I’ll be referencing these notes in an article to be published on AltEnergyStocks.com as What the ARRA Means for Clean Energy: One State’s Example on March 15th.
Archive for Events
RealClimate has an article outing "The 2008 International Conference on Climate Change" as a publicity event to generate reports in the press of a lack of consensus in the scientific community about anthropogenic Climate Change.
I was struck by this quote:
they are offering $1,000 to those willing to give a talk. This reminds us of the American Enterprise Institute last year offering
a honorarium of $10,000 for articles by scientists disputing anthropogenic climate change. So this appear to be the current market prices for calling global warming into question: $1000 for a lecture and $10,000 for a written paper.
That’s a high price, since serious scientists usually happy to deliver lectures on their scientific work for free. I can only conclude that we have passed "Peak Climate Denial" and that, because demand for "scientific" papers continues to be funded by industry lobbies such as the Heartland Institute and the American Enterprise Institute, the price has had to rise in the face of diminishing supply (i.e. scientists willing to destroy their reputations for money.)
Unfortunately, accurate data on the Climate Denial Reserves and Prices are scarce, but these prices make me think we’re well past peak (or at least on an undulating plateau.) Fortunately, society will continue to function (and most likely run better) when Denial Depletion reduces Denial Reserves to a few crazy bloggers in dark corners of the Internet.
I had just written an articles for the Colorado Renewable Energy Society’s e-newsletter CRES Clips about goings on at the Colorado Public Utilites Comission (PUC), when a piece of big piece of PUC related news came out:
Why should every advocate in Colorado care? Because it’s great to have another sympathetic ear!
What follows is the article I wrote for CRES Clips, to give readers unfamiliar with the PUC an idea of why I think this is so important:
The Colorado Public Utilities Commission: Where Energy Policy is Implemented
2007 was a banner year for the
lawmakers when it comes to energy policy, and with all the successes. While it would be tempting for clean energy advocates to declare victory and go home, getting good laws passed is only the beginning. When it comes to implementing laws that pertain to investor-owned utilities, the responsibility falls on the Colorado Public Utilities Commission (PUC) to interpret the legislation and ensure that our state’s public utilities comply with that interpretation. Here, “public utilities” means Xcel and Aquila , since rural electric cooperatives and municipal utilities are generally exempt from PUC regulation.
The PUC accomplishes its business in a series of “dockets” in which various “interveners” submit testimony (and respond to other interveners’ testimony) for the PUC to consider. Individuals can become interveners, but it is time consuming and requires
knowledge of PUC procedure. Public interest groups with an attorney can also intervene, with various expert witnesses submitting testimony on behalf of that group.
CRES is not currently intervening in any dockets, although several members of the Policy Committee (including myself) are involved in one way or another. Given those inherent conflicts of interest, CRES is not currently endorsing any particular intervening group.
What follows is a quick summary of some of the most important dockets before the PUC this year, and the groups who support Renewable Energy and Energy Efficiency who are intervening, and whom you can support or contact for more information about their activities. Also, it is possible that the PUC will combine some of these dockets.
07A-447E Xcel Resource Plan. These dockets will determine the mix of new generation and energy efficiency resources with which Xcel plans to meet our anticipated electricity needs in the coming years. Anticipated/ current interveners: EEBC, IEA, RUC, SWEEP, WRA.
DSM Plan in which the PUC will review Xcel’s proposals for electricity DSM policy including energy savings and DSM budget goals, DSM program cost recovery, and incentive to the utility for implementing effective DSM programs. This docket was initiated in response to DSM legislation enacted last year, HB 07-1037.
Renewable Energy Plan in which the PUC will review Xcel’s plans for complying with the recently doubled Renewable Energy Standard. Interveners: CoSEIA, WRA.
Plan on Transmission. Transmission is essential to bringing the power from renewable energy sources to population centers. This docket will determine much of when and where transmission is upgraded or built, and so will have a long term impact on what Renewables can be developed. Current Interveners: IEA, WRA.
DSM Rules. This docket will determine the key policies governing gas utility energy efficiency programs, including energy savings goals and how utilities will be compensated and rewarded for reductions in natural gas usage. Current Interveners: EEBC, RUC, SWEEP.
to Renewable Energy and Energy Efficiency Advocacy Groups intervening at
the Public Utilities Commission (alphabetical.)
