In the months leading up to this week’s PUC decision, Block Island residents have debated the merits of the proposed wind farm, focusing both on finances and aesthetics. Residents have weighed the pros and cons of eight wind turbines within three miles of Block Island with a guaranteed cable to the mainland, or a stand-alone cable with no wind farm.
As happens every summer, commercial and residential customers of the Block Island Power Company have shouldered the high cost of electricity along with brownouts causing interruption in service, which in turn, causes appliances to wear out much more quickly than on the mainland.
The most recent available statistics from the U.S. Department of Commerce are for the month of April, 2010 when the Block Island price was 40.40 cents per kilowatt-hour for the residential sector and 40.55 cents per kilowatt-hour for the commercial rate. These prices are in stark contrast to the mainland Rhode Island rates for April, which were only 15.78 cents per kilowatt-hour for the residential rate and 12.76 cents per kilowatt-hour for the commercial sector.
The discussion the last two weeks in the Rhode Island Public Utilities Commission (PUC) hearing room in Warwick, focused on complex utility cost and legal issues.
The PUC has been considering an amended Power Purchase Agreement (PPA) reached between National Grid and Deepwater Wind for electricity coming from the proposed Block Island demonstration wind farm. In March the PUC rejected an almost identical contract as being not “commercially reasonable” – e.g., too expensive. As a result the Legislature created a new law that obligated the PUC to consider the amended PPA.
The starting price in the amended PPA remains 24.4 cents per-kilowatt-hour the first year, with 3.5 percent annual escalations during the 20-year life of the contract. National Grid’s own witness agreed that the contract would lead to above-market costs of $370 million
The amended PPA makes an allowance that if the price of the wind farm construction comes in under $205 million, then the ratepayers would receive the benefit of a lower opening cost. This raised some eyebrows, as the estimated price for the farm in the first PPA was $219 million – shouldn’t that be the base from which ratepayers begin to benefit? Also, the opening per-kilowatt price did not change.
At the end of the hearings, the three-member board was left with a number of questions and its chairman asked the many lawyers to provide briefs on the issues.
Does the law allow the commission to consider above-market costs? Or only potential benefits?
Specifically, Germani asked whether the amended PPA contains terms and conditions that are “commercially reasonable,” and second, what is the “proper interpretation” of a provision in the statute that says “the amended agreement is likely to provide economic development benefits, including facilitating new and existing business expansion and the creation of new renewable energy jobs; the further development of Quonset Business Park; and increasing the training and preparedness of the Rhode Island workforce to support renewable energy projects.”
Germani asked that the briefs address the question of whether the section of the statute about economic development benefits requires the PUC “to take into account the above-market costs and whether there is any negative effect on existing businesses.”
Here follows a summary of the legal briefs that the commission used to makes its decision Wednesday.
FOR: Rhode Island Economic Development Corporation:
The Rhode Island Economic Development Corporation argued that there is no ambiguity in the statute passed by the legislature and no interpretation is required. While the term “economic development benefits” appears in the statute, the EDC pointed out that the word “cost” does not appear.
According to the EDC, when the Legislature wants an agency to conduct an analysis of relevant costs, it “routinely directs the agency to do exactly that, using plain and unambiguous language.” Using a different standard of review for the Block Island wind farm makes “perfect sense,” the EDC argued, “in light of the very specialized stated purpose in the statute ‘to facilitate the construction of a small-scale offshore wind demonstration project off the coast of Block Island … in order to position the state to take advantage of the economic development benefits of the emerging offshore wind industry….”
The EDC concluded that any attempt to use above-market costs as an offset in the economic benefit analysis of the Block Island Wind Farm “would utterly frustrate the General Assembly’s intent to facilitate a demonstration project to achieve the articulated goals associated with the development potential of the emerging renewable energy industry in Rhode Island.”
AGAINST: Attorney General Patrick Lynch
Attorney General Patrick Lynch, represented by attorney Mike Rubin, argued that the Legislature’s “statutory delegation of authority to a quasi-judicial tribunal [the PUC] should not be construed so as to nullify meaningful decision-making.” Pointing out that the statute requiring the commission to consider the amended PPA “does not say that over-market costs should not be considered.” Rubin wrote that the commission “should not yield to a perfunctory or rubber-stamp approach.”
In the hearings on the previous PPA, which the commission rejected as too expensive because of the above-market costs, Rubin says that testimony established that the Block Island wind farm project would create six permanent jobs and 35 to 50 temporary construction jobs. “If these facts alone were sufficient to establish sufficient economic development benefit, then no inquiry by the PUC would be necessary. The legislature could have made the finding itself,” he wrote. Since the legislature called for the matter to be reconsidered, “a weighing of the indirect impacts of the project is mandated.”
