Sometime on Friday, apparently after the markets closed, the Connecticut Department of Public Utility Control ("DPUC") issued its long awaited "Draft Decision" on proposals for "Project 100", including the FuelCell Energy based proposals under that program that were previously recommended by the Connecticut Clean Energy Fund and which FCEL has been saying will result in 68 MW ($200M) worth of orders for the company.

This Draft Decision is a big lump of coal for FCEL this holiday season. Of the proposed projects involving FCEL, only 16.2 MW worth are recommended in the Draft Decision published on Friday. This means that if the "Final Decision" (currently expected on January 9) ends up being the same as the "Draft Decision", the $200M worth of orders that FCEL has been saying it expects will, presumably (on a straight proportional basis), end up being more like $47.6M. (Actually somewhat less, because some of the 16.2 MW in the approved projects' total rated generation capacity will come from a "turbo expander energy recovery generator" involved in one of the projects rather than from FCEL fuel cells. See discussion below.)

Excerpts from the DPUC Draft Decision:

• "The OCC [Office of Consumer Counsel, "the State of Connecticut’s advocate for all utility ratepayers. OCC seeks to ensure just and reasonable rates and reliable utility service for customers of Connecticut’s electric, gas, telephone, and water utilities . . ."] recommends that the Department accept only those projects which create a limited cost impact to ratepayers and which provide co benefits to the generation of Class I renewable power. In addition, OCC suggests that the Department limit the risk associated with the rapid deployment of a fuel cell (FuelCell Energy DFC3000) technology that in the proposed project size has not been proven in a commercial setting over a sufficient time period." [The basic technology in the DFC3000 is the same as in any other FCEL product configuration. Why is a ratepayer advocacy agency like the OCC making technology risk assessments? What expertise does the OCC have in this regard? Why would a "suggestion" from OCC involving risk assessment be given any weight?]
• "OCC’s testimony noted that only two biomass and one landfill gas projects provide financial benefits to ratepayers, totaling over $70 million. The remaining eight projects, all, will increase costs to ratepayers. Of those eight, three projects, totaling 56.4 MW – the Brassworks Fuel Cell, Triangle Fuel Cell and Bridgeport Fuel Cell [all FCEL based proposals], stand out as being by far the most expensive and least justifiable under a “financial benefit to ratepayers” statutory standard. These three projects produce total cumulative costs to ratepayers of $651 million, with project costs to ratepayers between $190 million and $256 million a piece. OCC did not recommend acceptance of the proposal for a contract from any of these three projects. If these three projects were not approved by the DPUC, the total impact on ratepayers from the portfolio would drop from $651 million to approximately $113 million. On an annual basis, the cost would drop from approximately $35 $45 million to $2.5 $9.5 million if the three projects were rejected."
• "There is a significant difference between the proposed contract prices of the biomass projects and landfill methane gas and those of the fuel cell projects. In 2009, the price for the three biomass projects is between 12.3¢/kw and 12.9¢/kw. South Norwalk is a bit higher at 14.4¢/kw. On the other hand, the lowest cost fuel cell is 17.4¢/kw and the rest are between 18.5¢/kw and 20.3¢/kw. This compares to an avoided cost of approximately 12.5¢/kw."
• "According to the analysis by the EDCs [?], the overall impact would be an increase of $787.6 million if all eleven projects are approved. This is extremely expensive compared to other generation sources. The Department, therefore, will not approve all of the projects as CCEF has recommended. Instead, the Department will attempt to minimize the cost to ratepayers, while meeting the legislative intent to contract for 125 MW of renewable resources at this time."
• "The Department believes OCC’s objective to minimize the costs to ratepayers is appropriate and therefore we generally agree with their recommendations."
• "The fuel cell projects may never provide economic benefits to ratepayers. All of the fuel cell projects selected a pricing option that links their contract rates to natural gas prices. Their prices will decline if gas prices decline but they will increase if natural gas prices increase. This does not provide the hedge one would usually associate with the renewable resources." [H2FC's view: This has been abundantly clear from the outset: calling natural gas fueled generation capacity "renewable" has always been a politically convenient fiction. Everyone involved in the Project 100 process with even a basic understanding of the issues involved has known this all along. What caused this sudden revelation at DPUC? Did the commissioners, who are politicians, get cold feet in light of the OCCs cost analysis? Are the commissioners, afraid of the political heat that could result from the impact on ratepayers, now looking for a way out and therefore suddenly "realizing" that natural gas fueled fuel cells aren't really renewable?]
• "It is very clear from the analysis that the biomass and landfill gas projects are significantly less expensive than the fuel cell projects on all relevant measures. Three of the projects, both Clearview projects and SNEW Bio Fuel, are expected to provide economic benefits to ratepayers over their contract lives totaling approximately $72 million. The other biomass project, PRE, is estimated to be over market by approximately $17.5 million. Plainfield is a larger project at 30MW. In that context its overall impact is minor compared to the alternatives offered by the fuel cell projects. Plainfield is significantly lower cost than any fuel cell project on a cents/kwh or $/kw basis. The Department will therefore accept each of these projects, for a total of approximately 93 MW."
• "On the other end, Brassworks [FCEL], Bridgeport [FCEL] and PureCell [UTC] must be rejected. These are the most expensive projects on a ¢/kw and $/kw basis. Brassworks (21 MW) and Bridgeport (14.4MW) have a huge negative total impact on ratepayers of $255.6 million and $190.9 million. The 1MW PureCell project is the smallest project proposed. Due to its small size, its overall impact is only $6.6 million but it would not be appropriate to approve such an expensive project simply because it is so small. This project ranks 10th on the list on cost ¢/kwh and $/kw basis."
• "To summarize, the Department will approve seven projects, totaling approximately 109.2 MW. These projects are:
  • Clearview Renewable Energy, LLC biomass 30.0MW
  • South Norwalk Electric Works landfill gas 30.0
  • Clearview East Canaan, LLC biomass 3.0
  • Plainfield Renewable Energy biomass 30.0
  • Waterbury Hospital Fuel Cell 2.4 [FCEL - pure fuel cell]
  • Stamford Hospital Fuel Cell 4.8 [FCEL - pure fuel cell]
  • DFG-ERG Milford, LLC Fuel Cell 9.0" [This is the FCEL based proposal involving Enbridge that includes a gas expansion turbine. Notice that the three FCEL based projects that DPUC says it will approve (16.2 MW) plus the three that DPUC says it will reject ("56.4 MW") total 72 MW, 4 MW more than the 68 MW that FCEL has been talking about. The discrepancy is presumably due to the fact that the total rated capacities of the big FCEL based projects don't all come directly from the fuel cells. For example, the 9 MW total capacity of the "DFG-ERG Milford" project is partially from the fuel cells and partially from the gas expansion turbine. This also means that the 16.2 MW worth of FCEL based projects that DPUC says it will approve will lead to less than 16.2 MW worth of orders for FCEL. Probably more like a total of 12.2 MW (~$35.9M), since the the basic 2.2 MW "DFG-ERG" uses 1.2 MW worth of fuel cells and 1 MW worth of gas expansion turbine.]

