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Federal Agency Says Offshore Developer Can Charge Consumers Before It Delivers Power

Special incentives granted to Atlantic Wind Connection to help underwater transmission system attract financing.

Atlantic Wind Connection gained a key approval from a federal agency last week that enhances its efforts to attract financing for a $5 billion project to build the nation’s first offshore transmission system along the coast of New Jersey and other states.

Despite protests from consumer advocates in-state and elsewhere, the Federal Energy Regulatory Commission (FERC) approved special incentives that allow the developer to begin collecting payments from customers up and down the Eastern Seaboard even before it starts moving electricity from yet-to-be-built offshore wind farms.

The commission also allowed the developer to recover 100 percent of its costs if the project is abandoned through no fault of Atlantic Wind Connection, as well as a return on equity of 12.59 percent, far higher than electric utilities typically receive for improvements to the power grid. The commission also indicated that approval of all incentives depends on the project being included in PJM Interconnection’s regional transmission expansion plan.

Underwater Transmission

Atlantic Wind Connection is a 250-mile underwater transmission line meant to connect the spate of offshore wind farms being developed by New Jersey and other states. Its backers include Google and Trans-Elect, a transmission company. It backers say it will provide up to 6,000 megawatts of wind power to congested markets along the coast, an infusion of electricity that will lower energy costs for consumers and help states achieve goals to increase reliance on cleaner and renewable sources of energy.

The incentive rates, however, were opposed by New Jersey officials who fear the huge project might undermine their efforts to develop wind farms about 20 miles off the coast. At least four developers have proposed building wind farms off the Jersey coast, but some experts, including a principal in Atlantic Wind Connection, say that as many as a dozen could bid for leases when the federal government solicits interest in blocks of offshore waters next month.

The four more advanced offshore projects all have lined up connections on land at a price far less than the cost of the Atlantic Wind Connection. In filings with the commission, both the New Jersey Board of Public Utilities (BPU) and Division of Rate Counsel expressed concern the project would unnecessarily increase transmission costs for customers.

Typically, transmission accounts for about 8 percent of a customer’s overall electric bill, but that soon could change as more companies invest in transmission upgrades and seek special incentive rates. Indeed, FERC Thursday said it is seeking comment on the special incentive rates and whether changes should be made in the policy.

Since the commission approved the program in 2006, it has received more than 75 applications for transmission projects totaling greater than $50 billion. Public Service Electric & Gas (PS&G) has received special incentive rates on its Susquehanna-Roseland transmission project, a subject of much controversy and litigation because it traverses the heart of the New Jersey Highlands. PSE&G also is seeking incentive rates for five transmission upgrades. The incentives are opposed by state regulatory agencies in filings with the FERC.

Federal Frustration

New Jersey Division of Rate Counsel Stefanie Brand expressed frustration with the federal agency awarding Atlantic Wind Connection the incentive rates, noting if the project wins approval from PJM, it can begin collecting rates even before there are offshore wind farms to connect to.

"It’s insane. It’s like handing money out like candy," Brand said. "Why are we spending all of this money when we don’t even know yet whether this backbone transmission system is the best way to connect to the offshore wind farms?"

In its order, the commission said Atlantic Wind Connection had demonstrated in its filings that the project is not routine, having serious financial, regulatory and technological risks. Allowing the project to collect rates before it is in service, dubbed "construction work in progress," will allow the company to reach investment-grade credit rating sooner, improve cash flow and lower its borrowing costs. In addition, it will result in better rate stability for customers, the order said.

In approving the ability to recover 100 percent of its prudently incurred costs if the project is abandoned will aid the developer in attracting financing, according to the commission.

"This is an important and significant step forward to build the interstate electric superhighway necessary for offshore wind to reach scale," said Robert Mitchell, chief executive officer of Atlantic Grid Development, the project’s lead developer. "The project will allow thousands of megawatts of clean power to efficiently connect to the PJM transmission grid, while spurring the creation of thousands of clean energy jobs and improving the reliability and security of the power grid in the Mid-Atlantic."

Environmental Concerns

But some environmentalists fear the project also will allow AWC to wheel dirty coal power from the south up into the Eastern Seaboard and New Jersey. In the filing, AWC also noted it would be able to transmit up to 2,000 megawatts of capacity in southern Virginia to energy- constrained parts of the Mid-Atlantic region. Much of the generating capacity in southern Virginia comes from coal-fired plants.

Jeff Tittel, director of the New Jersey Sierra Club, noted because of delays in developing the offshore wind farms, the backbone transmission system may be in place long before farms are operational.

"The biggest issue is they are not going to prevent dirty coal power coming up from the south," Tittel said, referring to the 2,000 megawatts of onshore electricity the developers say they can transmit.

According to its application, construction of the backbone transmission system would be done in five phases, with the first phase in an area from Indian River, DE, to southern New Jersey, beginning in 2013. Phase one of the project would potentially be in service by 2016, probably much earlier than any of the offshore wind farms will be operational.

Last month, the project filed a right-of-way application with the Department of Interior’s Bureau of Ocean Energy Management, Regulation and Enforcement. In a recent congressional hearing, the director of the bureau, Michael Bromwich, indicated support for the project and said it’s on the fast track, according to a release from the AWC.

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