Bob Westby: Municipalization supports virus financial recovery

Due to the virus, Boulder’s economy is facing the new reality of a significant financial crisis for an extended period. This column “stands up” the position that a critical benefit of municipalization is that it can serve as an “economic engine” in support of achieving financial recovery from this crisis.

Specifically, municipalization supports securing direct and indirect financial benefits. The direct financial benefits include lower customer utility bills, elimination of Xcel profit taking, and lower cost of utility capital. The indirect benefits result from the direct savings remaining and recirculating in the Boulder economy (not “exported” to Xcel’s Minneapolis headquarters).

Municipalization unlocks these financial benefits by extricating Boulder from Xcel as its provider of electric services. The business model of municipalization offers local control, democratic decision making, and accountability all focused on the best interests of Boulder.

Xcel is a corporation focused on profit and is allowed to operate without competition as a regulated monopoly. The vulnerability of this regulatory monopoly system is that the utility being regulated can “game” the process. It is the state’s regulated monopoly utility governance system and Xcel (as the long-term incumbent utility) that are driving utility costs up.

An understanding of how Xcel is compensated under the regulated monopoly system is key to understanding the problem. Xcel is reimbursed for its corporate investments (power plants, transmission/distribution equipment, etc.) through its customer electric rates. Since the electric rates increase as the size of the rate base increases, the name of the game for Xcel is to grow the rate base.

The rate base is the total dollar amount of the investments plus Xcel’s “rate of return” (profit). Xcel has a successful history of maximizing the rate base by adding billions of dollars in sometimes questionable investments and working aggressively to increase its rate of return.

The investments included in the rate base are funded either by equity (Xcel cash) or debt (Xcel corporate bond sales). The allowed equity rate of return is determined by ongoing Public Utilities Commission negotiations. The current equity rate of return is a guaranteed 9.83 percent. This excessive rate of return is indefensible given current capital market rates.

The debt rate of return is 4.67 percent (50 percent higher than the 3-plus percent city rate). Any municipalization financing would be exclusively through debt financing (municipal bonds). Municipalization would provide for a lower cost of capital for investments by eliminating the use of the high-cost equity financing and exclusively using its lower-cost debt financing.

Here is an assessment based on projected comparative renewable energy utilization (municipalization vs. Xcel) that supports the expectation that electric rates under municipalization would be lower. Boulder’s goal is to utilize renewable energy sourced power approaching 100 percent by 2030. Xcel‘s “locked in” fossil fuel use is 46 percent for 2027. For a 2018 73 percent fossil use, Xcel’s current cost of power represents more than 60 percent of current rates.

Based on an approximate 10-plus cents/kWh residential rate, six cents would be Xcel’s embedded cost of power. Boulder expects to secure renewable power at around 3 cents. You do the math.

A direct measure of the excessive financial burden Xcel imposes on the community is its profit taking. In 2019, Xcel’s profits were $578 million (after-tax net income). As Boulder represents about 4 percent of Xcel’s electrical load, Xcel annually extracts more than $23 million from Boulder’s economy (diverted to Minneapolis). The elimination of some $23 million annually in extracted profits would return in under two years Boulder’s total investment to date in municipalization.

Indirect financial benefits result from the municipalization direct savings remaining in the Boulder economy. These dollars would recirculate in the Boulder economy resulting in an economic development multiplier of an estimated 3:1 ratio. For example, elimination of just the Xcel profit taking of some $23 million annually would generate more than $60 million of Boulder economic activity.

That this financial crisis should be treated as a priority is demonstrated by the considerable damage already inflicted on the Boulder economy. It is estimated that it will take at least some five years to fully work through this crisis. Currently, the economy is running on a “sugar high” attributable to federal government and Federal Reserve relief efforts. However, these efforts are limited and relatively short term in duration.

It will be up to Boulder city government to identify and implement more sustainable solutions. We are at an economic “inflection point” and an “all hands on deck” approach for Boulder to effectively manage this crisis is the prudent course of action. Going forward, municipalization affords the Boulder economy a significant financial recovery opportunity.

Bob Westby, a Boulder resident, retired from senior management at the National Renewable Energy Laboratory following a 23-year career. 

Published in the June 13, 2020 Daily Camera