Obviously an extremely negative Draft Decision for FCEL that, if it becomes final, will throw a major monkey wrench in FCEL's plans for ramping up its production capacity and its schedule for realizing economies of scale.

The Draft Decision does contain the following right at the top:

"This draft Decision is being distributed to the parties in this proceeding for comment. The proposed Decision is not a final Decision of the Department. The Department will consider the parties’ arguments and exceptions before reaching a final Decision. The final Decision may differ from the proposed Decision. Therefore, this draft Decision does not establish any precedent and does not necessarily represent the Department’s final conclusion."

So things could change for the better by the time of the DPUC's "Final Decision" on January 9. But it seems to H2FC that for any or all of the projects rejected in the Draft to be brought back to life in the Final Decision, a lot of political pressure will have to be exerted on the DPUC commissioners by the better known CT politicians who have made a lot of noise over the years about their support for the development of a major fuel cell industry in CT. In other words, CT's Congressional delegation, state legislators and Governor will have to to step up and be prepared to take the heat for the utility rate increases that the projects involved will entail.

It could happen. But H2FC is not holding its breath. Politicians hate nothing more than putting themselves in a position where they can be blamed for costing voters money: they hate this even more than they love talking about creating new industries and new jobs. So to H2FC, the prospects for revival of the projects that were rejected in the Draft Decision seem pretty slim.

