Bills for Xcel Energy's 1.4 million electricity customers in Colorado are up about 21 percent in the past six years — almost double the rate of inflation — to an average $68.26 a month. Over the next six years, rates are expected to increase another 20 percent as new power plants, wind farms and transmission lines are added, according to state regulators.
The increases have rippled through the bills of Colorado homes and businesses.
The Clegg family of Aurora saw its bill jump 20 percent in May to $108.98, compared with May 2009.
"We tried to cut back any way we could," said Lana Clegg, describing "power-out nights" when the family of five turned off the lights and played board games.
Although they used less electricity and the kilowatt-hour charge dropped $7.83 on the May 2010 bill, six automatic pass-through charges known as "riders" increased 39 percent to $70.31. Those riders were for costs such as renewable energy, transmission and fuel to make electricity.
"That's like a second bill," Clegg said. "I can't make heads or tails out of the Xcel bill."
Corporate, government shifts
Two forces are behind the rise in charges — one corporate, one public.
In 2003, Minneapolis-based Xcel embarked on a strategy dubbed "Building the Core," which focuses on upgrading facilities and building new ones and quickly getting those investments included in customer rates.
At the same time, Colorado, through a constitutional amendment and more than 50 laws, set out on a path to promote renewable energy and conservation — often providing financial incentives for utilities.
"We've gone down the environmental path, and that's more expensive than building coal plants," Richard Kelly, Xcel's chief executive, said in an interview.
Still, over the past 20 years, Xcel's Colorado rates have been below the national average, according to Colorado Public Utilities Commission data.
In December, an average U.S. home was billed 13.1 cents a kilowatt-hour, while Xcel's Colorado customers paid 10.3 cents, data show.
"We are below the national average, so it is not as if our rates are outrageous," Kelly said.
That doesn't assuage Lana Clegg.
"It's frustrating," she said. "We pay what Xcel charges or we go without electricity. There is no alternative."
Rebounding after collapse
Xcel's Building the Core strategy emerged after the company's stock hit a 21-year low of $5.66 a share on July 29, 2002 — a 78 percent plunge in three months.
The collapse was caused by the bankruptcy of NRG Energy Inc., Xcel's wholesale power producer that ran into trouble
Kelly, who had been NRG's president, became Xcel's chief financial officer and set about refocusing on selling electricity and gas.
"We wanted to be back in the regulated business," Kelly said. "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."
In the following three years, the strategy was outlined in investor presentations and U.S. Securities and Exchange Commission filings.
Xcel's aim is to build new facilities to increase its rate base — the company's "growth engine," Kelly said — and then file for rate increases.
The rate base is the total investments in facilities — about $4.4 billion in Colorado for electric — and rates are set as a percentage return on that amount.
In seeking those rate increases, Xcel would, as it said in its 2006 annual report, seek to avoid regulatory risk through upfront negotiated settlements and legislative approvals for projects.
The focus of that strategy is Colorado and Minnesota, its two biggest states.
While Xcel operates in eight states, serving 3.4 million electric customers and 1.9 million gas customers, in 2009, 44 percent of its $690 million in ongoing earnings came from Colorado and 40 percent from Minnesota.
And while Xcel also sells natural gas — it has 1.3 million customers in Colorado — the strategy would focus on electricity, which in 2010 provided 82 percent of the company's $10.3 billion in revenues, according to company filings.
Powered by Building the Core, Xcel's stock has rebounded to $23.65 a share.
Building support, coal plant
While 2002 was a turning point for Xcel, the key dates for Colorado came in late 2004.
In December of that year, Xcel reached agreement with environmental groups, community organizations and regulators to build the $1.4 billion Comanche 3 coal-fired power plant outside Pueblo.
The month before, voters passed Amendment 37, mandating that investor-owned utilities such as Xcel get 10 percent of their energy from renewable sources by 2020. Last year, legislators raised the target to 30 percent.
Paying for Comanche has been the single biggest driver in rates, although the cost of generating power through renewables also has shaped bills.
As part of the Comanche 3 accord, Xcel agreed to upgrade pollution controls on two older Comanche units and use top-of-the-line pollution devices on unit 3.
In return, the Republican-appointed PUC at the time — Gregory Sopkin, Polly Page and Carl Miller — granted Xcel accelerated cost recovery.
Xcel won the right to charge customers for "construction work in progress" and was able to get some costs for the plant included in rate cases before the plant went into operation in 2010.
Among the groups opposing the settlement was the AARP, formerly the American Association of Retired Persons, with Ron Binz as the group's consultant. Binz is now the PUC chairman, appointed by former Democratic Gov. Bill Ritter in 2007.
"For the environmental concessions, Xcel got very favorable regulatory treatment," Binz said.
It was the start of "an alliance of interests" between Xcel and environmental and renewable energy advocates that has continued for the past five years, Binz said.
