The trouble with (for) IOUs

Xcel reaps bitter harvest from SmartGridCity

Phil Carson | Dec 27, 2011

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Investor-owned utilities will do whatever they can to pass costs along to the ratepayer, no matter whether those costs are the result of bad decisions, cost overruns or faulty execution. And public utility commissions merely aid and abet this abuse of customers of regulated monopolies by rubber stamping this outrage.

A strong statement, perhaps? I wouldn't rush to reject it. For one thing, it isn't mine. It is the precise upshot of statements by dozens and dozens of ratepayers in Colorado in general and Boulder in particular over Xcel Energy's attempt to recoup another $16.6 million on its SmartGridCity outlays, after succeeding in recovering $27.9 million earlier this year.

Now, we all know that newspaper forums typically are populated with people driven to make a statement and are not statistically valid representations of the populace as a whole. But if you ran a business, you would pay attention to what you're doing to drive all these people to log on to their local newspaper sites during the holidays and excoriate you for your practices.

You can make up your own mind on Xcel's latest cost recovery effort by going to the Colorado Public Utility Commission's e-filing system and punching in docket number 11A-1001E and clicking "run."

Next week we'll bring you an Xcel representative who will explain the company's logic in stating that it has established clear ratepayer value by purportedly finishing the SmartGridCity project, justifying the collection of $45 million from Colorado ratepayers. (Recall that the company originally estimated its costs at $15 million. Then project costs tripled and both Xcel and the Colorado PUC jumped through multiple hoops to get cost recovery after-the-fact.)

I have been fiercely critical of that stance, that process and the outcome so far. But today I merely bring you a little local color, by quoting representative remarks made in the wake of local newspaper coverage of Xcel's latest effort on cost recovery.

Though the lesson to the industry ought to be apparent, I'm spelling it out: investor-owned utilities (IOUs), which have to balance responsibilities to shareholders with obligations to ratepayers, almost always favor the former over the latter. After all, shareholders vote with money, affecting the fate of IOU executive decision makers. Ratepayers' means to object are minimal, diffuse and at arm's length, through their public utility commission, whose members in Colorado are selected by the governor and confirmed by the state legislature.

So when an IOU makes a blatant grab for cost recovery that precludes any responsibility for its role in massive cost overruns and dumps the cost instead at the feet of its ratepayers, especially in tough times, no one should be surprised that perennial mistrust and resentment arises.

So what? Machiavellian politics dictates that you use all means at your disposal to have your way. Those strong enough to take what they want shall do so. The multitudes can cry foul, but they'll pay. That's the way of the world and tough luck to those who don't get it. Right?

Does anyone see a hitch in this "business plan," say, over time? Does anyone think that, moving forward, this is a basis for the support and funding of grid modernization? Does Xcel really want to be the poster boy for everything that's wrong with modern IOUs? These questions may be moot; their answers may already be firm in the minds of ratepayers. And the Colorado PUC may not like it, but in the public mind it only colludes with industry, it does not protect the public interest. 

On Monday, the day after Christmas, when newspaper readership is notoriously low, The Denver Post ran a five-sentence article cribbed from The Boulder Daily Camera. The longest sentence was a quote from an Xcel representative extolling the value of SmartGridCity. But the bare facts elicited some responses.

"Why should we pay for Boulder?" asked one Post reader. "We did not make the deal. Xcel is always asking for some kind of rate increase every time we turn around. Why can't the PUC just tell them no?"

"What incentive is there for them to control costs if they can just pass the cost on to their captured customers?" asked another reader. "Make them pay for it out of their profits, not our pockets!"

"A 300 percent [cost overrun]?" asked another. "No wonder Boulder is getting off the Xcel grid. Other communities should follow suit."

The Boulder Daily Camera article that ran Christmas day, "Xcel declares Boulder smart grid finished, asks to recoup $16.5M from ratepayers," ran to 25 paragraphs. It noted that Xcel claimed one major value from SmartGridCity was that it taught the utility what not to pursue and therefore "may have avoided hundreds of millions of dollars in investments, and associated rate increases, that would have created insufficient value for customers relative to costs."

Boulder readers weren't so sure that piece of wisdom was worth $45 million.

"These costs need to be absorbed by Xcel's shareholders, who can presumably hold management accountable for this boondoggle," wrote one Boulder reader.

"Everything that Xcel does validates the decision by Boulder voters to proceed with the possibility of forming a municipal utility," wrote another.

"Smart grid was an R&D project, pure and simple," wrote another. "Traditionally, R&D expenses are never passed on to the existing customer base, but are recouped in future business, if there is a profit. If not, it is written off as a loss, which is why the tax code allows such write-offs to encourage R&D. Xcel is trying to have its cake and eat it too, and the Colorado PUC so far has been going right along with it."

