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Xcel Energy customers are facing the risk of their electricity rates doubling or even tripling as the company launches an unprecedented spending plan to build new generation and transmission and feed power-hungry data centers.
The company, the state's largest electricity provider with 1.6 million customers, is set to invest $22.3 billion in Colorado by 2032. That is more than in any of the seven other states in which it operates.
The investments will raise its electric assets in the state, the so-called rate base upon which rates are set, from $8 billion in 2021 to $36 billion in 2029 and more than $44.6 billion in 2032, according to company filings.
"I can't get comfortable approving anything like the level of resource need and investment the company is seeking," Colorado Public Utilities Commission Chairman Eric Blank said at a meeting earlier this month. "That just seems like an enormous increase."
Xcel Energy makes money building plants and transmission lines and then getting a return, set by the PUC, on those capital investments. The more they build the more they earn.
Blank said his concern is that "capital spending may be driven in part by the company's financial incentives and perhaps not solely by system and customer needs."
Playing a role in all that building, economists and analysts say, has been a tendency of utility commissions to give utilities excessive returns on these investments.
"The result of these overly generous higher returns is that customers may be overpaying for their utility service," said Ryan Foelske, an analyst with clean energy consultant RMI. "It can also play a role in making the energy transition more expensive."
Xcel Energy said in a filing that retail rates would be kept in check by a robust 8% growth in electricity sales for next five years, with sales doubling by 2034. Blank noted that that was as much as 40 times above historical growth rates.
"This is the heart of the concern," Blank said. "I am worried about the potential long-term rate impacts if capital spending continues to increase and the sales and revenue growth doesn't materialize."
Commissioner Megan Gilman said, "It appears increasingly that the benefits are set to flow to the company given any scenario and the vast majority if not all the risk appears to be on the customer. That is the piece we need to address."
Even Xcel Energy's own forecast has the basic electric charge for residential customers increasing 30% by 2032 to about 21 cents a kilowatt-hour. Industrial and commercial rates increase 2% to about 14 cents a kilowatt-hour.
While saying that the rate disparity was "an optical concern," Jack Ihle, Xcel Energy's regional vice president for regulatory policy, explained under questioning by Blank, that there are exclusively customer-focused investments, such as $5 billion to upgrade the distribution system.
Xcel Energy may be underestimating the rate impact even within its own model, according to the environmental and clean energy organizations Western Resource Advocates and the Southwest Energy Efficiency Project.
In a PUC filing, the groups said using the company's long-term rate forecast model they calculated the increase by 2031 at 50%.
In October, Gov. Jared Polis sent a letter to the PUC and four other state agencies urging them to coordinate in meeting data center needs and moving activities such as transportation and building heating to electricity -- so-called beneficial electrification.
Polis said it was important to maintain affordable energy costs adding that some states had not managed the transition well and are seeing large rate increases, with California rates doubling in the past decade. California has the nation's second highest average electricity rates after Hawaii.
Colorado, however, may be under the same pressure, and Blank said Xcel Energy's 15 cent per kilowatt-hour residential charge could double by 2036 and triple by 2044 if spending is not tightly managed.
Xcel Energy's projected 16% growth in rate base between 2020 and 2032 is "significantly faster than in California," Blank said, adding that the current rate for Pacific Gas and Electric, which serves northern California, is 45 cents a kilowatt-hour and on "a rapid upward trajectory."
"I am concerned Colorado may be starting down the same path," he said.
Rates are being pushed by three pressures:
Over the past decade, Colorado governors and legislatures have enacted a series of policies and laws aimed at decarbonizing the economy and promoting clean energy. Each came with a price tag.
In 2019, the legislature passed House Bill 1261 requiring utilities to cut greenhouse gas emissions by 80% over 2005 levels by 2030. This led to Xcel Energy's $12 billion Clean Energy Plan.
The same year the legislature passed Senate Bill 77 requiring utilities to develop electrical vehicle charging station plans. In 2023, Xcel Energy proposed a $440 million plan, which the PUC cut to $264 million.
In 2023, the legislature passed Senate Bill 21, which required gas utilities to develop "clean heat plants" to cut emissions by 22% below 2015 level by 2030. The PUC approved a $440 million clean heat plan for Xcel Energy.
"Xcel Energy is making investments in our system, such as wildfire mitigation investments, to maintain reliability and keep customers safe," the company said in a statement. "We're also taking on a number of initiatives, on behalf of our customers and in alignment with state policy goals."
