benefit of counsel: removing impediments to wind and other renewable resources

Issue 3 and Volume 84.

Larry Eisenstat and Maria Farinella

On Feb. 14, 2006, the Arizona Corporation Commission (ACC) voted 3-2 to end its examination of the viability of two in-state wind generation projects that were rejected by Arizona Public Service Co. (APS) in a recently completed RFP for various renewable energy resources. Among the factors APS evaluated were the resources’ actual capacity value, the extent to which each was deliverable to the APS system, and whether each bid, inclusive of integration costs, was at or below “125 percent of the reasonable estimated market price of conventional resource alternatives.” Both the RFP and the bid evaluations were conducted by APS personnel, subject to ACC approval.

For more than three hours, the ACC commissioners, mindful of the challenges involved in effectively attracting workable wind resources to the state, wrestled with whether the wind projects were properly evaluated and whether, as was suggested by an ACC commissioner, such projects should be required to hold ratepayers harmless should their ultimate costs exceed its bids. Some commissioners strongly desired to encourage the state’s first wind projects, believing they doubtless would create tax and other economic benefits for local communities, allow ratepayer dollars to be retained within the state, and result in a more diversified and clean supply portfolio. Other commissioners insisted that only “cost-effective” renewable resources should be selected irrespective of location.

Some who commented argued that APS failed to properly calculate APS’ avoided costs and that it relied on unrealistically low gas forecasts and other improbable assumptions. APS claimed it rejected the two in-state wind projects primarily because its awards to other resources bid into the RFP, including one out-of-state wind project, left APS with insufficient available firm transmission capacity, notwithstanding its having previously announced that such capacity would be available.

Our purpose here is not to assess either the merits of this particular RFP process or the legitimacy of APS’ rejection of the two in-state wind projects, but rather to comment generally on the nature of issues laid bare by this RFP that must be resolved anywhere that policymakers desire wind energy to play a meaningful role. No doubt, the most obvious step in fostering wind power and other renewables would be for individual states or regions to establish mandatory renewable portfolio standards (RPS) and require utilities to include a stated percentage (by MW) of wind projects in their supply mix. If a utility were obligated to acquire a minimum of at least 15 percent of its capacity needs from renewable resources, presumably it would have an incentive to resolve whatever hurdles currently hinder further renewable power development.

Short of an RPS, though, the Arizona situation shows that for wind projects to obtain even a foothold, there must be a level playing field, and their evaluation must occur pursuant to a fair and transparent process. Indeed, if a state commission truly wishes to encourage the use of renewable resources such as wind, the RFPs of its jurisdictional utilities must address those concerns that developers uniformly have voiced, regarding, for example, the costs of integrating such resources, determining a wind resource’s peak capacity accreditation and, if there is to be an avoided cost benchmark, how best to independently and objectively determine just what those costs are. For example, traditional RFP evaluations tend to overlook the significant, albeit difficult to quantify, benefits of new wind resources, such as improved air quality, increasing supply diversity, and reduced reliance on foreign or fossil fuels.

Other than the problem of getting prospective customers to be comfortable entering into a long-term power purchase agreement, lack of available transmission is probably the most significant impediment to wind power development. It is ironic, however, at least as to states where there are RFPs, that there has been relatively little effort at devising solutions to the deliverability problems associated with limited transmission capacity. But if states are serious about having a more diverse portfolio that includes wind, given that productive wind sites are often located at some distance from load centers, consideration must be given to implementing more effective and comprehensive system planning, and to expanding the transmission grid in a manner that does not force new wind resources to bear the full burden of system expansions that benefit all users, not just wind projects.

Lastly, as to what are clearly legitimate concerns about potential cost overruns and guaranteed ratepayer protections, there is nothing wrong with requiring that renewable projects hold ratepayers harmless from such overruns. After all, the ability to transfer this risk from ratepayers to suppliers was one of the principle justifications for deregulating wholesale energy markets. But it is wrong to require these protections only from renewable projects and not from all suppliers, whether utility-owned or not, or to prohibit those resources willing to take these risks from keeping whatever market upside may occur.

Larry Eisenstat is head of the electric power practice and Maria Farinella is an energy attorney with Dickstein Shapiro Morin & Oshinsky LLP. They can be reached at [email protected] and [email protected], respectively.