Cape Wind wired with favoritism

by Jason M. Armstrong and David G. Tuerck

While debate over Cape Wind is now focused on electricity rates, the real story is about how elected officials carved out a sweetheart deal for a group of investors at the expense of the state’s ratepayers. The $5.5 billion project threatens to burden the electric utilities with higher costs and their customers with higher bills. Nevertheless, Cape Wind has been able to enter into a contract with one utility, National Grid, to buy half of its electricity. Once the Department of Public Utilities approves that contract, other utilities will, we can assume, line up to buy the other half. Only faintly visible are the machinations that our elected officials had to go through in order to pull the deal together.

The machinations trace back to the passage of the Green Communities Act of 2008. Section 83 of the Act mandates that the state’s four investor-owned utilities enter into 10-15 year contracts for “renewable energy generation within the jurisdictional boundaries of the commonwealth, including state waters, or in adjacent federal waters.”

A more truthful name for the law would have been “The Cape Wind Sweetheart Deal Act.” For one thing, it was written specifically to exclude cheap, renewable energy from out of state. For another, it specifies that the utilities must “consult with the Department of Energy Resources regarding its choice of contracting methods and solicitation methods.” We’re supposed to believe that Cape Wind’s supporters at the Department will remain neutral on the subject of just what “solicitation methods” it should use.

Governor Patrick is trying to mollify ratepayers with the line that Cape Wind will eventually prove to be a bargain. It would appear, however, that the bean counters at the utilities are not quite ready to buy that line. Thus Section 83 guarantees the utilities a bonus of “4 per cent of the annual payments under the contract to compensate the company for accepting the financial obligation of the long-term contract.” This bonus will cost ratepayers $220 million. That’s in addition to the $2.75 billion in above-market rates that the utilities will bury in electricity bills in order to make sure that Cape Wind has all the money it needs to go ahead with the project.

So badly written is the law that its authors inserted a paragraph that allows the regulators to “suspend the applicability of the challenged provision” of Section 83 so that the remaining provisions “are implemented expeditiously to achieve the public purposes of this provision.” Only as an afterthought and as a sop to the Attorney General is the DPU told to make sure the deal is “cost effective” and “reasonable.”

Cape Wind has tried, with a straight face, to say that the project will save ratepayers money by making them spend money. The authority for that wished-for magic comes from a Cape Wind sponsored study that predicts $4.6 billion in reduced wholesale prices over the life of the project. The idea is that the expensive electricity produced by Cape Wind will push down the prices charged by other suppliers and will keep their prices lower for decades.

By this logic, the state should subsidize the opening of a Morton’s Steakhouse at Fenway on the theory that doing so will push down the price of Fenway sausages! In reality, any cost savings that Cape Wind might confer will disappear in a year or two after it goes online, with ratepayers left holding the bag for the handouts needed to get Cape Wind’s investors and National Grid’s management to play ball.

The whole episode has come about solely as a result of the fetishistic importance that Cape Wind has acquired in the halls of state government. Nothing else could explain the willingness of the governor and the legislature to kowtow to a group of faceless investors at the expense of their constituents.

The legislature should repeal Section 83 and the DPU should reject the National Grid deal. If Cape Wind can’t live with a subsidy equal to the existing green credits (already hugely overgenerous in light of such environmental benefits as the project will confer), then the utilities should look elsewhere for renewable electricity.

The day may well come when Cape Wind serves as nothing but a reminder that a bunch of shrewd investors, with the help of their cronies in state government, were able to foist a sweetheart deal upon the backs of ratepayers. The investors will be long gone by then, but the ratepayers might want to register their feelings about the deal when they go into the voting booth.

Jason M. Armstrong is an authority on energy policy. David G. Tuerck and Jonathan Haughton serve in the Economics Department and with the Beacon Hill Institute at Suffolk University.

This article appeared in the Boston Herald on August 25, 2010

Format revised on August 25, 2010 11:58 AM