8. Municipal and Rural Cooperative Economic Development Program Allocations to the City of Sherrill and Village of Tupper Lake

The President and Chief Executive Officer submitted the following report:

SUMMARY

“The Trustees are requested to approve allocations of power under the Municipal and Rural Cooperative Economic Development Program (‘Program’) to the City of Sherrill and the Village of Tupper Lake.

BACKGROUND

“The 1991 amendment to the power sales agreement between the Authority and the Municipal and Rural Cooperative Systems reserved 108,000 kW of power for economic development in the systems’ service territories. As of October 24, 2006, 35,330 kW have been allocated.

“Power from this block can be allocated to individual systems to meet the increased electric load resulting from eligible new or expanding businesses in their service area. The recommended allocations under the Program comprise half hydropower and half incremental power. Under the guidelines established for the Program, an allocation to a system should meet a target number of new jobs per MW. The guidelines provide that for businesses new to a system, the jobs-per-MW ratios are considered on a case-by-case basis. For projects involving existing businesses, the number of jobs per MW is the number of new jobs as compared to the level of employment prior to the expansion. Specifically, for companies employing 100 or less, the target ratio is 25 jobs per MW; for companies employing between 101 and 250, the ratio is 50; for companies employing between 251 and 500, the ratio is 75 and for companies employing more than 500, the ratio is 100 jobs per MW.

“The City of Sherrill and the Village of Tupper Lake have submitted applications for power under the Program for consideration by the Trustees.

DISCUSSION

City of Sherrill

“An application has been submitted by the City of Sherrill on behalf of International Wire Group, Incorporated (‘International Wire’). International Wire’s bare-wire division started in 1973 and has continued to grow over the years with the subsequent acquisitions of eight wire-manufacturing corporations. The company is considered the market leader and principal supplier of bare wire to the aerospace, medical devices, electronics, data communications, automotive, appliance and energy industries in the U. S. and Europe. International Wire considered opening a new manufacturing facility in either Inman, South Carolina, or Trenton, Georgia, but the potential advantages of reduced power costs and the strategic location of Sherrill will allow the company to compete more efficiently. The Sherrill facility will include new product lines and bring much-needed additional jobs to the community.

“International Wire is planning to invest approximately $23 million to improve and renovate the old Oneida Ltd. knife plant in Sherill, as well as purchase new manufacturing equipment. The new facility will provide for approximately 37 full-time jobs over the next three years, adding revenue to the local economy and resulting in 26 jobs per MW of hydropower. The estimated electrical monthly peak load for the facility is 2,700 kW. It is recommended that the Trustees approve an allocation of 2,700 kW, of which half is hydropower, for the City of Sherrill on behalf of International Wire.

Village of Tupper Lake

“The Village of Tupper Lake has submitted an application for expansion on behalf of Jarden Plastic Solution, Incorporated (‘Jarden Plastic’). The company purchased the Tupper Lake facility, which has been in Tupper Lake since 1970, from OWD Incorporated in 2003, and will be expanding the facility in the near future. Jarden Plastic is considered the largest manufacturer and supplier of plastic cutlery, straws and other plastic products using the injection molding and extrusion processes in the U.S.

“The proposed expansion project entails internal building modifications, installation of new chilled water and electric lines and purchase of eight new injection molding machines and other auxiliary equipment, for a total investment of approximately $350,000. Jarden Plastics currently employs 83 people on a full-time basis. The expansion will provide for 21 new jobs over the next three years, adding revenue to the local economy and resulting in 69 jobs per MW of hydropower. The existing electrical load is approximately 940 kW and is expected to increase to 1,550 kW after the expansion is completed. It is recommended that the Trustees approve an allocation of 610 kW, of which half is hydropower, for the Village of Tupper Lake on behalf of Jarden Plastic.

“The Municipal Electric Utilities Association Executive Committee supports the recommended allocations to the City of Sherrill and the Village of Tupper Lake.

“The recommended allocations under the Program comprise half hydropower and half incremental power. In accordance with the Authority’s marketing arrangement with the municipal and cooperative customers, the hydropower will be added to the recipient system’s contract demand at the time a project becomes operational. The hydropower earmarked for this Program is presently sold to the municipal and cooperative customers on a withdrawable basis.

RECOMMENDATION

“The Director – Business Power Allocations, Compliance and Municipal and Cooperative Marketing recommends that the Trustees approve the allocations of power under the Municipal and Rural Cooperative Economic Development Program to the City of Sherrill and the Village of Tupper Lake in accordance with the above.

“The Executive Vice President and General Counsel, the Senior Vice President – Marketing and Economic Development and I concur in the recommendation.”

The following resolution, as submitted by the President and Chief Executive Officer, was unanimously adopted.

RESOLVED, That allocations of power to the City of Sherrill and the Village of Tupper Lake under the Municipal and Rural Cooperative Economic Development Program are hereby approved as set forth in the foregoing report of the President and Chief Executive Officer; and be it further

RESOLVED, That the Senior Vice President – Marketing and Economic Development or her designee be, and hereby is, authorized to execute any and all documents necessary or desirable to effectuate these allocations; and be it further

RESOLVED, That the Chairman, the President and Chief Executive Officer and all other officers of the Authority are, and each of them hereby is, authorized on behalf of the Authority to do any and all things, take any and all actions and execute and deliver any and all agreements, certificates and other documents to effectuate the foregoing resolution, subject to the approval of the form thereof by the Executive Vice President and General Counsel.

9. Increase in Hydroelectric Preference Power Rates – Notice of Proposed Rule Making

The President and Chief Executive Officer submitted the following report:

SUMMARY

“The Trustees are requested to approve a Notice of Proposed Rule Making (‘NOPR’) to increase the hydroelectric rates supplied from the Niagara and St. Lawrence/FDR Hydroelectric Projects (individually, ‘Niagara Project’ and ‘St. Lawrence Project,’ and collectively, the ‘Hydro Projects’). Such rates apply to the Authority’s sales of Preference Power to, among others, the municipal and rural electric cooperative customers, the neighboring state customers, plus the upstate utilities that purchase Preference Power from the Hydro Projects for resale to their residential customers. The proposed hydroelectric rates are for the 2007 and 2008 rate years, which extend from May 1, 2007 to April 30, 2008 and from May 1, 2008 to April 30, 2009, respectively. The proposed action would increase rates for a typical preference power customer by 7.1% in the first year of the plan and by 5.8% in the second. In accordance with the requirements of the State Administrative Procedure Act (‘SAPA’), the Trustees are requested to direct the Corporate Secretary to publish a NOPR in the New York State Register.

“Second, consistent with Authority ratemaking policy, the Trustees are requested to authorize the Corporate Secretary to schedule a public forum for obtaining the views of interested parties. After the 45-day comment period required under SAPA, Authority staff will address any filed comments, including any comments raised at the public forum, and return to the Trustees at their meeting on April 24, 2007, to seek final adoption of this proposal.

BACKGROUND

“The current preference rates and ratemaking methodology were approved by the Trustees at the April 29, 2003 meeting. At that time, the Trustees authorized the refund of $4.5 million and adopted a four-year rate plan based on a Cost of Service (‘CoS’) study for the CY 2003-2006 period. The final rate year under this plan terminates on April 30, 2007.

“In April and May of 2003, the Authority entered into ‘global’ settlements with its in-state municipal and rural electric cooperative Preference Power customers that established, among numerous other matters, that these customers would not object to the use of certain ratemaking methodologies adopted by the Trustees in their April 2003 rate action.

DISCUSSION

“The attached ‘Preliminary Staff Report, Hydroelectric Production Rates’ (‘Report’) to the Trustees sets forth in detail how the Hydro Projects’ CoS study was performed and the findings of that study. The Report continues the ratemaking methodologies adopted by the Trustees at their April 29, 2003 meeting. Exhibit ‘9-A’ of the Report shows the results of the CoS and resulting proposed rates. The key points are summarized below.

1) Operations and Maintenance (‘O&M’) and Administrative and General (‘A&G’) Costs

“The site O&M and A&G expenses for the Hydro Project include the day-to-day operations of the projects and on-going expenses associated with major maintenance programs and non-capital modifications. In addition, staff has included the amortization of roadwork of $51.3 million incurred from 1991 to 1996. The 15-year amortization ends in 2010.

