Executive Speeches

Remarks of Eugene W. Zeltmann, president and chief operating officer, New York Power Authority, at the Interstate Natural Gas Association of America Security Analysts’ Conference, Colorado Springs, Colorado.

July 14, 2001

Good morning. And happy Bastille Day.

Whether or not you think electricity deregulation is revolutionary, there’s no question that our business is undergoing some of its most profound changes since the days of Thomas Edison.

Needless to say, there have been some growing pains—most notably in California. But if what we’ve seen there is a case of unintended consequences, it’s hardly without precedent.

Even at the beginning of our industry, competition was not problem-free—though the problems then were caused because there were too many power plants—not, like today, because there are too few. The high rates that prevailed then were due to high fixed costs caused by an inefficient utilization of capacity—not a lack of capacity. It wasn’t supposed to play out that way, but it did.

My favorite "unintended consequences" story involves the NASA engineers who a few years ago came up with a gun to fire dead chickens at various types of aircraft and the space shuttle. The idea was to test the strength of the windshields by simulating the high-speed collisions that frequently occur with birds.

British engineers were eager to fire the gun at the windshields of their new high-speed trains.

Arrangements were made and the gun was shipped to England. But when it was fired, the chicken smashed through the windshield and destroyed the cabin.

The British engineers sent NASA the bad news, along with the windshield’s design and a plea for help.

NASA’s response was short and sweet: "Thaw the chicken."

While the answers to the current questions in the power industry may not always be as obvious, I’m confident that the overriding goals of competition—reliable supplies and lower prices for consumers—will be progressively realized over the next several years. As always, though, the tough times are periods of transition from a highly regulated marketplace to one based on price signals and customer choice.

A lot of what we’re doing at the New York Power Authority is intended to facilitate the ongoing move to deregulation in our state. Our job is to thaw the chicken.

A case in point was our recent sale of our two nuclear power plants to Entergy Corp. in what we believe was the largest privatization of public assets in New York State’s history.

The purchase price—$967 million—was a record for the U.S. nuclear power industry. And the sale led directly to upgrades in our credit ratings and operating outlook by the bond rating agencies.

That said, I can assure you the decision to sell the plants wasn’t easy. After some performance difficulties in the early-to-mid-1990s, they’d shown remarkable progress in the past few years.

We had every reason to believe the recent excellent operations would continue.

But, with an eye on the coming competitive industry, we concluded that the sale of the plants would better serve the people of New York State. Let me explain.

Deregulation and competition have given birth to what is, in effect, a new paradigm for nuclear power—something called a nuclear operating company.

These are companies like Entergy, Dominion Resources and AmerGen that operate a number of nuclear power plants at multiple sites—and are committed to expanding their nuclear fleets. Their size gives them significant competitive advantages. I’m talking about things like economies of scale, the ability to pool financial and physical resources and staff expertise, leverage in negotiating contracts for products and services such as nuclear fuel, and a single-minded attention to nuclear issues and operations.

Given these realities, we concluded that selling the plants would assure that they would operate more efficiently and provide greater value to consumers. And certainly bringing in Entergy as a major new power supplier promises to enhance competition in New York State.

Meanwhile, most of New York’s investor-owned utilities have sold—or are in the process of selling—their major power plants, both nuclear and non-nuclear, and are focusing on the transmission and distribution end of the business.

But one thing that’s clear—regardless of who owns the plants—is that the state must move aggressively to meet growing demand for electricity in the years immediately ahead. Among the many lessons of California is that deregulation and competition can succeed only if there’s a reliable, economical power supply.

Energy efficiency is clearly an important part of the mix—and the Power Authority is a national leader in that area.

But—in New York and throughout the country—we must also strengthen transmission systems and build environmentally clean power plants as quickly as possible.

Competition is already putting new demands on overburdened transmission networks as new suppliers seek to get electricity to their customers.

But because of environmental regulations and inevitable local concerns, it’s very difficult and expensive to build new transmission lines. The most desirable course—if feasible—is to transport more power on the lines we already have. And the New York Power Authority is carrying out a pioneering project to do just that.