"If there are mistakes that the customers end up having to foot the bill for, I maintain that means the entire enterprise is an experimental science project that is still 'immature,'" wrote another. "Mistakes should be billed to the R&D department and paid for by the investors, NOT the taxpayers. Taxpayers wanted the smart-grid tools on their boxes, and they didn't get them, and only when they do should they have to pay. Lately, companies are doing everything they can do to keep the investors happy at the expense of the customers and the taxpayers, and the PUC should not be dumb enough to be on the wrong side of this. Their job is to protect the consumer, NOT the investors."

IOUs everywhere ignore this dynamic at their peril. In an industry that is changing more rapidly than the players themselves understand, utility hubris plainly angers the "customer," who will seek any means at their disposal to escape this treatment. Remember the downside to Machiavelli's approach: Live by the sword, die by the sword.

More of our coverage on this case includes:

"SmartGridCity: Did Xcel Get Results?"

"Boulder Rejects Xcel"

"Boulder Seeks Divorce from Xcel"

Phil Carson
Editor-in-chief
Intelligent Utility Daily
pcarson@energycentral.com
303-228-4757 

 

 

 

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Comments

Boulder was a willing partner

While Boulder and Xcel are at loggerheads now, nobody should forget that the city was a willing partner in Smart Grid City when it was first proposed. This little-disguised bribe to the city back in 2008 to drop municipalization was eagerly anticipated by many in the city as a way of setting higher rates for power usage they saw as bad -- such as too much A/C in the summer.

Nobody at the time in Boulder asked any serious questions about how the technology would be implemented, what standards such as security would be met, or even what it would cost for adapters so appliances could be put on the smart grid. The city was not naive about Xcel -- the push for municipalization back then was fueled by the same hate for Xcel that exists today. No, the city got sucked in by all the fancy promises and did not do anything like a serious consideration of whether or not Xcel could keep its promises.

Let's not forget that the costs of the failed Smart City project are to be paid by all of Xcel ratepayers in Colorado. Boulder's share will be tiny. And if they municipalize, they will probably pay only a small fraction until their withdrawal is formalized.

Finally, what will happen to the fiber-to-the-curb network that Xcel installed in Boulder for Smart Grid City? Surely Xcel could recoup some of its costs by selling it to an ISP to provide high speed internet service. If we grant Xcel its latest request for the $16 million, what wil happen if they do make a sale? Do they get to pocket all the money?

A tad premature?

"Failed" or "succeeded" has yet to be determined. We'll follow the Colo. PUC's deliberations to see how it parses Xcel's arguments that it has created the value to ratepayers the Colo. PUC insisted on.

Sure, Boulder bears some responsibility for the outcome and perhaps it didn't ask the right questions at the outset. But then, neither did the Colo. PUC. The sort of evidence being offered in support of that $16.6 million cost recovery does not look like the typical pilot project output that discusses participation, behavior, energy saved, dollars not spent, etc. So I'm skeptical.

As for SGC infrastructure, I'd only be guessing that that's a stranded asset that Boulder would pay for, should the city reach that point. Again, frankly, I'm skeptical that Boulder will reach that point. Would the rest of us Colorado Xcel ratepayers be repaid the $45 million? It only seems fair, and, therefore, unlikely. However, that would mean that Xcel double-dipped on its capital cost recovery.

Too soon to tell (a woeful cliche, to be sure) on many of these questions.

Regards, Phil Carson

Profit maximization is the primary driver

Short term profit maximization is what drives many of the IOU decisions.  In a monopoly world, utility customers minimally impact a firm's profit because they cannot choose another provider.  On the other hand, shareholders can choose to invest in another company or purchase another company's bonds. 

This is a big reason why utilities are particularly sensitive to investor needs and not particularly interested in consumer needs.  This dynamic is starting to change.  Technology will allow customers to begin to influence this dynamic.  There will be opportunities to self generate, aggregate load, and aggregate excess EV battery charges.  Utilities that have continually placed the customer at the end of the line, will find there customers will be the first to leave. 

These disgruntled customers will also be the first customers to demand that their utility share their usage information with third parties so they can insert it into information portals that will allow customers to better manage their usage.  These portals will also be used to communicate, market, and build relationships.  Thus, the more customers that jump ship, the less influence utilities will have over their customer base.

The old utility thinking must change for the new utility market.  Building trust with customers before they have options is the optimal long term solution.  The old marketing adage is it is much cheaper to keep a customer than it is to find a new one.  Smart utilities will build relationships with customers to maximize long term profits rather than driving short term gains at the expense of the customer.

http://rubbervines.com  

Good article this morning on

Good article this morning on Boulder's Smart Grid.