“Also included in the O&M/A&G category of the CoS are payments reflecting the Authority’s assumption from the New York State Office of Parks, Recreation and Historic Preservation (‘OPRHP’) of responsibility for the annual cost of operations at the Robert Moses and Coles Creek State parks. Funding for these parks is part of the Federal Energy Regulatory Commission (‘FERC’)-approved recreation plan for the St. Lawrence Project and the Authority has the ultimate responsibility for these costs under the terms of its FERC license for this Project.

“Most recently, in May 2006, the Trustees authorized a payment to OPRHP. Included in the payment was $0.8 million related to Robert Moses and Coles Creek State Parks. These payments are also expected to be made for SFY 2007-08. The Trustees have annually authorized similar payments for SFY 2003-04, SFY 2004-05 and SFY 2005-06, and payments were subsequently made in conformance with such authorizations. It is proposed that these costs be included in the base hydroelectric rates.

2) Indirect Overheads

“The costs of overheads include shared services, R&D and indirect debt service used to support the Hydro Projects.

3) Relicensing Costs

“Included in current rates are relicensing costs, primarily related to the St. Lawrence Project. On August 18, 2005, the Authority filed with FERC its Application for a new license for the Niagara Project. On August 19, 2005, the Authority filed its Offer of Settlement with FERC, which consisted of four separate agreements, including the Relicensing Settlement Agreement Addressing New License Terms and Conditions along with the Host Community and Tuscarora Settlements. The total cost of compliance and implementing the new license and settlement agreements is estimated to be $210 million. Of the $210 million, $173.2 million is capitalized and will be recovered over the 50-year license.

“The Niagara Project license expires on August 31, 2007. At their June 28, 2005 meeting, the Trustees authorized the filing of a relicensing application with FERC. In August 2005, the Application and its Offer of Settlement which contained four agreements, was filed with FERC. Since its filing, the Offer of Settlement has been supplemented twice with the Niagara University Relicensing Settlement Agreement and the Erie County/City of Buffalo Relicensing Settlement Agreement ($2 million per year for projects related to the Niagara River Greenway within Buffalo and Erie County and $3.5 million per year to the Erie Canal Harbor Development Corporation for waterfront development). At their October 24, 2006 meeting, the Trustees authorized capital expenditures for costs related to compliance with the anticipated new License for the Niagara Project and for costs associated with implementing settlement obligations associated with relicensing the Project for the period 2007-2057.

“The costs of a new license and the associated settlement agreements are estimated to be nearly $494 million in constant (or 2007) dollars. Of this, $182.0 million represents capital costs that will be recovered over the 50-year term of the new license. As part of the Offer of Settlement, the Authority is committed to providing grants of $18.5 million/year to the surrounding communities. Of the $18.5 million, $12 million will come from the Authority’s Operating Fund and is reflected as an annual expense in the CoS. The remaining $6.5 million will be funded through the monetization of 29 MW of Niagara Project power.

4) Accrual Accounting of Other Post-Employment Benefits (‘OPEBs’)[1]

“The proposed rates reflect the continuation of accrual accounting treatment of OPEBs, which mainly include retiree health benefit costs. The Authority switched to accrual accounting in 2002. The charge is $12.9 million and $13.6 million for 2007 and 2008, respectively.

5) Capital Cost Issues

“In the April 2003 rate proceeding, the Trustees adopted a ‘hybrid’ approach to capital cost recovery, reflecting the use of the Trended Original Cost method for that portion of the Hydro Projects’ capital cost funded with equity and the more conventional debt service method that applies to the portion funded with debt. The hybrid method, developed by the Brattle Group in 2003, is carried forward in the current CoS. The total capital costs of the Hydro Projects, including both debt- and equity-funded investments, are $68.5 million and $78.3 million for 2007 and 2008, respectively. As noted below, these costs include the capital costs of the St. Lawrence Project and Niagara Project relicensing.

6) Credits for Ancillary Services

“The Hydro Projects perform certain ancillary service functions, primarily Regulation and Operating Reserves. These are sold to the New York Independent System Operator (‘NYISO’). Consistent with the ratemaking methodologies adopted in the April 2003 final rate action, the Authority has included a reduction in the CoS that represents the embedded costs of producing these services. The 2007-08 credits to the CoS are about $13.0 million and $13.7 million, respectively.

7) Rate Design

“Because the majority of the costs identified in the CoS do not vary with the energy production, but are in the nature of fixed costs, it was determined in the 2003 rate plan that the increased revenue requirement should be collected in the hydroelectric demand (or ‘fixed’) charge. The demand charge was increased for the rate year beginning May 2003, and each year thereafter, while the energy rate was held constant at $4.92/MWh. The current rate of $2.38/kW ends April 30, 2007. It is proposed that this rate design policy be continued for the 2007-08 periods, and that costs not collected in the current $4.92/MWh energy charge be recovered through the demand charge.

“The total Hydro Projects’ costs, net of the ancillary service credits, are $198.5 million and $209.0 million for the 2007 and 2008 calendar years. Consistent with past ratemaking practice, the rate year beginning May 1, 2007 will be based on the calendar year 2007 costs. Similarly, the rate year beginning May 1, 2008 is based on calendar year 2008 costs. The proposed demand and energy rates and overall rate at the 70% load factor are shown below. Exhibit ‘9-A’ shows the production and end-use impact on the municipal and rural electric cooperative customers and residential ratepayers of the upstate investor-owned utilities.

Rate Year Demand Rate Energy Rate $/MWh Rate

Beginning $/kW-month $/MWh at 70% LF % Increase

Current 2.38 4.92 9.58

5/1/07 2.73 4.92 10.26 7.1

5/1/08 3.03 4.92 10.85 5.8

FISCAL INFOMATION

“Implementation of the proposed schedule of rate increases would allow the Authority to recover its increased costs associated with serving the preference power customers. For the rate years 2007 and 2008, the estimated cumulative revenue increases would be $22.2 million.

RECOMMENDATION

“The Manager – Market and Pricing Analysis recommends that the Trustees authorize the Corporate Secretary to: (1) file notice for publication in the New York State Register of the proposed Authority action to adjust the hydroelectric preference power rates and (2) schedule a public forum for the purpose of gathering the views of interested persons.

“It is also recommended that the Senior Vice President – Marketing and Economic Development, or her designee, be authorized to issue written notice of the proposed action to the affected customers.

“The Executive Vice President and General Counsel, the Executive Vice President and Chief Financial Officer, the Vice President – Controller, the Vice President – Finance, the Director – Business Power Allocations, Compliance and Municipal and Cooperative Marketing and I concur in the recommendation.”

Ms. Brown presented the highlights of staff’s recommendations to the Trustees. In response to a question from Chairman McCullough, Ms. Brown said the public forum would be held in Albany on March 22. Ms. Brown explained that both energy and demand costs are passed on to the customers but that only demand costs are being affected by this increase. In response to a question from Trustee Cusack as to why the public forum will be held in Albany and not Niagara Falls, Ms. Morman explained that Albany is centrally located because these are preference power customers located throughout New York State, not hydro business customers that are primarily in Western New York.

The following resolution, as submitted by the President and Chief Executive Officer, was unanimously adopted.

RESOLVED, That the Corporate Secretary of the Authority be, and hereby is, directed to file such notices as may be required with the Secretary of State for publication in the New York State Register and to submit such other notice as may be required by statute or regulation concerning the proposed rate increase; and be it further

RESOLVED, That the Corporate Secretary of the Authority be, and hereby is, directed to schedule a public forum for the purpose of obtaining the views of interested persons concerning the Authority’s proposed action to adjust the hydroelectric preference power rates, as set forth in the foregoing report of the President and Chief Executive Officer; and be it further

RESOLVED, That the Senior Vice President – Marketing and Economic Development or her designee be, and hereby is, authorized to issue written notice to affected customers of this proposed hydroelectric preference power rate action; and be it further

RESOLVED, That the Chairman, the President and Chief Executive Officer and all other officers of the Authority are, and each of them hereby is, authorized on behalf of the Authority to do any and all things, take any and all actions and execute and deliver any and all agreements, certificates and other documents to effectuate the foregoing resolution subject to the approval of the form thereof by the Executive Vice President and General Counsel.

10. Authorization to Increase the Aggregate Amount of the NYMEX Margin Reserve Fund in the Authority’s Operating Fund

The President and Chief Executive Officer submitted the following report:

SUMMARY

“The Trustees are requested to authorize an increase in the amount of the New York Mercantile Exchange (‘NYMEX’) Margin Reserve Fund from an aggregate of $35 million to $90 million.

