” Miller said. The combination of 7% earnings growth plus 3% dividend gets a stockholder to 10%.

This steady growth is key to luring investors. “The two main tasks for an IOU is to operate the system and insure they can raise capital to fund the system,” Miller said. “Without investors there is no electricity and gas.”

When Xcel Energy builds a new power plant or extends a gas pipeline it must first win approval from the Colorado Public Utilities Commission for the project and then, when it is built, get the commission to put it into the base upon which customer rates are calculated, with a PUC set return on the investment — called a return on equity or ROE.

In Colorado, the effective ROE granted by the PUC has declined over the past decade to 6.7% from 8%, according to the commission, and during the past two years, electricity sales in the state have also been down.

Profits, however, have been up. Colorado’s earnings for Xcel Energy rose about 20% between 2020 and 2022, equal to $1.33 a share.

The reason is the growing rate base. In the last 10 years Xcel Energy’s Colorado investments in the natural gas rate base has almost tripled and electricity base has nearly doubled for a total rate base of $14.9 billion. Rate base growth outpaced natural gas and electricity sales.

An IOU “wants to grow rate base so that it can continue to get bigger in the interest of maximizing earnings,” King said. In an April investor presentation, Xcel Energy said it is seeking to add another $11.3 billion to the Colorado rate base by 2027.

“In this volatile economy having a large ratepayers base is gold for investors,” said Joseph Pereira, deputy director of the state office of the Utility Consumer Advocate, which represents residential and small commercial customers in rate cases.

In an assessment of the company’s Colorado prospects, the credit rating agency S&P Global said: “We believe its large customer base provides opportunities to increase rates.”


And with each addition to rate base bills rise. A $182 million electric rate award in March of 2022 raised the average residential electric bill $5.24 cents a month. A natural gas rate case settled last October increased the company’s rate base $62.4 million and boosted the average utility gas bill $2.90 a month.

What’s in Xcel Energy’s most recent $262 million electric rate request? There is a $16 million rebuild of a degrading transmission line in the San Luis Valley and $13.5 million project to serve the fast-growing area around Timnath. There is also a program to manage the company’s 518,000 wooden electricity distribution poles.

The proposed rate increase would add another $7.33 to the average residential electric bill.

Kenney said that such investments are necessary to ensure reliable service, accommodate growth and further the clean energy transition the state has mandated.

Rate increases, Kenney said, have remained below the rate of inflation. In 2021, the Colorado electricity rate per kilowatt-hour was 13% less than the national average for IOUs, according to the U.S. Energy Information Administration.

“The regulatory compact was originally an exchange of service for a fair rate of return,” Pereira said. “Public interest now includes affordability, environmental justice, a just transition for coal communities. … So, the compact is harder to meet.”

In the past four years the legislature has passed at least 14 bills directing the state’s utilities and PUC to initiate programs to do things such as promote energy efficient appliances and electric vehicles and to develop clean energy plans.

It is no wonder that Xcel Energy has more lobbyists and spends more on lobbying — $286,000 this legislative session — than any other company or group.

These initiatives boosted bills, said Bill Levis, the former director of the state Office of Consumer Counsel, forerunner to the utility advocate, and a consultant to AARP, which represents retirees and older citizens.

“The legislature in my mind has not really focused on costs until this session,” Levis said. “Now they are trying to address it without admitting they are part of the cause.”

Legislation enabled the utilities to do things like add charges on customer bills for new programs or allow Xcel Energy to accelerate recovery of funds or include performance incentive mechanisms, or PIMs, offering a bonus if a utility met a target.

“They’re very cutely called PIMs and so they’re a little bit like gremlins that you don’t realize quite how bad they can get until it gets out of control,” said King, the attorney who represents Xcel Energy business customers. “This is really the gravy on top of cost-of-service regulation. … The deal gets too sweet.”

Energy transition projects may not be in consumers’ best interest

Xcel Energy has embraced the energy transition, planning to close all its Colorado coal-fired power plants by 2031 and adding 3,900 megawatts of utility-scale wind and solar generation, with a guarantee it can own — and put in rate base — up to half the capacity.

