A conversation about utilities of the future

The case for revamping how we regulate investor-owned utilities

by Allen Best

Colorado State Rep. Don Coram and a utility company representative delivered unwitting testimony in support of a bill that both opposed on Wednesday afternoon at the Capitol in Denver.

The bill, which moments later was approved on a party-line vote by the House Transportation and Energy Committee, seeks to prod the discussion about how investor-owned utilities in Colorado are governed. Colorado’s Black Hills Energy and Xcel Energy enjoy monopoly status in exchange for regulation by the Colorado Public Utilities Committee. The utilities submit to oversight but get guaranteed profits.

Those revenues and hence profits, however, are largely premised on the generating assets owned by the utilities. That’s the compromise struck a century ago by Samuel Insull, the chief executive of ConEdison. As Wikipedia explains, Insull “used economies of scale to overcome market barriers by cheaply producing electricity with large steam turbines…”

For most of the 20th century, utilities made their money by selling as many electrons as possible. Have you thought about stringing lights along your driveway? Lighting your backyard? That was the theme of advertising by Public Service Co. of Colorado—now subsumed by Xcel Energ—in the 1960s and beyond.

This model has been tweaked in recent years. Partly as a result of regulatory prodding, Xcel and Black Hills have incorporated demand-management approaches and pushed energy efficiency. But the gains have been modest. The regulatory model still encourages utilities to build the generating equivalent of churches for Eastern Sunday. Their income continues to be determined by the volume of electrons they sell, not the services they deliver or other criteria.

Energy services, not electrons per se

The difference was explained decades ago by the Rocky Mountain Institute’s Amory Lovins, who pointed out that what we care about is whether our beer is cold, not the electricity used to cool it. With a different governance, he argued, utilities would have less motivation for building big power plants.

Launched in 2004 and completed in 2011, the Comanche 3 power plant at Pueblo, Colo., is symbolic of the emblematic of the old, centralized power production. Photo/Allen Best

Launched in 2004 and completed in 2011, the Comanche 3 power plant at Pueblo, Colo., is symbolic of the emblematic of the old, centralized power production. Photo/Allen Best

And that is really the idea that drove Colorado Rep. Max Tyler, a retired educator from Lakewood, to draft his bill, H.B. 15.1250, “Concerning a Directive of Explore Performance-based Regulation of Investor-Owned Utilities.”

The bill’s primary sponsor in the Senate is Matt Jones, a Democrat from Louisville.

The bill calls for the PUC to explore alternative utility revenue models and governance and report to the Legislature in 2016. The estimated cost of the study would be $250,000. It would not affect municipal utilities or co-operatives.

Those invested in the current system oppose the bill. A PUC representative declared opposition at the hearing, as did the Black Hills representative. Tyler, in his opening, reported that Xcel most assuredly opposes the bill, and in a brief interview later, said that Xcel has appealed to Gov. John Hickenlooper. Xcel, however, did not produce a witness to testify.

Xcel delivers 55 percent of electricity consumed in Colorado, and Black Hills 4 percent. Municipal utilities and co-ops deliver the remaining 41 percent, according to the Southwest Energy Efficiency Project.

In Tyler’s telling, it’s more a question of when rather than if the governance of investor-owned utilities will change. “This is so 20th century,” he said, a sentiment echoed by several speakers. The idea of a one-way grid is essentially no different than what was created in the days of Thomas Edison, he said.

Tyler argued that it really is in the interest of utilities to figure out alternative revenue models. He pointed to California, where demand has been flat for a decade owing to improved energy efficiency. We are, he said, on the verge of what Lovins has termed “negawatts,” or the reduction in total demand even as economic and population growth continues.

In addition, Tyler pointed to the need to broaden the matrix for evaluating utility performance. Reliability and cost were the traditional criteria specified by legislators, occasionally supplemented in recent years by murkier concerns about environmental performance.

Tyler would seek a more overt calculation of environmental performance, including impacts to water and also emissions of greenhouse gases. “Like it or not, carbon emissions will become far more expensive in the future,” he said. “This is the reality. This is the future.”

Higher costs … or lower costs?

Several speakers testified against the bill. “We cannot forget about the short term,” said Dan O’Connell, representing the Colorado Association of Commerce & Industry, while warning of higher costs.

Ron Lehr

Ron Lehr

Just as many were there to voice support. “A step forward, in my view,” said Ron Lehr, who was once chairman of the Colorado PUC as well as holding a similar title on the Denver Water Board.

Lehr said that instead of higher costs, this could lead to lower costs. He cited the example of PacificCorp, the utility now owned by Warren Buffett’s Berkshire Hathaway. The utility, said Lehr, adopted performance-based standards in response to Buffett’s questions.

Now, said Lehr, Illinois, Minnesota and New York are all investigating new standards for governance of investor-owned utilities. “We can learn from them. It’s not an overwhelming challenge.”

With the right incentives, added Lehr, “everybody benefits, including the utilities.”

During the session, much was made of Black Hills Energy, which provides power to Pueblo, Cañon City and the Wet Mountain Valley. The company has built a natural-gas power plant—at great cost, critics said.

Coram, whose skeptical questions foreshadowed his no vote, asked Heidi Morgan, the state governmental affairs manager for Black Hills, if there was a danger of blackout if the utility had not built the seldom-used but expensive plant.

No, she replied, as Black Hills could purchase power on the spot market, but it preferred to used power from its own generating plant.

And that is the exact point of advocates of utility reform. Money is not invested most productively under the current model of utility governance model. Without citing a source, Tyler said that energy efficiency measures cost 2 to 4 cents per kilowatt-hour compared to anywhere from 6 to 15 cents per kilowatt-hour for coal-fired electricity.

The same point had been made a week before at the Vail Global Energy Forum by Richard Kauffman, chairman of energy & finance for New York Gov. Andrew M. Cuomo. He said the current system encourages inefficient allocation of capital. He envisions a greater degree of distributed generation of electricity.

Will Colorado follow other states and revamp its current regulation of utilities? Not likely this year or next. Tyler said as much after the committee hearing. Asked if he thought the bill could get through the Republican-controlled Colorado Senate, he replied that his bill still had to go through two committees before getting to the floor of the House.

Tyler also said that there might be other ways in which Xcel will evolve into a  utility of the future. This is a conversation to be continued.

This story was revised to correct the misspelling of a state representative’s first name.

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About Allen Best

Allen Best is a Colorado-based journalist. He publishes a subscription-based e-zine called Mountain Town News, portions of which are published on the website of the same name, and also writes for a variety of newspapers and magazines.
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