AGAINST: Toray and Polytop
Representing two large industrial concerns that oppose the amended PPA, attorney Michael McElroy argued that Deepwater Wind’s $219 million capital cost estimate in the original PPA should be the baseline from which ratepayers should accrue any savings benefits, not the $205 million figure that appears in the amended PPA. In the amended PPA, Deepwater has set the starting price for determining savings at $205 million at the same time that the contract price of 24.4 cents is the same as in the original PPA. McElroy writes, “In other words, Deepwater Wind has retained the entire $14 million of recently realized savings solely to itself,” concluding that this is not in compliance with provisions of the statute and “for this reason alone, the amended PPA must be rejected.”
McElroy also pointed out that above-market costs to be paid by Rhode Island ratepayers were estimated at $370 million, significantly more than the potential benefits of about $129 million, cited by the EDC’s advisory opinion. McElroy argued that the only way to determine whether the amended PPA is “likely to provide economic development benefits” is to consider whether it would have a “net positive effect on economic development.”
“The Legislature would never pass a statute requiring the commission to approve an agreement that is likely to have net negative economic development benefits and discourage new and existing business expansion,” McElroy wrote, urging the commission to “open both eyes and look at both the positive and the negative sides of the ledger and offset them against each other.”
FOR: National Grid
National Grid argued that while some of its customers such as Toray Plastics and Polytop Corp. “may be understandably concerned about an agreement which is likely to result in a rate increase, this concern is not a consideration under the law. The opponents may not like the law. But the law must be implemented as written.”
In National Grid’s legal brief, attorney Jennifer Brooks Hutchinson wrote that when the legislature approved the amended statute, it “only sought a finding from the commission that economic development benefits were likely. There was no cost/benefit condition placed on this inquiry.”
“It is not the role of the commission in this case to create a higher bar for the approval of the PPA than otherwise exists in the plain language of the [statute],” Hutchinson wrote, concluding that the legislature has issued a “policy judgment that this small demonstration project is important to the state of Rhode Island even though they were aware that a rate increase is likely to accompany it.”
FOR: Deepwater Wind
Attorney Joseph A. Keough, Jr., representing Deepwater Wind, countered statements that the base number to calculate ratepayer savings should be $219 million because if it is $205 million, then Deepwater Wind will have retained the first $14 million in capital cost savings. “Such characterization is blatantly misleading,” Keough writes. Only with a baseline of $205 million would Deepwater Wind’s unlevered rate of return be 10.5 percent, Keough argued, describing it as a “commercially reasonable rate of return.”
“If the actual costs of construction are greater than the base amount, the price does not increase – rather, Deepwater Wind’s returns suffer,” argued Keough, adding that if Deepwater achieves savings, its returns do not increase. He explained that Deepwater Wind “accepted this asymmetric risk profile not only to satisfy the requirements of [the PPA], but also in recognition that as the developer selected by the state of Rhode Island to build these pioneering energy projects, Deepwater Wind has an obligation to be reasonable in its return expectations.”
In regard to the above-market costs or any negative effect on existing businesses, Keough argued that the PUC could not consider these because the statute passed by the Legislature makes no specific references to either “above-market costs” or the “negative effect on existing businesses.”
The Deepwater brief concluded that since a central purpose of the statute is “to position the state to take advantage of the economic development benefits of the emerging offshore wind industry,” the commission must find that the amended PPA is likely to provide economic development benefits.
AGAINST: Ocean State Policy Research Institute
Ocean State Policy Research Institute’s attorney, John J. Kupa, Jr., pointed out that the proponents of the Block Island wind farm argued at length before the public and the Legislature that the project benefits outweighed the costs, yet “when it came to actually debating that question in an evidentiary setting… those proponents… simply ducked the question. This is a disservice to the legislature, the commission and the public.”
Division of Public Utilities and Carriers:
Similar to the attorney general and McElroy, Division of Public Utilities and Carriers attorney Jon G. Hagopian argued that any ratepayer savings should be based on the project cost estimate of $219 million that was provided in the previous PPA. “Under the revised PPA, any savings between $219 million and $205 million will be retained by the developer,” Hagopian points out. The Division’s position is that “the amended PPA should be revised such that any savings in the cost to construct the facility below $219 million directly accrue to ratepayers unless it can be established that the base amount in the revised PPA was the underlying total facility cost contemplated during the [previous PPA] proceeding.”
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