Op-Ed: Cape Wind — An Unsightly Monument to Political Pull

David Tuerck is an economics professor at Suffolk University and executive director of the Beacon Hill Institute.

David Tuerck is an economics professor at Suffolk University and executive director of the Beacon Hill Institute.

By DAVID TUERCK

Playing out in Massachusetts is a saga in which a private developer is using his political connections to trump the interests of state electric ratepayers – and in the process creating a precedent for much broader misuse of governmental power. The saga involves a court case in which state officials invoked an arcane provision of the U.S. Constitution to deny aggrieved ratepayers access to federal court. It provides a study of the tactics to which government will resort in order shore up a green energy project for which there can be little, if any, justification on either environmental or economic grounds.

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The developer, Cape Wind, has been trying for more than ten years to build 130 massive wind turbines off the coast of Massachusetts in Nantucket Sound for the purpose of providing green energy. Cape Wind claims that the project will provide “75% of the power used on neighboring Cape Cod, Martha’s Vineyard and Nantucket Island, with zero pollution emissions.” It “will also reduce annual emissions of heat trapping carbon dioxide by 734,000 tons,” which is the “equivalent to taking 175,000 cars off the road each year.”

Eleven years ago, Cape Wind posted a report predicting that the project would bring hundreds of manufacturing and construction jobs to the state. According to the report, “75% of the construction and installation workers … [and] 25% of the manufacturing & assembly workers will be from Massachusetts,” with the latter portion rising “if some or all of the manufacturing & assembly operations are conducted in Fall River, MA, or possibly southeastern Massachusetts.”

windfarmCape Wind has also claimed that it would reduce electric rates. A study that it commissioned found that ratepayers could expect a “price suppression effect,” which would save them $7.2 billion over the life of the project, as Cape Wind power displaced conventional power.

The problem is that the project is expensive. Capital costs alone will exceed $2.5 billion. Given these costs, Cape Wind has had to resort to every means available to it – political as well as commercial – to secure private financing.

This then brings us to a recent decision in federal district court, the final outcome of which will determine the fate of Cape Wind as well as other projects like it around the country. The story of that decision begins with a group (an “obdurate” group in the words of the judge who rendered the decision) of local citizens, who have gone to court to stop the project from going forward. These are local property owners (both rich and not-so-rich), along with businesses and native Americans who see the project as a threat to what is in fact one of the most scenic and heavily used coastal areas in the country. This group has filed a number of law suits, which, until now, were based mainly on claimed harm to the environment and to public safety.

Recently, plaintiffs filed a suit that goes to the constitutionality of the efforts of state officials to secure Cape Wind financing. In January 2014, in Town of Barnstable v. Ann G. Berwick, plaintiffs argued that, in its efforts, the state violated the Dormant Commerce Clause and the Supremacy Clause of the U.S. Constitution. Under the Dormant Commerce Clause, state governments may not act in a way that discriminates in favor of in-state providers of a product or service over out-of-state providers. According to plaintiffs, the state did exactly that, however, when it pushed NSTAR, one of the state’s major electric utilities, into a power purchase agreement (PPA) with Cape Wind, thus favoring an in-state electricity provider (Cape Wind) over out-of-state providers that could have supplied the same green electricity much more cheaply. Plaintiffs also maintained that the state violated the Supremacy Clause of the Constitution by attempting, against federal statute, to set wholesale electricity rates.

Cape Wind’s PPA with NSTAR was the outcome of the passage in 2008 of The Green Communities Act (GCA), under which “utilities are mandated to enter into long term contracts of 10-15 years in length for up to 3% of their total load to spur construction and financing of new renewables.” The act offers a bonus equal to “4% of the annual contract payments for accepting the financial obligation of the long-term contract” to utilities that cooperate. It thus incentivizes utilities to contract for the most expensive power available that qualifies as renewable. The unstated, but well understood, purpose of the act was to push the utilities into long-term contracts that guaranteed Cape Wind a sufficiently high rate to attract the financing that it needs to begin construction.

