Costs at center of wind farm hearings

Mon, 08/09/2010 - 4:00am

08/07/10 - Hearings continued this week on the amended Power Purchase Agreement reached between Deepwater Wind and National Grid for electricity coming from the proposed Block Island demonstration wind farm.

The state Public Utilities Commission will decide on August 11 whether the contract is “commercially reasonable,” as required by a new state law. The commission unanimously rejected a similar proposal this spring, prompting the state legislature to rewrite the law governing the wind power proposal and order the PUC to consider a slightly revised Deepwater-National Grid deal.

The two weeks of hearings have focused on the economic impact the wind farm would have on the state. An expert testifying on behalf of large industrial concerns said higher electricity rates stemming from the farm would have a negative effect on business, while a consultant for the Rhode Island Economic Development Corporation saw a green future — both economically and environmentally — for Rhode Island if the contract were approved.

B.I. brown outs

The subject of brown outs on Block Island came up Thursday, the last day of hearings, while Seth Parker was on the witness stand.

Parker, a Boston-based power consultant testifying on behalf of the RIEDC, supports the contract as “commercially reasonable.”

In written testimony he said that the state could see between $92 million and $107 in economic benefit from the Block Island demonstration wind farm.

On Thursday, describing the Block Island Power Company as a small independent system for generation and distribution not connected to the mainland grid, Parker said that Block Island has been “subject to more than occasional brownouts.” PUC Chairman Elia Germani said it was his understanding that the brownouts are the result of the power company’s distribution system rather than a generation problem. “If it were just a distribution system problem then [the wind farm] would probably not improve it,” Germani said.

Commissioner Mary Bray asked if in his analysis, Parker took in account the increased energy costs for companies like Toray Plastics and for Rhode Island cities and towns that Bray said “are already struggling financially.” Parker said he did not.

On Wednesday, under cross examination by attorney Michael McElroy, representing Toray Plastics and Polytop Corp., Parker said he received a combined $200,000 for his testimony and advisory opinion for the RIEDC.

As part of the new renewable energy legislation that allowed for the power agreement to be reconsidered by the PUC, the EDC was specifically charged with acquiring an independent opinion on the wind farm contract.

Before Parker took the witness stand Wednesday, McElroy made a motion to strike his advisory opinion in its entirety. Germani denied the motion “because I want to give the commission an opportunity to consider the evidence.”

McElroy then moved to strike portions of Parker’s advisory opinion that referenced the utility scale project — a proposed 100-plus turbine wind farm that would be built in federal waters after the eight-turbine Block Island demonstration project was installed. In written testimony, Parker said that project could bring $900 million to the state.

Attorney Joseph Keough, Jr., representing Deepwater Wind, objected, arguing that witnesses called by McElroy had made references to the utility scale project.

Chairman Germani granted the motion, saying, “I’m not going to admit testimony on the utility scale project. We have enough on our plate as it is.”

The current contract before the commission is for electricity coming from an eight turbine demonstration wind farm within three miles of Block Island, capable of generating of a maximum of 28.8 megawatts of electricity. National Grid has agreed to pay Deepwater 24.4 cents per kilowatt-hour for that electricity beginning in 2013, with 3.5 percent increases each year of the 20-year contract. These are essentially the same terms the PUC rejected when a similar contract came before it in March; one notable difference, however, is that Deepwater has agreed to lower the opening price if the $205-million project comes in under budget.

In the wake of the rejection, the General Assembly hastily created a new law that calls upon the PUC to reconsider the modified contract.

The new law so offended the Conservation Law Foundation that it switched sides. Although the environmental group supported the original proposal, it opposes the current plan. CLF staff attorney Jerry Elmer calls the current law “special interest legislation to benefit just one developer.” He adds, “To create a strong renewable energy future for Rhode Island, we need to create a level playing field for all renewable energy developers. This is not the way to do it right.”

Earlier Wednesday, Dr. Edward Mazze, a professor and former dean of business administration at the University of Rhode Island, who testified last week on behalf of Toray and Polytop, faced cross examination.

Mazze stood by his testimony that the Block Island project would have a detrimental effect on the state’s businesses and would only benefit Block Island ratepayers. He did not agree with Parker’s model that suggested sizeable economic benefits coming from the wind farm.

National Grid’s position

At Tuesday’s hearing, Germani and PUC member Paul Roberti questioned why National Grid had abandoned its role as advocate for lower utility prices.

National Grid lawyer Ronald Gerwatowski answered that at no point in the lengthy legal proceedings had the utility stated a position on the wind project’s wider economic impact.

When the commission rejected the first contract in March it did so because the agreement would have caused state ratepayers to pay $390 million in above-market costs over the life of the 20-year contract.