It really should come as no surprise that a profit-motivated entity, such as an IOU, would pursue a path for them to make the greatest profit. Unfortunately, there is little to be done to Xcel after the Smart Grid horse has left the barn. However, I'm not that familiar with how Xcel's R&D costs are handled.

A better course of action is to get cost over runs handled before the project starts, as there is an incentive for the utility to spend as much as possible since they typically make a margin off these types of projects. One good thing is that this project has raised the public's awareness of how utilities operate across the U.S. 

Maybe that is the big take away here. If your serving utility wants to do something like this, find out how the costs will be passed on if it turns out not to be profitable. Most likely, those costs will always be passed to the rate payers and not shareholders.
 
Vince Marshall
Cherokee Energy Management & Construc

Understandable.

I am kind of in agreement with the Colarado ratepayers. Utilities need to implement Smart Grid/Smart Meter projects effectively and efficiently with business outcomes that are valuable to the ratepayers.  

Thank you

The alternative to the scenario described above, in my view, would simply be more transparency. The precise approach to cost recovery should have been spelled out at the beginning of SmartGridCity, so that when costs spiraled, Xcel would have made better decisions about the limits on its capital outlay. I.e., the Colorado PUC could have capped recovery up front, forcing better decisions impacting shareholders.

That didn't happen. In recognition of what did transpire, Xcel simply should have taken some financial responsibility rather than siphoning the wallets of its ratepayers to cover for its mistakes. I don't think you can characterize triple cost overruns as anything but a very bad decision.

Frankly, I think over time, Xcel will spend considerable amounts of money to generate virtually any goodwill in Colorado. That task would have been easier and cheaper if Xcel had stepped up and accepted some responsibility now. For instance, accepting a $16.6 million chunk of responsibility would have blunted criticism considerably. As it is, Xcel has doubled down here by asking for a $100 million rate increase without public hearing, declaring that it's a near-emergency. I'm sorry, that stance simply cannot pass without severe criticism.

I'm in favor of regulatory policies supporting R&D, but clearly the burden must be shared between shareholder and ratepayer. That's all. I leave it to someone more knowledgeable to draw the connection between cost recovery, profit and executive compensation -- I'm sure it's there, affecting these decisions.

Regards, Phil Carson

Maybe I see something that is not there?

Perhaps I am indulging "conspiracy theory thinking" too much but, one problem I have with all the "smart grid" push is that it will enable time-of-use billing that will come at the detriment of residential and commercial customers in particular--those people who live in a normal day/night timeframe.  Industrial customers typically have long term, fixed-price contracts for baseload power on a 24/7 basis.  Those rates are pretty low compared to folks who use power on a work day basis--residential customers, small to medium manufacturers, grocery stores and other retail business, doctors etc.  The goal, in this conspiracy theory, is the use of draconian measures to force the public to modify their life cycle to minimize power production and thereby fuel combustion (and emissions therefrom) by making the dominant domain of fossil power--the daily peak(s) so expensive we cannot afford it.  I recall working for a process plant down in Corpus Christi, TX that was paying $25/MWh for electricity when commercial customers--small manufacturers, repair shops etc--were paying $140/MWh.  What do you reckon the impact on small business--the #1 job creator in the US--was?

I hear you

A few readers have suggested that time-of-use rates will cover for a money grab. Now, I'll defend utilities. Moving to charge for electricity based on its cost of production over the 24-hour cycle (given little to no storage) just makes simple sense, from a market perspective.

Yes, that will require shifts in behavior, but technology will aid end-users. For residential, automated pre-cooling, e.g., can cover for lowering consumption during critical afternoon heat. Small businesses may find a similar strategy will work for them. Perhaps a customer's pattern of behavior can lead to peak time rebates or other incentives to adapt where possible. Meanwhile, the vulnerable or any user would presumably be protected by having an optional default flat rate.

The question is whether IOUs in particular will abuse this process or use it to benefit ratepayers. I start with the belief that regulators will ensure fair play, but then, I wrote today's column citing my own naivete. Jury's out.

Regards, Phil Carson  

IOU Business Model

Having worked in the co-op/public power sector for 30 years, I've often thought about the best business model for the provision of electric service and the sharehold/ratepayer pecking order.  With all due respect to IOUs, because electricity is foundational to our modern way of life, it seems that ratepayers should have priority over shareholder interests. This is particularly true today as we consider and deploy  technologies that deliver  more control, greater reliability, operational flexibility and a lot more information to both utilities and their ratepayers. Who will have the loudest voice in the future -- the distant shareholder or the rate payer with an app that lets them pay their bills, report outages and gives them interval readings?