Executive Speeches

Remarks of Eugene W. Zeltmann, president and chief executive officer of the New York Power Authority, at the Independent Power Producers of New York Legislative Conference, Albany, New York

May 12, 2004

Good morning. It’s great to see so many of you again.

You may recall that I had the opportunity to speak at your annual meeting in October 2002. So I want to thank Gavin Donohue for inviting me back—and to point out that Gavin has generously participated in the Power Authority’s strategic planning conference for the past two years.

I think all of this has led to increased understanding between our organizations—a very welcome development that has Governor Pataki’s strong support.

It’s evident, though, that a lot more is needed in the way of communication since I understand a number of you remain concerned about the Power Authority’s role in the restructured industry. I fully appreciate that such concerns and uncertainty can—along with other factors—inhibit private-sector investment in the New York power generation market.

Let me begin, then, by stating that we do not foresee the need for the Power Authority to build any more new power plants. We believe the private sector should be able to meet the challenges and capitalize on available opportunities in our market. You construct power plants, you take it very seriously and you’re very good at it.

I’ll have more to say about this a little later. But first I want to look quickly at some national trends that have had a major impact on power-plant development here in New York.

As you well know, the energy sector—like the technology sector—has in the last couple of years experienced a bubble that proceeded to burst.

Rosy demand forecasts led to a national boom in the power industry that in hindsight was not sustainable. The result of that boom was that many lenders overvalued the collateral on which they provided capital. This, in turn, permitted some power-plant builders to borrow aggressively—though they couldn’t pass these expenses through to ratepayers.

The fallout from that strategy has yet to be fully felt, given that a huge chunk of the U.S. merchant power industry’s total debt is coming due between now and 2010. But we’re seeing a wave of power-plant sales—and transfers to bank lenders—as independent power producers seek to cut their debt.

We’re even seeing some of the old-line utilities looking to acquire plants or to transfer them from unregulated to regulated units to serve their retail customers. This is troubling to the Federal Energy Regulatory Commission since it threatens to upend the competitive system that FERC has worked so hard to create.

When it comes to financing new construction, New York’s IPPs have suffered along with the rest of the industry—despite the recent breakthrough on SCS’ Astoria Energy plant in New York City. I suppose that’s been inevitable. But in New York—unlike some other parts of the country—we have to move ahead as quickly as possible to build new power plants.

We'll need those plants before we know it to keep the lights on—particularly in the city and on Long Island. New plants could also strengthen competition, reduce consumer costs, and improve the quality of our air by permitting the retirement of older, less-efficient generators. And you—the members of this organization—are the state’s best hope for building them.

Clearly, renewal of New York’s Article Ten siting law would be a valuable impetus to power-plant development. I hope state lawmakers will make Article Ten a top priority in the final weeks of this session and that they will send a balanced and responsible measure to Governor Pataki for his signature.

However, it’s worth noting that the state Siting Board certified more than 6,000 megawatts of new capacity under the previous Article Ten law—with a little more than half of that targeted for New York City and Long Island. Only a small part of that new capacity has materialized.

The problem, of course, is that approval of a new plant by the Siting Board is no guarantee that it will actually be built—given the financing issues facing the industry.

Article Ten renewal is essential, not just to the siting process, but as a signal to the energy industry and the investment community that New York State is serious about adding new generation.

The financing of such new generation is critical. And, in that regard, I’m encouraged that the Public Service Commission is looking at means to facilitate the long-term contracts with utilities that could help spur investment in your projects.

The guaranteed power sales under these contracts should help to build investor confidence. But, unlike regulation, they wouldn’t encourage overinvestment—the chief drawback to the old rate-of-return guarantees.

Given the various national and state issues that affect you, I think it’s clear that the Power Authority isn’t really an obstacle to investment in your projects in New York State. But it’s also important for developers and investors to know that we fully expect the private sector to respond to the state’s capacity needs.

The Power Authority foresees that the most efficient option for us to meet our future customer demand will be to purchase the necessary capacity and energy—unless we have to build a facility in response to a compelling public need that is not being fulfilled. And, ultimately, that need will be created by the people in this room—if you don’t build the necessary generating plants.