The effect of the Draft Decision on FCEL's share price over the coming days is difficult to predict with any confidence. How many FCEL investors will be paying enough attention during the next two holiday weeks to even notice the publication of Draft Decision, especially if no one issues a press release about it? (Note that the short sellers, who tend to be market professionals, are probably more likely than retail longs to be keeping track of the dates and to be seeking out the information for themselves.) H2FC doesn't expect a press release from the DPUC or CCEF about the Draft Decision since they didn't issue one on Friday when the Draft was published. Will FCEL say something? It sure seems like the company has to: the Draft Decision, even if only a "draft", is still very highly material for the near term prospects of FCEL, and if the company remains silent it exposes itself to charges of withholding critical information from its shareholders. Will the company issue a release in which management provides more happy talk about how it expects the Final Decision to be much more favorable? Who knows. On general principal though, H2FC expects the stock to take a good sized hit over the next couple of trading days.

Another problem for FCEL: under threat of a veto by President Bush, the federal energy bill signed into law on December 19 was stripped of extensions of investment tax credits ("ITCs") for capital expenditures on renewable energy projects that are currently set to expire at the end of 2008. (H2FC can't find a single news report that explicitly talks about the $1,000/kw ITC for fuel cells, put presumes that it was left out of the energy bill along with the ITCs for wind and solar.) Nothing under Project 100 will be operational by the end of 2008, so without an extension of the federal ITC, nothing under Project 100 will qualify for a federal ITC. This will leave a very big hole in the required project financing - $1M for every megawatt - making it seem likely that none of the financing deals that FCEL is depending on for Project 100 will close unless and until a veto-proof extension of the fuel cell ITC is passed by Congress. (This is the risk a company runs when it bases its entire business plan on government subsidies. H2FC has been warning about this for years with respect to FCEL.)

Previous H2FC discussion of "Project 100":
12/17/07 Additional steps required subsequent to final DPUC approval
9/2/07 Discussion in notes from Q3 conference call
8/22/07 Two Connecticut Utilities Submit 68 Megawatts of FuelCell Energy Power Plant Projects to Connecticut Department of Utility Control
6/10/07 FCEL management says it expects final CT project approvals of all 68 MW in mid to late August
3/26/07 H2FC Update: Connecticut Clean Energy Fund, Under Round 2 of Project 100, Selects 11 Renewable Energy Projects 68 MW worth of FCEL based projects
12/27/06 FuelCell Energy Submits 98.6 MW of Bids for Ultra-Clean, Multi-Megawatt Power Plant Projects in Connecticut Proposals Range in Size from 2.4 MW to 28 MW

News subsequent to this Update:
12/25/07 DPUC Chooses Energy Projects Hartford Courant
12/24/07 Connecticut Slights FuelCell Energy Forbes
12/24/07 FuelCell Receives Preliminary OK From CT Utility for Order, but Stock Falls AP
12/24/07 FuelCell shares fall after size of DPUC projects disappoints Reuters
12/24/07 1:00 PM ET FCEL closes at 10.06, down 2.82 (21.9%) from Friday's close, volume 6.54M (3m avg. vol. 1.237M) | 4th biggest NASDAQ decliner on Monday
12/24/07 FuelCell Receives Preliminary OK From Connecticut Utility for Order, but Stock Falls "The decision disappointed some investors who hoped for a bigger part of the state's efforts to reduce energy consumption." AP [Just maybe because FCEL management has been saying for months that it fully expected to get the entire 68 MW.]
12/24/07 Premarket Movers: FCEL "On the losing side in the early session were shares of FuelCell Energy Inc., after Connecticut's state utility commission reportedly decided to grant a smaller contract to the Danbury-based alternative energy company, disappointing investors who hoped for a bigger slice of the state's efforts to reduce energy consumption. The final decision has not yet been released. The stock had rallied in recent weeks, as investors anticipated a larger award. "We believe the stock will be under meaningful pressure given this outcome which will slow FCEL's potential cost reduction plans given lower than potential production levels," said JPMorgan Securities analyst Brannon Cook in a note to clients . . ." AP
12/24/07 Connecticut Department of Public Utility Control Issues Draft Decision Approving 16.2 Megawatts of Projects Using FuelCell Energy Power Plants DPUC's Decision Fosters Clean Energy Projects FuelCell Energy, Inc. "These selections firmly establish fuel cells' role in deploying ultra-clean energy capacity. With their 24/7 reliability, fuel cells can solve electric grid congestion while reducing the need for new generation, transmission and distribution investment. Our fuel cells provide this power with virtually no emissions.'' For FuelCell Energy, these project approvals represent an important achievement that represents an estimated $43 million in potential product sales" FCEL Press Release [So the strategy at FCEL is to simply pretend that this is not a huge disappointment. Meanwhile, FCEL opened down more than $2 this morning.]

market close at 1:00 PM ET on 12/24/07