Executive Speeches

Testimony of James H. Yates, Vice President - Major Account Marketing and Economic Development, New York Power Authority to the Assembly Standing Committee On Energy and the Assembly Standing Committee On Corporations, Authorities And Commissions

March 16, 2005

Good morning Chairman Tonko, Chairman Brodsky and distinguished members of the Assembly.  My name is Jim Yates. I serve as Vice President of Major Account Marketing and Economic Development. Thank you for conducting this hearing and providing us the opportunity to present you with information about the economic development power programs administered by the New York Power Authority.

As Chairman Ciminelli noted, the economical electricity supplied by the New York Power Authority through these various programs now helps to protect more than 410,000 jobs at some 735 enterprises across the state and assists to provide an estimated $5.3 billion in state and local tax revenues.

Replacement Power was established by federal law in 1957. It provides up to 445 megawatts of hydropower to industries in the Niagara Mohawk service territory within a 30-mile radius of the Niagara Power Project.  Allocations are awarded on a competitive basis to manufacturing firms that commit at least ten jobs per megawatt, create new jobs and new electric load and commit to completing facility expansion within three years.

Expansion Power, established by state law in 1987, provides up to 250 MW of hydropower to businesses within a 30-mile radius of the Niagara Power Project, including up to 20 MW that may be allocated to businesses in Chautauqua County. Allocations are awarded on a competitive basis to businesses that commit to create jobs, increase electric load, build new or expanded facilities, and have at least 100 kilowatts of demand.

Together these Niagara hydropower programs are currently supplying nearly 585 MW linked to more than 43,000 jobs.

As Chairman Ciminelli noted, the Power Authority, working with Buffalo Niagara Enterprise, Niagara Mohawk, and Empire State Development Corporation, established a Western New York Advisory Group to provide a coordinated, cooperative effort to enhance the Niagara hydropower programs.

The new process was conceived in late 2003 and has helped NYPA to allocate 40 MW of low-cost Niagara hydropower to 25 companies with commitments to create more than 2,200 new jobs and invest $557 million in Western New York.

The federal mandate for the Replacement Power program is scheduled to expire at the end of 2005. Most existing contracts run through August 2007, the end of the Niagara Project license, with many of the agreements with the largest customers allowing for extension through 2013 if the Niagara Project is relicensed. However, the pending loss of the federal predicate for Replacement Power exposes current customers to uncertainty about the future supply of low-cost hydropower.  Moreover, the value of the program as an economic development tool is hindered by the ambiguity of the program’s future.

The history of the Replacement Power program dates back to June 1956 when Niagara Mohawk Power Company’s Schoellkopf Plant in Niagara Falls was substantially destroyed in a rockslide, eliminating its supply of hydropower to critical industries. The U.S. Congress in 1957 approved the Niagara Redevelopment Act (NRA) mandating that the Federal Power Commission issue a license to the New York Power Authority to use water available by treaty for power generation.  The NRA and the project license required NYPA to contract with Niagara Mohawk for the sale of 445 MW of Replacement Power (RP) “for a period ending not later than the final maturity date of the bonds initially issued to finance the [project]” which is January 1, 2006.

In 1961, the Niagara Project generated its first power. NYPA and Niagara Mohawk entered into Contract NS-1, which, among other things, provides for the sale, transmission and distribution of RP to industries within a 30 mile radius of the Niagara Project. By 1978, over 111 MW of RP had been released from contract by industrial customers and was being used by Niagara Mohawk to serve residential customers.  Niagara Mohawk took the position that the NRA and Contract NS-1 did not require the unallocated RP to be reallocated to industry, but rather that it could be retained for general system use. The Airco litigation was commenced in 1978 by certain RP industries seeking a ruling that all relinquished RP be awarded to original RP recipients or their successors. That litigation was settled in 1982 under which the 111 MW of relinquished RP was allocated among a number of the industries. Procedures were adopted for the allocation of future available RP. The Bethlehem case was then commenced by industries who were not parties to the Airco case seeking equitable allocations of the 111 MW. In 1988 the Bethlehem litigation was settled resulting in certain additional RP allocations, but retaining the procedures and criteria adopted in Airco for the future allocation of RP.

Under the terms of a 1994 rate settlement among the Authority and the largest users of RP, the terms of certain RP allocations were extended through the end of the current Niagara Project license on August 31, 2007, with provision for extension until 2013, “[t]o the extent consistent with applicable laws and regulations including, but not limited to, conditions of a license issued to the Authority pursuant to . . .  the Federal Power Act. . .”.  In October 2002, NYPA and Niagara Mohawk extended Contract NS-1 through August 31, 2007, the end date of the Niagara Project license.