BACKGROUND

“At their meeting of April 27, 2004, the Trustees authorized the creation in the Authority’s Operating Fund of a NYMEX Margin Reserve Fund. The purpose of the fund is to provide monies or securities to meet collateral requirements (called ‘margin’) associated with hedging instruments such as futures contracts and options that are traded on NYMEX. A futures contract, which is a standardized NYMEX-traded contract purchased by the Authority through a broker, enables the Authority to purchase a specified amount of natural gas (or fuel oil) in a given time period at a fixed price. A futures contract also allows the Authority to either accept physical delivery of fuel or, alternatively, opt for a financial settlement of the contract. Under a financial settlement, which is the predominant and preferred means of settlement, the Authority would either: (1) receive the difference between the futures contract price and the market price, if the market price is higher than the contract price at the time of settlement or (2) pay the difference, if the market price is lower than the futures contract price. The financial settlement of a futures contract can be used to fix the price paid by the Authority for fuel it purchases. Transactions on NYMEX have the additional advantage of eliminating counterparty credit risk for the Authority, since NYMEX stands behind all transactions conducted on the exchange.

DISCUSSION

“At their meeting of April 27, 2004, the Trustees authorized both the execution of transactions on NYMEX through commodity brokers (as part of hedging strategies designed to reduce cost uncertainty related to fuel price volatility) and the creation of a margin reserve fund for collateral support as required by the account rules of such commodity brokers and NYMEX. In order to participate in such transactions via NYMEX using commodity brokers, the Authority is required to post margin pursuant to the underlying commodity broker agreements consisting of an initial margin deposit and any additional margin (called ‘maintenance’ margin) resulting from fluctuations in the market price, each as determined in accordance with NYMEX rules. Due to the increased number of NYMEX-related hedging transactions related to the Long-Term Agreements with the New York City Governmental Customers and the steep increase in energy prices, it is necessary to increase the authorized margin amount from an aggregate of $35 million to an aggregate of $90 million. Margin deposits are maintained by NYMEX in segregated Authority accounts.

“At their meeting of April 27, 2004, the Trustees also authorized creation of the NYMEX Margin Reserve Fund in an amount up to $35 million and authorized the withdrawal of monies or securities from the Operating Fund to meet these margin requirements even in instances where the Operating Reserve Fund is below $150 million. In addition, at their meeting of January 31, 2006, the Trustees revised the previously granted authority for the aggregate purchase cost of all NYMEX contracts from an aggregate purchase cost not to exceed $90 million to an aggregate purchase cost not to exceed $250 million.

“Recent prices illustrate the increase in price volatility and need for an increased margin reserve fund. On October 10, 2005, the 12-month strip price for natural gas rose to $11.57/mmbtu (from a level of about $8.00 per mmbtu as recently as June 2005) due to the destructive effects of Hurricanes Katrina and Rita. By October 10, 2006, the 12-month strip was $8.21/mmbtu, down 31%. This dramatic and rapid increase in prices followed by a subsequent and equally dramatic decline in prices had the effect of increasing the margin required to be deposited with commodity brokers as collateral. Further illustration lies in both the dramatic increase and the rapid up-and-down whipsaw in natural gas prices, generally. The 12-month forward strip price of natural gas in April 2004 (when original Trustee approval was granted for the current margin reserve margin) was about $5.80 per mmbtu. The 12-month forward strip price as of early December 2006 was about $8.40 per mmbtu.

“To accommodate calls under the commodity broker agreements for increased margin due to price volatility and the overall increase in natural gas prices (with their commensurate ability to also fall), Authority staff requests that an aggregate of up to $90 million in collateral be authorized, and that the NYMEX Margin Reserve Fund be funded from monies or securities in the Operating Fund in such amounts as deemed advisable by the Treasurer, up to a maximum amount in such Fund at any one time of $90 million, comprising an aggregate of $80 million plus an additional aggregate of $10 million, upon the approval of the President and Chief Executive Officer or, in his absence, the Executive Vice President – Chief Financial Officer and either the Senior Vice President – Energy Resource Management and Strategic Planning or the Vice President – Chief Risk Officer.

“The Trustees are also requested to allow withdrawal of monies or securities from the Operating Fund to meet these margin requirements even in an instance where the Operating Fund is below $150 million.

“In addition, since NYMEX market dynamics often require immediate action, it may be necessary or advisable to terminate these NYMEX contracts prior to their normal expiration, which, in the case of a futures contract, would entail either a payment to the Authority (if market prices have risen) or a payment by the Authority (if market prices have fallen). Consequently, the Trustees are requested to continue to authorize the Senior Vice President – Energy Resource Management and Strategic Planning or, in his absence, his designee, to take such actions relating to NYMEX contracts as he deems necessary or advisable, including, but not limited to, termination of such contracts and, in the case of a futures contract, a determination of whether to financially settle or take physical delivery under the contract.

FISCAL INFORMATION

“Any payments to be made under NYMEX contracts will continue to be treated as fuel payments to be paid from the Operating Fund.

RECOMMENDATION

“The Senior Vice President – Energy Resource Management and Strategic Planning recommends that the Trustees approve the increase of the aggregate amount of the New York Mercantile Exchange Margin Reserve Fund in the Authority’s Operating Fund from a total of up to $35 million to a total of up to $90 million and that such monies or securities may be used as collateral for New York Mercantile Exchange margin requirements.

“The Executive Vice President and General Counsel, the Executive Vice President and Chief Financial Officer, the Senior Vice President and Chief Engineer – Power Generation, the Vice President – Chief Risk Officer and I concur in the recommendation.”

Mr. Warmath presented the highlights of staff’s recommendation. In response to questions from Trustee Seymour, Mr. Warmath advised that the reserve fund would only be used in the event that additional funds were necessary to meet the NYMEX collateral requirements associated with certain hedging activities. Mr. Russak further advised that this practice has been approved in the past and that the NYMEX Reserve Funds were held in a separate account. In response to a question from Trustee Scozzafava, Mr. Russak advised that savings or additional costs from the underlying hedge positions are passed on to the customers. In response to questions from Trustee Seymour, Mr. Bellis advised that the Operating Reserve is set and should perhaps be increased if the Trustees have concerns regarding the level of the reserve. At the request of Chairman McCullough and Trustee Seymour, Mr. Russak confirmed that the Trustees would continue to receive monthly status reports on this matter as the outstanding balance is noted in the monthly financial reports and if the separate Operating Reserve balance were to fall below minimum target levels, it will be so reported.

The following resolution, as submitted by the President and Chief Executive Officer, was unanimously adopted.

RESOLVED, That it is hereby authorized that Authority money or securities in the amount of up to $90 million in the aggregate at any one time may be used as collateral for New York Mercantile Exchange (“NYMEX”) margin requirements, and monies or securities may be transferred from the Operating Fund for such purpose, even in those instances where the Operating Reserve Fund is below $150 million, provided that

(1) if a proposed transfer of monies or securities for margin purposes would result in the aggregate amount of such collateral outstanding exceeding $80 million, such transfer shall not occur unless it is approved by the President and Chief Executive Officer or, in his absence, the Executive Vice President and Chief Financial Officer and either the Senior Vice President – Energy Resource Management and Strategic Planning or the Vice President – Chief Risk Officer, and

(2) prior to any withdrawal for such purpose the Treasurer, the Vice President – Finance or the Executive Vice President and Chief Financial Officer shall certify that such amount to be withdrawn is not then needed for any of the other purposes specified in Section 503(1)(a)-(c) of the Authority’s General Resolution Authorizing Revenue Obligations;

AND BE IT FURTHER RESOLVED, That the Trustees authorize the increase in the NYMEX Margin Reserve Fund in the Operating Fund, from which monies or securities may be drawn to pay margin requirements, from a maximum amount of up to $35 million at any one time to a maximum amount of up to $90 million at any one time; and be it further

RESOLVED, That the Trustees hereby continue the authority of the Senior Vice President – Energy Resource Management and Strategic Planning (formerly the Senior Vice President – Energy Resource Management) or, in his absence, his designee, to take such actions relating to NYMEX contracts as he deems necessary and advisable, including, but not limited to: (1) approval of the termination of the contracts prior to their expiration and (2) the determination of whether to financially settle or take physical delivery under such contracts; and be it further

RESOLVED, That the Chairman, the President and Chief Executive Officer, the Executive Vice President – Chief Financial Officer, the Senior Vice President – Energy Resource Management and Strategic Planning, the Vice President – Finance, the Treasurer and any other necessary Authority officers are, and each of them hereby is, authorized on behalf of the Authority to do any and all things, take any and all actions and execute and deliver any and all agreements, certificates and other documents necessary to effectuate the foregoing resolutions, subject to the approval of the form thereof by the Executive Vice President and General Counsel.

