Xcel Energy is proposing to raise electric rates in Colorado to collect an additional $210 million.
Beyond the extra $6.52 per month an average residential customer would pay in 2007 if the rate hike is approved, why should you care?
Here’s why: Xcel wants to recover its costs quicker from customers in order to bolster its appeal to investors, improve its credit rating and reduce its financial risks.
State regulators will hold hearings this fall. But consumer groups already are soliciting customers to fight the rate increase through a campaign at www.exposeXcel.com.
The rate case raises an important philosophical question for the state Public Utilities Commission, which rules on rate requests: If Xcel shareholders are taking less risk, shouldn’t the company’s regulated rate of return – funded largely by residential customers – be lower too?
Xcel has asked the PUC to increase its rate of return to 11 percent from 10.75.
Utility analyst Ron Binz said the PUC should instead lower Xcel’s rate of return to single digits because ratepayers would shoulder more risk.
“Much of Xcel’s revenues are on autopilot in Colorado,” said Binz, the former director of the Office of Consumer Counsel. “They are pretty much buffered from fluctuations in demand and economic conditions. Their investments tend to be relatively risk free.”
Fred Stoffel, Xcel’s vice president for policy development, said the utility’s approach benefits customers and shareholders because the company will be stronger financially and have lower borrowing costs.
“It’s mutual,” he said.
Minneapolis-based Xcel serves 1.3 million electric customers in the state through a subsidiary, Public Service Co. of Colorado. Public Service has not operated efficiently in the past.
In 2005, it was allowed to make a 10.75 percent return on equity in Colorado, but it only earned 8.5 percent because costs were up and sales were down.
Standard & Poors, a credit rating agency, lists Public Service’s debt at BBB-, the lowest investment grade rating. Among the reasons: its high ratio of debt to equity, and the amount of power it buys from outside providers.
The rate case is one vehicle the utility is using to deal with these issues.
As part of the case, it is asking the PUC for permission to more quickly recover costs from customers and make a profit on its investments. Two examples:
Instead of an annual adjustment to the amount it charges customers for the fuel it uses to generate electricity, the utility wants the adjustment to occur monthly. That means when natural gas costs spike to $15 per million cubic feet, as they did last winter from less than $8 per million cubic feet six months earlier, the company can recover its costs quickly.
The utility wants to include $210 million in costs at its Comanche power plants near Pueblo in its rate base and begin collecting a profit on that investment. Most of that cost is for construction work that will be done this year on the new Comanche 3 plant. Historically, utilities have only profited from a new power plant after it got up and running. A previous agreement with regulators allows the change, but the utility has to justify it in the rate case.
“The company wants more real-time cost recovery,” said attorney Mark Davidson, who represents Rocky Mountain Steel Mills, Public Service’s biggest customer.
Improved cash flow could reduce Xcel’s borrowing costs and ultimately mean lower costs for customers, said Jim Greenwood, director of the Colorado Office of Consumer Counsel, which represents ratepayers.
Xcel also wants to shift the capital structure of Public Service to 60 percent equity and 40 percent debt, in part by retiring debt, according to the rate filing.
In 2002, the ratio of debt-to-equity was balanced but has shifted toward higher equity.
“What we needed to do was … increase the amount of equity in the company and that reduced the amount of risk associated with our debt,” said Stoffel.
But he said the utility still faces considerable risk because it is spending $1 billion on the Comanche 3 power plant, which won’t be finished until 2009.
Staff writer Steve McMillan can be reached at 303-820-1695 or at smcmillan@denverpost.com.
