Tuesday, November 13, 2007

My Letter to the Public Service Commission

Arnetta McRae, Chair
Delaware Public Service Commission
861 Silver Lake Boulevard
Cannon Building, Suite 100
Dover, DE 19904

Dear Ms. McRae:

I am writing to urge the PSC and other agencies to do all in your power to see to it that the negotiations between Delmarva Power and Bluewater Wind continue until a successful conclusion has been achieved.
The environmental and health benefits of wind power are self evident. We in Delaware are particularly vulnerable to the potential effects of climate change and need to act to ameliorate the effects in order prevent rising sea levels. Our citizens need relief from continuing toxic emissions from burning fossil fuels.
The economic benefits of a long term Power Purchase Agreement are disputed and deserve careful review. We need the long term price stability, mandated by EURCSA, that a wind farm could provide as part of our energy portfolio. The criticisms that we can't afford the Bluewater proposal do not hold up under close scrutiny.
This assertion that we can't afford wind power is based on the crucial and fatally flawed assumption that fossil fuel prices will not rise significantly over the next thirty years. The energy price projections presented by the federal Energy Information Administration (EIA), and used in the analysis of the energy options on the table, are not credible. The EIA projects that natural gas prices will remain flat in today's dollars for the next 20 years. It is worth noting that the EIA made essentially the same prediction ten years ago. Instead natural gas prices tripled.
The Independent Consultant's analysis does not present the full price risk we are likely to face in the next 30 years. The International Energy Agency (IEA), in its World Energy Outlook, projects that overall energy demand will increase by 55 percent by the year 2030 (
www.worldenergyoutlook.org/). The IEA projects that demand for natural gas will match overall energy demand, and that demand for coal power will increase 73 percent by 2030. At the same time, the need for carbon emission controls will increase the cost of coal power by at least 20 percent, according to an MIT study ("The Future of Coal," p. 30, http://web.mit.edu/coal/). Taken together, increased demand, limited supply and the need for further controls on carbon emissions can only mean sharply higher prices.
As for buying renewable energy on the market, it seems increasingly likely that supply could lag demand for the foreseeable future. Delaware isn't the only state to adopt renewable energy portfolio standards. Delaware's portfolio standard calls for penalties if Delmarva fails to meet the standard. If we don't act, we could either pay that penalty or be forced to pay a premium for scarce renewable energy.
Those who argue against a long term agreement to provide wind power to Delaware claim we can't afford the risk. But the term sheet now on the table does not present us as ratepayers with additional risk. Instead it presents us with the opportunity to add a significant measure of price stability to our energy portfolio.
If we are to take advantage of this opportunity, we must insist on vigorous negotiations in order to create the best terms for ratepayers. The PSC staff performed a public service by identifying the risk involved in proposed construction cost escalators. In turn, Bluewater Wind responded by taking this risk off the table. Negotiations work when both sides are engaged in testing assumptions and performing what-if analyses to ensure the best possible deal is achieved. I see this example as a compelling argument for continuing negotiations, and further, for encouraging our state agencies to take a more active hand in ensuring a positive outcome.
Curiously, Delmarva Power's consultant, PACE has issued a report that asserts that the commodity risk that Bluewater had taken off the table somehow remains a burden for ratepayers. This assertion, found on page 3 of the report, deserves closer scrutiny:
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.
First, the exhibit doesn't demonstrate anything; it just presents a result. How that result is achieved is, as Jeremy Firestone dryly observed, "not particularly clear." Bluewater takes the commodity price risk off the table, but through some act of financial prestidigitation, it remains on the table, and can be quantified: $143.92/MWhr. How did a commodity risk transform itself into a credit default risk, and one that can be measured so precisely?
According to the PACE report, Delmarva is going to arrange for us as ratepayers to take out "Credit Default protection" for Bluewater Wind and its parent company, Babcock & Brown. And the report already includes a calculation of the cost of that risk price down to the penny: 14.392 cents per KWh to hedge Bluewater's credit exposure.
But isn't that what investors are for? Aren't rational investors expected to recognize and account for credit risks? Such risks are generally valued by through mechanisms such as credit ratings and by buyers and sellers in investment markets. Yet the PACE report is unclear as to the mechanism by which ratepayers would take on credit risk, and offers no specifics as to how this risk might be determined by the market, let alone calculated to five decimal places. This murky analysis is central to the report's assertion that we can't afford wind power.
While the assertion that we as ratepayers somehow would take on credit default risk on behalf of Bluewater's investors may be murky, the risk we face of continually climbing energy prices is all too evident. The proposed PPA with Bluewater would satisfy EURCSA's crucial requirement of price stability by locking in a source of renewable energy with a fixed price for 25 years. No alternative suggested by Delmarva would meet the objective of creating a Delaware based source of renewable energy and provide the price stability called for by EURCSA.
Those who oppose the wind power proposal would in effect be making an enormous bet on our behalf—a bet using our money. They are betting that fossil fuel prices will remain flat for the next thirty years. It's a bad bet. We are holding a potentially winning hand. We must not allow opponents of wind power to force us to fold that winning hand and lose the chance to bring a measure of price stability to our electricity bills for years to come.

Thomas Noyes

cc: Russell Larson, Controller General
John Hughes, Secretary, DNREC
Jennifer Davis, Director, Office of Management & Budget


Post a Comment

<< Home