Selling less electricity is eroding Xcel Energy Inc.'s bottom line -- and, at the same time, shoring it up.
The Minneapolis-based utility has seen two consecutive quarters of lower electricity sales, which contributed to a 10 percent drop in first-quarter earnings.
Yet Xcel also is making money helping customers save energy, thanks to state-mandated programs that reward utilities for conserving power. Those conservation-related profits were $71 million before taxes last year, or roughly 5 percent of net earnings. Most of the savings occurred in Minnesota, where Xcel reported a record 1.53 percent conservation-related drop in electric use.
"That represents more than it would take to serve everybody in the city of Bloomington for a year," Laura McCarten, Xcel's regional vice president, said in an interview.
The gaining-by-losing paradox is the result of state programs that allow utilities to make a profit on investments to conserve power and reduce peak demand -- just as they do when building new power plants. Similar programs exist for natural gas conservation, which contributed a small share of Xcel's $71 million energy-saving profits.
"The least expensive form of energy is not using energy," said Jim Bellessa, an analyst with D.A. Davidson & Co. in Great Falls, Mont. "It is a lot less expensive to conserve electricity than to build a brand-new power plant to satisfy energy demand."
Xcel achieved energy savings by spending $82 million last year in Minnesota on efforts that include subsidizing residential light bulb replacements with low-energy models, and offering advice and rebates to residential and commercial customers to cut lighting and other electric use.
In return, the utility was allowed to collect from ratepayers more than $50 million in conservation incentives in Minnesota. It earned $20 million in similar incentives in Colorado and New Mexico. This year, it will begin a program in South Dakota, another of the eight states that Xcel serves, McCarten said.
Customers pay for these programs through their bills. Xcel's Minnesota program costs less than a third of a cent per kilowatt hour, or about $26 a year to the average household. Xcel has proposed a 20 percent increase this year as it pushes for more conservation.
Bellessa said it's a good deal for Xcel ratepayers and shareholders, although not all states offer such programs. Minnesota's current program has been in place since 2007, although earlier versions have been in place for two decades.
While the days of utilities promoting more electric use are largely over, executives still must explain to investors when sales are down, including Xcel. It reported a slight drop in electric sales in the first three months of this year.
The decline is attributed partly to the weak economic recovery and the warmer-than-usual winter. The president of Xcel's revenue group, David Sparby, told investors at a Deutsche Bank conference in New York on Monday that "had we not had our conservation programs, we would have seen 0.9 percent of growth."
A 'shadow effect'?
Conservation programs shave about 0.8 percent off power sales in the company's eight-state service area, Xcel CEO Ben Fowke said last month. The utility is analyzing whether those programs are having "a shadow effect" on electric sales, Fowke said, a reference to customers who conserve energy without participating in Xcel's conservation initiatives.
An example of the shadow effect is when customers purchase new televisions, which typically use less power than older models, said Xcel renewables director Lee Gabler. Xcel doesn't have a program to encourage TV upgrades. The customer still saves energy, but Xcel can't take credit and doesn't profit from it.
For the future, Xcel may find it harder to keep shaving 1 percent or more off electric demand year after year. Gabler said the company recognizes the challenge and is continually developing new programs to encourage conservation.
David Shaffer • 612-673-7090