CRES has not reviewed the testimony of any of these parties, and their
opinions are their own. Their
information is included because they are known to be aligned with CRES’s
mission of promoting Renewable Energy and Energy Efficiency in
Solar Energy Industries Association
Lynn Hirshman, Executive Director
lynn at coseia dot org
Trade association for the Solar industries in
Energy Efficiency Business Coalition of
Paul Kriescher, President
PaulK at lightlytreading dot com
Industry Association of Energy Efficiency Businesses,
dedicated to promoting Energy Efficiency in
Craig Cox, Executive Director
cox at interwest dot org
Group of RE businesses and advocacy groups promoting RE project
development in the West.
Gina Hardin, Attorney
ginahardin at msn dot com
Nonprofit advocating for responsible and accountable
energy at the PUC.
Southwest Energy Efficiency Project
Howard Geller, Executive Director
hgeller at swenergy dot
Promotes Energy Efficiency in Southwestern States
Western Resource Advocates
John Nielsen, Energy Project Director jnielsen at westernresources dot org
Nonprofit dedicated to protecting and restoring the
natural resources of the states of the interior west.
For the Shopping season, I’ve just publised an article on a gift that’s greener than just giving more “stuff.” Help your young ones prepare for their future (and the future of the planet) with my Top Five Stocks to Give as Gifts this Holiday Season.
I’m often aghast at the price conference organizers ask for people looking to
learn about alternative energy, when there are so may great inexpensive
opportunities available, sponsored by nonprofits a and other organizations
whose mission is to get the word out about our energy options. Here are
three monthly events that Denver area residents can go to… I go to most of
- The National Renewable Energy Laboratory’s Brown Bag Analysis seminar … Free, but make sure to bring photo-ID.
- The Colorado Renewable Energy Society’s Monthly Meetings. ($5 or $40 annual membership – snacks usually served afterwards.)
- The Colorado Cleantech Initiative monthly meeting. ($10 with RSVP – you get dinner & free beer.)
- Smart Energy Living Workshops (Usually about $10-15, lower with membership)
- Clean Energy Action monthly meetings (Boulder)
Please leave comments if I forgot (or don’t know about) your regular free
or almost-free event.
Preview the Denver Tour of Solar Homes Online
The Denver area Tour of Solar Homes takes place in less than a month, and this year you can preview some of the buildings involved online.
Check out the Sneak Preview on the right-hand side of the
Tour of Solar Homes page on the CRES Web site
The 2007 Tour of Solar Homes will take place on Saturday, October 6 in Denver and most locations around the state. However, some of the activities are slightly different.
The Boulder tour will take place on Saturday, September 30.
And the tour in Pueblo will span two days: October 6 – 7.
See a complete listing of solar home tours in Colorado on the American Solar Energy Society Web site.
National Solar Tour
Outside of Colorado, people you can find tour in your own community by visiting the National Solar Home Tour website.
Volunteers Needed for the Tour of Solar Homes October 6
CRES needs volunteers to help with the Denver Metro-Area Tour of Solar Homes on Saturday, October 6. If you step forward, you will assist homeowner with visitors.
There are two shifts: morning from 8:30 a.m. to 12:30 p.m., and afternoon from noon to 4 p.m.
Volunteers are welcome to spend the half-day they are not working touring homes themselves. Volunteers are also invited to attend a workshop free of charge from 6 – 8 p.m. Thursday, Oct. 4 titled "Solar Photovoltaics and Xcel Energy’s Solar Rewards Program" and presented by Jeff Scott of SolSource and Juliea Gauthier of Xcel Energy. The
workshops take place at the National Renewable Energy Laboratory (NREL) Visitor’s Center at 15013 Denver West Parkway in Golden, which is two blocks west of the Denver West Marriott at I-70 and Denver West.
Following the workshop, veteran volunteer John Avenson will give a brief orientation for volunteers about the duties the day of the
Tour of Solar Homes. To volunteer, contact Patty Roberts via email at: patty at pacificmillimeter dot com
This week, I’ll be covering the WGA’s Energy Efficient Buildings Workshop, which took place in Denver on July 17 and 18. I have drafts of 4 articles, the first two of which are an overview of the workshop, and a Western States Energy Efficiency Political update, which I just published on AltEnergyStocks. I’ll be publishing articles on Homebuilding and Performance Contracting later this week.
Please Join Us on July 20th-9-4 at the Adams Mark Hotel, Denver—Colorful Poster
Take Advantage of Colorado’s Amazing Experts
on Climate Change Science!
are going to address the problem of climate change we have to be clear on what
the scientists are telling us—and there is much more to the story than the
media have told us. Please join us on July 20th for a day long
workshop of essential information delivered by some of the world’s top
climate change scientists. Poster and Agenda attached and Agenda copied below.
Please join us—and pass the word!