11. INFORMATIONAL ITEM: Annual Report Regarding Energy Risk Management Policies and Procedures

The President and Chief Executive Officer submitted the following report:

SUMMARY

“The Governing Policies for Energy Risk Management (‘Governing Policies’) direct the President and Chief Executive Officer, or his designee, to provide to the Trustees periodically, but no less than annually, a report on the results of the energy risk management program, including compliance with the Governing Policies and its implementing procedures. The following briefly describes program activities and developments for 2006.

BACKGROUND

“The Governing Policies were adopted by the Trustees at their meeting of October 29, 2002 and revised at their meeting of January 31, 2006. The objectives of the Governing Policies are to identify exposures to energy and fuel price movements, to understand the potential financial impact of such exposure on the Authority and to mitigate, where appropriate or as deemed prudent by management, the possible adverse impact of such exposures while maintaining adequate flexibility to improve financial performance. The following parameters were established to facilitate the objectives:

· Scope of the program (all transactions related to physical commodities and derivatives for electrical energy, capacity, ancillary services, transmission, natural gas, fuel oil and related hedging transactions);

· Risk management philosophy (non-speculative);

· Energy Risk Management Committee (‘ERMC’) as the vehicle for establishing procedures for administering the program;

· Permissible risk management (hedging) instruments; and

· Requirement for reporting to the Trustees.

DISCUSSION

POLICIES AND PROCEDURES

“Amendments to the Governing Policies require Trustee approval. The Governing Policies were amended effective January 31, 2006 by the Trustees. There have also been revisions, with Trustee approval, to the initial hedging transaction authority (October 29, 2002 Resolution) for Energy Resource Management (‘ERM’) and Marketing and Economic Development (‘MED’) staff, the most recent of which was also effective January 31, 2006. Additionally, a number of procedures, as reported in prior annual reports, have been developed and implemented by the ERMC and Energy Risk Assessment and Control (‘ERAC’) staff.

“Over the course of the past year, the ERMC and ERAC staff have not issued any additional procedures further refining administration of the energy risk management program. However, with the expected near-term completion of an audit of the Energy Risk Management and ERAC areas by the consulting firm CRA International (selected pursuant to a Request for Proposals (‘RFP’) process), it is anticipated that new procedures may be developed and existing procedures may be modified to address mutually agreed-upon and accepted recommendations (with our Governmental Customer class) contained within this audit. Such recommendations should further a collaborative relationship and reflect the Governmental Customers’ desires with respect to risk tolerance. This audit was a provision negotiated within the Long-Term Agreement (‘LTA’) with selected Governmental Customers that was executed in March 2005.

“Additionally, over the course of 2006, the Trustees approved four items concerning the administration of the risk management program, as follows:

· Revisions to Governing Policies for Energy Risk Management (1-31-06);

· Revisions to the cascading transactional authorization limits for energy-related transactions and hedging transactions (1-31-06);

· Approval for the Authority to: (1) participate in the New York Independent System Operator (‘NYISO’) virtual transaction program; (2) authorize the issuance of collateral for such program not to exceed $2 million and (3) either enter into agreements with one or more banks to provide letters of credit to meet the collateral requirements of the program or post cash collateral (1-31-06);

· Approval of specific hedging transaction authority for the 2007 rate year to acquire energy supplies to meet load requirements of the New York City Governmental Customers, provided, however, that the cost of such energy supplies not exceed a cap amount (6-27-06).

PROGRAM ACTIVITIES

“The Authority is routinely exposed to energy and fuel price risk in the conduct of its day- to-day operations. In most cases, price volatility holds significant potential risk to the business objectives of the Authority. ERAC, through policy development and interaction with various Authority business units, works to identify such risk and make it known to management. A primary ERAC mission is to spread the culture of risk awareness and identification throughout the Authority and to bring to bear analytical analysis in an attempt to quantify the range of possible outcomes of energy and fuel activities. To this end, during the last year, ERAC has undertaken the following:

· Continued to develop and refine the analytical model developed by a consultant for the Authority to project a range of potential regional forward electric prices, as well as economic generation levels;

· Continued to make incremental improvements in the Authority’s processes and systems for capturing hedge transactions and measuring financial risk;

· Proposed to the Trustees specific guidelines for executing approval of hedge transactions to satisfy long-term agreement obligations for certain Governmental Customers (approved by the Trustees at their meeting of June 27, 2006); and

· Selected a consultant (via RFP Q-02-3606DG), The Structure Group, that completed a review of some of the Authority’s processes and procedures for the purpose of developing a future RFP (estimated release in the first quarter of 2007) to solicit a comprehensive computer system to record, track, report, manage and monitor energy commodity transactions and their associated risk. The Structure Group, as an addendum to its work on risk software systems, is also completing a limited organizational review to assess organizational alignment to better conform to good risk management practices, proper functional organization of staff within certain business areas, staffing level needs to perform the work consistent with the current functional organization arrangement and staff resource needs to perform not only existing tasks, but those needed to handle growing workload and responsibilities driven by the changing realities of the still evolving deregulated electric market and the Authority’s obligations to serve customer load.

PROGRAM RESULTS AND COMPLIANCE

“ERAC, in coordination with the Human Resource Department’s Performance Planning Group, developed two performance measures for the program. One measure characterizes the collective financial quality of the counterparties used for the Authority’s hedge transactions and is essentially calculated as a credit exposure weighted average of the counterparties’ Standard & Poor’s default ratings. Another measure has been established to determine whether the distribution of forward prices generated via modeling processes is a reasonable representation of future market prices. The measure essentially examines how frequently the actual NYISO zone A on-peak forward price, for the next three months of each forward curve developed, falls within the range of projected possibilities. Cumulative results of 100% and 1% have thus far been recorded, respectively, for these two measures, which compare favorably to the established control limits of 80% and 3%, respectively. Annual results for a third 2006 ERAC performance measure, the Customer Satisfaction Survey, which compares end-of-year to start-of-year stakeholder customer satisfaction, indicate a survey response of 2.0 vs. a target of 1.75. Thus, improvement must be sought to better this performance. Steps have already been taken to address this.

“A new LTA with certain of the Authority’s Governmental Customers was executed in March 2005. Among the provisions of the new agreement is one requiring mutual agreement in the selection of a qualified independent expert to review the Authority’s ERM and ERAC functions. In the first quarter of 2006, CRA International (‘CRA’) was selected to perform this audit. CRA began its review process in June 2006 and is now in the final phase of completing its report, the draft of which currently consists of 22 recommendations that have been presented to both the Authority and the Governmental Customers. The Authority will meet with the Governmental Customers, currently planned for January 2007, to collectively discuss recommendations and mutually agreed-upon next steps. Depending on which recommendations may be mutually accepted and agreed upon and how such recommendations are to be implemented, the work efforts to support this customer class could grow substantially. Two salient features of the above LTA are a risk-sharing provision between the Governmental Customers and the Authority and a collaborative decision-making process on hedging the risks associated with serving the customer load. Note that under the process within the LTA for the 2007 rate year, the Governmental Customers selected an energy charge adjustment (‘ECA’) mechanism, therefore, there will be no risk sharing between the Authority and Governmental Customers for 2007.

“Overall, compliance with the policies and procedures established by the ERMC was very good. The few minor issues of procedural administrative noncompliance that arose were detected and corrected with no negative consequences to the Authority.

FUTURE PROGRAM INITIATIVES

“Given the doubling of monthly energy commodity hedging transactions from 2004 to 2005, the Authority’s new risk-sharing arrangements with the Governmental Customers and concomitant increased workload and the anticipated further increase in the Authority’s duties in serving the Governmental Customers as a result of recommendations in CRA’s current draft report, the Authority undertook an initiative (RFP Inquiry # Q-02-3606DG) to improve its energy commodity hedging work processes and information systems. The firm selected through this RFP process was The Structure Group. The objectives of this project, which started in early 2006, were as follows:

· Review and document all of the Authority’s existing hedge-related work processes and information systems, including the Deal Capture, Credit Management, Risk Measurement and Settlement Processes; and

· Produce detailed technology-specific recommendations for improving the functionality and efficiency of those processes, including: (1) a detailed blueprint that will provide the technical foundation for subsequent software development and system integration RFPs; (2) a marketplace assessment of the most relevant and highly used software providers and integrators; (3) recommendations as to whether the existing software should be enhanced or replaced and (4) detailed cost estimates.