When we installed a series of small, clean natural-gas-fueled plants at seven locations in New York City and on Long Island back in 2001, it was in response to a compelling public need—to stave off power shortages that had been threatened for that summer.

The plants—with a total output of about 450 megawatts—served that purpose. They did the same in 2002—and they’ve provided year-round economic and environmental benefits as well. We had no wish or intention to install these plants—but we did so because of the critical need that otherwise would not have been met.

In the same vein, the 500-megawatt combined-cycle plant that we’re now building in Queens is needed to help avert future capacity shortages in New York City—and specifically to serve our government customers in the city. Here again, we acted in response to a potentially serious problem.

We’re building the plant—which will be one of the cleanest and most efficient in New York City’s history—on the site of our existing Charles Poletti Power Project.

I’m sure many of you are aware that a landmark agreement reached under Governor Pataki’s leadership calls for us to close the 875-megawatt Poletti project as soon as 2008 if the New York Independent System Operator finds there’s enough other generating capacity in the city. In any case, the existing plant will close no later than 2010. And the agreement requires us to limit Poletti’s capacity factor to 30 percent on a three-year average after the new 500-megawatt plant begins commercial operation next year.

All of which is by way of saying that our combined-cycle plant doesn’t lessen the need for more new capacity in the city. In fact—as I indicated—replacing Poletti with the new plant will result in a net capacity decline, though there will be significant environmental and efficiency benefits.

With that very much in mind, the Power Authority earlier this week announced that on June 4, we’ll issue a request for proposals to supply capacity and energy on a long-term basis to serve our government customers in New York City after Poletti closes.

We’re looking for as much as 500 megawatts of in-city capacity—along with sufficient energy supplies—to help meet these customers’ needs for up to 20 years.

Many of you will recall the Con Edison RFP that resulted in a crucial 10-year, 500-megawatt commitment to the Astoria Energy plant. Now—through our competitive bidding process—the Power Authority is giving New York’s independent power producers the opportunity to replace the output of Poletti.

We could have elected instead to build another new plant. In fact, we did consider adding a second combined-cycle facility at the Poletti site. In the final analysis, we determined that our customers’ needs could be more effectively met with power purchase transactions. Beyond that, we recognize that it is vitally important to New York’s power industry that there be a competitive private sector.

I should note that our agreement to close Poletti requires us to apply by July 1 of next year to build the second new plant. But that requirement—to submit the application—will be waived if we formally notify the parties in writing by this coming January 1 that the plant won’t be needed to serve our government customers or to ensure a reliable power supply.

Let me tell you—we fully expect to meet those needs with commitments from private developers and to send out that notification before the New Year’s deadline. And, Gavin, I’ll copy you on it.

And—so that there are no lingering doubts—let me also say: The Power Authority will fully comply with all terms of the Poletti shutdown agreement. That power plant will close—as soon as 2008—and certainly no later than 2010. New power plants built by those of you here today—or others in the industry—could guarantee the closure in 2008.

Even with Poletti still in service, we have energy contracts with two of your members—Constellation Power Source and Entergy Nuclear Northeast—to help take us through 2008.  The addition of a capacity component will, of course, greatly increase our reliance on independent producers in the years after that. We have every confidence you’ll meet our needs and those of our customers.

Looking beyond the Power Authority for a moment, there’s been some encouraging news in New York City in the past couple of weeks with KeySpan’s 250-megawatt cogeneration plant at Ravenswood going into service and site preparation under way for the first half of the 1,000-megawatt Astoria Energy project.

But bear in mind that Mayor Bloomberg’s Energy Policy Task Force forecast earlier this year that the city will need an additional 2,600 megawatts by 2008—to ensure reliability and promote economic growth and environmental protection. So there’s more to do in providing new generation—and you’re the people to do it.

What I’ve said about new power plants holds true for transmission: The Power Authority does not foresee building any new transmission lines unless we perceive that we must do so in response to a compelling public need.

Last August’s blackout and, more recently, the cancellation of a capacity auction for the planned Empire Connection project from the Albany area to New York City have focused increased attention on transmission issues.

Ideally, the competitive market will dictate where merchant transmission projects such as Empire are appropriate or where new power plants close to the load centers—or demand-side management—would be preferable.