Citizens Working to Bring Clean Energy Solutions
The Science of Climate Change and
the Greenhouse Century
Friday July 20, 2007,
How Urgent is the Problem? How Long Do We
Have to Make the Needed Changes?
These World Class Scientists Will Bring Us
the Latest Information
Confirmed Speakers in Bold
“Leadership in the Greenhouse
Century: A Citizen’s Perspective”
Glustrom, Clean Energy Action
“CO2—Where Does it Go
and How Long Does It Stay There?”
Pieter Tans, NOAA
Thresholds, Feedbacks and Predictable Surprises”
James White, CU-Boulder
Lunch (On Your Own)
1:00 – 1:45
“Leadership in the Greenhouse Century”
Governor Bill Ritter or
“Leadership in the Greenhouse Century—A Republican Perspective
Mike Bowman 25 x25
Impacts and Colorado: Bringing it All Home”
Martin Hoerling, NOAA
Members of Clean Energy
Registration–$30/person–before July 17t;
$50 after July 17th
Call 303-245-8637 or send an e-mail to email@example.com to reserve a seat
Organizational Pass for NonProfits, State Agencies and
Companies with Fewer than 15 Employees–$150
Organizational Pass for Companies with More Than 15 Employees–$300
Organizational Passes Provide Unlimited Attendance for the
Organization; Must be Reserved by July
If you live on this planet you should be
Next month is the annual Colorado Renewable Energy Conference, held this year from June 8- 10, 2007 at the Steamboat Grand Hotel in Steamboat Springs, Colorado. Keynote speakers are Dr. Chuck Kutscher and Patty Limerick.
CREC is a great place to fnd out what’s happeninging renewable energy in Colorado, and to network with people in the business here.
If you’re really desperate for something to do Saturday Evening from 4-5pm, you can go to a panel led by some guy named “Dr. Tom Konrad” on “Investing in Renewable Energy Stocks.” If you’re lucky, it will be dark in the back of the room and you can take a nice nap.
The Colorado School of Mines is hosting a free series of talks open to the public. Since Climate Action Days is in large part the work of a friend, I thought I’d help with publicity. Go if you can, they have a great lineup of speakers.
Apr 19 Keynote by Tom Plant (director of the Governor’s office of Management and Conservation) and Tim Killeen, director of the http://www.ucar.edu/”The Future of the Planet Earth and its Inhabitants”
Apr 20 has a full day of presentations on Climate, Technology Solutions, and Policy Solutions. See the Flyer for details.
Jens Soby, Vestas’ head of North American operations spoke for about 10 minutes, and here’s some statistics he gave:
75 acre site.
200,000 square foot factory.
35 White-collar jobs
455 Blue-collar jobs
$60 million investment by Vestas
Will start production in early 2008
The reasons he gave for coming to Colorado were:
Many of you know of Blue Sun Biodiesel from one of my more popular posts Why I Bought a Jeep where I talk about my decision to buy a Jeep Liberty diesel (which I run on biodiesel) as a cost effective alternative to a hybrid SUV. That article was first published in the Colorado Renewable Energy Society blog, which led Blue Sun cofounder John Long to contact me, I ended up doing due diligence for a client for a private placement with them.
I liked Blue Sun’s business model and management, but had reservations about the price they were asking… evidence for good management, because if they had been offering a price I liked, they probably weren’t asking enough… I’m very cautious when valuing private equity; there’s a lot that can go wrong and no exit if it does. My client decided to make a substantial investment despite my reservations. Events have now proven him correct.
On January 29, Blue Sun announced that they were merging with M-Wave in a move which essentially gives them a back door to a Nasdaq stock market listing. Sarbanes-Oxley, by making conventional routes to going public much more difficult, has made this route much more popular in recent years. Blue Sun shareholders will own 87.5% of the merged company and gain access to a much broader pool of equity to fuel their expansion plans. As the quality leader in biodiesel, they are one of the few stand alone companies that have a chance against agricultural giants such as ADM and Bunge.
Blue Suns’s other advantage over the giants is thier emphasis on quality. As Texas producers know, it’s very important to have biodiesel of consistent quality, and Blue Sun sets the gold standard. Unlike most biodiesels, Blue Sun’s actually reduces NOx emissions (along with particulates, VOCs, etc., and increased lubricity, which reduces maintenance costs like other biodiesels), as well as having a lower cloud point, due to their proprietary additives and use of higher quality oil as feedstock.
As a side note, there was a rumor going around the Colorado Cleantech Initiative last Tuesday night that this was the biggest private equity deal in Colorado history. Jeff Probst, Blue Sun president was there, but he didn’t know for sure how the deal stacked up to previous deals.
