Colorado’s current utility regulatory model is already leading the state toward clean, reliable energy, and does not need an overhaul, according to the state’s largest investor-owned utility (IOU).
Xcel Energy’s Colorado subsidiary filed comments with state regulators Jan. 10 in response to the state’s proceeding examining the potential benefits of performance-based regulation (PBR), in which utilities are rewarded based on their ability to deliver on preset goals and metrics.
PBR would be a major shift from the traditional cost-of-service model, which some critics say makes utilities biased toward large-scale capital infrastructure rather than new distributed energy technologies.
Colorado Gov. Jared Polis, D, has named PBR among the policies the state needs to pursue in order to achieve his declared goal of 100% renewable energy for Colorado by 2040.
In 2019, the Colorado legislature passed a bill directing the Public Utilities Commission (PUC) to open the proceeding and report on PBR and performance incentive mechanisms for the state’s IOUs by November of 2020. The governor’s climate and energy policy “roadmap” said that PBR can “better align utility investment and operations with public goals such as emissions reductions, cost savings to ratepayers, and reliability.”
But any changes to Colorado’s regulation of electric utilities “should be grounded in thoughtful and cautious deliberation in order to avoid jeopardizing the industry-leading progress the Company is making in advancing Colorado’s energy policy,” Public Service Co. of Colorado, also known as Xcel Energy-Colorado, said in its initial comments.
That progress, the utility argued, includes Xcel Energy’s commitment, announced at the end of 2018, to reduce carbon emissions across all its companies 80% below 2005 levels by 2030 and 100% by 2050. The utility has also been able maintain high reliability of service and relatively low rates, the comments said.
“These are not the markings of a regulatory system in need of an overhaul,” according to the comments. If the goal of PBR is to address poor performance by the utility, then “the instances where [performance-based incentive mechanisms] may be useful are likely to be limited” because the utility has had “success in achieving public benefit goals,” Xcel Energy said.
But exactly what those goals should be is up for discussion. Groups pushing for PBR in Colorado believe the current regulatory model — in which a utility achieves a higher return on equity through capital investments such as building new power plants — does not give utilities sufficient incentives to pursue distributed energy.
“The traditional cost-of-service regulation model creates inherent financial biases that incentivize utility capital expenditures in generation, transmission, and distribution infrastructure to the exclusion of non-utility owned assets and services that could otherwise serve customers at lower costs to ratepayers,” the Colorado Solar and Storage Association and the Solar Energy Industries Association said in their comments.
“While this model was largely effective in delivering reliable power supplies to customers when assumptions about economic efficiencies gained by monopoly franchises held true, these assumptions do not all hold true today.”
Rather than driving improvements in specific metrics like reliability, PBR should be about “aligning utility expectations with a 21st-century grid,” Advanced Energy Economy (AEE) Principal Coley Girouard told Utility Dive. AEE has advocated for PBR reforms in several states and is also participating in the Colorado proceeding.
In their comments, the AEE urged that the PUC “use PBR to drive outcomes related to system-wide metrics such as peak demand reduction, increased energy efficiency, and greenhouse gas reductions” because “the existing regulatory framework is unlikely to sufficiently motivate utilities to actively seek out the best means for achieving these goals.”
For example, the PUC could give the utility additional compensation if it is able to reduce its peak demand, but financially penalize the utility if its peak demand increases. In its comments, AEE supports an “outcome-based” approach based on broad goals like reducing peak demand, rather than dictating exactly what programs the utility should enact.
Girouard said the hope is that through these outcomes and incentives, utility strategies like integrating rooftop solar or other distributed energy resources can compete on a level playing field with infrastructure-heavy options like building power plants or distribution lines. PBR “doesn’t predetermine that the traditional infrastructure way is the only way to do it” like the current system does, he said.
Xcel Energy, however, warned that regulators should act cautiously when implementing PBR because performance metrics can have “potential pitfalls.”
“The Commission should carefully consider how certain performance metrics will actually drive utility behavior and how such mechanisms will result in shifting of resources and attention to certain areas of focus and possibly away from others,” the utility said.
On several commonly-used measures of utility performance, Colorado scores above average.
Colorado’s average retail price of electricity was 10.02 cents/kWh, just under the national average of 10.53 cents/kWh, according to 2018 data from the U.S. Energy Information Administration. Xcel’s average power interruptions were also below the national average by 36 minutes, according to the EIA.
Other states considering PBR are grappling with this issue of benchmarking: If the utility’s earnings are determined by its performance, to what baseline should the utility’s performance be compared?
“Just because a utility has comparatively favorable rates and reliability metrics does not necessarily mean it is managing all assets and processes well,” R Street Institute Director of Energy and Environmental Policy Devin Hartman said in an email to Utility Dive. “A big challenge in peer comparisons is the baseline — in an industry with chronically poor performance, even the stronger performers have much room for improvement but it’s not reflected in a lot of metrics.”
The R Street Institute is a think tank that has filed a notice to appear in Colorado’s PBR proceeding, and has also been involved in an ongoing PBR case in Minnesota.
Chris Villarreal, an associate fellow with the R Street Institute, told Utility Dive that reforms to the traditional model can be made gradually, without dramatically upsetting the status quo.
Research shows that a way to implement PBR “is to start small,” he said, by beginning with a few targeted metrics, and over time introducing more. PBR should also not be viewed as the sole option for reform, and should be accompanied by other efforts like distribution planning to ensure that reliability is maintained, Villarreal said.
Xcel is one of two IOUs in Colorado. The second IOU, Black Hills Energy, is participating in the PUC’s proceeding and has no comments on PBR at this time, a spokesperson told Utility Dive in an email.
The PUC has said it anticipates comments from the various participants on the PBR proceeding to be completed by July, with the report to follow by a deadline of Nov. 30.