Rhode Island Supreme Court to hear challenge to Deepwater agreement 

It takes a lot of power for Toray Plastics America to make special polyester and polypropylene films at its North Kingstown factory.

Every step of the process in each of the plant’s five manufacturing lines is automated. Rollers feed seemingly endless streams of plastic sheeting to stations that heat the plastic and stretch it precisely, sometimes to the thickness of just a few microns, resulting in products used for everything from holograms on credit cards to biodegradable bags for potato chips.

The plant uses 160 million kilowatt hours of electricity a year, more than anyone else in Rhode Island and the equivalent of about 27,000 homes.

Because Toray uses so much electricity, a small fluctuation in the price can make a big difference to its bottom line. So instead of buying from National Grid, which locks itself into long-term contracts for large chunks of power, Toray has an agreement with another supplier that can more nimbly respond to market changes. If all goes well, that company buys power at lower prices and Toray saves money.

So last year, when National Grid, Rhode Island’s dominant utility, signed a deal to buy electricity from an offshore wind farm proposed near Block Island, Toray was taken aback by details of the arrangement. Even though it buys no power from National Grid, under the deal, Toray would still have to pay some of the cost of the electricity generated by Deepwater Wind’s project.

In other words, Toray would be paying for power it will not use.

Toray and Polytop Corp., of North Smithfield, a maker of plastic bottle caps that also buys power from a competitive supplier, have appealed the Deepwater contract to the Rhode Island Supreme Court, seeking to have it overturned. The court will hear the case on Wednesday.

But the two plastics companies are not the only ones that will be charged for power they will not use. Thousands of other ratepayers in Rhode Island do not buy their power from National Grid, instead signing up with competitors that can offer, say, more price stability or cheaper rates. By and large, the users are commercial or industrial entities. They include the toy company Hasbro and Teknor Apex, a Pawtucket plastics company.

And they will all help pay for the wind farm that Deepwater wants to build three miles southeast of Block Island.

How is this possible? The simple answer is that under state law, National Grid is allowed to spread out the cost of renewable energy to everyone connected to the power grid in the state – regardless of whether they buy their power from the utility or not.

Why this is allowed and whether it’s fair are more difficult questions with answers rooted in Rhode Island’s policy to encourage the development of renewable energy.

In 2009, then-Governor Donald Carcieri signed into law a groundbreaking statute requiring National Grid to sign long-term contracts to buy energy from wind farms, solar farms and other sources of clean, renewable energy.

Environmentalists heralded the new law as a way to help wean Rhode Island off polluting fossil fuels and address climate change. Renewable energy developers welcomed the change because power purchase agreements can mean the difference between attracting financing for their risky projects or not. Carcieri threw his support behind the law, in part, because, he said, it would boost a new industry in a state suffering from recession and a long-term decline in manufacturing.

And National Grid was also in agreement with the change, despite the near certainty that it would have to buy more expensive power.

“It was really impressive the range of support it had,” said Jerry Elmer, staff attorney for the Conservation Law Foundation, who lobbied in favor of the law. “I had legislators coming up to me saying, ‘I’ve never seen the utility and environmental groups on the same side of any issue.’”

The law acknowledged that, at least in the near term, the price of renewable energy would be higher than the price of power from fossil fuels, so it prescribed how National Grid would pay for these additional costs.

“The difference shall be credited or charged to all distribution customers” through an annual rate case reviewed by the state Public Utilities Commission, the law says.

Savings may result if, as expected, the price of fossil fuels is eventually driven up by declining supplies and increasing demand. But until then, renewable energy will cost more.

As for who will be responsible for paying these higher prices, the statute is clear, referring specifically to “distribution customers.”

After Rhode Island became the first state in the nation to deregulate its electric industry in 1996, two broad categories of customers were created: those that buy their power under what’s known as the “standard offer” rate from National Grid and have it delivered by National Grid; and those that buy their power from a competitive supplier but still have it delivered by National Grid.

Both classes can be considered National Grid’s “distribution customers.”

Although the state Utility Restructuring Act forced Narragansett Electric to sell off its power plants, the company, which would be merged into National Grid, retained ownership of nearly the entire power grid in Rhode Island – all the transmission lines, transformers, and individual hookups. So anyone who uses electricity in the state must pay National Grid to have it delivered.

The idea behind deregulation was that competition would benefit the consumer by tamping down prices, much like it did for long-distance telephone service. The practice never caught on for residential electric customers in Rhode Island – partly because the price savings for smaller users can be incremental – but it has steadily spread among larger users of electricity, mainly businesses and factories.

As of March, National Grid had 476,480 standard offer accounts versus 12,408 accounts in competitive supply. About one-third of industrial users in the state have signed up with competitive suppliers while about one-eighth of commercial users have done so.

Under the long-term contracting law, every one of these account holders – those using the standard offer and those using competitive supply – must pay any additional costs incurred by National Grid for the purchase of renewable energy.

There are two main reasons why lawmakers chose to make everyone pay.

The first is to protect National Grid. If the additional costs of renewable energy were charged only to users who buy their power from the utility, they may decide to seek cheaper power from another supplier. In short, the expense of renewable energy could act as an incentive to leave the standard offer.

If customers did opt out, the added costs would be charged to a smaller group of users, each customer’s burden would grow, and the pressure to leave would be greater. It would spiral down from there.