The New York Power Authority has not taken a position on the current Replacement Power legislation. NYPA does have contractual obligations to Replacement Power customers and is certainly concerned about continuing to protect the jobs those customers provide. There is a very real concern that failure to address the future of Replacement Power in a timely fashion will send a negative signal to both existing businesses and those enterprises that might be attracted to bring new jobs to Western New York.

As administrators of the program, we are also interested in maintaining an essential degree of flexibility in program administration to assure the effective use of the power in economic development.  The recent changes we’ve made to the allocation process are helping to make hydropower available on a timelier basis; integrate the involvement of regional business organizations, state and local economic development agencies, and electric utilities; provide better-coordinated and more effective marketing to prospects; research and develop more sophisticated measures to evaluate the economic benefit of companies seeking the power. We would hope that any new state law governing Replacement Power would accommodate our continued efforts to enhance the process.

For the two Niagara hydropower programs, Replacement Power and Expansion Power, there are currently some 110 MW of power available for allocations, which has been relinquished by business or recaptured as a result of enforcement of contractual job commitments. The level of unallocated Niagara hydropower generally fluctuates with the economy. During the economic growth of the mid to late 1990’s, the level of unallocated hydropower averaged little more than 10 MW annually. As I noted previously, in 1978 there was over 111 MW of Replacement Power that had been released from contract by industrial customers. The current level reflects the effects of the economic downturn of the past several years and the overall economic restructuring that closed older companies and relocated some manufacturing industries to other parts of the world. Much of the 110 MW currently available is a result of nearly 90 MW that had previously been supplied to two companies, Carbide/Graphite (44.7 MW) and Globe Metallurgical (43 MW).

These businesses closed or left Western New York despite having had the advantage of some of the lowest-priced power in the world. Clearly, in such cases, factors other than power costs have closed these industries or moved those jobs elsewhere around the globe.  For example, when Saint-Gobain Abrasives announced in 2002 that it was shutting its Wheatfield, NY plant, Niagara County IDA officials were quoted in the Buffalo News as saying the company’s decision was “driven by proximity to its customers and overcapacity, rather than by the cost of labor or power…” That plant had been supplied by 1.9 MW of low-cost Niagara hydropower.

In addition to the hydropower programs using Niagara Power Project hydropower, the St. Lawrence-FDR Power Project provides low-cost hydropower to Alcoa and GM PowerTrain in Massena.  Alcoa is supplied 478 MW (374MW firm and 104MW interruptible) hydropower and GM PowerTrain is supplied 12 MW of hydropower.

Alcoa currently provides some 1,300 jobs at its facilities in Massena, but its power contract includes no job commitments. The GM Powertrain power contract includes a commitment for 200 jobs.

The history of the NYPA supplying power to aluminum companies in the North Country precedes first deliveries of Replacement Power in 1961. When the St. Lawrence-FDR power project first began to generate electricity 1958, the aluminum companies were the first to buy power from the project, providing an essential steady stream of revenues for the new power plant.  The power sold today to Alcoa is a legacy of those years and not part of a power program with statutory requirements for job commitments or investments. The current power contract with Alcoa, which resulted from a renewal of a contract first signed in 1958, was approved in 1981 and runs until 2013.

Soon after the merger of Alcoa and Reynolds in 2000, NYPA began formal discussions with Alcoa regarding long-term plans for its plant operations in Massena. From NYPA’s perspective, the central issue to those discussions has always been long-term job commitments and new capital investment from Alcoa. Once the agreement to keep the East Plant open was reached in 2002 with the assistance of a $7 million loan from NYPA, the discussions for the long term continued in 2003.  There have been numerous meetings, beginning with a March 2003 session that included state economic development officials, union representatives and state legislators who represent the region. Active discussions with Alcoa have continued and remain ongoing. Throughout the discussions, NYPA and state economic development officials have insisted that Alcoa make commitments to keep and create jobs and make capital investments as part of a new power contract.

Hydropower is also part of the Industrial Economic Development program that serves the State’s 47 municipal electric systems and 4 rural electric cooperatives. Up to 54 MW of hydropower from the federally mandated block of Preference Power that serves those public power systems is made available for economic development purposes within those communities. Current criteria require 25 jobs per MW and creation of at least 200 kilowatts of new load.

