PROVIDENCE – More than a decade ago, when policymakers put Rhode Island on the path to hosting the first offshore wind farm in the nation, they made a bargain.
They knew that power from the Block Island Wind Farm would be expensive but were willing to pay the price in the hopes that the project would spur creation of a new clean-energy industry in the state.
What they didn’t bargain for was that the wind farm would become a gold mine for an energy company that already had a dominant presence in Rhode Island: National Grid, the main electric utility in the state and the owner of the 20-mile undersea transmission cable that brings power generated by the project from a Block Island substation to the mainland power grid.
In the four years since the five wind turbines went into operation, National Grid has made $46 million in excess profits from delivering electricity through the cable, according to filings by the utility in response to questions by state regulators.
That’s money coming into National Grid on top of what was estimated for operations and maintenance of the cable, taxes on it, and even how much the company calculated it needed to pay off its installation and construction costs over time while still earning a reasonable profit.
And it’s money paid entirely by Rhode Islanders through a surcharge on their electric bills.
What’s more, even though a good portion of the money was designated for operations and maintenance of the cable, National Grid never set the profits aside in a reserve fund. So when the company agreed last year to rebury part of the cable after it became exposed by waves, National Grid decided to capitalize the $31 million in repairs.
That pushed the total cost of the transmission project up to more than $145 million, and, as a result, the company is set to make electric customers pay even more for the cable’s use.
Because the surcharge is based on the value of the cable, the rate is scheduled to increase in May, essentially rewarding National Grid with more money for fixing a problem that state coastal regulators, long before construction began, warned could arise.
Meanwhile Ørsted, the Danish company that owns the wind farm and the portion of the cable that runs from the turbines to the Block Island substation, is paying out of pocket for its share of the reburial.
National Grid says it plans to amend the cable surcharge, but maintains that it has done nothing wrong. The surcharge is allowed by federal energy law, which governs ratemaking for electric lines that supply multistate power systems. It is a fair way to assess rates because it aims to balance costs over the long term, the company says.
“In the earlier years of a project, actual costs may be lower compared to the revenues recovered, whereas in the later years of a project’s life, along with any unexpected [operation and maintenance] costs, the actual costs may be greater than the revenues recovered,” National Grid said in a statement. “The Company is not able to predict when certain substantial costs associated with the [cable] will occur in future years.”
But the Rhode Island Public Utilities Commission questions the company’s rationale and says that National Grid may have violated state law in the way it calculated the surcharge.
As for the excess money that’s been collected so far, it’s already been spent on other things.
Hidden costs of renewable energy
In some ways, what’s happening in Rhode Island may be unique because of how the wind farm and cable agreements were structured, but the recent disclosures stand as a warning about possible hidden costs associated with new energy resources.
As the nation ramps up development of offshore wind farms as part of President Joe Biden’s climate agenda, many more transmission cables will be needed to bring power to Massachusetts, New York and other states with clean-energy goals.
While the price of offshore wind power is becoming more competitive, electric users could still be on the hook for high fees to get the electricity to their homes and businesses.
“This may be an issue that Rhode Island is the first to deal with,” Ronald Gerwatowski, chairman of the Rhode Island Public Utilities Commission, said at a recent meeting. “We have to set some examples for other states to follow.”
R.I. Public Utilities Commission Chairman Ronald Gerwatowski says National Grid is “ripping off ratepayers” through charges associated with its wind energy transmission cable.
The amount that National Grid is reaping from the Block Island Transmission System, or BITS, was only discovered over the last nine months by Gerwatowski, the former chief legal counsel for National Grid in Rhode Island who worked on agreements with the wind farm more than a decade ago when he was still with the company. Gerwatowski went on to serve as a Massachusetts energy official before then-Gov. Gina Raimondo appointed him last year as chairman of the Rhode Island utilities commission.