Commissioner Roberti noted that the Rhode Island General Assembly has relied on the British based National Grid and its predecessor companies to provide an honest opinion on policy questions concerning electricity prices. Yet by backing an agreement to buy power from Deepwater, Roberti observed, National Grid supported a proposal that would increase typical residential electric rates on the mainland by an estimated 1.7 percent. In addition, attorney McElroy projected that the rate increase caused by the Deepwater project would cost Toray $304,000 a year.

In the past, Roberti noted, National Grid’s revenue would decline when the economy declined. In the future, however, if the Rhode Island economy suffers as a result of higher prices caused by Deepwater, “National Grid would be protected.” Roberti then referred to Rhode Island’s new “decoupling” law that allows utilities, with PUC approval, to collect a set amount of revenue regardless of electricity usage. If usage is lower than anticipated due to conservation, the utility would profit under the decoupling system. National Grid would also not suffer financially if high electric rates caused manufacturers to leave Rhode Island.

Led by construction industry unions, supporters of the Deepwater project argue that it would make Rhode Island the center for American offshore wind development creating manufacturing and assembly jobs in addition to numerous short term construction jobs. But under questioning from McElroy, Madison Milhous Jr., director of wholesale market relations for the energy portfolio management organization at National Grid, admitted he knew of no new manufacturing company investigating relocation to Rhode Island.

Milhous also reluctantly conceded that the plan would not financially benefit consumers because it would sell power to National Grid for 24.4 cents per kilowatt-hour, rather than the current 9 cents. Deepwater and National Grid have defended the proposal as beneficial to the environment and similar to European offshore wind power arrangements.

Tuesday’s final witness, Robert McCullough, testified on behalf of seven citizens of Block Island and North Kingstown, including Republican state Rep. Lawrence Ehrhardt, who oppose the project. McCullough said the power purchase agreement was not commercially reasonable because it estimates costs without stating what equipment would be used on the project. “We don’t know where the prices are coming from,” he stated, “We don’t even know what the equipment is.”

Cost questions

On Monday Deepwater Wind’s CEO and its consultants faced a barrage of skepticism.

Attorney McElroy persistently questioned Deepwater CEO William Moore to show that the cost and projected profit were understated for the company’s proposed wind farm.

McElroy, who usually represents Interstate Navigation Company and Block Island Power Company at the PUC, noted that the project’s estimated cost, which is required by state law to be “commercially reasonable,” does not include the estimated $42 million needed to install an electric cable connecting Block Island with the mainland. Deepwater consultant David Nickerson agreed that 87 percent of the electricity generated by the project would be sent to the mainland, with only 13 percent used on Block Island. Nickerson argued, however, that the cable to the mainland should not be included in cost estimates because Block Island is the end point of Deepwater’s power purchase agreement with National Grid. A later PUC case would be required to review the cable project, he said.

McElroy, however, was not convinced and noted that if the $42 million were factored into the project’s cost, it would be 23 percent more expensive than the average cost of the European offshore projects cited by Nickerson to prove that the Block Island project is commercially reasonable.

But McElroy’s most dogged questioning was reserved for CEO Moore. When McElroy asked Moore if Rhode Island’s high electric costs would discourage manufacturers from locating in the state, Moore responded that it would not be a large factor in costs for an assembly plant. McElroy then asked repeatedly about discouraging manufacturing investment before getting Moore to concede, “That theoretically could be the case.”

Next McElroy asked how Rhode Island’s electric rates compared with rates around the country. Moore responded that Rhode Island’s rates were comparable to those in other New England states. After several more tries, Moore conceded, “Yes, Rhode Island has above average electricity costs for the country.”

McElroy also pointed out that even a unique profit sharing plan would force mainland ratepayer costs upwards. The PPA assumes that the Deepwater turbines will operate at 40 percent of their capacity, an accepted estimate in the wind industry. If they operate at a higher capacity, however, the “savings” would be split equally between Deepwater and consumers. McElroy noted that the provision would still mean mainland consumers would pay 12 cents per kilowatt-hour, rather than the current 9 cents.

PUC Senior Legal Counsel Cindy Wilson-Frias asked Moore why the corporation’s cost estimates included warranty repairs and repairs of vendor work. Shouldn’t the equipment warranty cover the cost of warranty repairs, she asked, and wouldn’t contractors be responsible for shoddy work? Moore admitted he could not explain.

Commissioner Bray asked if the project would fail without a $55 million loan from the United States Department of Energy. Deepwater’s first attempt to win the loan was rejected, but the company plans to reapply in August. The company is only eligible for the loan, however, if the project is completed by the end of 2012. No DOE loan “would make it that much harder,” Moore responded, to arrange the private sector borrowing required for the project, “but it would not be a reason to abandon the project.”

PUC chairman Germani also questioned the project’s viability, calling Deepwater “a shell company,” that “isn’t really in a position to know what the project’s going to cost.” Moore strongly disagreed, citing a British consultant hired to estimate construction costs.