Saturday, November 10, 2007

Delmarva's Consultant Report "Not Particularly Transparent"

Delmarva Power filed a report with the Public Service Commission (PSC) yesterday prepared by PACE Global Energy Resources. Not surprisingly, the report finds that the Bluewater Wind proposal would be really expensive. The News Journal has the story:
PACE's report identifies a higher "green premium" than the one outlined in a Public Service Commission staff report last month, which suggested the wind farm alone would cost the average ratepayer $11.71 per month over market. The difference is largely because the PACE report projects a lower price for buying traditional electricity off the grid, said Greg Adams, who co-wrote the report for PACE.
This of course is the heart of the matter: What will we be paying for electricity from current sources over the next 30 years? On this subject, the PACE report and other analyses that find offshore wind too expensive tend to underestimate future energy costs.
The PACE report also appears to inflate the cost of Bluewater's proposal:
University of Delaware researcher Jeremy Firestone said the report also assumes Delmarva Power would be buying more electricity from Bluewater than the PSC staff report identified. That would boost the price, he said. He called the report "not particularly transparent."
How murky is the report? Let's take a look at Exhibit 2:
See the big green area at the top? It's called the Energy Price Escalation. But didn't Bluewater pull it off the table? The PACE report says not:
Exhibit 2 demonstrates that even if the escalators were removed the SOS customer is bearing potentially $143.92/MWhr in credit risk. Contractually, the Bluewater risk profile cannot be changed by elimination of the pricing escalator language which would only shift the escalator price risk into other types of risk, which may not be capable of being hedged. By removing the pricing escalators the SOS customer, through Delmarva, would need to hedge Bluewater credit exposure through the use of Credit Default protection.
Let me try to make sense out of this not particularly transparent passage. (First, the exhibit doesn't demonstrate anything; it just presents a result.) Bluewater takes the commodity price risk off the table, but through some act of prestidigitation, there it is! It must be that dead hand the economists like to talk about. And not only is the risk still there on the table, we can quantify it: $143.92/MWhr. Now how did commodity risk transform itself into credit default risk? How would we as ratepayers end up as creditors? The PACE report explains:
Removing price escalators without strong credit protections imposes severe rate instability upon the SOS customer, as Bluewater is carrying risk far above its capacity, and potentially well in excess of its base energy cost.
Is Bluewater in over its head? As we know, Bluewater recently sold a majority stake to the global energy firm Babcock & Brown, which manages $52 billion in assets. The capital needed to build the proposed wind farm represents no more than 3 percent of the assets Babcock & Brown manages. The firm has a structured finance unit, which means it has the expertise to hedge some of the commodity risk. Further, a firm of its size should be able to raise the capital for the offshore wind project without having to shoulder the risk premium Bluewater would have to pay if it sought investors as a stand alone enterprise. Now if I were to invest in Babcock & Brown, I would recognize that I am taking on a credit risk. But I don't see how I am taking on a credit risk as a ratepayer.
There you have it. The Bluewater proposal includes this big extra cost of $143.92/MWhr. It's not there in the term sheet. But Delmarva's consultant says it's still there. The dead hand is quicker than the eye.

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