The eight-turbine 20MW wind farm was earmarked for development off Block Island. The PPA would have allowed owner New Jersey-based Deepwater Wind to sell the electricity to the National Grid at more than twice the average price.
However, the deal, which was supported by the state's governor, was rejected on the grounds it was not "commercially viable".
In 2009 Rhode Island signed a legally binding joint development agreement with Deepwater Wind for an offshore wind power development. The stated aim is to eventually expand it to around a 100 turbines representing as much as 400MW.
The aim of the Block Island project was prove the commercial viability of the project.
Speaking about the decision, PUC commissioner Mary Bray said: "As excited as we can get about the wind project, I personally don't think that's commercially reasonable."
The commission also questioned why the Block Island project is necessary when offshore wind technology has already been proven in Europe.
Paul Roberti another member of the PUC said all the deal demonstrated was "the political will of Rhode Island to pay substantially above-market rates for energy".
Speaking before the judgement Deepwater CEO William Moore warned about the dangers failing to secure an approval of the PPA.
Moore said Rhode Island could lose an opportunity to stake a claim in the North American offshore market. He added that one of the major turbine manufacturers was investigating build a facility in the state.