The other major Massachusetts utility, National Grid, got right on board, buying 50% of Cape Wind’s power. But NSTAR balked, arguing that it could buy its green power from cheaper sources. As a result, and because this ran afoul of the real purpose of the GCA, the state had to find a way to get NSTAR to cooperate. An opportunity to do just that presented itself when NSTAR filed an application to merge with two other companies.

Wielding its authority to block the merger, the state gave NSTAR an offer it couldn’t refuse: Buy Cape Wind power or kiss the merger good-bye. Having no real choice, NSTAR reluctantly agreed to buy more than half the remaining Cape Wind power.

NSTAR and National Grid will buy Cape Wind power at a price that is currently about 3.5 times time the average wholesale cost of electricity in New England and about 2.5 times the cost of onshore wind power. Both ratios will rise over time since the participating utilities are contracted to increase their payments to Cape Wind by 3.5% a year. According to plaintiffs, the NSTAR PPA alone will add a billion dollars to the cost of power to Massachusetts ratepayers over its lifetime. By that standard, the additional cost of both PPAs will come to about $3 billion – and this is irrespective of any “price suppression” effect.

Thus, in an act of what one lawmaker has called “legalized extortion,” state officials have used every means available to them to extract billions of dollars from the pockets of state ratepayers in order to satisfy Cape Wind’s investors. Given that events under the GCA led to contracts that favored Cape Wind over much cheaper, out-of-state sources of green power, there would appear to have been a clear violation of the Dormant Commerce Clause. In May, however, judge Richard G. Stearns of the U.S. District Court of Massachusetts dismissed the case.

In dismissing the case, the judge accepted the defendants’ argument that the doctrine of “sovereign immunity” barred plaintiffs from suing. That doctrine, as applied here, rests on the eleventh amendment to the U.S. Constitution, ratified in 1798, under which a state cannot be sued in federal court “by citizens of another State, or by citizens or subjects of any foreign state.” Judge Stearns found precedent for the opinion that states are immune from suits filed by their own citizens as well.

Fittingly for Town of Barnstable, sovereign immunity has its origins in the doctrine of constitutional monarchy whereby “the King can do no wrong.” Wary, as they were, of this lineage, the founding fathers supported ratification because they didn’t want lenders to expect the federal government to help them collect on state debts. The practical result was a period of time over which state governments gleefully reneged on their debts without fear that their creditors could go to the federal courts for redress – a process that reached its moral nadir when racist Southern legislatures repudiated debts incurred during Reconstruction. Many constitutional scholars view sovereign immunity as inimical to the very concept of the rule of law.

If defendants are able to prevail on appeal using the sovereign immunity argument, Town of Barnstable will acquire the same infamy as Kelo v. City of New London, in which the Supreme Court permitted a Connecticut city to take private land for the purpose helping a private developer. As in Town of Barnstable, the issue in Kelo was whether the courts are willing to stand aside as government officials use their powers to advance projects for the benefit of private developers and to do so at the expense of ordinary citizens.

Plaintiffs have hired Professor Laurence Tribe of Harvard, perhaps the nation’s leading constitutional scholar, to represent them on appeal. There is irony in this, in that Judge Stearns used a passage from one of Tribe’s books to buttress his decision. In a press release submitted by one of the plaintiffs, Tribe is quoted as saying:

The opinion of the district court relied on and quoted what my treatise on the Constitution had said about the Eleventh Amendment to reach a conclusion that neither I nor, much more importantly, the U.S. Supreme Court, would agree with – a conclusion that would make that relatively narrow constitutional provision a veritable engine of destruction for otherwise valid constitutional challenges to state laws, policies, and actions.

It appears that state officials might agree, without realizing it, that Professor Tribe is right. In accord with its central goal of aiding Cape Wind, the state included a provision in the GCA that limited eligibility to power generators located in Massachusetts or its adjacent waters. When one out-of-state competitor, TransCanada, sued over this discrimination, state officials quickly suspended the offending provision. Apparently, they took no comfort, in that instance, in their eleventh-amendment immunity from suit.