If you know anyone who lives in or around Castle Rock and is willing to do a little paid work for clean energy, read on.
I’ve written before about IREA Voices, (here and here.) They are a group of dedicated volunteers who are trying to change the way their electric co-ops, Intermountain Rural Electric Association is run.
In Colorado, Rural Electric Co-ops (RECs) are exempt from the requirements of Amendment 37, which mandates that our public utilities get a certain percentage of their power from renewables. Ostensibly, this is because they are owned and controlled by their members (the people served by the utility.) In reality, very few members vote in the elections (often as little as 10%) and so the boards can often end up being very unrepresentative.
In the case of IREA, this manifested itself with IREA’s general manager, Stan Lewandowski, contributing $100,000 of ratepayer’s money to a prominent global warming skeptic, and soliciting other RECs to do the same.
While the low turnout in REC board elections can be a big problem, it is also an opportunity. While IREA is out funding global warming skeptics, perhaps the most progressive electric utility in Colorado is Delta-Montrose Electric Association (DMEA), and it’s all due to who is on the board.
IREA Voices is working to change the IREA board, and they have a real chance of doing so. Due to low turnout, board elections of RECs often hinge on only a handful of votes. IREA Voices is fielding candidates in three of the four districts up for election, but they are still looking for someone to run in district 4, around Castle Rock.
Being a board member is a paid position ($300 a day), so if you know anyone who might be willing to run for the IREA board in Castle Rock, please send me an email and I’ll hook them up with the right people.
(Or they can do it themselves on the IREA Voices website.)
An email from the IREA Voices follows the break… Read the rest of this entry »
On January 18, Xcel Energy filed a motion with the Colorado Public Utilites Commission to reject a merchant coal power plant bid for 2014. Xcel has been under intense pressure from the Colorado Commission to sign a contract with the project. The Company also filed a motion for extraordinary protection for critical parts of the bid report, which means we can’t see the underlying bid info or economic analysis. While this is unfortunate but expected, the parts of the motion we can see make very interesting reading.
This docket is a continuation of the competitive bidding process from the company’s 2003 resource plan and the settlement agreement.
Xcel’s main ground to reject this bid is because it is “not economic.” Unfortunately, we do not have access to the specific numbers, so we should not use this to say that coal plants are never economic. I simply want to highlight the fact that this coal plant, according to Xcel, is uneconomic. If the true cost of externalities of pollution and CO2 emissions were taken into account, the case for any coal plant’s economics becomes much worse.
Some arguments Xcel uses:
- Electricity demand has not kept up with the demand they assumed in the 2003 LCP. (Most likely due to increasing prices of fossil-fuel generated power, and a heightened awareness of the problems associated with global warming, both of which spur efforts for conservation. It is also worth pointing out that our personal efforts to conserve electricity have contributed to the drop in demand, and that drop in demand makes this coal plant less likely to be built. In this way, everyone can make a difference when it comes to fighting global warming.)
- Xcel has successfully negotiated with bidders to provide natural gas fired power to lower their prices (p.5), while the coal bidders want to modify the terms of the contracts in a way that may shift environmental risks to Xcel (p.6) (which would then try to shift the environmental risks to ratepayers.).
- Coal is very capital intensive, so in order to make coal economically effective, the plant must be running as near constantly as possible. (The inflexibility of coal and the need to keep the plants running all the time make coal as difficult to integrate into a system faced with variable demand. In my mind, there is a certain irony in this, because the main argument against wind power is similar: the power supply is not well matched to demand.)
- (p.27) “Far and away the most influential factor contributing to the reduced value of coal bid is the fact that the bidders increased their bid prices from what they initially offered in May 2005.” (These increased bids are probably due to higher estimated construction costs, which coal plants are particularly vulnerable to due to the large amount of steel and concrete used in construction, as well as much higher prices for coal. One of the best arguments for solar and wind generation is the fact that they are immune to escalating fuel costs.)
- While Coal plants require years to construct, Demand Side Management (DSM aka Energy Efficiency), gas and wind can all be on-line in less than 16 months, making it much easier to match supply with demand.
- (p.27) The PUC told Xcel to use their 2006 gas forecast prices in this analysis, at the same time as they were told to use their 2005 coal price forecasts. Even though this artificial imbalance skews the results in favor of coal, it is not sufficient to make the coal bids seem economic.
