What Funny Math Looks Like

This week, Bob Stevenson ruminates on what a contract between Clean Line Energy Partners and the City of Hannibal might look like.

It looks like funny math to me.

Bob tells the ratepayers that they have four options.  But they really also have a fifth -- to tell Clean Line Energy Partners to go back to Houston and quit using Hannibal as a fattened pig to force approval by the Missouri Public Service Commission.  It is not the duty of the PSC to save Hannibal from the financial consequences of its own bad energy choices.  There's nothing Hannibal can do to cure the defects of the project upon which the PSC based its denial.  It never was a simple problem of GBE not having customers in Missouri.  The PSC found that GBE had not carried its evidentiary burden that the project is needed, economical, or that its benefits would outweigh the burden on affected landowners.  Bob sitting up in the witness chair telling the PSC that he thinks GBE is needed isn't going to cut it.  Bob wouldn't last two seconds under cross examination because he has a whole lot of personal opinion and little in the way of facts.  Does he really want to embarrass himself that way?

All Bob's options involve contracting with Clean Line Energy Partners at some point.  Let's take a look:

1. Writing a contract with Clean Line for transmission capacity at $5/mwh.  $5/mwh?  Where did this number come from?  As we know, Clean Line quoted a $10/mwh transmission figure to Hannibal during its presentation of "wind options" in January.  Clean Line also quoted a figure of $15-20/mwh to the MO PSC.  And, finally, Clean Line quoted a figure of $20-25/mwh in a presentation to MISO.  What's the real figure?  Is Clean Line willing to sign a contract today to provide Hannibal with transmission capacity at $5/mwh?  Or is this a product of Bob's imagination?  Regardless, this is only a potential contract for transmission, not energy.  Bob figures the City would have to write a separate contract with a wind generator in Kansas in order to use the GBE capacity.  Without a firm energy contract, a transmission capacity contract is like a plane ticket to a certain location you're not sure you want to visit.  It doesn't work.  Bob thinks the "indicative" price of Kansas wind in they year 2021 might be between $19-20/mwh.  But that's nothing more than wishful thinking.  Is Bob going to sign a firm contract with a Kansas wind generator before signing a firm contract to have that generation delivered via Clean Line?  It doesn't look that way.  Bob is basing his prices on rumor.  Bob fails to take into account what future pricing may actually be when the federal production tax credit is phased out over the next 5 years.  Beginning in 2017, the tax credit is reduced by 20%, therefore wind prices will go up 20%, with additional increases every year.  Where has Bob figured this into his future pricing?  He hasn't.  In addition, Bob shares that Hannibal is paying the legal costs of developing a contract with Clean Line Energy.  Why?  Any company so eager to sign a contract should be offering to reimburse Hannibal for its contract expenses.  Why is Bob obligating Hannibal's ratepayers to pay for legal services to evaluate a contract that benefits a private corporation?
2. Option 2 involves joining with other municipalities to make a joint purchase of Clean Line capacity (and that fictional future energy from Kansas).  Bob thinks this might save 5-10%.  But he doesn't seem to have any facts to back up his thoughts.  What happened last time Missouri municipalities got together to jointly purchase the latest and greatest generation?  Prairie State.  The track record here isn't comforting.
3. Option 3 involves waiting until the line is built before writing a contract.  But Bob wants to convince you that will be more expensive.  Bob "expects" a lot of things to happen that won't.  Bob thinks that Clean Line transmission capacity rates will be subject to the forces of supply and demand, which would make them "higher."  Bob also thinks that construction cost overruns will show up in future rates.  He also thinks that eastern utilities will "find a way to use more of the wind energy" and drive up costs for Hannibal.  Finally, he thinks that post-construction contracts will only be available for shorter time periods.  Bob, Bob, Bob, you don't understand Clean Line's business model, do you?  It's going to cost $2.1B to build the line, assuming it ever gets approved, which isn't likely.  Clean Line doesn't have $2.1B.  It would have to borrow the money to finance construction.  In order to borrow money to finance the project, Clean Line must show the bank a revenue stream sufficient to repay the loan.  Since Clean Line is not a MISO-approved project that is cost allocated to all ratepayers in the region, Clean Line cannot use a ratepayer financed revenue stream as collateral on a loan.  Instead, Clean Line will have to present the bank with a pile of contracts for transmission capacity that obligate buyers to purchase capacity at a firm price for a firm period.  Clean Line must have evidence of its revenue stream BEFORE construction.  Therefore, Clean Line must negotiate all contracts for its capacity long before it ever puts a shovel in the ground.  Firm, long-term contracts are the best collateral, not short-term contracts for tiny bits of capacity at below-cost prices!  And furthermore, there are no "eastern utilities" interested in contracting with Clean Line.  In fact, you seem to be the only one, Bob.  Does that tell you anything?
4. The "investment."  Option 4 involves Hannibal giving Clean Line Energy Partners a big ol' chunk of ratepayer cash up front "during construction."  In exchange for this "investment," Bob thinks Hannibal will receive free capacity for the life of the project.  Where's this investment coming from, Bob?  Just for giggles, let's use the figure of $12.5M.  Where is BPW going to get the $12.5M?  Will it borrow the money?  If so, then the City will be paying interest on the money it has borrowed, and it will be expected to repay the loan.  An "investment" in ownership of the project like that would be a utility capital asset.  Capital assets are paid for over their useful life.  Therefore, Hannibal would have to determine the useful life of its asset and depreciate it over that time period.  Depreciation of the asset gets added to rates.  Therefore there would be a yearly cost for such an "investment."  It wouldn't provide capacity at "$0/mwh for the life of the project."  In addition, ownership comes with obligations, such as annual operations and maintenance expense, taxes, etc.  That would also have to be added to the depreciation costs and will be reflected in increased rates.  In addition, any "investment" will not be secured.  If Clean Line doesn't finish building its project, or goes broke several years down the line, Hannibal loses its entire investment.  Entirely.  However, ratepayers would still be on the hook to repay the $12.5M, even though they would receive nothing in return.  This has to be the worst option Bob has come up with.

Here's Option 5:  Do nothing now.  It's the only "free" option.  Let Clean Line sink or swim on its own.  When Hannibal is ready to write a contract for future energy, it can follow its purchasing procedures to write a Request for Proposals and accept sealed bids from companies wishing to supply Hannibal with energy.  When companies compete, Hannibal ratepayers win!  It makes no sense (and may not be quite legal) for Hannibal BPW to write contracts with a certain transmission company behind closed doors.  The ratepayers of Hannibal deserve better -- they must demand that energy purchases follow established procedure to be evaluated through an open and competitive process.

When does the repainting of the water tower begin?