The statements and views expressed in the postings on the Ocean & Offshore Energy Projects and Policy Blog are my own and do not reflect those of Nixon Peabody LLP. This Blog does not provide specific legal advice. Reading or visiting this Blog does not create an attorney client relationship. This Blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

Monday, July 25, 2011

Federal Legislative Update: Politics and Geography

Offshore wind project developers and industry supporters have spent almost as much time clamoring for a comprehensive tailored legislative package as they have working on their own projects. Although some progress has been made at both the state and federal levels, there is nearly universal agreement that the absence of coordinated federal and state regulatory schemes has seriously impeded project progress and, worse, has discouraged investors from committing to capital-intensive offshore wind projects in the United States. While everyone seems to agree that top-down legislation would help streamline offshore wind in the United States, legislators have yet to agree on what that legislation will look like.

Since June 2011, three pieces of proposed legislation affecting offshore renewable energy have been introduced on Capitol Hill. The first two bills, H.R. 2170 and H.R. 2173, propose to fast track offshore wind projects abating certain prerequisite environmental studies and curtailing the associated public comment periods. The third bill, S.1397, proposes to extend the Investment Tax Credit (“ITC”) for offshore wind. Notably, the congressmen who are sponsoring the first two bills are mostly from states without active offshore wind projects. These bills have been met with significant industry resistance. In contrast, the congressmen who introduced the third bill all hail from states with active offshore wind projects. This bill has been widely lauded by industry members and advocates.

H.R. 2170 and H.R. 2173

On June 14, 2011, United States Representative Rob Wittman (VA-1) introduced two bills: H.R. 2170, “Cutting Federal Red Tape to Facilitate Renewable Energy Act”; and H.R. 2173, “Advancing Offshore Wind Production Act”. These bills seek to streamline the development of offshore energy projects by limiting or entirely eliminating certain obligations normally required under the National Environmental Policy Act (“NEPA”).

Unless a proposed action is eligible for a categorical exclusion, NEPA requires federal agencies to consider detailed evaluations of the environmental impact of any (a) the proposed action; (b) a no action alternative; and (c) alternative courses of action.

Proposed bill H.R. 2170 limits the scope of environmental assessments associated with offshore wind projects. Accordingly, H.R. 2170 eliminates the need to consider alternative courses of action in the environmental assessment as follows:

a Federal agency shall—
(1) consider only the proposed action and the no action alternative;
(2) analyze only the proposed action and the no action alternative; and
(3) identify and analyze potential mitigation measures only for the proposed action and the no action alternative.
See H.R. 2170. In addition, H.R. 2170 shortens the public comment period from the statutory minimum of 45 days to 30 days.

H.R. 2173 legislates a categorical exclusion for offshore meteorological site testing and monitoring projects. Accordingly, offshore wind developers would be allowed to install meteorological site testing and monitoring projects without preparing the otherwise mandatory environmental assessments and/or impact statements.

Although both H.R. 2170 and H.R. 2173 would have the potentially desirable effect of shortening the list of regulatory mandates for developers, both industry representatives (see testimony of Chris Taylor on behalf of AWEA) and environmental advocacy groups (see Brandi Collander on behalf of NRDC) have indicated strong opposition to both bills on the grounds that reduced or eliminated opportunities for public involvement will lead to an increase in litigation volume, which, in turn, will cause more development delays.

Both bills were co-sponsored by the same nine additional House members: Rep. Paul Broun (GA-10), Rep. Jeff Duncan (SC-3), Rep. John Duncan, Jr. (TN-2), Rep. Bill Flores (TX-17), Rep. Doc Hastings (WA-4), Rep. Raul Labrador (ID-1), Rep. Doug Lamborn (CO-5), Rep. Jeffrey Landry (LA-3) , Rep. Tom McClintock(CA-4), Rep. Steve Southerland (FL-2). With the exception of Representatives Wittman (VA) and Flores (TX) whose districts are not directly involved with offshore wind, none of the bills’ sponsoring congressmen hail from states with active offshore wind. Notwithstanding the opposition testimony, both bills were approved by the House of Representatives’ Natural Resources Committee on July 11, 2011.

S. 1397

On July 21, 2011, Senators Tom Carper (D-DE) and Olympia Snowe (R-ME), filed S. 1397, the “Incentivizing Offshore Wind Power Act.” S. 1397, also known as “A Bill to Amend the Internal Revenue Code of 1986 to Provide For an Investment Tax Credit Related to the Production of Electricity from Offshore Wind.” Although the text of S. 1397 is not yet available, Sen. Carper’s office has issued a press release describing the terms of the bill as follows:

Specifically, the Incentivizing Offshore Wind Power Act provides the offshore wind industry with enhanced stability by extending investment tax credits for the first 3,000 MW of offshore wind facilities placed into service – which is an estimate of 600 wind turbines. These tax credits are vital for this new clean energy technology because there is a much longer lead time for the permitting and construction of offshore wind turbines, compared to onshore wind energy. Once awarded a tax credit, companies have five years to install the offshore wind facility. Companies cannot receive other production or investment tax credits in addition to the offshore wind investment tax credit.
See, Offshore Wind Development Coalition ("OWDC") have announced their support for S. 1397. In fact, the OWDC had previously identified legislation extending the ITC as a key goal.

Co-sponsors for S.1393 include: Sen. Sherrod Brown (OH), Sen. Benjamin Cardin (MD), Sen. Susan Collins (ME), Sen. Christopher Coons (DE), Sen. Frank Lautenberg (NJ), Sen. Robert Menendez (NJ), Sen. Jack Reed (RI), and Sen. Sheldon Whitehouse (RI). Significantly, all of S.1397’s sponsoring legislators represent states hosting active offshore wind development projects.