“If we had to charge everybody on the standard offer, everybody would leave the standard offer and we’d have nobody to recover the costs,” National Grid lawyer Ronald Gerwatowski told the PUC in a hearing last August.

The second reason relates to the potential benefits of renewable energy. The thinking goes that by investing in, say, offshore wind power, Rhode Island would use less electricity generated by burning coal or other fossil fuels that pollute the air. Everyone in the state benefits from cleaner air, whether they use the renewable energy purchased by National Grid or not. So everyone should pay to make investments in renewable energy possible.

“Everybody has to share the costs of what regulators have decided are projects with society-wide benefits,” said Deepwater chief executive William M. Moore.

He said the situation is analogous to how Rhode Island and other states treat energy efficiency. All ratepayers must pay a charge that funds projects to conserve electricity. Individual homeowners and business owners use that money to weatherize buildings, install compact fluorescent light bulbs or do something similar. Energy conservation helps keeps prices lower, so everyone benefits.

Massachusetts also has a law governing long-term contracts for renewable energy, and it spreads out costs in the same way. Last year, National Grid agreed to buy half the power from the Cape Wind project planned in Nantucket Sound under terms governed by the Massachusetts statute.

Even groups that have raised objections to the Deepwater contract say the way the Rhode Island law allocates costs is fair.

The Conservation Law Foundation has challenged a controversial amendment to the long-term contracting law that benefited only Deepwater, but the group supports how the law recovers costs. Elmer, attorney for the organization, said that renewable energy is part of a solution to climate change with “universal benefits.”

Rep. Laurence Ehrhardt, R-North Kingstown, who opposes the Deepwater contract and argued against the long-term contracting law for other reasons said “the fair way is to spread the costs out.”

Still, the above-market costs of the power that would be generated by Deepwater’s Block Island wind farm are undeniably high.

National Grid agreed to buy the power at up to 24.4 cents per kilowatt hour in the first year. That price could go down if Deepwater is able to save money on construction, but, no matter what, the base price will increase 3.5 percent annually over the 20-year contract. In the final year, it could be as high as 48 cents per kilowatt hour.

When the deal was signed last year, the 24.4 cent price was more than twice what National Grid paid for power from conventional sources, primarily natural gas-fired plants and nuclear power facilities. Since then, the utility has been able to buy cheaper power, mainly because the price of natural gas has dropped as new supplies have come on line.

The standard offer rate has dropped from 9.6 cents per kilowatt hour to 6.9 cents for residential users. So Deepwater’s starting price is now more than three times the price from other sources.

Deepwater and its supporters defend the price, saying offshore wind is a long-term investment, not only in renewable energy but also in the Rhode Island economy.

“It’s a high rate,” said Sen. Josh Miller, D-Cranston, a lead sponsor of the long-term contracting statute, “but it’s important to develop an industry.”

National Grid has calculated the difference between what it would pay annually for power from the wind farm and what it would pay for the same amount of power from conventional sources. Initial estimates using the 24.4 cent base price put this above-market cost at $12.4 million in the wind farm’s first full year of operation. Over 20 years, the additional costs would add up to $390.5 million.

National Grid subsequently updated those estimates so that they take into account the recent reduction in the price of natural gas. According to documents submitted to the Public Utilities Commission in April, the additional cost is now estimated at $13.9 million in the first year. Over 20 years, that amount would total up to $415 million.

Those costs would be allocated by usage. If you use more electricity, you pay more for the wind farm – even if you buy your power from someone other than National Grid.

Because the majority of competitive supply customers are commercial or industrial entities, they generally use much more electricity than residential customers. Although they are only 2.5 percent of the number of ratepayers, they use about 35 percent of the total power supplied to Rhode Island.The costs for a residential user are relatively low – about $16.20 a year for the typical household – but the cost for Polytop and Toray add up because they each use so much electricity.

According to figures from National Grid, Polytop would pay $46,000 more for power in the first year of the Deepwater contract and $1.1 million total over the 20-year contract. Toray would pay $305,000 more in the first year and $7.3 million over the life of the deal. Those calculations have not been updated since the price of natural gas dropped, so the above-market costs would be slightly more based on current data.

At the Supreme Court hearing, the two companies will argue that these costs are not commercially reasonable and could harm their business.

“It’s just cash out the door for Polytop,” Thomas D’Amato, Polytop’s manager of manufacturing systems, said in a filing with the PUC. “It does not give us anything.”

Toray senior vice president Shigeru Osada puts it another way, saying that his company is in the “pennies for pounds business.”

“If we charge one penny more for our products, then we may lose customers,” he said recently at the company’s plant in the Quonset Business Park.

That’s why it’s important to keep utility costs down at the 600-employee factory, he said. Toray buys its electricity from TransCanada Power at about 6 cents per kilowatt hour, a little lower than the rate of 6.3 cents per kilowatt hour that National Grid charges its large industrial customers. Even then, Toray spends about $11 million annually on power.

Toray is not opposed to renewable energy. In fact, it will start installing 1,650 solar panels at the North Kingstown factory later this month. It will be the largest photovoltaic array in the state.

But Osada said the costs of that project make sense, in part, because some financing is coming from a low-interest loan from the state as well as a federal stimulus grant. On the other hand, he said, the costs of the Deepwater contract are simply too high, especially when Toray will not even use the power.

“The point of deregulation was to let us choose a lower price for ourselves,” he said. “In the [Deepwater contract], we don’t have a choice.”