At a substation in Central New York, we’re investing $35 million in a first-of-its-kind device called a convertible static compensator—or CSC—that we developed in cooperation with EPRI, the electricity industry’s research arm.

The CSC will use high-speed electronics to control electricity flow and permit instant transfer from heavily loaded lines to those with spare capacity.

We recently completed the project’s first phase—which has strengthened voltage support and boosted capacity on a congested transmission corridor, just in time for the summer peak demand period.

When the CSC is fully operational next summer, it will also permit operators to simultaneously control power flows on two lines. It’s this capability that will make the CSC the most advanced transmission control device in the world.

I think it’s significant that about 30 other electric utilities in the U.S., Canada and New Zealand are helping to offset the project’s $48 million cost. They obviously see tremendous potential for their own areas. In fact, this innovation—if widely adopted—could revolutionize the way electric power is transmitted.

The CSC, like the nuclear sale, is a prime example of how the Power Authority is helping to prepare New York’s electricity market for deregulation.

But, as I said, new power plants are also needed. About 20 proposed plants—all to be fueled by natural gas—are now in various phases of the regulatory process in New York, and two have been approved. The proposed plants include a highly efficient and environmentally clean 500-megawatt combined cycle facility that the Power Authority is planning for New York City. But it’s unlikely—in the city or elsewhere—that any of the new plants will be up and running before 2003.

Meanwhile, until recently, New York City was looking at the very real prospect of California-style blackouts, brownouts and price spikes as soon as this summer.

To stave off a potential crisis, New York State turned to the Power Authority. I think our response was truly extraordinary, and I’d like to focus on it this morning.

Under what we call the PowerNow! program, we’ve installed nine small, clean gas turbine generators in various parts of the city and another unit on Long Island, which was looking at summer shortages of its own. All of these units have already produced electricity. We’re completing work on one more unit in the city, which should be up and running by the beginning of August.

We completed the natural-gas-fueled units on an emergency basis in a period of several months—even though a job like this generally would take as much as two years or more.

To put all this in perspective, let me tell you a little about New York City’s precarious power supply situation. One big problem is that transmission constraints limit the amount of electricity that can brought into the city from outside sources.

As a result, the Independent System Operator that runs New York State’s power system requires that enough generation be available within the city to meet at least 80 percent of the projected demand.

Back in March, the ISO forecast that the city would fall about 400 megawatts short of the 80 percent requirement. As it happens, our city gas turbines together will just about offset the deficit. In fact, in an updated report at the end of May the ISO said that thanks to our units and several other measures, the city should have a "razor-thin" capacity margin this summer.

Well, here we are in the middle of July, the city has avoided major problems so far and the gas turbines have pitched in on some 90-degree plus days and at more routine times as well. There’s probably plenty of hot weather—and possible record peak demands ahead—but the new units provide a real reason for confidence that New York City will make it through.

That’s a big difference from last summer, when the city escaped likely blackouts and brownouts only because of unusually cool weather. Even then, there were price hikes of more than 40 percent over the previous year as Con Edison—the local utility—passed on higher wholesale power costs to its retail customers.

Before the summer of 2000 was over, state officials recognized that they couldn’t count on the weatherman to help keep the lights on again.

The need was clear, and the Power Authority’s trustees—in late August of 2000—authorized the emergency purchase of the 11 LM6000 gas-turbine units from General Electric Packaged Power. We knew we had to move quickly to secure the units—which are among the world’s most fuel-efficient simple-cycle gas turbines—because of intense global competition for them.

Because of the time pressures, I must admit we’ve violated some textbook project management rules.

Normally, you’d carry out various tasks sequentially. For example, you’d select a site—or in this case, sites—for a project and obtain your equipment before beginning your detailed design work. Normally, you’d want your engineering to be 90 percent complete before going out to bid for a general contractor. And then probably you’d take four to six months to select that contractor.

But that’s all under normal conditions. And this project was anything but normal.

Rather than following the traditional sequence, we handled multiple tasks simultaneously. We selected our outside engineering, environmental and legal firms within a week of the trustees’ action. Our construction manager was on board within a month and we had our general contractor by the end of last year—four months after the trustees acted.