Tuesday, July 5, 2011

Rhode Island Supreme Court Affirms Block Island PPA

On Friday July 1, 2011, the Rhode Island Supreme Court unanimously voted to uphold the Rhode Island Public Utilities Commission’s approval of a power purchase agreement between utility National Grid and offshore wind developer Deepwater Wind with regard to a proposed wind energy installation to be located three nautical miles southeast of Block Island in Rhode Island state waters (the “PPA”). See In re: Review of Proposed Town of New Shoreham Project, No. 2010-273-M.P. (4185)(July 1, 2011)(“New Shoreham”).

The New Shoreham decision resolved a challenge brought by third party intervenors, Conservation Law Foundation (“CLF”), Toray Plastics (“TP”) and Polytop Corp.(“PTC”) (together, the “intervenors”) as to the legality of a PPA submitted by Deepwater Wind and National Grid in 2010 ("2010 PPA"). Under the 20-year 2010 PPA, National Grid will pay up to 24.4 cents per kilowatt hour for electricity in the first year of operation with an annual 3.5% increase over the lifetime of the project. The intervenors alleged that the rates set by the PPA are nearly three times higher than the 6.9 cents per kilowatt hour that National Grid pays for electricity from traditional generation sources such as natural gas-fired facilities and nuclear power plants, and therefore are not “commercially reasonable” as required under R.I. Gen. Laws § 39-26.1-7 (2010) (Rhode Island’s Long Term Contracting Standard for Renewable Energy statute) (the “LTC statute”).

At the heart of the parties dispute is the definition of the term “commercially reasonable”. Under the original LTC statute passed by the General Assembly in 2009, the PUC was required to review the Block Island PPA using the definition set forth at § 39-26.1-2(1): “terms and pricing that are reasonably consistent with what an experienced power market analyst would expect to see in transactions involving newly developed renewable energy resources.”

In 2009, National Grid and Deepwater Wind submitted their initial PPA to the PUC (the “2009 PPA”). Citing the above definition of “commercially reasonable”, the PUC rejected the 2009 PPA. Specifically, the PUC found that when it compared the terms and pricing of the 2009 PPA to any renewable energy project, “regardless of sizing restrictions, technology, location or novelty”, the 2009 PPA was not “commercially reasonable.” See 2009 PUC Decision.

Subsequently in 2010, the Rhode Island General Assembly issued an amended version of the LTC statute ("Amended LTC"). The Amended LTC included, among other changes, a special new definition of the term “commercially reasonable” which was to be applied solely with regard to the PUC’s review of a Block Island offshore wind project PPA. The Amended LTC definition provides that the PPA’s “terms and conditions [will be considered] commercially reasonable [if the] terms and pricing…are reasonably consistent with what an experienced power market analyst would expect to see for a project of similar size, technology and location, and meeting the policy goals in [§ 39-26.1-7(c)(i); (c)]."

Following the enactment of the Amended LTC, National Grid and Deepwater Wind resubmitted their PPA to the PUC ("2010 PPA"). The 2010 PPA contained pricing and terms that are virtually identical to those set forth in the 2009 PPA. The PUC approved the 2010 PPA in August 2010.

The intervenors appealed the PUC’s decision to the Rhode Island Supreme Court through a petition for certiorari filed in September 2010. The intervenors argued that the PUC had “exceeded its authority or acted illegally, arbitrarily, or unreasonably” when it approved the 2010 PPA.

Following exhaustive briefing and oral arguments by both parties (see here), the Rhode Island Supreme Court issued its decision on July 1. In its 75 page opinion, the Court unanimously rejects the intervenors’ challenge and upheld the PUC’s approval of the PPA. In so doing, the Court stated:

Although we view with trepidation the General Assembly’s unwavering quest to sink this demonstration wind farm into the sediment of Rhode Island’s continental shelf, we nonetheless are constrained by our standard of review and the bounds of the revised [long-term contracting] statute.

Notably, the Court held that the Amended LTC statute did not require the PUC to balance the costs of the project against the benefits. Rather, the PUC’s review of the PPA needed only to consider the criteria set forth in the Amended LTC statute. Thus, held the Court, the PUC acted appropriately when it considered only potential positive impacts of the project.

The Court concluded the Opinion with what could be construed both as a critique of the General Assembly's 2010 amendments to the LTC as well as a whimsically quaint wish for the ultimate success of the Block Island offshore wind project, and for the U.S. Offshore Wind industry generally:

...it is this Court's fervent hope that our Legislature's William Seward-esque policy decision championing this amended purchase-power agreement proves as lucrative and majestic as the Alaska Purchase of 1867.

Because the case does not concern federal law or a federal constitutional challenge to Rhode Island state law, this decision is final and is not eligible for review on certiorari to the U.S. Supreme Court. Nevertheless, while this particular obstacle to development of the project has been eliminated, Deepwater Wind still has significant hurdles to overcome before it can begin construction of its Block Island project. For example, Deepwater Wind must still secure permitting from, among other agencies, the Rhode Island Coastal Resources Management Council and the U.S. Army Corps of Engineers. Hopefully, the affirmation of its PPA with National Grid will bolster investor confidence and help Deepwater Wind to procure the over $200 million in front-end financing needed for the project.

The New Shoreham case is among the first of what will likely be many challenges to PPAs fashioned for offshore wind installations. Because the upfront development, permitting, supply-chain, and construction costs for offshore wind are so high, PPAs negotiated for these projects typically present rates that are significantly higher than rates associated with traditional and/or existing generation sources. As in Rhode Island, states will most likely be forced to enact legislation that authorizes exceptional terms (see e.g., New Jersey) and/or requires state utility commissions to employ special analytical criteria for new renewable generation projects if these projects have any hope of being built.