Friendly, protective laws
The meshing of Xcel's corporate strategy with Colorado public policy has been most visible in the legislature, say state regulators and consumer advocates.
A string of bills, often with Ritter's support, has given Xcel financial incentives for renewable energy, conservation and environmental programs.
"The company, the political imperatives and the environmentalists formed an irresistible lobby," said Ray Gifford, a former PUC chairman and an attorney now representing Peabody Energy Inc., the nation's largest coal company.
Some bills required the use of riders, and some provided for small, added profits if Xcel could show the public benefits of investments.
Riders enable utilities to pass designated costs — for items such as transmission lines or fuel — directly onto customer bills without having to wait for a rate case.
"Utilities make money by selling kilowatt-hours," said Tom Plant, director of the Governor's Energy Office in the Ritter administration. "So when we ask a utility to do something like conservation, we have to find a way to build the public interest into their business model. That's what we tried to do in legislation."
Moving to alternative energy sources that do not pollute and are not susceptible to the price fluctuations of fossil fuels is worth the incentives, Plant said.
Some of those laws, however, tamper with PUC oversight, current and former regulators say. Eight bills mandated rate recovery actions that weaken the commission's leverage over utilities, Binz said.
The laws have also reduced Xcel's risk and more quickly gotten charges onto customer bills, said Bill Levis, executive director of the state Office of Consumer Counsel, which represents consumers and small businesses in rate cases.
Projects were long deferred
It isn't that investment isn't needed.
When Xcel negotiated the Comanche project, it had been 22 years since it opened its last power plant — the Pawnee Station in Brush. Its plants in the Denver area dated to the 1950s.
During that time, the state's population had grown 53 percent to 4.6 million.
"There was a lot of investment that had been deferred for a long time," said John Nielsen, energy program director for the environmental policy group Western Resource Advocates.
"There is a lot of old plant and new technology to deal with, and it is going to be expensive," Nielsen said. Western Resource was a party to the Comanche 3 agreement.
Across the nation, utilities are upgrading plants, closing old units and building new ones. The demand for renewable energy also is leading to more investment, with 33 states implementing renewable energy requirements.
It is the largest transformation in the history of the industry, said David Owens, executive vice president of the Edison Electric Institute, which represents investor-owned utilities.
The nation's rate base — the total investments upon which a utility's rates are set — is projected to triple to $3 trillion by 2030, Owens said.
What does that mean?
Major shift to renewables
In 2011, Xcel's subsidiary Public Service Company of Colorado will generate 72 percent of its energy from coal, 16 percent from natural gas and 12 percent from renewable sources.
By 2018, coal will be cut to 48 percent, 33 percent will come from natural gas and 19 percent from renewables, according to the company.
During the same period, Xcel projects air pollutants such as nitrogen oxides and sulfur dioxide and airborne mercury will drop more than 80 percent.
"Dick Kelly is doing what he should do, spending a lot of money and talking utility regulators into putting it in the rate base," said Leslie Glustrom, who, as a private citizen, intervened to oppose two Xcel rate requests. "But that doesn't mean Xcel should get whatever it asks for."
Regulations and planning
Electric utilities, by law, operate as regulated monopolies, with only one company designated to a geographic area — a decision based on efficiency and dependability. Xcel's Public Service Company of Colorado is a monopoly in a large part of the state.
As a check and balance on the monopoly, the company is regulated by the PUC.
The utility must prove to the PUC that proposed projects such as new power plants, transmission lines or renewable energy projects are needed or meet state mandates.
That is often where the first battle lines are drawn, Glustrom said.
Xcel built the 750-megawatt Comanche 3 and then spent $156 million for 300 megawatts of new gas turbines at the Fort St. Vrain plant.
In November, the utility filed a report with the PUC indicating that demand for electricity has weakened and the company has 744 megawatts of excess generating capacity above its emergency reserve.
The recession was a key reason for slowing of electricity sales, the report said, but Xcel projects it will still have 153 megawatts of excess capacity in 2015.
"That's generating capacity that won't be used for years, but we are paying for it now," Glustrom said.
Power generation is a moving target, said Mark Stutz, an Xcel spokesman.
"You have to build for the long term," he said. "It takes years to bring on a new plant or wind farm."
Xcel by 2012 will shut about 400 megawatts of older coal-fired units, Stutz said. Another 338 megawatts of coal will be closed by 2017, and 352 megawatts will be switched from coal to natural gas.
And then the company will build another $488 million gas-fired plant — that will go into the rate base — to replace some of the coal units.
Through all those moves, the utility has to assure there will always be enough electricity, Stutz said.
The challenge is figuring out how much to build without overbuilding, said Gifford, the utility commission chairman from 1999 to 2003.
"The problem in 'regulated utility land' is that whatever you chose you are stuck with for decades," Gifford said. "If you make a mistake, the cost just gets passed along to consumers."