Critics say sometimes the utility has taken advantage of these mandates to "gold plate" their plans, reaping larger returns for shareholders.
"Decarbonization has given Xcel cover to find the most technology-advanced solutions, i.e., the most costly," said Joseph Pereira, deputy director of the Colorado Office of Utility Consumer Advocate.
"There is tension between investor-owned utilities and public-policy goals," Pereira said. "Investors want short term profits and decarbonization is a long-term goal."
For years environmentalists and clean energy groups said the investments would lower electricity bills because expensive fossil fuel generation was being replaced with cheaper renewables, as the cost of wind, solar and battery storage dropped year after year.
The cost to install utility-scale solar, for example, fell to $1.20 a watt in 2023 from $6.50 in 2010, according to the National Renewable Energy Laboratory.
That trend, however, has, at least for now, stopped due to supply chain issues, which started during the COVID pandemic, inflation and tariffs.
In PUC testimony, Xcel Energy said the cost of wind has gone up 74%, solar has risen 84% and the price of combined-cycle gas turbines is up 40%. There is also a four-to-six-year wait for turbines.
In a filing last fall the company put the price of a transformer at $5 million. In the spring it was $6 million. "The market is a little nuts," Ihle testified.
Renewables are still comparatively less expensive than alternatives, but they have become more costly.
These rising costs were not factored into Xcel Energy's projected 30% increase in customer rates, Blank said, and if they were added in "then this average residential rate would be higher. ... Is that fair?"
"It's fair," Ihle said.
When Xcel Energy filed its last electric resource plan -- projecting future demand and the resources needed to supply it -- it expected to capture $10 billion in federal tax credits, but the credits are quickly being sunset by the Trump administration.
The loss of the credits could add 30% to 50% to the cost of wind and solar projects, according to Jesse Jenkins, head of the Princeton University Zero Lab, clean energy research group.
Tariffs are another variable. In 2024, about 88% of the solar panels used in the U.S. were imported and 92% of them, about 55 gigawatts, came from six Asian countries that are now facing tariffs of 19% to 25%.
Utilities are also sensitive to 50% tariffs on steel, aluminum and copper.
"Given the volatility in energy markets and the decarbonization goals, Xcel is trying to front-load savings and investments to speed transition," Pereira said. "I understand the impetus but the volatility and supply chain problems will lead to a situation where customers are left with these costs."
In the resource plan before the PUC, Xcel Energy is seeking to pass all tariff-related costs directly to customer bills.
Another wild card is the impact of data centers, which Xcel Energy said will make up about two-thirds of the new demand for electricity. The utility is projecting a 19% increase in peak demand to 8.6 gigawatts between 2024 and 2031. One gigawatt can power about 90,000 households.
"For the last several decades, energy growth has been flat," Xcel Energy said. "That dynamic is changing and with that, how we plan our system must change as well. We are seeing unprecedented growth in energy demand from new customer sectors as well as from new customer technologies and it's unlike anything we've seen in recent history."
Still, how many data centers are going to be built is a big question, according to a PUC filing by Colorado Energy Consumers, which represents large commercial and industrial customers.
The risk is that Xcel Energy will build too little generation and transmission, stressing the grid, or more than is needed, leaving customers to pay for the unused plants and wires.
"How do we shuffle the risk-rewards?" PUC Commissioner Gilman asked. "If customers are being asked to gamble, how is that risk going to be shared?"
In large part the answer to that question comes down to how rates are set, what customers pay for and what costs and risks the company and its shareholders assume.
This hinges on how new generation and transmission is financed and how much of a return on capital investments the utility commission allows. Those returns, according to several studies, have historically been too generous.
Investor-owned utilities operated as regulated monopolies overseen by a utility commission that approves its plans and sets its rates. Colorado and most other states use "cost of service" rate setting.
Under this method the costs are divided between operations and maintenance and capital investments, such as plants and transmission.
The operation and maintenance costs -- buying fuel, repairing lines -- are passed onto customer bills dollar for dollar. For capital investments, the utility gets back what it spent plus a return on that money.
This gives utilities an incentive to build their own projects, especially when the returns awarded by utility commissions are high, rather than using alternate financing, such as bonds or contracting out projects to independent developers.
"I've been on the boards of four, four or five utilities," said Paul Joskow, an Massachusetts Institute of Technology economist focused on utilities, "and from a utility's perspective, they like putting things in the rate base."
"They don't like solutions that may be substitutes, but which they don't get a return on," Joskow said.
