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Energy Future Background
Why is Boulder considering creating its own electric utility?
Boulder's energy supply is one of the most carbon-intensive in the nation. Our community wants to change that.
In 2002, Boulder became one of the first cities in the country to pass a resolution in support of the Kyoto Protocol establishing the goal of reducing greenhouse gas emissions to 7 below 1990 levels by 2012.
Since adopting this goal, our community has worked hard to get there. In 2006, Boulder voters approved the nation's first "carbon tax." We have created innovative, nationally acclaimed programs that help our community reduce energy use such as Energy Smart, curbside composting, and expansion of our bike trail system.
But, as 2012 approached, it became clear that we were not going to meet our Kyoto goal just by changing the way we use our power, even though most of the programs had been very effective. We realized we had to shift our dependency away from carbon-intensive coal and change the source of our power in order to meet our carbon goals.
With the approval of voters in 2011 and 2013, the city has been exploring options that could deliver our community clean, reliable, low cost, local energy. This has included partnership discussions with Xcel Energy, which failed to result in a proposal, as well as in-depth analysis of the possibility of creating and operating our own electric utility.
Current efforts to increase renewables are hampered by Xcel's continued investments in coal.
While Xcel emphasizes its leadership in wind energy, it still invests heavily in coal. So much so, that Boulder customers are forced to make do with one of the most carbon-intensive energy suppliers in the nation discharging 1,632 lbs of carbon per MWh of electricity. Even when Xcel creates more renewables, Boulder is still powered primarily by coal. Real change would mean decommissioning more coal plants than the company has planned and an end to building new ones.
While Boulder remains open to the possibility of reaching a new partnership with Xcel to address our supply goals, this depends on Xcel being willing to re-examine its business model and work collaboratively on our community's goals. Xcel Energy's Colorado Electrical Resource Plan starting in 2017 says from 2017 to 2037 -- a 20 year period -- Xcel will reduce coal by 35 percent, Increase gas by 29 percent, have up to 3 percent solar and up to 20 percent wind. From 2017 to 2037, Xcel plans on increasing wind by 1 percent. Learn more about Xcel's resource plan by clicking the link to your right.
So, the option that Boulder has explored the most is creating a local power utility. Through this research, we’ve learned that a local electric utility could meet more than 50 percent of Boulder's energy needs with renewable energy sources (wind, solar, hydro) while maintaining the same (or better) costs and reliability as Xcel. In fact, a local utility could eliminate our coal dependency entirely and still maintain comparable rates to what Xcel charges now.
The city’s model show potential to include 35 percent wind by 2017. Currently, Xcel generates 59 percent of electricity from coal and plan on reducing that to 55 percent in 2017. Xcel projected it will reach 24 percent renewables through 2037. For a municipal utility to deliver 35 percent of its power from wind would be nearly a 50 percent improvement over Xcel’s plan. Xcel’s continued reliance on, and reinvestment in, its “coal fleet” is a cause for continuing concern because of the massive continuing carbon emissions.
Municipal utilities in Colorado and across the country are leading the charge for integrating renewables and innovative energy-efficiency programs to make their communities stronger and more resilient. Our community could do a lot with the money that will otherwise go to shareholders as profits.
Coal costs might continue to rise.
A recent filing by Xcel at the PUC showed projected cost increases associated with coal consumption that are higher than the company has estimated in the past. To account for this likelihood, the city included a potential carbon tax in its modeling to test the impact this - or a carbon tax or both - might have on utility costs.
While Xcel Energy insists a carbon tax is unlikely, other disagree. The city's models show that even if this anticipated regulation does not take effect, a local electric utility that reduces our reliance on coal would still be able to deliver competitive rates.
Renewable Energy Credits (RECs) are not the solution.
Boulder residents buy wind energy credits (REC) at the highest rate of any community in Xcel’s service territory, This demonstrates that Boulderites are willing to do whatever they can to buy better power. Unfortunately, buying RECs doesn’t really mean that your house is using wind power. A REC simply requires Xcel to add wind to its overall mix. They don’t have to use it, they just have to have it. And because coal is cheaper than wind, Xcel still burns mostly coal around here. Additionally, Xcel utilizes wind power to meet state mandates - not because it has decided to stop investing in coal. Our community is asking Xcel for a more direct commitment to renewable energy, or looking for a way to achieve one itself.
A city-owned electric utility could increase renewables—and significantly decrease harmful greenhouse gas emissions. With one exception, all of the municipal options modeled would enable the city to exceed the Kyoto Protocol goal of lowering emissions by 7 percent from 1990 levels on the first day of operation.