“This first project by The Structure Group is close to completion and it is anticipated that another RFP will be issued in the first quarter of 2007. The purpose of such RFP is to solicit qualified suppliers of computer software systems to supply and implement a new system that fulfills the requirements, functionality and needs of the Authority as identified by the work completed by The Structure Group. The target is to have the first stages of what could be a three-year plan for implementing a new system under way by the end of 2007.

CONCLUSION

“Maintaining and implementing an independent energy risk assessment and control program is a major task and, due to the ever-changing character of relevant markets, an ongoing process. As the deregulated electric marketplace and the Authority’s obligations continue to change, it has become apparent that, in large part, many portions of risk systems currently in place are now no longer adequate to either address the Authority’s needs or handle the continually growing workload and complexity of the Authority’s activities; hence, the RFP to first select a consultant (The Structure Group) to help identify and quantify the Authority’s requirements for a new risk system and, soon, another RFP to solicit software suppliers and implement a new system. However, this year, the major program focused on:

· Working with The Structure Group on completion of their efforts to map out process and procedures and identify and quantify the software and system needs for new risk systems for the Authority;

· Coordinating and cooperating with CRA International, selected under the LTA with the Governmental Customers, on their audit of ERM and ERAC functions;

· Meeting the Authority’s obligations under the LTA by working with the Governmental Customers to develop, design and coordinate analysis and implementation of their selected hedging program for 2007 consistent with their specified objective function(s);

· Building a new modeling process specifically for Governmental Customers by which they can assess the performance of their own selected hedge strategy or otherwise assess how their cost might change by varying hedge positions or due to changes in market prices; and

· Ensuring that risk considerations remains a part of every business discussion and process.

“Going forward into 2007, the focus will be as follows:

· Issuing an RFP for the selection and implementation of new risk software and risk systems;

· Implementing mutually agreed-upon recommendations contained in the CRA International audit report with the Governmental Customers;

· Continuing to identify, analyze and review the Authority’s risk exposures;

· Maintaining a robust customer/client relationship between ERAC and all other Authority business units; and

· Providing continued staff development and training.”

12. Information Technology Initiatives – Capital Expenditure Authorization

The President and Chief Executive Officer submitted the following report:

SUMMARY

“The Trustees are requested to authorize capital expenditures of $3,758,000 for the implementation of Information Technology (‘IT’) Initiatives in 2007 as per the Authority’s Expenditure Authorization Procedures. These expenditures have been budgeted in the 2007 approved Capital budget.

BACKGROUND

“In accordance with the Authority’s Expenditure Authorization Procedures, the award of non-personal services or equipment purchase contracts in excess of $3 million, as well as personal services contracts in excess of $1 million if low bidder, or $500,000 if sole source or non-low bidder, requires Trustees’ approval.

“For each of the past 10 years, in concert with the Business Units, IT has developed a list of initiatives designed to meet business needs by taking advantage of evolving technology applications. These application developments have been funded from a capital program called IT Initiatives. This capital program, which has typically totaled less than $3 million annually, has been approved by the Trustees in the Authority’s Capital budget each December with funds later authorized and released by the President and Chief Executive Officer during the budget year. Since the request for 2007 is greater than $3 million, Trustee approval is requested as per the Authority’s Expenditure Authorization Procedures.

DISCUSSION

“The following lists the 2007 IT Initiatives, along with the estimated cost of each:

Fuels Management System $ 600,000
This initiative is a major modification to the existing FMS system. These
changes are required to allow proper transaction processing for gas
activities as a result of further deregulation in the industry. There is a need
to accept multiple delivery points for a single purchase of gas and for each
leg of the gas delivery for a single purchase.

Time & Attendance $ 600,000
This project entails replacement of the TESS payroll time entry system

with the SAP R/3 CATTS module. The existing TESS time-entry system is

used by staff to feed the external payroll-processing environment, as well as

for internal reporting. The new system will become an integral part of the

SAP R/3 environment and eliminate existing interfaces.

Fleet Management System $ 300,000
This initiative is to purchase and implement a specialized system which is

optimized for fleet vehicle operation and maintenance.

Marketing Forecasting $ 380,000
This project will develop enhancements to the Short- and Long-Term

Marketing Forecast Systems.

NERC Cyber Security Initiative $ 100,000

This initiative represents the implementation of a software package to

facilitate security assessments and development of risk profiles. The system

will support the development of a database of critical systems, critical cyber

assets and their current state of compliance to new standards.

Traders Portal $ 300,000
This project represents additional enhancements to the Traders portal system.

A number of additional functions and additional reports are planned for this

initiative.

Maximo – Meridan Initiative $ 300,000
This initiative represents the implementation of new software to allow better

integration of AutoCad drawings and their use from within Maximo the

Work Force Management System.

Energy Efficiency Initiative $ 200,000
This initiative is implementation of a new software solution for project

management, scheduling and reporting on various projects conducted by

Energy Services and Technology.

Human Capital Initiatives $ 300,000
HR has requested a series of solutions to manage various issues related to

Human Capital including Performance Management, Succession Planning,

Recruitment Management and Compensations Surveys.

IT Security Initiatives $ 200,000
Security initiatives in the cyber environment required to harden the

Authority’s enterprise and minimize risk to its systems from cyber attack.

Internal Labor $ 299,000
HQ Overhead $ 179,000

Total $3,758,000

FISCAL INFORMATION

“Payments associated with these projects will be made from the Capital Fund.

RECOMMENDATION

“The Chief Information Officer – Information Technology recommends that the Trustees approve the Capital Expenditure of $3,758,000 for Information Technology Initiatives.

The following resolution, as submitted by the President and Chief Executive Officer, was unanimously adopted.

RESOLVED, That Capital Expenditures are hereby approved in accordance with the Authority’s Expenditure Authorization Procedures, as recommended in the foregoing report of the President and Chief Executive Officer, in the amount and for the purpose listed below:

Expenditure

Capital Authorization

Information Technology

Initiatives 2007 $3,758,000

AND BE IT FURTHER RESOLVED, That the Chairman, the President and Chief Executive Officer, and all other officers of the Authority are, and each of them hereby is, authorized on behalf of the Authority to do any and all things and take any and all actions and execute and deliver any and all agreements, certificates and other documents to effectuate the foregoing resolution, subject to the approval of the form thereof by the Executive Vice President and General Counsel.

13. INFORMATIONAL ITEM: Participation in Emission Reduction Programs

The President and Chief Executive Officer submitted the following report:

“In 1990, when the Clean Air Act (1975) was amended, the U. S. Congress created a market-based concept to reduce air pollution from industries and to achieve National Ambient Air Quality Standards. Congress authorized the U. S. Environmental Protection Agency (‘EPA’) to implement a so-called ‘Cap and Trade’ program that limits the total pollutant emissions in the country (and in each state) to an annual amount called a ‘budget’ and allows for the sale and purchase of Allowances among users. Power plants (and other sources of emissions) must hold these Allowances to operate. EPA developed a methodology to allocate Allowances to power plants based on the history of the plant’s operation or on the projected or planned level of operation as specified in the plant owner’s permit application. Allowances, defined as one ton of a regulated pollutant that a user may emit, are allocated to the individual power plants (and other large industrial sources) from that annual budget. Allowances currently cover the emission of sulfur dioxide (SO₂) and nitrogen oxide (NOx) pollutants. In addition to the EPA program, the New York State Department of Environmental Conservation (‘DEC’) has run a program since 2005 that regulates the same emissions. Separate Allowances are allocated in each program for specified control periods. The control period for SO₂ is one calendar year for both programs. For NOx emissions, the control period is May 1 to September 30 (the Ozone Season) for the EPA program. For the New York State program, the control period for NOx emissions is October to April (the Non-Ozone Season). If a plant’s operation during a control period results in its exceeding its allocated Allowances, the operator may purchase additional Allowances from another plant operator, transfer Allowances from some of its other plants that have unused Allowances or install pollution control equipment. The decision to purchase Allowances or install pollution equipment is an economic and operating cost decision that gives the plant operator some flexibility as to how to meet the emissions limitations. In this way, a producer of emissions has a financial incentive to curtail its own production of emissions over time.