“That ownership provides a real advantage to Xcel and the reasoning for that is that they’re losing some of their rate base by retiring their coal plants,” King said.

Much of the rest of the generation will come from private merchant power companies in long-term contracts.

By 2030, Xcel Energy says it will have cut its greenhouse gas emissions by 85% from 2005 levels, with wind and solar 80% of its energy mix.

The new strategy is dubbed “Steel for Fuel.”

But “Steel for Fuel” is another spur to build new infrastructure, such as the $1.7 billion Power Pathway high-voltage transmission project approved by the PUC in 2022. The project will bring wind and solar electricity from the Eastern Plains to the Front Range.

“The more they build, the more they make,” Cutter said, “but it is not always clear these projects are in the best interest of the consumers.”

Maintenance crews work on a row of overhead power lines on March 9, 2021 in Limon. (Kathryn Scott, Special to The Colorado Sun)

The PUC is the backstop to evaluate the need and prudence of proposed projects and rate increases in a quasi-judicial process in which other parties may intervene to challenge the rate request.

It is, however, a process in which Xcel Energy has a decided edge and where critics say the regulatory compact needs some tuning.

“They file first, so they set the battlefield we are going to fight on and then come with overwhelming resources,” the utility advocate’s Pereira said. “They had an overwhelming show of resources in the past gas rate case.”

In the 2021 gas rate case Xcel Energy spent $2 million on attorney fees and had 20 witnesses. The Utility Consumer Advocate’s total annual budget is $2 million.

“We bear the burden of proof in these cases,” Xcel Energy’s Kenney said. “So, we provide as much information as we can upfront.”

But King’s group and UCA say that Xcel Energy is sometimes slow to furnish materials they need to make their cases to the PUC and the data is often opaque, lacking key details.

One section of Senate Bill 291 would require more transparency and documentation for intervenors. It also directs the PUC to establish guidelines for limiting rate case expenses.

The aim, Fenberg said, is “to level the playing field.”

Utility also answers to credit rating agencies

The fact that Xcel Energy applies overwhelming force isn’t surprising since there is a lot at stake with credit rating agencies that determine how much the utility will pay to borrow money to build its projects.

“If it starts to appear that our ability to recover prudently incurred costs is at risk or is uncertain, they’re going to deem this environment to be more risky, and that means investors are going to want to be compensated for that additional risk,” Kenney said.

Xcel’s Colorado subsidiary has an A3 credit rating from Moody’s Investor Services and an A- rating from S&P Global. Both agencies view Colorado as “credit supportive.”

“However,” Moody’s said in a January credit opinion, “we also see a risk that more frequent rate case filings could expose the utility to the risk of rate case fatigue and some public backlash, particularly if commodity prices and inflation remain high.”

One concern is “regulatory lag” — the time from making investments to the time the utility begins recovering its costs. “That can drive our actual return down,” Kenney said.

To cut down on the lag, Xcel Energy has proposed multiyear rate increases and basing costs on future estimates rather than cost it has already incurred. While these approaches have been adopted in Minnesota, they have consistently been rejected by Colorado regulators.

“The farther into the future we get, the less reliable those forecasts become,” King said. “And if Xcel knows that it’s going to be able to recover those costs irrespective of how good or not its forecasts might be then it really lacks the incentive to manage those consequences.”

Construction crews place solar panels on mounts at the Neptune Solar Project Sept. 28, 2022 in eastern Pueblo County. When completed, the 3,800-acre solar array will provide up to 250 megawatts of energy. (Mike Sweeney, Special to The Colorado Sun)

One of the ways Xcel Energy has gotten around regulatory lag is through getting direct payments on customer’s bills for initiatives, such as electric transmission, energy efficiency programs and renewable energy.

There are nine of these so-called riders on a Colorado residential Xcel Energy bill and in 2020 the company was able to use them to capture 35% of its revenue stream on a cash basis, King said.

It is the piling on of riders, performance incentives, accelerated cost recoveries plus the steady stream of rate cases and plumping the rate base that is raising bills.

“Xcel does a good job,” King said. “It is not that insane that these are their interests or that those are counter to the public interest, but they do run into a tug-of-war at times.”

Special to The Colorado Sun
Twitter: @bymarkjaffe