We also had to settle very quickly on the design of the gas connections—and advise the local utilities—even before we knew for sure where the units would be located.

I should note, by the way, that we’re buying spot gas for the turbines and that we have agreements with Con Edison and Keyspan for deliveries from the city gate. Although the deliveries are interruptible, we don’t anticipate problems since the summer period when the turbines are most apt to run at full strength is also the period of lowest demand for gas from the utilities’ other customers. Things have been fine so far, and we think they’ll stay that way.

Now let me tell you something about the site selection process, which was extremely difficult and complex. Believe me, it would have been tough to find a site in New York City for even one new generator in this tight time period, let alone 10.

We eventually selected most of the sites last November—with one more in January—after considering about 60 potential locations. We used several major criteria, including size—at least an acre; proximity to natural gas and electric connections; the ability to avoid or minimize environmental impacts; geographic diversity; and the prospects for meeting the all-important summer deadline.

Given these rigid criteria, we were unable to come up with individual sites for each of the 10 units in New York City. So we have six locations in the city—four of which accommodate two units each.

Now, the maximum output of each unit is 44 megawatts—and the state’s full-scale power-plant siting process applies to facilities of 80 megawatts or larger. Thus we had to commit to limit the combined output at the dual-unit sites to 79.9 megawatts.

There were some complaints about this, but the fact is that the units underwent thorough environmental assessments under state law and received the required state air-quality permits. They are, in fact, the cleanest power plants in New York City.

Because of the time constraints, we began preliminary site preparation activities in December—even before we’d received the environmental permits. We did this with the full understanding that if a permit weren’t granted at a given site, we’d have to restore the site to its previous condition. Fortunately, that didn’t happen.

Our first big job after site preparation was to get the gas turbines delivered and placed on their foundations. To help meet the schedule, we used ships—rather than barges—to transport some of the units from Texas to New York City.

Next came the electrical and mechanical work and the installation of the remaining components. We used a Russian airplane—the only aircraft we could find that was big enough—to bring in the transformers two at a time from Mexico.

Finally we carried out an extensive testing and startup process leading to full-scale operation of each unit.

As we moved ahead, we had the backing of various business, labor and electricity-consumer organizations in the city—and of a number of community groups and public officials—including Mayor Rudolph Giuliani.

There was, of course, some vehement local opposition—which I suppose is inevitable. In fact, opponents filed three lawsuits to block the projects. Appeals court decisions are pending in two and a judge just this past Monday ruled in our favor in the third. The key point is that none of these actions interrupted the work—even though we lost one of the cases in the lower court, we were allowed to keep right on going during the appeals process.

I honestly believe these suits are misguided because we’ve followed all the regulatory procedures; the units are so urgently needed; and—as I’ve indicated—they’ll have only minimal environmental impact.

Of the total program cost of $530 million, we’ve earmarked $55 million—$5 million for each generator in the city and on Long Island—for the express purpose of providing the most advanced available environmental controls. Increases over existing emissions and noise are thus imperceptible in virtually all cases.

Nevertheless—in an innovative voluntary program—the Power Authority has pledged to offset even the minimal air emissions from the New York City units by reducing those from other sources in the city. We’ll thus achieve zero net emissions—and possibly an overall improvement in air quality. We’re looking at various ways of doing that, and have also asked residents of the communities in which the units are located to give us their suggestions.

I mentioned the project cost a moment ago, and this audience might be interested in knowing that we’re financing the full amount through our sale last November of tax-exempt variable rate bonds and the issuance of commercial paper over the next few months. We’re well positioned to accommodate that since our net debt reduction since the end of 1996 has been more than $740 million—close to 25 percent.

The installation of the gas turbines is in keeping with the Power Authority’s long tradition of meeting New York State’s most pressing energy needs.

It’s been a remarkable effort, but we’re already looking ahead to new challenges as New York’s power industry heads further into the competitive era. We can’t be sure at this point precisely what those challenges will be, but we do know they’ll be out there.

As far as we’re concerned—and this goes for just about everyone else in our business as well—the novelist Louis L’Amour may have said it best: "There will come a time when you believe everything is finished. That will be the beginning."

Thanks very much.

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