When he realized the full amount of money being made – in his opinion, unjustifiably so – he was furious. He laid into the company last month using words that have rarely been heard, if ever, in commission meetings.
Gerwatowski called the situation “appalling” and “unconscionable,” and said the company’s actions amounted to “ripping off ratepayers.”
“They’re making so much money on this that it’s ridiculous,” he said. “The company should be ashamed of itself.”
Commissioner Abigail Anthony, who holds a doctorate in environmental and natural resource economics, agreed.
“It is astounding,” she said. “It shocked me.”
The issue is coming to the fore at a delicate moment for National Grid, which has agreed to sell its businesses in Rhode Island to Pennsylvania-based utility PPL Corporation. PPL would certainly have taken into account the cable earnings as part of its decision to agree a deal with National Grid, said Gerwatowski.
“They should be on notice that this isn’t over,” he said.
Following the criticism, National Grid lawyers responded with a letter that did not challenge the commissioners’ assertions. They said the company is working with staff at the commission’s sister agency, the Division of Public Utilities and Carriers, on a solution that “is in the best interest of Rhode Island customers, while remaining consistent with [federal] precedent.”
PPL is aware of the situation and is on board with National Grid’s approach to the issue.
To put the $46-million figure in context, consider that National Grid is already receiving a bonus payment from ratepayers simply for agreeing to buy power from the wind farm. For making a 20-year commitment to the purchase, the company was rewarded with an incentive equal to 2.75% of the contract’s value.
That income has totaled more than $3.2 million so far, and the annual payments are going up because the contract is backloaded.
Operating costs lower than expected
The additional money National Grid is getting from the Block Island cable was discovered by chance.
Gerwatowski started raising questions when National Grid reported higher-than-expected earnings for 2019. Typically, if the utility makes extra, ratepayers are awarded a share, but that didn’t happen with this money.
When Gerwatowski dug into the issue, it became clear that the money was coming from revenues associated with the Block Island cable, which is not subject to the earnings-sharing agreement.
Workers guide 20 miles of cable from on an installation vessel at Quonset in 2016.
For a company that had a net income in Rhode Island in 2020 of $122 million, the revenues from the cable have been significant: All told, National Grid will have been paid $73 million for the cable over the first five years of operation when the company’s own calculations put the costs, which include a payback on its investment, at only $15.7 million.
How is this possible? Through energy laws overseen by the Federal Energy Regulatory Commission. Federal law applies because Rhode Island is part of a regional power grid that sends electricity all around New England. National Grid owns the part of the system in Rhode Island.
Under FERC regulations, surcharges are based on a formula that takes into account all the expenses to run the transmission system in a given service area. The resulting rate is then applied to the particular value of a certain line.
By their nature, lines buried under the seafloor are more costly to install than lines strung between poles on land, but, based on the four-plus years that the Block Island cable has been in use, its operation has not been nearly as expensive as envisioned by the surcharge.
In 2019, National Grid received $6.1 million for administrative and general expenses for the Block Island cable. But in reality, it spent no money for those purposes. That same year, the company got $3.1 million for operations and maintenance of the cable, but spent only $115,000.
National Grid argues that its hands are tied by FERC regulations. There’s no way to reconcile the difference between actual expenses and revenues in any given year, and excess earnings can’t be deferred, the company says.
“In years where the Company collects more than the actual costs via the formula, it is effectively prefunding future repairs,” National Grid responded in one filing to the commission.
The company also contends that because the cable is associated with the first offshore wind farm in the nation, significant expenses could arise in the future. But under questioning by Gerwatowski at a hearing last month, a company manager could not give specific reasons why the wind farm would complicate operations of the cable.
After further questions without an adequate response, Gerwatowski shot back, “It sounds like you just made it up because it sounded good.”
Even as National Grid says the overpayments could be evened out by large costs in the future, estimates cited by the company put maintenance expenses for the cable in the range of only $93,000 a year, and up to $398,000 every five to six years, depending on inspection schedules.