“As a result, an active trading system has developed for buyers and sellers of SO₂ and NOx emissions. Prices for SO₂ and NOx Allowances are determined in a competitive market through supply and demand forces. EPA and DEC require the reporting of all sales and purchases (transfers), identifying buyers and sellers and the specific power plants involved in the transfer. Due to the Authority’s environmentally sensitive operations at its plants, such as using cleaner-burning natural gas rather than fuel oil when feasible, as well as its substantial investment in pollution controls, the Authority has unused Allowances available for sale. The Authority limits its emissions sales to those buyers that will restrict their use or resale within New York State or New England. A majority of the $19 million of revenue received from the Authority’s sales have reduced its Southeastern New York Governmental Customer overall cost of service since 2004. A summary of the Authority’s transactions in these programs is attached.

“EPA recently promulgated a new regulation called the Clean Air Interstate Rule (‘CAIR’), which becomes effective between 2009 and 2015. This regulation will lessen the budget of available Allowances, increase the number of states participating from 11 to 28 and extend the current 7-month program to a 12-month program. When fully effective in 2015, CAIR is expected to reduce SO₂ and NOx emissions in the eastern United States by more than 70% and 60%, respectively, relative to 2003 levels.

“Separate from the above programs, some states have put into place their own programs to reduce Green House Gas (‘GHG’) emissions, principally carbon dioxide (CO₂), since there is no federally run GHG program. One such initiative is New York State’s Regional Greenhouse Gas Initiative (‘RGGI’). This is an effort by seven states in the Northeast (New York, New Jersey, Delaware, Connecticut, Vermont, New Hampshire and Maine) that calls for major reductions in CO₂ emissions from power plants beginning in January 2009. Initial RGGI targets are to achieve 90% of year 2000 CO₂ levels by 2020. A similar program in California is targeted at achieving year 1990 CO₂ levels by 2020. Details of each program are to be worked out by the various states’ relevant regulatory bodies. The California and RGGI programs are expected to coordinate efforts to ensure that CO₂ Allowances on both coasts are essentially equivalent on a monetary basis.”

In response to a question from Chairman McCullough, Mr. Michael Carey advised that it is hard to forecast whether the revenues will continue given the volatility of prices, but that the Allowances will continue.

Summary

Year	EPA			DEC
Year	Allowance Tons		Revenue	Allowance Tons		Revenue

2004	NOx	500	$1,037,500
	S0₂	12,500	5,952,500

2005	NOx	200	$680,000	NOx	200	$430,00
	S0₂	7,567	5,276,900	S0₂	2,500	1,325,000

2006	NOx	350	$ 327,000	NOx	160	$33,125
	S0₂	6,200	3,983,300	S0₂	0

	NOx	1050	$ 2,045,000	NOx	200	$463,125
	S0₂	26,267	15,212,700	S0₂	2,500	1,325,000
Total			$17,257,700			$1,788,125


GRAND TOTAL						$19,000,000

14. Procurement (Service) Contract – Blenheim-Gilboa Power Project Life Extension and Modernization Program – Increase in Expenditure Authorization
and Contract Compensation Limit

The President and Chief Executive Officer submitted the following report:

SUMMARY

“The Trustees are requested to authorize capital expenditure of $76,099,000 for Engineering, Procurement and Construction to complete the first three units of the Blenheim-Gilboa Life Extension and Modernization (‘B-G LEM’) Program by the spring of 2009. This additional request will bring the total authorization to $103,419,000.

“The Trustees are further requested to approve an increase of $2,000,000 in the contract value and expenditure authorization for Hitachi America Limited (‘Hitachi’) from $20,176,624 to $22,176,624 for additional work associated with the turbine installation and removal.

“The overall cost estimate for the B-G LEM Program remains at $135,495,000 as approved by the Trustees at their meeting of November 25, 2003.

BACKGROUND

“Section 2879 of the Public Authorities Law and the Authority’s Guidelines for Procurement Contracts require the Trustees’ approval for procurement contracts involving services to be rendered for a period in excess of one year.

“The Authority’s revised Expenditure Authorization Procedures (‘EAPs’) require the Trustees’ approval when the cumulative change order value of a personal services contract exceeds the greater of $250,000 or 35% of the originally approved contract amount not to exceed $500,000, or when the cumulative change order value of a non-personal services, construction, equipment purchase or non-procurement contract exceeds the greater of $500,000 or 35% of the originally approved contract amount, not to exceed $1,000,000.

“At their meeting of November 25, 2003, the Trustees approved the initiation of the LEM Program and authorized capital expenditures of $26,320,000 to begin engineering, procurement and construction of long-lead components. This, together with $1,000,000 authorized earlier for preliminary engineering and design, brings the present total authorized funding to $27,320,000. The Trustees also approved the award of a $19,700,000 contract to Hitachi for replacing the four pump turbines.

DISCUSSION

“Work on the first unit to undergo overhaul under the B-G LEM Program began in September 2006 and milestones reached to date include: dewatering of the upper reservoir; installation of the new spherical valve; delivery of two new power transformers, power circuit breakers and exciters and repair of the liquid rheostat tank.

“Modification of embedded parts such as the scrollcase stay vanes and bottom ring are in progress and the balance of work is proceeding to support the June 1, 2007 return to service date.

“The total estimated cost of the B-G LEM Program is unchanged at $135,495,000. The current B-G LEM expenditures are consistent with the approved expenditure limits.

“In order to allow for completion of the B-G LEM Program within the current four-year schedule, it is necessary at this time to increase the expenditure authorization limit for engineering, procurement and construction services to support the program through the spring of 2009. The remaining fund balance would then be requested as required to complete the last B-G unit in 2010.

“This current Capital Expenditure Authorization Request (‘CEAR’) is:

Engineering $ 3,978,000

Procurement $ 8,782,000

Construction $54,569,000

Authority Direct and Indirect $ 8,770,000

Total $76,099,000

“After disassembly and inspection of the first unit’s components, it was necessary to carry out additional work to correct unforeseeable, as-found deficiencies. This additional work, which falls under the Hitachi contract, included additional field machining, removing head cover weldments placed over the years to reduce leakage, removing thrust bearings and reassembling and providing additional shop repair of removed components that had excessive corrosion.

“The cost for the additional materials and work is approximately $2,000,000; therefore, the request is to increase the compensation ceiling for Hitachi to $22,176,624, to allow for the work noted above to be completed. This additional material and construction cost is within the contingency allowances included with the B-G LEM Program estimate.

FISCAL INFORMATION

“Payment will be made from the Capital Fund.

RECOMMENDATION

“The Vice President – Project Management, the Vice President – Procurement and Real Estate, the Vice President Engineering – Power Generation, the Regional Manger – Central New York and the Project Manager recommend that the Trustees authorize: (i) capital expenditures in the amount of $76,099,000 for rehabilitation of three Blenheim-Gilboa Life Extension and Modernization units and (ii) an increase in the compensation limit of $2,000,000 for additional material and work required for the contract with Hitachi American Limited (Contract #4600001252) for removing, rehabilitating and installing four new pump turbines and accessories at the Blenheim-Gilboa Power Project, bringing the total contract amount to $22,171,624.

“The Executive Vice President and General Counsel, the Executive Vice President – Corporate Services and Administration, the Executive Vice President and Chief Financial Officer, the Senior Vice President and Chief Engineer – Power Generation, the Vice President – Controller and I concur in the recommendation.”

The following resolution, as submitted by the President and Chief Executive Officer, was unanimously adopted.

