02/20/10 -

To: the Editor—

State law requires that the terms of the Power Purchase Agreement (PPA) recently entered into by Deepwater Wind and National Grid be found “commercially reasonable” by the state Public Utilities Commission (PUC). On February 2, the R.I. Attorney General’s office filed important expert testimony on point. The AG’s office filed this testimony on behalf of the R.I. Division of Public Utilities and Carriers in connection with the PUC’s examination of the PPA. The expert providing this testimony, Mr. Richard S. Hahn, holds BA and Masters Degrees in Engineering from Northeastern and an MBA from Boston College, and is a 35-year New England power purchase expert. It is becoming clear to those charged with protecting the interests of Rhode Island citizens that the terms of the PPA are not commercially reasonable and should be rejected.

To solve for the question of what is “commercially reasonable,” it is obvious in utility project finance that the way to do that is to determine Deepwater’s equity investment returns and measure them for fairness against the burden of subsidies provided by ratepayers and the involved governments. The PUC has been empowered by the state to examine and limit equity returns on the Block Island Wind Farm because they are derived from revenue based on regulated utility rates, special taxes and government credit support.

The R.I. Attorney General’s expert witness, who has testified many times before the PUC, put the following testimony into evidence:

• The current terms of the PPA would lead to significantly outsized investor returns to Deepwater;

• The initial power price that Deepwater would charge National Grid ($237.75 per MWH), and be paid for by Rhode Island ratepayers, is at the high end of prices for renewable energy projects;

• Revenue to Deepwater under the PPA would generate annual internal rates of return (IRR) on equity invested by Deepwater’s owners in excess of 98 percent for each and every year of the wind farm’s expected 20-year useful life, using Deepwater’s planned capital structure;

• Typical annual IRRs for in-service renewable projects of this type are, instead, 12 to 15 percent;

• The PPA would cause ratepayers to pay $500,000,000 over the market value of the electric output that will come from the BI Wind Farm;

• Of all renewable energy sources, only projects producing power through solar technologies have higher prices than what Deepwater and National Grid plan to charge Rhode Island ratepayers;

• These conclusions are reached even without including the $42.5 million median cost estimate of the transmission cable from Block Island to the mainland, an additional cost to ratepayers.

A 98 percent IRR means an investment almost doubles (at 100 pecent) every year of the investment — a $25 million investment becomes $50 million, then $75 million, then $100 million and so on, each year. It is clear that the current terms of the PPA would enrich Deepwater’s Wall Street investment bankers at the serious expense of the U.S. Treasury (who would guaranty project financing loans, and provide investment and production tax credits to the project) and Rhode Island’s statewide citizenry through unnecessarily high increased power costs and subsidies (effectively a new tax on ratepayers). These excess charges would be in our electric bills and fill Deepwater’s pockets. An annual rate of return of 98 percent is obviously not commercially reasonable, not even close. The planned energy purchase costs are much too high. Seems like Wall Street has found at least one replacement for their once high-yielding mortgage derivative products. This letter is not about being for or against wind farms (I support the 15-mile offshore wind farm and would invest in it). It’s about who is left holding the bag and who may take off with what was in it. I hope the PUC will be vigilant on our behalf. Find Mr. Hahn’s full testimony at www.ripuc.org/eventsactions/docket/4111-DPU-Hahn(2-2-10).pdf.

Mike Beauregard,

Mohegan Trail