Opinion: The billion dollar block of concrete


Xcel has been in the news lately. In the first week of March, Xcel refused to issue rebates for photovoltaic panels to the owners of a mobile home because it is not a “permanent structure.” Also, the Public Utilities Commission (PUC) approved Xcel`s application for a two-tiered rate structure for residential customers. And Xcel backed Gov. Bill Ritter`s plan to convert a number of coal plants to natural gas to improve metro air quality.
Although not obvious, the fundamental issue that ties all these events together is one that all investor owned utilities (IOUs) must eventually face — how to make money while providing a cleaner environment. IOUs make money by owning assets on which they earn a rate of return. In Xcel`s latest rate case, in December the PUC approved a 10.5 percent return on invested capital and 6.21 percent payment on Xcel`s bonds. The insider joke is that utilities always want to build the next “billion dollar block of concrete” — not for the power, but because it can be added to their “rate base” and thus earn these returns.
Why is their return on capital far higher than you or I can make on a secure investment? The PUC basically sets these rates based on those of other utilities, a circular process since that`s what other commissions do. The argument that utilities make is that there is “regulatory uncertainty” – bureaucratic double-speak for the possibility that the PUC might change its mind. But this would be much more cheaply addressed by simply putting more certainty into the process.
The high interest rates on Xcel`s bonds, as best as I can determine, is because the bonds are “callable.” This means that they can be paid off at any time, so investors require a higher return. Apparently the excuse for this unnecessary flexibility is the same “regulatory uncertainty.”
The mobile home story is an effect of Xcel`s difficulty in addressing their fundamental issue. Xcel, in my opinion, made a strategic mistake by initially contracting for rather than investing in wind and solar so that it would have been added to their rate base. They are just now finally confronting a future where coal will be scarce, high priced, and subject to high emissions charges and regulatory constraint. In the past, they resisted solar — to the extent that they could and not violate Colorado`s renewable energy requirement — because house-sized installations reduce the need for their “billion dollar blocks of concrete.” With the price of photovoltaics dropping every week and backup power units becoming cheaper (like the Bloom fuel cells that have been in the news lately), distributed renewable generation will become more the norm.
Using rate design to promote actual energy conservation, as their two-tiered residential rate is intended to do, is long overdue; water utilities have been using this for decades. Unfortunately this rate structure undercharges for low use and overcharges for higher use, thereby failing to provide smaller houses with proper incentives. But, as with the “solar gardens” bill in the Legislature, Xcel is now supporting these innovations after resisting them in past years, so better late than never.
The conversion of coal plants to gas is a more complex issue. The Cherokee units, in north Denver, were apparently due to be retired within the next 10 years, so why is conversion on the table? I suspect that the answer is in the “billion dollar block of concrete” approach; it`s better for Xcel to re-invest and keep assets in the rate base. As to the rest of the proposed conversion, the real issue is whether these plants could or should be retro-fitted to provide rapid response to back up wind and solar, or decommissioned entirely, as apparently there is no lack of gas plants in eastern Colorado to serve as backup power.
Xcel`s biggest albatross is their two-thirds share of Comanche 3, near Pueblo, still not on line because of design and construction flaws. Without their share of this $1.3 billion “block of concrete,” Xcel`s reliance on coal relative to 2010 levels would have been roughly 80 percent by 2020, 50 percent by 2030, 20 percent by 2040, and no coal at all by 2050 (based on Xcel`s retirement dates in 2006 filings.) But Comanche 3 will still be spewing CO2 and pollutants until 2070.
Xcel is making progress, but dealing with their coal-fired “billion dollar blocks of concrete” will be an ongoing struggle.

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