RESOLVED, That additional capital expenditures are hereby approved in accordance with the Authority’s Expenditure Authorization Procedures, as recommended in the foregoing report of the President and Chief Executive Officer, in the amounts and for the purposes listed below:

Current Previous Current New Authorized

Description CEAR Estimate Authorization Request Total

Prel. Eng. $ 500,000 $ 500,000 $ 0 $ 500,000

Engineering 13,305,000 6,000,000 3,978,000 9,978,000

Procurement 15,044,000 2,500,000 8,782,000 11,282,000

Construction 89,094,000 13,370,000 54,569,000 67,939,000

Direct/Indirect 17,552,000 4,950,000 8,770,000 13,720,000

$135,495,000 $27,320,000 $76,099,000 $103,419,000

AND BE IT FURTHER RESOLVED, That approval is hereby granted under the existing contract with Hitachi America Limited to increase the contract value and commit capital funds for refurbishing the pump turbines (contract #4600001252) and associated work for the Blenheim-Gilboa Power Project Life Extension and Modernization program, in the amounts and for the purposes listed below:

Current authorized $20,176,624

Current increase amount $ 2,000,000

New authorized amount $22,176,624

AND BE IT FURTHER RESOLVED, That the Chairman, the President and Chief Executive Officer and all other officers of the Authority are, and each of them hereby is, authorized on behalf of the Authority to do any and all things, take any and all actions and execute and deliver any and all agreements, certificates and other documents to effectuate the foregoing resolution subject to the approval of the form thereof by the Executive Vice President and General Counsel.

15. Procurement (Services) Contracts – Business Units and Facilities – Awards

The President and Chief Executive Officer submitted the following report:

SUMMARY

“The Trustees are requested to approve the award and funding of the procurement contracts listed in Exhibit ‘15-A’ for the Authority’s Business Units/Departments and Facilities. Detailed explanations of the nature of such services, the bases for the new awards if other than to the lowest-priced bidders and the intended duration of such contracts, are set forth in the discussion below.

BACKGROUND

“The Authority’s Expenditure Authorization Procedures (‘EAPs’) require the Trustees’ approval for the award of personal services contracts in excess of $1,000,000 if low bidder, or $500,000 if sole source or non-low bidder.

DISCUSSION

“The terms of these contracts will be more than one year and/or the requested funding will exceed the dollar thresholds that can be authorized by the President and Chief Executive Officer per the EAPs; therefore, the Trustees’ approval is required. These contracts contain provisions allowing the Authority to terminate the services for the Authority’s convenience, without liability other than paying for acceptable services rendered to the effective date of termination. Approval is also requested for funding these contracts, which range in estimated value from $800,000 to $1,200,000. Except as noted, these contract awards do not obligate the Authority to a specific level of personnel resources or expenditures.

Contracts in Support of Business Units/Departments and Facilities:

Corporate Services and Administration

“Due to the need to commence services, the contract with Ove Arup and Partners, PC (‘Arup’; 4500134375) became effective on December 28, 2006, in accordance with the Authority’s Guidelines for Procurement Contracts and EAPs, subject to the Trustees’ subsequent approval as soon as practicable. The purpose of this contract is to provide for consulting services to develop the framework for integrating sustainability principles into all facets of the Authority’s operations. These services will include researching globally the best sustainability practices of electric utilities and other industries, and working with Authority staff and external stakeholders, developing guidelines, policies and procedures for integrating such principles, where applicable, into all of the Authority’s operational, transmission and administrative processes. To this end, in September 2006, 25 firms were invited to submit qualification statements, including those that may have responded to a notice in the New York State Contract Reporter; 14 such statements were received and evaluated by an Authority team comprising representatives from Procurement; Environment, Health and Safety and Energy Services and Technology. In November 2006, a formal Request for Proposals, including scope of work, was sent to nine pre-qualified firms. Eight proposals were received and evaluated by the team. The six bidders with the lowest overall estimates for completing this work were then interviewed. Arup submitted a very detailed and complete proposal that demonstrated the best understanding of the scope of work requirements and the effort required to complete this work, and presented the most comprehensive plan. Arup’s presentation was compelling and, by far, the best of all of the bidders interviewed. Its proposed project team is exemplary and includes staff that has developed the Sustainability Plan for the San Francisco Public Utilities Commission (a water authority with some hydropower operations). Arup has also performed sustainability or environmental planning for Princeton University, Pfizer, Wal-Mart, the Hudson River Park and the Fulton Street Transit Center in New York City; provided engineering and environmental services to the New York City Transit Authority in connection with the Second Avenue subway project and worked with other energy utilities across the globe. In addition, Arup will use a certified Women-Owned Business Enterprise (‘WBE’), Padron International Associates, to help develop the training curriculum and program for Authority staff to implement the sustainability policies and guidelines. Based on the foregoing, the Authority’s evaluation team, consisting of Procurement; Environment, Health and Safety; Corporate Support Services and Energy Services and Technology representatives, determined that Arup’s was the best project team to perform the study and to work with Authority staff to develop the Authority’s sustainability framework. Staff therefore recommended award of the subject contract to Arup, the most technically qualified, reasonably priced bidder, for an intended term of nine months, subject to the Trustees’ approval, which is hereby requested. Approval is also requested for the total estimated amount expected to be expended for the term of the contract, $800,000. This excludes funding for optional Tasks 3 (for reviewing current energy services and new technologies programs and policies, particularly with respect to Authority customers, and implementing a community outreach and education program) and 8 (for reviewing a proposed developmental project from a Leadership in Energy and Environmental Design (‘LEED’) perspective at the Vernon Boulevard site in Queens).

Law Department

“At their meeting of March 28, 2006, the Trustees approved the award of a three-year contract to Berman, Paley, Goldstein & Kannry, LLP (‘Berman Paley’) to provide for legal services to support the Authority in matters relating to the 500 MW Combined Cycle Project and to assist the Authority in its defense against claims made by others. The Trustees also authorized a total estimated contract amount of $2,000,000 for such services, to be released as needed. Recently, Jack Kannry, the partner in charge of the Authority’s matters, notified the Authority that as of January 1, 2007 he would no longer be affiliated with Berman Paley and would be joining a new, larger firm, Warshaw Burstein Cohen Schlesinger & Kuh, LLP (‘Warshaw’). Mr. Kannry has decades of experience in all aspects of construction law and has been the lead outside counsel representing the Authority with respect to claims by General Electric (‘GE’), as well as the Authority’s claims against GE related to the design, engineering and equipment provided by GE for the 500 MW plant. Mr. Kannry’s partner Linda Sklaren, who worked with him on the Authority’s case, is also moving to the new firm. These attorneys’ expertise and knowledge of the complex facts underlying this construction project are integral to successfully supporting the Authority in ongoing matters. Continuing with the old firm, none of whose partners had any familiarity with the 500 MW Project, was not an option. Staff therefore recommended that the specialized services of Mr. Kannry, his support staff and various subcontractors be continued under a new contract with Warshaw, awarded on a sole source basis. (It should be noted that the original contract with Berman Paley was awarded as the result of a competitive search.) Due to the need to provide for uninterrupted service, the contract with Warshaw (PO# TBA) became effective January 1, 2007, in accordance with the Authority’s Guidelines for Procurement Contracts and EAPs, subject to the Trustees’ subsequent approval as soon as practicable. The Trustees are hereby requested to approve the award of the subject contract for an intended two-year term. Approval is also requested for the total estimated amount expected to be expended through 2007, $1,200,000, to be released as needed. Should additional funding be required, such funding will be approved in accordance with the Authority’s EAPs. It should be noted that the contract amount also includes funds for expert consultants required to support the legal services.

FISCAL INFORMATION

“Funds required to support contract services for various Business Units/Departments and Facilities have been included in the 2007 Approved O&M Budget. Funds for subsequent years, where applicable, will be included in the budget submittals for those years. Payment will be made from the Operating Fund.

“Funds required to support contract services for capital projects have been included as part of the approved capital expenditures for those projects and will be disbursed from the Capital Fund in accordance with the projects’ Capital Expenditure Authorization Requests.

RECOMMENDATION

“The Vice President – Procurement and Real Estate, the Vice President – Environment, Health and Safety, the Director – Corporate Support Services and the Project Manager – Energy Services recommend the Trustees’ approval of the award of procurement contracts to the companies listed in Exhibit ‘15-A’ for the purposes and in the amounts set forth above.

“The Executive Vice President and General Counsel, the Executive Vice President – Corporate Services and Administration, the Executive Vice President – Chief Financial Officer, the Senior Vice President – Energy Services and Technology, the Senior Vice President – Marketing and Economic Development, the Senior Vice President and Chief Engineer – Power Generation and I concur in the recommendation.”

The following resolution, as submitted by the President and Chief Executive Officer, was unanimously adopted.