- There are substantial costs of added transmission to incorporate these coal bids. (pp.47-50) I point this out because wind naysayers often point to the transmission costs of new wind facilities, without taking into account the transmission costs for coal. I infer from the text that this bid may be a mine mouth coal plant in Wyoming, which would require upgrades along transmission lines from Wyoming to Colorado. Considering the Wyoming/Colorado border is an area with excellent wind resource, many sites for extensive wind generation would require the upgrades to the same or shorter sections of transmission lines.
I have uploaded Xcel’s filing here. It will eventually be avialable on the Colorado PUC’s website, under Docket No. 05A-543E.
I’m happy that environmental advocates have this opportunity to build a more constructive relationship with Xcel by joining them in this.
I also believe that these same arguments that Xcel is using here might be effectively used against some of the 150-odd other coal plants currently being planned in the US by utilites which are less progressive than Xcel (and there are many… TXU in Texas and many Rural Electric Co-ops come to mind.)
Colorado’s new Democratic Governor, Bill Ritter was sworn in today. For environmentalists, it is a moment of rejoicing. Sticking to his themes from the campaign, Ritter outlined his agenda, and the very first item was:
“Let’s start by being bolder than any other state when it comes to renewable energy. Let’s commit right now to making Colorado a national leader … a world leader … in renewable energy. Let’s create a New Energy Economy right here in Colorado.”
I couldn’t ask for anything more.
He also had some other quite sensible agenda items, such as health care for all Coloradans, something that I think is worth paying for, but which I simply hope does not end up exhausting his political capital.
Here’s to a breath of fresh air (in more ways than one!)
The full text of his inaugural address follows the break.
His speech was widely reported in the press because he called for national regulation of greenhouse gas emissions. The AP story emphasized Kelly’s shift from being an environmental skeptic to calling for national Carbon emissions regulation. This is a big shift, and a giant step for a utility, but Kelly is not so much of an environmental advocate as he might sound.
I had a short conversation with him before dinner. After we introduced ourselves, I told him I’d been making his life harder recently at the Colorado PUC. Like anyone who’s been successful in business, he didn’t miss a beat, and told me that it was great, and the more people’s input we had, the better.
He said that Xcel had been opposed to Amendment 37 because of the cost of the solar set-aside, a position I’m actually sympathetic with. After all, is it better to have 1 MW of solar photovoltaics on people’s roofs, or 20 MW of Wind? When you look at the subsidies needed to get people to install PV (which is an Amendment 37 requirement), we could probably get 20x as much wind energy onto the grid for the same cost. It’s not that wind cost 1/20 as much as solar, but since the price of electricity from wind is comparable to the price of coal, it does not take much to get a lot of wind, while solar needs to be heavily subsidized.
What I really would have liked in A37 was an allocation for Demand Side Management (DSM) and energy efficiency. If the same incentives could have gotten us 20 MW of wind or 1 MW of solar, it could also have gotten us 40 MW of DSM and energy efficiency. (none of these numbers are precise… it’s hard to tell what an incentive will accomplish until it is implemented, but we do know that DSM is cheaper than wind is cheaper than solar.) But energy efficiency was not on the table when A37 was being written… polling data said that adding “energy efficiency” to the bill dropped popular support by so much that we couldn’t have gotten it passed.
Dick Kelley also told me that Comanche 3 (a new 750 MW coal plant) would be the last conventional coal plant that Xcel would build. I told him Comanche 3 would be fine with me, if they’d just shut down Comanche 1 and 2 (a couple old, less efficient plants at the same site.) That was an option that’s clearly off the table, but he did say Xcel needed to find a way to clean up the emissions of those plants. I suggested wood chips, like Aquila is doing at their Clark Generating Station in Canon City. By co-firing wood and pine needles from necessary forest thinning, Aquila is able to reduce net CO2 emissions, as wel as NOx, SOx, and Mercury.
I mentioned the option of hybridizing concentrating solar thermal power (CSP) with existing coal plants. He didn’t really understand the concept, and thought I was talking about photovoltaics. I’m not sure I was able to explain myself well. Put simply, when heat is available from the sun, it can be used to displace heat from coal (or natural gas) in an existing generator.
Kelly also said he’d like to raise wind to 20-25% of generation, but after that they’d have to see what the effect on reliability of the grid would be. I brought up the idea of Pumped hydro or CAES. He didn’t seem familiar with the fact that Colorado’s Big Thompson Project could be adapted for pumped hydro fairly easily. As he said, new big hydro is not going to happen. Which is all the more reason for adapting out existing reservoirs for energy storage with pumped hydro.