Chasing that return on equity, Blank said, could lead to "potentially misaligned regulatory incentives where utility earnings are directly linked to rate base growth -- whether the capital spending produces corresponding customer benefits."
The key determinant in how much an utility makes is the "return on equity" or ROE. Xcel Energy's awarded ROE in Colorado is 9.3%, according to company filings.
Utilities calculate their required ROE using mathematical models. "Because these models ... are such a technical component of building the rates, a lot of times they are not challenged," RMI's Foelske said.
More than that, utilities often put a thumb on the scales, said Mark LeBel, an analyst with the Regulatory Assistance Project, a clean energy consultant.
"There's always a way that a utility can try to cheat, and I'm using that colloquially," LeBel said. "I think that that's inherent in the system unless you really want to blow up the system."
Numerous studies have argued that utility commissions are overly generous with ROEs.
Researchers at the University of California Berkeley looked at 3,500 rates cases between 1980 and 2020 and found that the ROE remained steady -- in the 11% to 9% range -- even when returns on top rated corporate bonds fell to 2.3%
A higher return is needed, utilities say, to lure investors because stocks are a riskier investment than bonds.
"The concern is that utilities won't be able to continue to invest, to expand and improve the system for customers access and the fears about credit downgrades with lower returns," Foelske said.
"But utilities may be oversensitive to those fears and ROEs will be too high," he said.
Another measure of high ROEs is the ratio of a company's assets to the value of all its stock, the book-to-market ratio. The higher it is the more investors value the stock over the company's assets.
A study by RMI found that the ratio for the 20 U.S. largest utilities was 1.81, meaning that the stocks were trading at an average 81% premium. Xcel Energy's ratio is 2, according to Yahoo Finance.
"It's like magic, for every dollar you invest you get $2," said Mark Ellis, a senior fellow at the progressive American Liberties Project and a former utility executive.
In a policy paper, Ellis calculated that the average utility ROE for the first half of 2023 was 9.3%, while average return for 34 Wall Street fund managers and investment banks, including Morgan Stanley, Black Rock and Well Fargo, was 6.7%.
"The financial economics of this is very clear," Ellis said. "Everybody is making all this money that they shouldn't be making and no one is talking about the elephant in the room."
What impact does ROE have on the monthly household electricity bill?
On an average $107.44 bill, RMI estimates, about half is operating costs, about a third is depreciation, debt costs and taxes and 16.7% is ROE, about $17.45 on the bill. Every 1% decrease in ROE would cut the monthly bill $2.33.
There are other ways a utility can finance projects. It can raise funds through bonds or it can let independent developers build projects and buy their electricity through long-term contracts called purchase power agreements or PPAs. Each has less of an impact on rates.
MIT's Joskow said the issue with cost-of-service is that the investment is front-loaded. "So let's say it is $1 billion in investment. It goes into the ratebase in year one. In year two it is $1 billion minus depreciation."
"Most PPAs don't work like that," Joskow said. "They tend to have constant real revenue streams, and so that the rate impact is spread out over a longer period of time."
As for bonds, while PSCo has a 9.3% ROE, its long-term bonds range from 1.9% to 6.5%, according to the Xcel Energy annual report. "Debt is always cheaper than equity," UCA's Pereira said.
When it comes to selling stock and spending money, Xcel has been among the top investor-owned utilities, raising $1.1 billion in stock issues in 2024, the third most among the 38 publicly traded utilities.
It was ninth in capital expenditures at $7.4 billion, according to the 2024 annual financial review of the Edison Electric Institute, the industry's trade group.
Utility stocks are currently selling at high prices. "Utilities are quite rich right now, multiples of their book value, because of all the excitement around the power demands and electricity needs for AI and data centers," said Travis Miller, an analyst with Morningstar, a financial services company.
On Xcel Energy's second quarter earnings call July 31, a stock analyst asked about the prospects for ROE in Colorado. Bob Frenzel, the company CEO, said the utility is set to file for electricity and gas rate hikes at the end of this year.
"We've done a lot of work to improve the electric side of the ROE," Frenzel said. "We expect the electric side of the ROE to continue to improve."
The PUC's Blank has directed the agency staff to explore alternative rate-making methods to cost-of-service and ROE.
"If customers are being asked to take a risk, that risk is shared," Gilman said. "How is that risk reward structure properly designed? I have a lot of doubts that the current structure without any modifications will get us there."
The prospects for change, however, are slim, the utility consumer advocate Pereira said. "We are stuck with cost of service where the regulatory environment won't push back against the pressure of the utility," he said.