There may, of course, be situations in which the market does not respond to meet a reliability need. In such cases, we believe that any lines necessary to maintain reliability can most effectively and efficiently be built by the utilities that directly serve retail consumers and that this should be done through the regulatory process. The only circumstance under which the Power Authority would foresee building new transmission would be if this process failed and there were a compelling reliability need.

The fact remains, however, that the Power Authority now owns and operates more than one-third of the high-voltage transmission in New York State. So we’ll continue to devote considerable attention to operating and maintaining our facilities and rights-of-way.

We’ll also work with entities like FERC, the ISO and the PSC to develop effective regional planning processes for transmission and to address issues concerning appropriate investment incentives and cost-recovery mechanisms in cases where new lines or upgrades are needed.

Another way to strengthen the transmission system, if necessary, is to employ new technologies that enable us to carry more power on the lines we already have.

The Power Authority has taken a leadership role in this field by installing the world’s most advanced transmission control device at our Marcy Substation near Utica. This convertible static compensator—or CSC—has boosted statewide transmission capacity by close to 200 megawatts through the use of real-time digital controls.

When I last discussed this with you back in 2002, we’d finished Phase One of the CSC—which has strengthened voltage support on the system. And just a little over two weeks ago—with Phase Two complete—that part of the project also began commercial operation under ISO control. Now—for the first time anywhere—operators will be able to instantly move power from a heavily loaded line to one with spare capacity.

As the CSC initiative suggests, we’re looking beyond the immediate horizon to see what roles we might take on in the deregulated industry. Three major areas that we’re focused on are economic development, clean new energy technologies and energy efficiency.

The Power Authority has long given New York State a critical advantage in the international fight to attract and keep job-producing businesses. The economical power we provide through various programs helps to support more than 400,000 jobs throughout the state. We intend to continue to work with your members, the investor-owned utilities and organizations like Empire State Development to build on that record.

One key part of our economic development efforts will be to keep on operating our big hydroelectric projects on the Niagara and St. Lawrence rivers as efficiently as we know how.

These projects produce what’s probably the least-expensive electricity in the country for businesses. They’re vital to the economic health of Western and Northern New York and we want to make sure their power is put to the best possible use in those regions. Doing so will strengthen the overall economy of New York State—and that’s good for all of us.

Last October—right on schedule—we received a new 50-year federal license to operate the St. Lawrence-FDR Project. We’re now in the midst of an all-out effort to obtain a new license for the Niagara Project when the current one runs out in 2007.

The massive turbines at these two major hydroelectric facilities have been spinning for close to half a century. That’s why we’re investing a total of more than half a billion dollars to modernize both projects and extend their operating lives.

The hydro projects are—and will remain—central to our operations. But since we sold the FitzPatrick nuclear plant, all the megawatts supplied through our other economic development programs—including Power for Jobs—have come from the private sector.

In the case of Power for Jobs, Governor Pataki's proposed rebate is designed to contribute further to the development of competition, with more than 450 megawatts of demand moving from Power for Jobs to the retail market. The Governor's rebate program will continue savings and protect jobs—at a lower cost than under the current program.

Economical electricity is important to the Empire State’s effort to help create and protect jobs for New Yorkers. And much of that electricity—I trust—will be produced by your members.

As I’ve indicated, the Power Authority’s emphasis on economic development can work well with what you do. I think that’s also true of our continued and expanding focus on promoting clean new power sources like fuel cells and solar panels. Our goal here is not to preempt the field, but to demonstrate the commercial viability of various technologies so that private developers might be willing to take them further.

Like the new power technologies, the Power Authority’s ambitious energy-efficiency programs ease stress on the power system, clean the air and reduce our dependence on foreign oil. These initiatives—along with our program to promote the use of clean electric and hybrid-electric vehicles—are in keeping with Governor Pataki’s Executive Order 111, which established specific targets to make state entities more energy efficient and environmentally friendly. I think they reinforce my point that the Power Authority has plenty to keep it busy.

The way I see it, we’re made up of a variety of individual pieces. Like a kaleidoscope, the picture they create can change as the pieces rearrange themselves. But overall, our activities and yours should complement each other, based on market incentives and responses. And—under that scenario—the Power Authority will fit into particular niches that provide the greatest benefit to the people of New York State.

Thank you.