Cable problem was preventable
When Gerwatowski first questioned National Grid about the additional earnings, the company said the money was being held in reserve for future repairs. But at the hearing, a company executive said that was an error.
“There is no accounting reserve for those dollars on the books,” said Melissa Little, director of New England revenue requirements for National Grid.
The company says that because of the way the cable rate is designed it couldn’t save the excess profit, but events suggest that it would have made sense. Months after it was installed in 2016, sections going to and from Block Island started to become exposed off Crescent Beach.
During installation there, National Grid used a jet plow that was unable to get through the rocky bottom to create a deep trench for the cable. At its opposite landing point in Narragansett, where there have been no problems with exposure, a more expensive technique was used to drill under Scarborough State Beach.
At a state Senate hearing last year, Grover Fugate, then-director of the Rhode Island Coastal Resources Management Council, said an agency engineer had recommended burying the cable at Block Island six to eight feet deep using the same type of horizontal directional drill that was employed in Narragansett.
He said the developers countered with their own engineering report that concluded the cable could be safely buried two to four feet deep using the jet plow. Against staff advice, the coastal council approved the less costly option.
To remedy the resulting problems, Ørsted and National Grid agreed to rebury portions of the cable using the drilling technique. National Grid’s share of the work includes removing a 1,700-foot length of the line and splicing in new cable. The project started in the fall and is set to wrap up by Memorial Day.
The work is driving up the surcharge. In 2020, National Grid was paid $13.8 million for the cable and its actual expenses were $3.2 million. Those numbers are increasing to $15 million and an estimated $4 million, respectively, this year.
No plan to reimburse ratepayers
Because it’s a FERC matter, this would all appear to be out of the Rhode Island PUC’s hands. But Gerwatowski has raised another question that he believes could fall under state jurisdiction.
National Grid had two options when it sought approval to collect a charge for the cable: classify it as a transmission line and get one rate or classify it as a distribution line and get a higher rate. The company went with the latter.
Transmission lines carry electricity in bulk from power plants and other generating sources to substations, which then send it out through distribution lines to individual homes and businesses.
Distribution lines warrant higher rates because they are usually strung within neighborhoods and close to trees, and are subject to more wear and tear that requires a greater expense for maintenance and repairs. They can also require more staff to operate them and can be subject to more local taxes.
Transmission lines get a lower rate because they’re suspended between taller poles and generally installed in rights of way, where trees are cut well back. Damage is less common and administrative and tax costs can be lower.
National Grid says it chose the distribution rate because, at 34.5 kilovolts, the cable has a lower voltage than typical transmission lines. But its voltage is also higher than typical distribution lines, and National Grid has acknowledged that it owns dozens of similar lines that are classified as transmission lines. The cable also acts like a transmission line by carrying power from the wind farm to a substation.
The state law that allowed the Block Island project to go forward specifies that any revenue requirements for the cable be calculated in the same way they are for other transmission lines in Rhode Island.
If National Grid had classified the cable as a transmission line, the surcharge would have been lower. In 2019, instead of paying $19.2 million, the cost would have been $15.8 million, for a savings of more than $3.3 million.
While the commission is considering scheduling a hearing to determine whether National Grid violated state law, the company says it expects to come up with a proposal to rectify the concerns within weeks and will ultimately present it to FERC. The changes are expected to lead to a lower cable surcharge in most years to better reflect actual costs.
But what about the more than $46 million in excess money that National Grid has collected so far? Will the company reimburse Rhode Islanders? No, any solution will only take effect going forward.
At the hearing last month, Gerwatowski asked Little, the National Grid revenue executive, about the impact of the cable project on the utility’s bottom line.
“Would you say the company’s been making out very well with the way the BITS has been operating and being able to get over $45 million of additional revenue for an investment of $114 million?” he asked.
After a long pause, Little responded.
“So far to date,” she said.
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