The city modeled with and without a carbon tax included.
After the first round of modeling, there was concern around the inclusion of carbon tax and what would happen to costs if a carbon tax wasn’t imposed by the state or federal governments. To address this, staff incorporated a variation without any carbon tax into its models for Council on July 23, 2013. The results showed a local utility could still meet the charter metrics test. The models were also run with and without a wind production tax credit in order to further test the costs. With or without this included, the utility could still meet the charter metrics.
The city’s proposed acquisition area provides the highest level of reliability and the lowest impact on our community and environment.
You may have heard that the city was seeking to serve about 6,000 customers outside of its boundaries – in limited portions of unincorporated Boulder County – to many customers that already receive city water and sewer service.
While the city was considering this, Boulder is not seeking to provide this service at this time. Instead, the city would acquire related Xcel assets, in order to serve all in-city customers, but the current utility would continue to be the provider for out-of-city customers who rely upon the city-owned equipment for service.
The service area boundaries were drawn the way they are to provide maximum reliability. Even Xcel’s consultant acknowledges that drawing the boundaries to include all six of the substations that currently serve the city is the technically optimal way to separate from Xcel’s system.
Since the original map, engineers were able to field verify the equipment and investigate the portions of the system at the service area boundaries. They recommend that the city also acquire the 115kV transmission loop that serves the city. This loop connects the six substations in the original acquisition plan and includes the Boulder Hydroelectric plant so the city could access electricity it generates. Acquisition of the loop also allows the city to more effectively balance local generation and other electricity distribution thereby improving reliability within the city. Incorporation of the loop adds approximately $28 million in costs over 20 years to maintain and update the equipment. This additional amount was incorporated into the modeling. Even with the additional amount to acquire the loop, the city has valued the necessary assets at about $120 million.
A map of the proposed service area and transmission loop is available here.
There are other municipal utilities, including our neighbors in Longmont that serve customers outside their city limits.
♦ The county properties amount to less than 9 percent of the overall load the city would be serving, if the city were to serve these customers in addition to those inside the city.
♦ Condemnation would be limited to assets owned by Xcel that are essential to providing reliable and quality service to customers.
♦ The Colorado Constitution gives home-rule cities the authority to seek to acquire property to provide services of public necessity to the community. Case law has established that this includes utility service. Xcel has the right to contest this action in state court, and there are certain standards the city will have to meet before a court will grant approval.
♦ Contrary to statements by Xcel, if the city does end up serving out-of-city customers, the city has no plans to charge county customers within its proposed service area rates that are higher than those paid by city customers.
A Boulder electric utility would make infrastructure decisions that preserve or enhance current reliability levels. Inter-agency cooperation and agreements would provide coverage if an emergency caused a system failure.
A local utility would hire seasoned crews or companies to maintain its system. It would also enter into mutual aid agreements with local and regional partners to bring customers back on-line quickly after bad weather or other emergencies. Watch our video of a recent presentation from mutual aid specialists.
Boulder’s plan to finance a local power utility is smart business.
If Boulder creates a local power utility, it will use capitalized debt to pay for start-up costs. This is a prudent practice in business and is typically utilized by start-up companies and public power utilities. Capitalized debt was built into the modeling to be conservative and ensure there would be adequate cash reserves in the event of unforeseen circumstances.
Xcel customers are already used to deferred financing models that spread costs over time. They just might not know it. One example is Allowance for Funds Used During Construction (AFUDC). Xcel regularly accumulates interest costs over the course of its construction projects. This deferment can last for many years and is often at higher interest rate than the city might pay. When the construction project is complete, Xcel takes the construction costs and rolls the accrued, unpaid interest into its rate structure. By doing this, the company can charge rate payers for depreciation and earn a return on its total costs over the life of the asset.
Now Xcel is suggesting to voters that the city should approach this effort to build the Electric Utility of the Future differently, even as its company clearly benefits from this practice. It is simply a good business sense to ensure a new local utility has enough cash flow for contingencies at the time of start up.
The city has made a commitment to lower or equal rates than Xcel offers not just on day one, but for 20 years.
By Charter, the city cannot charge rates higher than those charged by Xcel at the time it takes over the distribution system. But the city has analyzed and projected costs and associated rates for a local utility for its first 20 years. As many municipal utilities have already found, these projected rates could be lower than investor-owned utility rates.
For three of the studied municipal options, a city utility’s costs would be significantly lower than Xcel’s leading to rates that were better, on average, over this entire timeframe. Two municipal options that called for the most aggressive environmental action did not meet this test, so staff is not recommending that a utility start with them.
