Why the Move to Put the East Bay Energy Consortium Under the Economic Development Corporation and into the Wind Farm Business Should Be Rejected by the General Assembly this Session
Some Rhode Island General Assembly members want to take the state into the wind farm business. They want to make an already-existing body called the “East Bay Energy Consortium” into a subsidiary of the RI Economic Development Corporation, so that the governmental parts of the EDC’s quasi-governmental authority can be leveraged by the EBEC, so that the EBEC can involve itself in the creation, financing and management of an electricity-generating windmill project in Tiverton. The bill that would authorize this has been fast-tracked in this legislative session, even as the collapse of another EDC project, 38 Studios, has played out in public, with some legislators apparently oblivious to the potential downside of semi-attentive politicians trusting quasi-government panels to guide sector-specific economic development. Drawing parallels between 38 Studios and the East Bay Energy Consortium is appropriate, not only because the Economic Development Corporation is involved with both projects (though it is fair to ask if the organization that bungled the oversight of a software company is qualified to oversee a power generation company), but also because both projects center on government presenting itself to the world as a “risk-free” investment.
The State of Rhode Island became involved with 38 studios as a result of its ownership being unable to convince investors that direct investment in the software gaming company was likely to return more money than was put in (at least on terms that 38 Studios owners were willing to agree to). As a result, to generate the startup capital that was needed, 38 Studios found something else, by making a deal with Rhode Island, that financiers were willing to invest in: the ability of Rhode Island’s government to raise revenue through taxation. This is what buying bonds that back loan guarantees is, an investment in government’s ability to use its sovereign powers to acquire from future citizens the monies that bondholders are owed. Whether the state gets the money to pay bond obligations from a sales-revenue stream, as would be ideal in this case for all parties involved, or from some other source is irrelevant to the bondholder. Bondholders just want to know that some source of revenue that they have access to is certain to be there in the future, so that their investment will be “risk-free”. (Contemporary bondholders are also investing in the gullibility of modern government, who are alright with being charged 6%+ interest rates on what are supposedly “risk-free” investments, but that’s a separate issue).
Since 38 Studios went out of business before it could pay off its associated bonds, the money to pay the bondholders is obviously not going to come from sales revenue; it will come from revenues taken directly from taxpayers. Likewise, if a Tiverton wind farm financed by public bonds is unable to generate sufficient revenues to cover its operating costs and finance the bond obligations, additional revenue would be need to be raised from somewhere else — and after the 38 Studios debacle, claims that there is no chance that a startup business backed by Rhode Island government can fail, or that it is impossible for a project to be substantially delayed, or that future market conditions might not be favorable to generating revenues needed to cover operating costs and payoff bondholders are not to be taken seriously.
An underperforming East Bay Energy Consortium wind farm probably would not draw on general taxation if it needed extra money to pay bond obligations. The most recent version of the EBEC legislation that has been made available to the public states that Consortium obligations will not become obligations “of the state or of any political subdivision of the state”. But if EBEC bonds are to be made attractive to bond investors, i.e. if they are to be made “risk-free”, then some method of raising revenue independent of the success or failure of the Tiverton wind-farm must be possessed by the Consortium. The alternate revenue mechanism is probably the power “to collect revenues under tariffs approved by the Rhode Island Public Utilities Commission”, a power (along with a few others) enumerated in the new law that the state and municipalities “pledge” not to alter the rights of the Consortium until all of its obligations, “together with the interest thereon”, is paid off.
Whenever government assumes revenues from the successful future completion of a project, while at the same time presenting investments related to that project as risk-free, a number of very basic questions need thorough public examination, so that lawmakers, taxpayers and, in this case, ratepayers have a realistic idea of how likely it is that taxpayers and ratepayers will end up subsidizing poor business planning, unexpected changes in market conditions or some combination of the two. The highest-level questions are:
- What is the risk that a Tiverton wind farm won’t be able to generate the money to cover its operating costs and pay back its associated bondholders by selling electricity at market rates?
- If the project cannot generate adequate revenues by selling electricity at market rates, by what mechanism will money be taken from ratepayers/taxpayers to pay off bondholders, and upon whom is the bulk of this burden expected to fall?
- If the risks are minimal, then why is a long-term subsidy mechanism written into the law needed to find startup capital?
- And what will be the EDC/EBEC/PUC attitude towards the priority of bond payments, i.e. will it be bondholders-first, where no surcharge is deemed too high to add to a bill, to pay off the project?
In the aftermath of 38 Studios, a number of Rhode Island lawmakers have said that they didn’t know what they were voting on, or what the real risk was, when they approved the legislation that made taxpayers an alternate source of payments to 38 Studios bondholders. Lawmakers should not repeat that mistake by approving the East Bay Energy Consortium bill before all of the ramifications of the structures it implements have been fully explained to the people who could end up paying for them. Claims of we didn’t know what we were voting on will absolutely not be tenable next time around.
The problem with blogs like these is that they all share the same “fear” sentiment. And as opposed to actually answering some of the questions posed, these authors instead would rather just make statements that legislation like this is “bad,” because of some perceived fear, or some linkage to other organizations that these authors favor as champions for failure. Refuting these questionable statements is a waste, which is why I won’t do Carroll Andrew Morse’s homework because such non-scientific sentiments in this blog post can be seen as pure emotional reasoning why EBEC should not be supported and truth positive that authors who write this stuff are not actually concerned about the idea’s goals, but more interested in posturing author’s personal opinion. But this is the democratic way, and many good bills do pass, that do work for the community, regardless of the naysayers and NIMBYs. EBEC is good legislation, and those that do answer questions, as opposed to those authors as here, who are just stirring emotion to malign EBEC will see that all of the negative antics toward EBEC are just that, antics. As for the Gerald Falese Company, which is debt ridden, and for APEX wind whose data package can be seen as questionable, why this blog and others like can’t seem to shoulder that as questions to be answered should be seen as more worrisome – vet EBEC but accept without question the Falese Co. and Apex, shoddy/inexperienced reporting maybe??
Xatian,
The non-“scientific” (actually non-“economic”) assumption is that there’s easy money available from investing in wind farms for no risk. So just give us a round number as to the probability that the wind-farm will not be in the black (based on market electricity rates) by the time the first payment to bondholders comes due, or point us to a source where that estimate has been presented to the public, and tell us where the extra money will come from to pay EBEC obligations, if the electricity sales are not enough.
I think this article gets the fundamental issues right, but I don’t think the answer is having some report prepared by the state government or the EDC with some crunched out numbers reported as “the risk” to three decimal places. As Nassim Taleb does a great job pointing out in his writings and lectures, humans are terrible at estimating these kinds of risks and forecasting in such a precise way. The error rate quickly becomes monstrous and makes the estimates meaningless. I think the more responsible approach is to simply “not do” these types of public-private investments because they are poor economic practice, just like you don’t drink from glasses of water left out by other people because it’s poor practice, even if the risk is minimal.
Wind Power Nirvana?…hardly. There are risks and very few rewards with wind. Hot air is what the left is blowing (along with the politicians and their commissars).
http://www.aweo.org/problemwithwind.html
Per Justin at Ocean State Current:
bill has been “indefinitely postponed”
Thank heavens.
Not held for further study or in other words, it is not dead. House committee approved a study commission; e.g. deal with it in January. Senate committee tonight held 2nd version of the legislation for further study. After discussion with a couple of senators, it became clear that the sponsore et al will try to come to some agreement with the House to get the legislation passed before the end of this session.
A tower to measure wind velocities around Tiverton was erected nine months ago. Do we know now if there is adequate wind to make the project viable?