I was encouraged that he has recognized that Carbon Emissions are a massive problem, and that the utilites, who are the biggest emitters of carbon, are going to have a big part in the solution, but discouraged that he knew so little about several pieces of the solution that have great potential to be quickly viable.
Xcel likes wind, but is not looking at new ways to increase how much they can put on their system… they’ll just go to 20-25% and see what happens. They’re pursuing IGCC (Internal Gasification Combined Cycle a.ka. “Clean Coal”) with carbon sequestration in a pilot plant, which many environmentalists feel is just a distraction from renewable energy, pointing out that no one has ever done any sort of sequestration on a large scale. To me, that is an argument for IGCC with Carbon Sequestration, on a small scale: let’s give it a try and see if we can make it work or not.
IGCC is a lot better than one of the other ideas that Kelly brought up in his speech: he thinks that part of the solution will be nuclear power. Nuclear power is indeed carbon neutral, but it requires diminishing uranium supplies, or the use of breeder reactors which make plutonium, an element which is not only extrememly toxic, but also an excellent material for making nuclear bombs. We still haven’t figured out what we’re going to do with the waste from our existing reactors… until we do that, I think it’s crazy to look into building more. And considering the real threat of terrorism, a nuclear reactor or wastepile makes a much better target than a solar array or wind farm.
When it comes to Kelly’s call for national regulation of carbon emissions, it’s a great step in the right direction, but it was a far cry from calling for a carbon tax (which economists think would be the most effective method of carbon regulation.) Kelly knows global warming is real, and he knows that our politicians are going to do something about it. By calling for national mandatory regualtion (but not a tax) he’s trying to shape the debate to come out in a way that Xcel will find easier to deal with.
With a little more education about alternatives such as CSP, and ways to make the grid able to accept more intermentent resources (Time of use pricing, DSM, and energy storage), he may come to realize that Xcel has lots of ways to live in a carbon taxed or carbon limited world. And he seems willing to listen; so if you get his ear for five minutes, try to make the most of it.
I just testified on Friday in the Colorado Public Utilities Commission rate case for Xcel Energy. The case has been going on since April, and is in its last stages. I only recently got involved (Who pays attention to rate case hearings, anyway?)
To be clear, a rate case is not a Least Cost Planning (LCP) process, which is when the regulators decide if the utilities plans to meet future needs of consumers are prudent. That is, when they decide what sort of generation they need. This is somewhat relevant because much of the opposition to this rate case is really opposition to the new coal plant being built by Xcel in
Pueblo, Comanche 3.
Given the reality of global warming (which many people are just now starting to realize is a real and immanent threat), the fact that coal is our most carbon-intensive fossil fuel (not to mention all the other emissions associated with coal), and the fact that the planned life of a coal plant is 50 years, the opposition is understandable. Unfortunately, this rate case is not the proper forum to oppose construction of new generation.
A rate case, is about how Xcel is allowed to charge for their electricity, and how much they are allowed to charge. When it comes to how much they are allowed to charge, this is determined by setting an allowable Return on Equity (ROE) for shareholders, as well as a Debt/Equity mix. Because debt is cheaper for a company to raise, a higher ratio of debt to equity will be cheaper for ratepayers, but the more debt to equity there is, the less stable a company will be, and the higher return both debt holders and equity holders will demand in order to take the risk of owning the debt or stock.
I made three basic arguments.
- In order to avoid perverse incentives, it is best that in any situation, the parties should share risk in proportion to their ability to take action to reduce that risk.
- The return on equity allowed under the settlement agreement was higher than is necessary to induce shareholders to own the stock under current market conditions,
- The rate mechanism, as envisioned in the settlement, contained several perverse incentives which would lead to behavior by Xcel that will likely place costs on ratepayers which would likely be prudently avoided if Xcel has an incentive to do so.
The first point about perverse incentives is important mainly for future planning. If Xcel bears the risk that costs will exceed their projections, they will be much more conservative about their cost projections. In this case, that means that cost projections will be higher, and take more of the unpredictability of fuel costs into account. In addition, holding Xcel accountable for unexpected environmental costs will lead them to be much more conservative about their assessments of future environmental costs. This better information both of these effects will lead renewables to be seen in future least cost planning cases much more favorably, because many have zero fuel cost (and hence zero fuel cost risk), while their lower environmental impacts will lead to lower future environmental costs.
Energy efficiency measures, demand side management, time of use pricing, and investments in large scale energy storage, all of which lower fuel costs by reducing or shifting fuel use will also be more likely to be pursued by a company that bears modeling risks, because these measures all reduce risk by reducing fuel use or shifting it to lower cost times.