In an effort to limit mistakes, the process for approving a new project, assuring its expenses are prudent and allowing charges to customers only when a project is operating can take years.
For Xcel this "regulatory lag" can tie up investment funds so they are not yielding a return, and there is the possibility costs will be disallowed by the PUC, posing a "regulatory risk."
It was this lag and risk that Xcel's corporate strategy set out to reduce.
"Before we started making these major investments, we want to make sure the Public Utilities Commission agreed this was a legitimate path," Kelly said.
Ownership and oversight
Electricity in Colorado is provided by three types of utilities — municipally owned utilities, rural cooperatives and investor-owned companies, such as Xcel and Black Hills Energy.
The investor-owned utilities serve about 63 percent of Colorado customers, the cooperatives 19 percent and municipal systems 18 percent.
While the PUC oversees investor-owned utilities, it is the city councils in Fort Collins and Colorado Springs that set policies and rates for those two municipal utilities.
Tri-State Generation and Transmission Association, which provides electricity to the cooperatives, is overseen by a board made up of cooperative representatives.
The average monthly bill in Fort Collins for 700 kilowatt-hours is $59.94, and in Colorado Springs it is $63.35 for 600 kilowatts, according to the utilities. The average Xcel bill is calculated on 625 kilowatt-hours.
At Intermountain Rural Electric Association, one of the larger cooperatives, the average bill is about $70 for 600 kilowatt-hours.
The municipal utilities had about a 29 percent higher use of coal to make electricity in 2009 than Xcel, according to the 2010 state utilities report from the Governor's Energy Office.
They also face a lower renewable energy threshold — 10 percent for utilities serving 40,000 people or more.
Still, Boulder has decided not to renew Xcel's franchise to be the city's sole electricity supplier because some officials say the utility still uses too much coal and not enough renewable energy.
Approach boosts Xcel stock
Under the Building the Core strategy, Xcel has rebounded. Since July 2002, Xcel's share price is up fourfold to $23.65 in trading Friday.
The company's dividend, over the same time, is up 18 percent to about 25 cents a share.
Last year, Xcel stock outperformed the Standard and Poor's Utility Index and the largest investor-owned power producers — Xelon Corp. and Southern Co.
"Xcel has one of the brightest earnings growth prospects in the utility industry because of its initiatives in the states where it operates," said Travis Miller, an analyst with Morningstar Securities Inc.
Another part of the strategy has emphasized environmental performance and renewable energy. Xcel is now the largest generator of wind power in the country and fifth in solar power.
In 2009 in Colorado, the company spent $55 million on conservation programs and $54 million on the Solar Rewards rebate program and renewable energy credits.
Some of those funds were raised through a renewable energy rider of 2 percent of the total monthly bill, about $1.37 for an average bill.
Still, the environmental path has kept Xcel ahead in cutting pollution and meeting state and federal rules, Kelly said.
"It is a balance, a balance between cost and environment," he said.
Since 2006, Xcel has received three Colorado rate increases totaling $391 million and two in Minnesota for $223 million, with a $198 million rate-increase application pending there.
The company is projecting its 2011 to 2015 capital projects at $13 billion, with more than 60 percent going to new power generation and transmission lines. About $4 billion of that money will be spent in Colorado, according to the company.
"We are going to be asking for rate relief in the years to come," Ben Fowke, Xcel's chief operating officer, told financial analysts in October.
The rate relief Xcel will be seeking, which includes new projects and inflation, is expected to boost the average bill for a Colorado customer 20 percent by 2017, according to company data.
That is a dismaying prospect for Lana Clegg.
"My husband hasn't gotten a raise in five years, so it's like we are living on a fixed income," Clegg said. "It's fine to say we have to do all these things, but people can only pay so much."
Mark Jaffe: 303-954-1912 or mjaffe@denverpost.com
Xcel uses more "riders," to pass along costs to customers
The number of automatic pass-throughs of costs, called riders, on Xcel bills has risen from four to six — and from 14 percent to 43 percent of an average bill since 2004 — according to state data.
"This is a trend that is proliferating across the country," said Ken Costello, a principal researcher at the National Regulatory Research Institute.
Riders are used to pass along costs for items such as fuel and transmission construction.
Utilities like riders, Costello said, because "they improve cash flow, reduce their risk and make life easier for them."
Bill Levis, director of the Colorado Office of Consumer Counsel, said a utility doesn't have to worry about market share and so it has no incentive not to pass along those costs.
Riders can also be "points of distortion," Costello said.
Faced with spending money to improve the efficiency of a boiler — which might not be recovered in rates — or just burning more fuel and passing along the cost to customers through a rider, a utility might just opt to burn more fuel, Costello said.
Most rider costs, however, are eventually reviewed and folded into rate cases, said Richard Kelly, Xcel's chief executive.
"Riders help us get more current," Kelly said. Mark Jaffe, The Denver Post
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