Professor Tribe’s comment should serve as a warning about how Judge Stearns’ action, in dismissing the case, could pave the way not only for future such green energy deals in other states but more generally how states might don the mantel of sovereign immunity to engage in similar acts of cronyism across a wider spectrum of state power.

As for Cape Wind, it becomes increasingly clear that it lacks any purpose that might justify the state’s largess. Consider the promised Massachusetts manufacturing and construction jobs. Cape Wind has outsourced the construction of an electrical service platform to a Maine company. It hired Siemens to build its turbines in Denmark and ditched a Massachusetts manufacturer for a German manufacturer to construct the turbine foundations.

Then, as for the promised $2.7 billion in savings from “price suppression,” it is important to see this promise for what it is. Cape Wind would depend on various subsidies, including renewable energy credits and federal tax credits, as much as it would on price guarantees, in order to make a profit. Subsidies to wind power, just like subsidies to agricultural products like wheat and corn, cause price to fall.

Cape Wind would sell its subsidized power into the electric grid, in the process displacing power from conventional power providers and adding to the supply of electricity. While this would temporarily suppress electric rates, the price saving would not be a free lunch. Rather it would amount to a temporary redistribution of income from taxpayers and from providers of conventional power to Cape Wind and state ratepayers.

What must be remembered is that, however much this momentarily benefits ratepayers, the cost of producing Cape Wind’s power would be vastly greater than that the cost of the conventional power it displaces. The subsidies would be made necessary by the fact that, without them, Cape Wind’s power would be too expensive to sell into the market. Any price suppression effect camouflages the fact that a choice to use wind power over conventional power is to a choice to produce energy at a higher cost to society.

Ultimately, therefore, the effect of wind power is to make electricity more expensive, in one way or another, to taxpayers and ratepayers. On its website, Cape Wind claims that Denmark gets 30% of its power from wind. What it won’t say is that electric rates in Denmark are more the than three times electric rates in the United States.

At any rate, the price suppression effect does not make an argument for the NSTAR PPA. The reason is that, because their costs are lower, other green energy providers would not have needed the price guarantee that Cape Wind had to extract from NSTAR in order to secure financing. Whatever the effect on market price of adding new green power to the grid, therefore, state ratepayers will end up paying more for Cape Wind’s green power than they would have paid for cheaper green power that is available from other sources – and they will have paid this premium only because state officials wanted Cape Wind to go forward.

In short, Cape Wind will never be more than an unsightly trophy to the persistence of its developer and to the skills of a few players in state politics. Through political luck and skill, and thanks to a lock on National Grid and NSTAR business, Cape Wind might yet succeed in shoehorning this project into Nantucket Sound. Then for years to come, tourists can go out to the Sound to watch the migratory birds flying through that area offer themselves as small sacrifices to Massachusetts Governor Deval Patrick’s determination to be the first governor to achieve the development of offshore wind power in the United States.

Judge Stearns closed his opinion with a footnote in which he said:

If instead of a judicial robe, I were to wear the hat of John Muir or Milton Friedman, I might well conclude that the Cape Wind project should have been built elsewhere (or not built at all), or that the NSTAR-Cape Wind contract should never have been approved. But in this case, the Governor, the Legislature, the relevant public agencies, and numerous courts have reviewed and approved the project and the PPA with NSTAR and have done so according to and within the confines of the law. There comes a point at which the right to litigate can become a vexatious abuse of the democratic process. For that reason, I have dealt with this matter as expeditiously as possible.

It is too bad that the judge did not consider the possibility that Cape Wind’s success to date stems from the fact that it was not until plaintiffs in Town of Barnstable revealed the backroom dealing that had become necessary in order to make the project profitable to its investors. Had he thought more about that, he might have seized on the case as an opportunity to stop in its tracks a project that amounts to a vexatious exercise in economic waste and environmental harm. Perhaps the appeals court will see the case in a way that he could not.

David Tuerck is Executive Director of the Beacon Hill Institute, and Professor of Economics at Suffolk University in Boston.  

Listen below for an interview with David Tuerck.