Widespread adoption of demand side management, time of use pricing, and energy storage also all favor intermittent renewables such as wind and solar by shifting usage to times when these resources are available.
Basically, energy efficiency and renewables are excellent way of addressing both the price and environmental risks that are currently borne by ratepayers for utilities. Shifting some of these risks to the utility will lead the utility to take more proactive action to address these risks, both through renewables and through other mechanisms we may not yet have thought of. That is the beauty of incentives rather than mandates: they inspire creative thinking, and usually come up with cheaper and more effective solutions to the same problem.
I’d like to be clear here that I don’t think that Xcel is the problem; I see Xcel as the solution. What I hope to accomplish is to provide carrots and sticks will induce Xcel to be much more responsive to environmental and energy cost concerns. With those properly designed incentives, I expect that Xcel will be able to accomplish more than many environmentalists could ever hope to win in mandates. And Xcel shareholders should be well compensated for the risks of these investments; I want them to be able to do well by doing good. My second point, that the return on equity (ROE) allowed under the settlement agreement hinges on weaknesses on the various methods of calculating appropriate ROE. ROE is the compensation that shareholders demand and are entitled to for taking on the risks involved in operating a public utility. These calculations are inherently tricky: the formulae are fairly simple, but actually getting good numbers to put into the calculations can be very tricky. The essence of the problem is that financial markets, and the formulas are all forward looking. To really know what ROE is appropriate, we would have to know about future growth and risks of the company. This information is unknowable, and in practice, the calculations are based on past information, and stock prices.
There were three calculation methods used, two of which depend on estimating the risk premium (Risk premium and Capital Asset Pricing model or CAPM) that shareholders demand in order to hold the stock, and the other (Discounted Cash Flow model, or DCF) of which depends on analyst predictions of future growth rates. The Risk premium and CAPM use historical market data to derive those risk premiums, and the results of those calculations from those methods led to almost uniformly higher estimates of ROE than the DCF method. I believe this is because the markets are currently demanding much lower risk premiums than they have in recent years. These lower risk premiums are partly a function of the market run-up since 2002, and partly a function of the run-up of the late 1990s, which, in my opinion and in the opinion of many other market analysts whom I respect. I bring up Alan Greenspan, the former fed chairman in my testimony, but I also include Richard Russell, Nouriel Roubini, Pimco’s Bill Gross, and Yale’s Robert J. Shiller in that. I chose Alan Greenspan because he has the most kudos and is most likely a recognizable name. I note that when Xcel’s witnesses were trying to trash my testimony, they convieniently chose not to mention Greenspan.
However, if I’d been able to travel a week into the future, I would have probably tried to include Bill Gross’ November Investment Outlook column in my testimony as an exhibit. As allways, Bill leaves me in awe with his depth of research and clear reasoning.
The DCF method is also flawed in its reliance on analyst estimates, since analysts can easily be caught up in the market mood as well, but they are often a much more sober lot, and so based my recommended ROE on the low range of the DCF calculations of other analysts. If you look at the confidence index graphs at the International Centerfor finance at Yale, you will note that institutional and individual confidence tend to follow the same long term ternds.
Finally, in reference to the perverse incentives in the Electric Commodity Adjustment (ECA) primarily concern two parts of the ECA: the Baseload Energy Benefit (BLEB) and time of use (TOU) pricing.
With regard to the BLEB, this is an incentive for Xcel to keep their coal plants running as much as possible, under the assumption that coal is the cheapest form of electricity generation that is dispatchable (i.e. that they can turn on and off at will.) I have serious problems with a lot of the assumptions that go into the BLEB. I had problems with the form of the equation they used, given that it was based on annual average prices for natural gas, as opposed to real time prices, but that was a minor point compared to the things which the BLEB left out. Carbon Intensity of various fossil fuels, lb Carbon/MBtu.
The BLEB left out of the costs of coal all the environmental costs of its use, thereby giving coal a great incentive than it deserves. Also, only natural gas an coal were had reference at al. Xcel’s explanation of this is that only gas and coal are dipatchable, yet part of what they say the BLEB is designed to encourage is improved maintenance of their coal plants to ensure that they are always available. All forms of generation can benefit from improved maintenance. Using their logic that the form or generation with the cheapest fuel cost should be incentified, there should clearly be strong incentives for improved maintenance of renewable resources such as wind and solar. Finally, while wind and solar power are not now dispatchable, with the addition of energy storage such as pumped hydro or CAES, they can be made dispachable. Incentives for coal will only delay investments which improved the dispatchability of other forms of generation.