But what about later? The City Charter includes specific language setting guidelines for future rate considerations, as well. It says, “Rates charged by the utility will be designed to create a fair and equitable distribution among all users.” In addition the charter states, “The cost of electric power is a significant portion of business and household budgets. The utility will operate in a fiscally responsible manner, always being mindful that every expenditure will be reflected in customers’ rates and will affect household budgets and business profitability. The utility will, while always honoring its obligations to bondholders, strive to maintain rate parity with any investor-owned utility whose service area would include the City of Boulder.”
Unlike some other cities, Boulder is limited by Charter from being able to use - or increase - rates in order to boost its General Fund. The only transfer of funds that is permitted is 4 percent to cover what Xcel had been paying for a franchise fee. City voters are currently paying this as part of a Utility Occupation Tax to ensure that core services remain funded. This additional tax would no longer be necessary.
Providing stable electric rates and strengthening the Boulder economy are as important as our community's environmental goals.
A local utility would encourage local generation and a reduction in the amount of electricity supplied by the city would not have a big impact on rates. 70 percent of operations costs are in power supply. Local generation would reduce 70 percent of the cost and remaining 30 percent would be spread among customers which leads to a very small rate increase.
Boulder will only proceed with creating a local electric utility if it can meet strict financial requirements previously approved by voters.
The Charter also requires the city to show that a local utility would raise enough money to cover its bond obligations plus a little extra to be safe. City Council will have to pursue alternatives if the costs of acquiring and separating from Xcel's system are too high to meet these conditions—plain and simple.
There are two areas where costs remain unknown. The first is stranded costs – or repayment the city might have to make to Xcel for investments it made in generation when it assumed Boulder customers would be helping to pay the company back. Based on a recent clarifying statement from the FERC, the city received confirmation that it could reduce some or all of its stranded cost obligation, if imposed by the FERC, by continuing to purchase power some or all of its power from Xcel for some period of time.
The city has strong arguments that support its position that it will not owe stranded costs. Stranded costs only apply to generation investments, not to lost revenue. In addition, costs are only stranded if the utility can't sell the generation power to anyone else in the country.
More specifically, Xcel Energy has told the Public Utility Commission that it is likely to need more resources than it currently has at the time the city is most likely to municipalize. This means that if Boulder customers depart the system and no longer draw their power from Xcel's sources, the company - and other rate payers - could avoid the need for more generation and the costs associated with it. This could be a win for everyone, if Xcel is not successful in delaying a decision.
The second area is acquisition. The city believes the assets are valued at about $120 million. The modeling the city conducted used a figure that was a little higher, $150 million, based on information that Xcel provided. The Charter limits acquisition costs to $214 million. Even if the city had to repay bonds at this higher cost of acquisition, it would have significantly lower costs than Xcel over 20 years.
There are legal and regulatory processes in place that are designed to ensure that both departing customers of a utility and the remaining utility are treated fairly. The full costs will be known and evaluated after these processes.
Boulder has tried to partner with Xcel to meet Boulder’s energy goals.
The City of Boulder has been open to a partnership with Xcel, either as part of, or instead of, municipalization. In fact, the city has tried for 10 years to engage Xcel in developing an energy solution that works well for everyone. View the City's White Paper on Partnership ideas as well as information about the Boulder-Xcel Partnership Task Force for more information.
We recognize that a benefit of partnering with Xcel Energy, as opposed to creating a city electric utility, would be that Boulder would have a chance to bring meaningful change to the region and make a larger impact. But our community cannot realize this benefit without Xcel’s collaboration and vision.
In March 2013, Xcel proposed the creation of a task force that would engage with Xcel executives, city staff and other experts to discuss possible paths to forming a partnership. The city fully participated in these. During discussions, it became clear that the partnership ideas that group members were proposing were not acceptable for Xcel Energy. As a result, the group suggested it would be more effective for Xcel to present a proposal of its own that would outline possible programs and services to help Boulder reach its goals. The group continued this effort until it became clear that such discussions were not resulting in the desired outcome. The group disbanded in early 2014.
The city is in a better position to respond to its customers and continues to explore governance models that will give everyone served a strong voice in decisions.
A core tenet of municipal utilities is to communicate with its customers and build a system and products that meet their needs. It is much easier for customers to call City Hall, reach out to a council member or come to a council meeting to share their viewpoints than to speak to a corporation that is headquartered hundreds of miles away.
