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Delaware Wind Issue

Delaware Public Service Committee Executive Summary

Executive Summary

As set forth in detail in the attached Independent Consultant  (the  “IC”) Report, the proposal outlined in the Bluewater Wind, LLC (“Bluewater”) Term Sheet is not the same project that Bluewater proposed in its initial bid received and previously reviewed by the IC.   In fact, viewed solely from an economic prospective, the new Bluewater proposal has little relationship
to its prior bid.  First and foremost, the negotiations with Bluewater have not reduced the price of the project, as was the expectation of Staff when it recommended negotiations with Bluewater in its report issued six months ago, but rather increased those prices dramatically.   Instead of“sharpening its pencil,” Bluewater has used the negotiations to dramatically escalate the potential cost of the project to Delmarva Power (“Delmarva”) and its Standard Offer Service (“SOS”) ratepayers.

The Bluewater Term Sheet raises prices for its services to Delmarva.    Bluewater’s original bid employed a fixed payment rate for energy, capacity, and Renewable Energy Credits (RECs).   Moreover, the Bluewater Term Sheet includes an energy price adjustment provision to track changes in the commodity indices and currency exchange rates.   This price adjustment shifts the energy payment rate in one direction - upward and towards the SOS ratepayers who will now bear  100% of the risk associated with these new price escalators.    Second, the Bluewater Term Sheet delays the project in-service date by one year, which further increases the ratepayers’ risk associated with the Bluewater project.

The consequence of the changes in Bluewater’s project is a drastic increase in the price impact for Delmarva’s SOS ratepayers.   The current price impact for customers with the new proposal  with  the  IC’s  conservatively  low  price  adjustment  is $11.71/MWh  compared  to $6.23/MWh for Bluewater’s original proposal.   However, if one uses the historical escalation of the indices proposed by Bluewater (over the past five years), and factors in a potential two-year delay in the financial closing for construction of the windfarm, the price impact per MWh rises above $55, and on a net present value basis is more than $1.7 billion over the original Bluewater bid.

After an informed and deliberative review of the Term Sheets, Staff cannot recommend that the State Agencies direct Purchase Power Agreements (“PPAs”) based on any of the long- term generation proposals, including the backup arrangements.   Although Staff would like to be part of the effort to pioneer offshore wind power to take control of Delaware’s energy future,
such a recommendation is -- at this time -- not in the public interest and is not consistent with the underlying principles of the Electric Utility Retail Customer Supply Act of 2006 (“EURCSA”). Staff believes that approval of Bluewater’s revised project is not in the public interest because:

•   The  revised  project,  which  includes  a  commercially  unreasonable  pricing  escalator, imposes significant additional risk as well as cost on Delmarva’s SOS ratepayers;

•   Bluewater shifts the project’s risk associated with cost increases during construction to Delmarva SOS ratepayers, and thus, the ratepayers  -  not  Bluewater  - assume full
responsibility for any losses incurred with project delay and/or failure;

•   The delayed timing of the revised project results in additional cost and exacerbates the price risk;

•   Staff expected that the negotiations would yield a lower price for the wind project, on a per customer kWh basis, but rather the negotiations resulted in a more expensive, less favorable project than the original bid proposal; and

•   Other jurisdictions, such as New York and Texas, have determined that offshore wind facilities are not an acceptable solution to energy needs base on unreasonable expense       and uncertainty with regard to project viability.

Moreover, the bidders and Delmarva have not complied with the State Agencies’ direction to craft Term Sheets that include the material aspects of the long-term power arrangements because several crucial issues remain in dispute in all three proposed Term Sheets.

In light of the foregoing reasons, the current Bluewater proposal does not achieve the greatest long-term system benefits in the most cost-effective manner, which is the cornerstone tenet of the EURCSA.   Because approval of the Bluewater project is a predicate to the backup facilities, Staff recommends that the State Agencies deny both NRG Energy, Inc.’s (“NRG”) and Conectiv Energy Supply Inc.’s  (“Conectiv”) proposals under the Term Sheets.    Despite the recommendation with respect to the long-term generation proposals, Staff continues to advocate the portfolio approach to energy planning.   Staff recommends that the State Agencies continue the review of energy supply alternatives, including on and offshore wind projects, in PSC Docket No. 07-20.

Delaware Public Service Committee Executive Summary Full Report