Xcel did me the honor of spending several hours of the hearing trying, with various degrees of success, to tear apart my arguments. I almost didn’t get any chance at all, but Ratepayers United Colorado’s attorney Gina Hardin managed to get me about 5 minutes to respond to multiple comments from several other witnesses. Thank you, Gina!
Here is my take on what they had to say (from my notes.) Frederic Stoffel – Testifying in his former capacity as VP Energy Policy development for Xcel. Stoffel totally misinterpreted my testimony, by saying that he felt that I wanted Xcel to take on all environmental risks, and the price risk of any deviation from projections. Note that while this blog makes it clear, I’m not sure if he didn’t get it because I was unclear, or because he simply chose to misinterpret what I was saying to make it easier to defend against. I feel I managed to counter this argument effectively in my five minutes on the stand the next day.
I did not fare so well at the hands of George Tyson, Xcel VP and Treasurer. In my analysis of appropriate ROE, I glossed over a major salient point, saying Public Service of Colorado had a “high” bond rating from S&P. I had gotten this impression reading other testimony in the case, but in fact, PSCo’s senior unsecured debt rating is BBB-, one tiny notch over junk status. Oops! This makes a lot of my arguments about risk premiums irrelevant, because a debt downgrade (which might indeed follow if the commission were to assign my recommended ROE of 8.9%) would seriously impinge on PSCo’s ability to operatate, even if shareholders at the moment are not worried about such an event. (In fact, shareholders shouldn’t be worried about this case, because the realistic chances of this settlement being thrown out are nil. The main reason we were doing what we were doing is to demonstrate that there is real ratepayer unhappiness, so, when we have a more sympathetic PUC with one or two new appointments from Bill Ritter, who we hope and expect to win the election Tuesday – If you have not voted yet, do it! – then we can go back and appeal this.)
But Xcel did feel that they needed to counter what I had to say, since for both Tyson and Robert B. Hervert spent much more time attacking my testimony against the settlement than they did on any aspect of the settlement itself. Considering how little they said about the settlement agreement, I get the feeling that they probably would not have even taken the stand under other circumstances. Hervert is a CFA charterholder, and economic and financial consultant for Xcel. He took me to task for my conclusions about risk premiums. His points were basically that he sees no indication that investors are currently asking lower risk premiums, and that analysts are not being swept along with that sort of mood, either. I really can’t argue with that: it’s impossible to judge if valuations are currently high now because the current outlook really is good, or because people are too exuberant. All I can say is, “Time will tell.”
He also took more to task for saying that the VIX is at historically low levels. If you will note from the graph, it has currently only been this low once before (the index did not exist prior to 1990,) and, he noted that it is currently within “one standard deviation” of its mean. This is bad analysis, which I would not expect from a Charterholder, and it really gets me steamed because I wasn’t able to dissect his mistake fast enough to pass a good question to Gina Hardin to allow her to challenge it by crossing him.
(Skip this paragraph if math makes your eyes glaze.) Hervert’s mathematical sin is that the VIX does not conform even roughly to a normal (or even symmetrical) distribution, and so talking about “standard deviation” in reference to a lopsided distribution such as the VIX really is not relevant.
Anyway, I wish I’d had time to bring that point up in the few minutes I actually got on the stand. Not that anyone would have understood it, which is why I stuck to my main points about incentives and Stoffel’s misinterpretation of my testimony.
I really don’t care that much what ROE Xcel is authorized. I’m much more concerned about the incentives that they are given. With the right incentives, Xcel would stop trying to build coal plants and instead invest heavily in energy efficiency, demand side management, time of use pricing, energy storage, transmission, and renewable energy generation, and make a lot of money doing it. That’s what I would hope to come out of a rate case. Maybe under our next governor, we’ll get something like that.
So go vote Tuesday (even if you don’t live in Colorado.) It really does matter who wins even the small races. If you had the time to read through this multipage diatribe, surely you have enough time to make it to the polls.
I’ll be testifying for Ratepayers United Colorado in the upcoming hearing starting Thursday on the Settlement Agreement reached between Xcel, regulators, and consumer advocates (representing large commercial purchasers of electricity.)
I’ve been told that hardly anyone fights settlement agreements in these cases, but environmentalists and clean energy advocates were left entirely out of this agreement, which actually contains an incentive, refered to as the BLEB, or Base Load Energy Benefit, for Xcel to burn as much coal as it possibly can, in preference to all other types of electricity generation.
Ratepayers United asked me to help out because 1) I volunteered, 2) I understand economics, and 3) there wasn’t anyone else with the first two qualifications bull-headed enough to go ahead this late in the game.