Pueblo Water has an offer that Xcel Energy can’t refuse. Actually, it’s more of a contract than an offer, requiring the utility to pay for 12,783 acre-feet of water every year for its coal-fired Comanche Generation Station even if it doesn’t use it.
Since 2010, the “take-or-pay” contract has cost Xcel Energy customers almost $13 million for water never used by the plant in making electricity, and customers could be on the hook for as much as another $89 million for unused water.
Those are the estimates of the Colorado Public Utilities Commission staff. Xcel Energy’s subsidiary Public Service Company of Colorado filed testimony with the PUC saying that it took more water than the staff estimated, but it still tallied approximately $6.4 million in excess water charges.
“This contract, never approved by this commission, stands to result in PSCo paying Pueblo Water tens of millions of dollars for water that it does not need,” Erin O’Neill, the commission’s chief economist, said in testimony.
The water contract was a point of contention in the $45 million electric rate case settlement pending before the commission. It was also challenged in the company’s 2019 and 2021 electric rate cases.
“It seems to come up in every case Xcel files,” said Seth Clayton, Pueblo Water’s CEO.
Xcel contract spurred $60M spend on interest in a ditch
As part of the electric rate case settlement, Xcel Energy agreed “to continue to explore options to mitigate the impact on rates of the historical Pueblo Water contract” and to report annually on developments.
“Xcel has inquired about it for obvious reasons,” Clayton said. “We do not want to change the contract nor do we have any plans to do so.”
Servicing the Xcel Energy contract was one of the reasons Pueblo Water went out and spent $60 million between 2009 and 2011 to acquire a 28% interest in the Bessemer Ditch, Clayton said.
“Our contention is that Xcel has entered into this contract and we are providing water earmarked for them and our customers should benefit from that,” Clayton said.
In the early 2000s Xcel Energy was preparing to build its $1 billion, 750-megawatt Comanche 3 unit at the generating station in Pueblo. The plant already had two operating coal-fired units.
The 1,410 megawatts of generating capacity at the station would need a lot of water, which is used for cooling and for the stream that turns the turbines to make electricity.
In 2005, Xcel Energy signed a 60-year contract with Pueblo Water to take a minimum of 12,783 acre-feet a year with a maximum of 14,700 acre-feet, before dropping to a 5,218-acre-feet minimum in 2036. An acre-foot is enough to provide for two families of four to five people with water for a year.
The contract gave Pueblo Water the right to increase the price of the water by 5% a year (prices have risen annually by an average 3.8%) and there was no prohibition on the water utility reselling any acre-feet not used by Xcel Energy. The Xcel contract represents about 20% of the supplies Pueblo Water provides customers annually.
“At the time this contract was executed, PSCo did not request or obtain commission approval to enter into this contract at the agreed take-or-pay terms,” O’Neill said.
Between 2010 and 2022 the generating station never used 12,783 acre-feet in any single year, according to the PUC staff, leaving Xcel Energy paying $12.8 million for nearly 35,500 acre-feet unneeded water.
Part of the problem was the poor performance of the new Comanche 3 unit, with its state-of-the-art supercritical, pulverized-coal technology.
From its start the unit has been plagued with problems. It was delayed coming on line for months by leaking steam tubes and in its first full year of operation, 2011, it ran at half of its capacity.
Between 2010 and 2022 the plant suffered more than 700 days of unplanned shutdowns, according to a report by PUC staff.
Since the PUC report was issued the Comanche 3 has suffered another than 125 days of unplanned shutdowns.
Through all those problems Xcel Energy had to pay for the water for Comanche 3 even when the unit wasn’t running.
Cost of unused water is covered by Xcel electricity customers
Comanche 3 was originally slated to operate through 2060 — the end of the Pueblo Water contract — but in the face of pressure from environmental and consumer advocates the company moved the closure date to 2031, with operations ramping down starting in 2025. This will create even less demand for water.
Between 2010 and 2022 Xcel Energy paid for but did not use nearly 35,500 acre-feet of water, according to the PUC staff.
For example, in 2022, a year in which Comanche 3 sustained shutdowns, Xcel Energy used 9,194 acre-feet, 72% of its required take, paying $1.6 million for water not used. The cost of the water is part of the operating and maintenance expenses covered by customer bills.
In rebuttal PUC testimony, Richard Belt, Xcel Energy’s director of chemistry and water resources, made a distinction between water delivered to the plant and water used in making electricity.
Xcel Energy took delivery of 155,700 acre-feet between 2010 and 2022 with eight years close to or above the contract requirements, Belt said. This put the water not taken about 10,451 acre-feet at a cost, using PUC staff price estimates, of $6.4 million.
The Xcel Energy figures are based on deliveries while the PUC figures are based on water used at the generation station. This leaves almost 25,000 acre-feet that was delivered to the Xcel facility but not used.
“Ms. O’Neill provides information regarding water consumption, which is different from water deliveries — the basis of the take-or-pay provision in the Pueblo Water contract,” Belt said. “This may be a result of a misunderstanding of water data. Typically, water consumption data are provided in response to requests for information in regulatory proceedings, as consumption data allows for common comparisons between company generation facilities.”
Some of the water was used for “ancillary uses, with some lost to evaporation from the on-site,” the company said. The water is never used off site or for things unrelated to the plant.
Kaite O’Donnell, a PUC spokeswoman said in an email that the staff stands by its calculations.
The contract requirement drops to 5,218 acre-feet in 2036 when the first two Comanche units, opened in 1972 and 1973, were slated to close. However, Comanche 1 closed in 2022 and Comanche 2 is now scheduled to close in 2025.
The first year Xcel Energy could seek to terminate the contract is also 2036, with the company paying an $8 million exit fee over five years.
In oral testimony before the commission Belt said that it might be wise to hang on to the water contract as new energy projects may be located at the Comanche site.
“Water prices are now three times what are in the Comanche water contract,” Belt told the commission.
But Commissioner Megan Gilman questioned the idea of speculatively “holding these water rights and paying for them with ratepayer money.”
O’Neill, the PUC economist, estimates that under the contract by 2041 Xcel Energy customers could end up paying $89 million for unused water.
The electric rate case dealt with another long-standing water issue, Xcel Energy’s ownership of water rights in two ditch companies in southeastern Colorado. The company purchased so-called Southeast Water Rights in 1985 for $27 million.
Xcel bought the rights with the expectation of building a coal-fired power plant in that corner of the state.
“The Southeast Water Rights have never been used or useful in the provision of electric service and likely never will be. The cost burden of this purchase 34 years ago should not be borne by today’s ratepayers,” Kevin C. Higgins, an expert witness for Colorado Energy Consumers, which represents major industrial and commercial customers, told the PUC in 2019.
While Xcel Energy customers have not paid for the water right, they have serviced the debt on the investment. As part of the electric rate case settlement, the company agreed to remove the costs associated with the water rights from customer charges.