RESOLVED, That pursuant to the Guidelines for Procurement Contracts adopted by the Authority, the award and funding of the procurement services contracts set forth in Exhibit “15-A,” attached hereto, are hereby approved for the period of time indicated, in the amounts and for the purposes listed therein, as recommended in the foregoing report of the President and Chief Executive Officer; and be it further

16. Motion to Conduct an Executive Session

“Mr. Chairman, I move that the Authority conduct an Executive Session for the purpose of discussing matters related to potential litigation and the financial and credit history of GE.” Upon motion moved and seconded, an Executive Session was held.

17. Motion to Resume Meeting in Open Session

“Mr. Chairman, I move to resume the meeting in Open Session.” Upon motion moved and seconded, the meeting resumed in Open Session.

18. INFORMATIONAL ITEM: 2007 EXECUTIVE ORDERS

The President and Chief Executive Officer submitted the following report:

“On January 1, 2007, Governor Eliot Spitzer issued five new Executive Orders, three of which impact the Authority. Among the topics addressed and actions taken in the Executive Orders are new ethical conduct guidelines for public employees and members of authorities, the elimination of politics from governmental decision making, the promotion of public access to government decision making and the continuation of certain other Executive Orders from prior administrations.

“Executive Orders Nos. 1, 2 and 3 are applicable to the Authority. Executive Order No. 1 prohibits the receipt of gifts of more than nominal value where the circumstances of the giving indicate an intention to influence the recipient in the performance of official business. This prohibition is stricter than Public Officers Law § 73(5), which provides that gifts up to $75 may be allowed in certain circumstances. This Executive Order also prohibits nepotism in hiring and contracting and the use of state property for personal purposes, including stationary, postage, telephones and computers (other than incidental and necessary use) and vehicles (the value of any authorized personal use is to be calculated and reported as personal income).

“Executive Order No. 2 seeks to eliminate politics from governmental decision making by prohibiting campaign contributions to the Governor and Lieutenant Governor, prohibiting consideration of politics in employment and contracting, prohibiting state agencies or public authorities from having elected officials or candidates for elective office from appearing in any advertisement paid for, in whole or part, by an agency or authority. This Executive Order also requires the head of an agency or public authority to take a leave of absence from his/her position before commencing a candidacy for that office.

“Finally, Executive Order No. 3 requires agencies and public authorities to identify all meetings that are subject to the Open Meetings Law and to set a time by which these meetings are broadcast on the Internet.

“Executive Orders Nos. 1 and 2 contain a requirement that an agency or public authority establish penalties, up to and including dismissal, for any individual who violates the orders.

“While I believe current Authority policies and practices embrace most of the new Executive Orders’ requirements, I have directed the Executive Vice President and General Counsel to ensure an orderly and coordinated review process within the Authority of the new Executive Orders. He has reached out to the applicable Business Unit heads and their direct reports and requested them to review the current polices against the new requirements and to amend current policies or draft new policies to implement the Executive Orders. The Law Department will then review the updated or drafted polices as to form and consistency.”

“After the Chairman and I review and comment on the revised polices, we intend to report to the full Board of Trustees at the regular March 2007 meeting.”

Mr. Kelly presented the highlights of Governor Spitzer’s Executive Orders and advised that Executive Order Nos. 1, 2 and 3 would affect the Authority. In response to a question from Trustee Scozzafava, President Carey mentioned that the Authority does not advertise, although it has a branding process that is currently under review. He said that in the past the Authority had done radio ads promoting energy efficiency with local elected officials. President Carey said that recently a borough president had asked that such ads be continued, but that the Authority had to decline because of Executive Order No. 2.

At this point in the meeting, Chairman McCullough left for an appointment, turning the meeting over to Vice Chairman Townsend.

19. INFORMATIONAL ITEM: Windfarm Substations for Interconnection

The President and Chief Executive Officer submitted the following report:

SUMMARY

“In accordance with the New York Independent System Operator’s (‘NYISO’) Open Access Transmission Tariff (‘OATT’) filed at the Federal Energy Regulatory Commission (‘FERC’), the Authority is allowing developers to connect new generation to its transmission lines. Currently, three developers are in the process of designing five windfarm projects to be connected to the Authority’s lines in the Northern Adirondacks.

“In order to connect to the system, the developers must design and construct three substations to the Authority’s specifications at their own expense. The Authority was subsequently confronted with the issue of whether to own, operate and maintain these new substations, as opposed to the developers. In the spirit of the pro-forma Interconnection Agreement (‘IA’) filed with the NYISO’s OATT, and in the interest of maintaining its reliability standards and control of its bulk power transmission system, the Authority has concluded that it will own, operate and maintain these three (as well as any future) substations required by any developer to interconnect to the Authority’s transmission facilities, at the expense of those developers.

BACKGROUND

“Between the years 2007 and 2009, the New York power grid will host a number of new green power generators as required by NYISO’s OATT. In fact, as many as 10 windfarm projects will be connecting to the Authority’s transmission lines in the Northern Adirondack region of New York. The first five windfarm projects will be constructed adjacent to both of the Authority’s MWP-1 and MWP-2 lines between the Authority’s Willis and Plattsburgh substations.

“In order to accommodate this new, green energy, at least three new substations (also referred to as ‘attachment facilities’) must be constructed to connect the windfarms to the Authority’s lines. At this time, three wind power project developers have pledged to design and construct these substations at their own expense. As part of the interconnection process set forth in the NYISO’s OATT, the Authority, NYISO and the developers must execute a three-party pro-forma IA for each project prior to its construction. Under these (yet to be executed) IAs, each developer is obligated to pay for the operation, maintenance, repair and replacement (at the Authority’s direction) of any substation it builds for its use. Throughout this interconnection process, the Authority has worked closely with the developers in engineering and procurement, and will also assist in construction. The Authority will recover these costs in each project’s respective IA.

DISCUSSION

“As encouraged by FERC and NYISO, the Authority concluded that it would own, operate and maintain the new windfarm project substations for a number of compelling reasons. As integral parts of the Authority’s transmission system, the new substations could have a deleterious effect on transmission system reliability unless built and maintained to the appropriate standards. In making its determination, the Authority considered its need to maintain the continuity, reliability and control of its existing transmission system without the interference of non-regulated entities. The reliability of these facilities is paramount to the Authority.

“As an extension of the aforementioned concern, the Authority determined that, as a ‘Transmission Owner,’ it would be accountable to the North American Electrical Reliability Corporation (‘NERC’) for the proper operation of these substations. It is unclear at this time how generation developers (that own transmission bulk power facilities) would be classified, and whether or not they would be held accountable to NERC. If these developers were to own the substations, but are not held accountable by NERC (or to lower standards than the Authority), the Authority’s ability to reliably operate its transmission system could be undermined.

“Also significant to the Authority was the understanding and knowledge that the cost to design, construct and maintain said facilities shall be entirely the responsibility of the developers as outlined in the NYISO Interconnection process and as negotiated in the IA. Finally, the Authority believes that owning these substations will reduce safety-related risks associated with their operation and maintenance.”

Mr. DeCarlo presented the highlights of this informational item to the Trustees. In response to a question from Trustee Seymour, Mr. DeCarlo said these windfarms would be located north of Utica, including parts of Madison County. The substations will be built and paid for by the wind developers as part of the interconnection process set forth in the NYISO’s OATT (Open Access Transmission Tariff)and in accordance with Authority standards and specifications. Mr. Kelly further advised that the Authority might incur some liability in connection with the windfarms and that legal staff is monitoring the process. Trustee Seymour asked what the charge per kilowatt would be and Ms. Morman said that it would be 7 cents at the source.

20. Other Business

On behalf of Monroe County Executive, Maggie Brooks, and himself, Vice Chairman Townsend thanked Authority staff for their part in the success of the Monroe County landfill-gas-to-energy project.

Vice Chairman Townsend acknowledged the passing of Shalom Zelingher, the Authority’s Chief Technology Development Officer, and asked that the meeting be adjourned in his memory.

21. Next Meeting

The next meeting of the Trustees will be held on Tuesday, February 27, 2007, at 11:00 a.m., at the Clarence D. Rappleyea Building, White Plains, New York, unless otherwise designated by the Chairman with the concurrence of the Trustees.

Closing

On motion duly made and seconded, the meeting was adjourned by the Chairman at approximately
12:30 p.m.

Anne B. Cahill

Corporate Secretary

[1] Staff’s 2003 memoranda and Staff Reports on preference power rates referred to this cost item as Post-Employment Benefits Other than Pensions or PBOPs.

Table of Contents

20. Other Business

21. Next Meeting