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Will Xcel provide customers with advanced meter benefits? Only time will tell.

November 21, 2024
picture of an electric meter

Published November 21, 2024

On October 31, Halloween started with a disappointing regulatory decision: the Minnesota Public Utilities Commission (PUC) declined to require formal measures that would help ensure ratepayers receive the promised benefits of Xcel’s advanced metering infrastructure (AMI). While AMI holds great potential for grid modernization and load flexibility, the technology sits under-utilized as Xcel reaps substantial profits from its investment. 

 

Background

Utilities across the country are replacing their old meters, which must be read manually or via radio signals as utility personnel drive through neighborhoods. The new AMI meters being deployed can remotely transmit data back to the utility. While AMI serves the same general purpose of tracking how much energy a household uses, it does so on a much more granular basis than previous metering technologies. Customers are provided with a near real-time look at how they use electricity, enabling them to make behavioral changes around energy usage. In addition, the data provided by these meters allows utilities to remotely monitor grid safety and reliability. Together, these various functions of AMI can enable new rates and programs to help reduce emissions and lower customer costs. 

Xcel is replacing residential customers’ meters with AMI and installing a communications network that will allow the new meters to communicate directly with the utility. This will cost an estimated $560 million. Given the scale of this expenditure, it is extremely important that efforts are taken to ensure the promised cost savings and benefits of AMI materialize. 

Xcel’s initial request for cost recovery of AMI was approved last year, at least partially because the anticipated benefits of the project outweighed its substantial cost. When Xcel first proposed installing AMI in 2019, it estimated the expected ratepayer and environmental benefits of the meters would exceed $600 million. Unfortunately, there is a well-documented history of utilities over-promising and under-delivering on these benefits. To help protect against this, the PUC agreed with CUB, the Minnesota Department of Commerce, and the Office of the Attorney General that ratepayers should be protected from cost overruns, and it established cost caps in order to do so. The PUC also directed Xcel to file “performance incentive mechanisms” (PIMs) that would make cost recovery dependent on the utility’s achievement of the promised benefits.

These PIMs were the focus of the PUC’s hearing on Halloween. As further discussed below, CUB and the state agencies found Xcel’s PIM proposal lacking, so we put forward a separate recommendation that would better tie Xcel’s financial interest to the realization of advanced meter benefits. Unfortunately, the PUC chose not to adopt any performance incentive measures and instead directed further development of programs enabled by advanced metering technology. While this is a step in the right direction, it makes it difficult to hold Xcel accountable to the scale of benefits it promised.. 

 

Aligning Utility Interests with Ratepayer Benefits

When Xcel originally proposed its AMI and FAN projects, the Public Utilities Commission clearly stated that “all future cost recovery [would] be based upon the Company accomplishing Commission-approved metrics and performance evaluations.” On this basis, CUB again worked with the Office of the Attorney General, the Minnesota Department of Commerce, and Synapse Energy Economics (the Department’s outside expert) to propose a series of PIMs that limited Xcel’s ability to charge customers for its meters if they failed to deliver the benefits they promised. 

As discussed above, these benefits are wide-ranging. AMI provides a vast amount of information that can be used to better understand electricity usage and modernize the grid. One of the key benefits of the meters is the tracking of system data and energy consumption in near real-time. This data is remotely conveyed to Xcel and allows the company to quickly detect electricity outages and loose connections. AMI also provides an opportunity to develop “load flexibility” programs that encourage customers to shift energy usage away from “peak” periods when the grid is strained and electricity costs are high. This would lower costs for customers and reduce the need to invest in new resources. 

These sorts of programs provide the majority of AMI’s anticipated benefits and are a key reason why we see PIMs as necessary. At a high level, PIMs trigger financial incentives or penalties if utilities meet (or fail to meet) performance targets. Because utilities earn returns on capital expenditures—and because peak load reductions limit the need for those sorts of investments—developing effective load flexibility programs could limit Xcel’s profits. If, however, the company were faced with financial incentives and penalties that tied cost recovery to load flexibility outcomes, Xcel would have “skin in the game” and its interests would be better aligned with those of ratepayers. 

 

Performance Incentive Mechanisms

Our PIMs proposal was based on the estimated costs and benefits outlined by Xcel and would have imposed financial penalties on the company if it didn’t meet performance thresholds for load flexibility, meter failure rates, and unassigned usage (i.e. energy use not assigned to an account). If Xcel ultimately provided customers with more benefits than promised, it stood to earn a slight incentive.

Xcel also proposed a PIM under which the company would receive a reward or penalty of $1.1 million depending on if it met, exceeded, or fell below identified performance targets. Rather than considering performance on each of these metrics separately, Xcel sought to aggregate performance across multiple categories. This meant that Xcel could fall below its targets for several different measures and still receive a financial award if it exceeded expectations in other areas. Despite proposing an incentive mechanism, Xcel strongly encouraged the PUC to fully reject the development of PIMs, reevaluate them in a different docket, or defer implementation until a later date. 

CUB, together with other parties, expressed concern about Xcel’s proposal. The recommended $1.1 million penalty was only a fraction of the overall cost of the project and was significantly smaller than the amount Xcel stood to earn on its investment. Furthermore, Xcel’s proposal allowed the company to be awarded even if it failed to provide certain promised benefits. Ultimately, we advocated for our proposed mechanism because we saw it as a way of holding Xcel accountable to customers and staying true to the PUC’s original directive to tie cost recovery to utility performance.

 

Commission Decision

At the hearing on October 31, the PUC denied all proposed PIMs. While various commissioners acknowledged their desire to hold Xcel accountable to its promises, they expressed skepticism that PIMs would facilitate the changes they sought to see from the company. Instead, the PUC emphasized that Xcel should undertake efforts to launch load flexibility programs based on the technological capabilities of AMI. 

The PUC directed Xcel to work with stakeholders to propose a procedural process for developing and implementing load flexibility measures. This is an incremental step towards realizing advanced meter benefits—and one we agree is needed—but it does not go far enough. Without PIMs in place, Xcel has no financial interest to reduce peak load. 

The PUC’s change of heart on PIMs is frustrating, but it is not the end. Together with the Department, Synapse, and the Office of the Attorney General, CUB has spent countless hours working to ensure Xcel stays true to its promises. This work will not stop. As load flexibility programs are developed, CUB will continue to advocate on behalf of Minnesotans and work to hold Xcel accountable for delivering the promised benefits of its meters to customers.