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Ratepayers Lose Big with PUC’s Solar Settlement

This afternoon the Public Utilities Commission approved a Settlement Agreement to end the Solar*Rewards imbroglio. The Settlement Parties were Xcel, the Office of Consumer Council, the Governor’s Energy Office, Western Resource Advocates, Colorado Solar Energy Industry Association, the Solar Alliance, and Public Utilities Commission Staff.

As I explain in detail here, the underlying cause of the Settlement was Xcel’s February 17 decision to suspend the Solar*Rewards program, which is a subsidy for the installation of photovoltaic solar panels. Xcel’s decision was well warranted: The program has been over budget every year since 2008 and has accrued a rolling deficit that is projected to be almost $100 million by the end of 2011, on which Xcel collects interest. To be sure, the utility wasn’t concerned about the impact of the program on its customers; rather, Xcel was worried about the possibility that the PUC would blame the cost overruns on poor management and order the utility to pay some of the $100 million shortfall with shareholder money, instead of Colorado ratepayer revenues.

Of course, businesses that install solar panels objected to Xcel’s decision to stop subsidizing businesses that install solar panels. Accordingly, the state’s solar industry orchestrated a protest on the steps of the capitol. They also made unsubstantiated claims about losing “thousands” of jobs. As a result of this agitprop, Sen. Gail Schwartz held a snap hearing, allowing solar industry representatives to make their case before the General Assembly that “the New Energy Economy is dead,” thanks to Xcel’s decision to suspend the Solar*Rewards.

The parties first came before the PUC two weeks ago, on Friday March 4. (I describe that hearing in a separate post.) Despite the fact that the Solar*Rewards program was projected to cost almost 4 percent of retail sales, which is twice the statutorily imposed 2 percent rate cap on Xcel’s procurement of green energy, the PUC’s paramount concern was resuming the solar subsidies. The Commissioners essentially ordered the stakeholders to reach a settlement within a week. On Friday March 11, the parties said they needed until the following Tuesday to reach an agreement. They met that deadline, and a settlement was filed.

The Settlement Agreement

The Settlement Agreement sets a “Cost Cap” for the Solar*Rewards program at $97.3 million through at least May 2012. In testimony before the PUC today, Xcel’s counsel stated that the utility already has committed roughly $90 million to solar subsidies through 2011 (to purchase 43 megawatts of installed solar capacity, which is .23% of retail sales, according to the Settlement Agreement (p 13)). Therefore, the agreement allows for $7 million more to be spent on the Solar*Rewards program.

In addition to the Cost Cap, the parties also agreed to a “60 Megawatt Cap” on solar capacity that can be added through May 2012. If either of these limits is reached, then the program must be shut down.

PUC staffer Gene Camp testified that, as a rule of thumb, each megawatt of installed photovoltaic solar power costs about $2 million. Using this estimate, reaching the 60 megawatt cap would cost roughly $120 million. Yet the Cost Cap is set at about $7 million. What gives?

The parties squared this circle with creative accounting. To date, the Solar*Rewards program subsidized solar panels with up front rebates. The stakeholders to the Settlement Agreement switched the subsidy from primarily an upfront rebate to a payment over time, based on the electricity generated. This is known as a “Production Based Incentive.”

According to testimony today by Xcel Vice President of Rates and Regulatory Affairs, if the 60 megawatt capacity cap is reached, then Xcel will be committed to subsidies totaling $10.3 million a year for ten years, and $7.5 million a year for the decade after that (the dropdown is due to the fact that certain classes of solar customers were subsidized over ten years, while others received payments over twenty years. Over the next two decades, the 60 megawatts would cost ratepayers about $185 million.

Finally, the Settlement Agreement would lend to Xcel the “presumption of prudence” in its management of the program. In practice, this means that Xcel is in no danger of having to use its own money to pay for the bloated budget of the Solar*Rewards program. As a result, ratepayers are fully on the hook.

My Take on the PUC’s Decision

During the March 4 hearing, Commissioner James Tarpey asked Xcel’s counsel to provide “bookends” of what the 2011 Solar*Rewards program would cost. Xcel’s lawyer responded that the minimum is $97 million and the maximum is $300 million. Unfortunately for Coloradans, the PUC approved a Settlement Agreement near the higher bookend. This year, the program will cost $97 million. Over the next twenty years, it’ll cost $185 million (if the 60 megawatt rate cap is reached). That’s $282 million.

By statute, Xcel’s annual expenditures on green energy are supposed to be limited to 2 percent of total retail sales. In 2011, 2 percent of retail sales will be about $50 million. On February 16, a day before it suspended the Solar*Rewards program, Xcel already had committed $90 million to solar subsides, which is $40 million more than the rate cap. Under the Settlement Agreement, the utility plans on spending another $7 million this year. All told, this money will buy a fraction of one percent of 2011 electricity sales. Xcel’s green energy target this year is 12 percent of electricity sales, so Xcel is guaranteed to further exceed the cap.

In the face of this data, how could Xcel let the Solar*Rewards program grow? Does the retail rate cap mean anything? Evidently not.

William Yeatman is an energy policy analyst at the Competitive Enterprise Institute.