The Charter currently calls for a nine-member electric utility advisory board. So that a variety of views are represented, three of the seats are open to non-city residents, specifically individuals who own businesses or work in Boulder.
A governance working group of community members from the city, the business community and impacted portions of the county gave recommendations on the role of the board relating to rates and rate structure as well as board composition relating to county residents, customer classification, and skill sets required. Voters approved the group's recommendations in 2013. The provisions related to out-of-city customers would take effect only if the city were to serve these individuals and businesses.
Boulder is not the first community to create a municipal utility, and is in a unique position to build the most efficient, environmentally sensitive, reliable utility in the country.
The City of Boulder has learned from others’ experiences and applied these lessons to its modeling, including taking into account the possibility of higher-than-expected initial costs. Industry specialists familiar with the city’s analysis say that Boulder is doing it right.
Xcel has recently provided examples of challenges faced by local governments seeking to municipalize. But it’s interesting to note that many of the challenges that local governments face are roadblocks created by an investor-owned utility . There is even a “playbook” that investor-owned utilities like Xcel follow to keep cities from forming their own local electric utilities.
The Jefferson County PUD in Washington State is a success story. Three years after its creation, the PUD’s supply is 95 percent carbon free (largely because of hydro). The local power utility added jobs and maintained existing rates while the investor-owned utility that previously served the area is experiencing ongoing rate increases.
Additionally, more than 50 percent of the resource mix in Denton, TX—a college town the size of Boulder—is from renewable sources. Aspen is 75 percent renewable-powered. There are many communities in Europe that are 100 percent powered by renewable resources and have reliability levels better than in the US. Clean, reliable, low-cost, local power is possible for our community.
As pointed out by Gregory Booth, PE—he who has represented 300 utilities in 40 states, including the largest investor owned utility (IOU) in the country—a locally controlled municipal utility can react to these drivers of change and take advantage for its customers of the many opportunities with a speed and decisiveness that cannot be matched by the large IOU’s.
Many municipal utilities have become economic vitality engines and hubs for innovation in their towns.
By offering enhanced reliability options and collaborating directly with the Boulder business community, it is likely that a local electric utility would create local jobs and attract new companies, while giving those that are already here a leading edge.
Cost-savings could support new technology that would set our community apart. Our neighboring Longmont public power utility recently announced that it is going to build a broadband system offering incredibly high speeds and low rates. This will not only be convenient for residents, but also incredibly attractive to commercial and high-tech industry.
A local utility also could isolate a portion of its distribution system to become a test bed – something the emerging green industry sorely needs – without impacting the service customers receive. This would boost Boulder’s already strong reputation as THE place for start-ups, innovators and entrepreneurs.
The local electric utility model is being carefully evaluated by a third-party reviewer.
Who was the evaluator?
Power Services Inc. of Raleigh, NC, was hired as an independent, third-party evaluator to determine whether there is a reasonable likelihood that Charter requirements related to creating a local electric utility can be met. Power Services was ideally suited to answer the question, because it is a company that represents over 300 utilities, from small municipal utilities to the biggest investor owned utility (IOU) in the US.
What did they evaluate?
Essentially they answered the question: “Can a municipal utility provide electricity to Boulder that would reduce carbon emissions, increase renewables, have a debt service coverage ratio of 1.25 and do so with greater reliability charging the same or lower rates than Xcel for electricity. The only limitations placed on this process relate to assumptions the city made about acquisition and stranded costs figures. That's because the city used figures provides by Xcel as a high end of its estimates. Read the RFP.
Power Services was asked to identify any items city staff may have missed and provide feedback about resource and financial assumptions in order to ensure the analysis completed to date was solid. The results showed that a Municipal Utility could do all of those things listed above, and that rates charged to Muni Customers could be lower not only on day 1, but over a 20 year period. Read the third-party review final report.
The City modeled worst-case scenarios and the models were heavily stress tested.
Xcel and others criticized the City’s Feb. 26, 2013, modeling of a local electric utility, saying that it did not model worst-case scenarios. In response, the city reran its models and included assumptions for worst-case scenarios, even though those scenarios are highly unlikely to occur. The city presented additional modeling on July 23, 2013, that intentionally stress tested the conclusions of the previous model results by incorporating higher levels of risk in the form of higher costs. Specifically the models tested no carbon tax or fee, the elimination of production tax credits, significantly higher natural gas prices, and adjusting the stay with Xcel baseline to be even more favorable to Xcel. While stress testing provides the worst case muni scenarios for consideration, it does not provide the worst case “stay with Xcel” scenarios, nor does it show the large upside potential that may be enjoyed by local electric utility customers.