In addition to programs that allocate hydropower for economic development, the Power Authority administers non-hydro power programs designed to keep and create jobs in the Empire State.  NYPA purchases power for several programs, established by state law, which had been served by the FitzPatrick nuclear power plant, now owned and operated by Entergy.  These programs include Power for Jobs, Economic Development Power, High Load Factor Power and Municipal Development Agency Power.

The Power for Jobs program was created in 1997 as a transition to the emergence of full-scale competitive marketplace for electricity. It was intended to assist New York State enterprises that are at risk of reducing or closing their operations or moving out of State or are willing to expand job opportunities.

As established in its original enactment (Chapter 316 of the Laws of 1997), the Power for Jobs program provided low-cost power to businesses and not-for-profit corporations that agreed to retain or create jobs in New York State. In return for commitments to create or retain jobs, successful applicants receive three-year contracts for economical electricity. The Power for Jobs program originally made available 400 MW of power; up to 200 MW provided from the Authority’s James A. FitzPatrick Nuclear Power Project with the remainder purchased by the Authority through a competitive bid process. The program was to be phased in over three years, with approximately 133 MW being made available each year.

In July 1998, as a result of the initial success of the program, Governor Pataki and the Legislature amended (Chapter 386 of the Laws of 1998) the Power for Jobs statute to accelerate the distribution of the power, making of total of 267 MW available in Year One. The 1998 amendments also increased the size of the program to 450 MW, with 50 MW to become available in Year Three.

In May 2000, budget legislation (Chapter 63 of the Laws of 2000) was enacted which included provisions that authorized another 300 megawatts of power to be allocated under the Power for Jobs program. The additional megawatts were described in the statute as ‘Phase Four’ of the program. Customers who received allocations in Year One were authorized to apply for reallocations. Over 95% reapplied. The balance of the power was awarded to new applicants. In 2000, NYPA was also authorized to make a voluntary contribution to finance up to half of the costs of the Gross Receipts Tax (GRT) Credit associated with the Power for Jobs program, up to a total of $125 million.

In July 2002, legislation was signed into law (Chapter 226 of the Laws of 2002) which authorized another 183 MW of power to be allocated under the program. The additional megawatts are described in the statute as ‘Phase Five’ of the program. Customers who received allocations in Year Two or Year Three were given priority to reapply for the program. Remaining power was allocated to new applicants. In 2002, NYPA was authorized to accelerate its contribution and finance 100% of costs of the Power for Jobs GRT credit for the upcoming fiscal year, up to a total of $125 million.

In August 2004, budget legislation (Chapter 59 of the Laws of 2004) was approved which included provisions to extend benefits for Power for Jobs customers whose contracts expire before the end of the program in 2005. Those customers were provided the choice of an “electricity savings reimbursement” rebate and/or a power contract extension.  Power for Jobs customers whose contracts expired by November 30, 2004 were made eligible for a rebate from the date their contract expired through December 31, 2005. As an alternative, such customers could choose to receive a rebate from the date their contract expired as a bridge to a new contract extension.  The new contracts were to be in effect from a period no earlier than December 1, 2004 through the end of the Power for Jobs program on December 31, 2005. Power for Jobs customers whose contracts expired after December 1, 2004 were made eligible for rebate or contract extension from the date their contract expires through the sunset of the program at the end of 2005.  NYPA was also authorized to make voluntary contributions to finance the GRT credit associated with the remaining years of the current program and finance the new extended benefits program, up to a total of $275 million.

Provisions of the law providing the statutory authorization for extended benefits authorize EDPAB to “solicit and review applications for the power for jobs electricity savings reimbursements and contract extensions…” Through the end of February 2005, EDPAB has reviewed and recommended approval of 100 applications for extended benefits. That set includes 13 rebates, 62 contract extensions and 25 combinations of extended benefits.

The law further states: “An applicant shall be eligible for such reimbursements and/or extensions only if it is in compliance with and agrees to continue to meet the job retention and creation commitments set forth in its prior power for jobs contract.” Review of the applications for extended Power for Jobs benefits has determined that more than one-third of the applicants (121 of 322) have reported employment levels below their contractual job commitments. At the February 22 EDPAB meeting, the board asked staff to advise all non-compliant applicants that the board is unable to recommend approval of their applications for extended Power for Jobs benefits.

While the 2004 legislation extended benefits, it maintained the scheduled sunset of the program at the end of 2005. The Executive Budget for SFY2005-2006 includes provisions that would extend benefits for existing Power for Jobs customers until December 31, 2006.

As the legislature deliberates the future of Power for Jobs, there are a variety of issues that deserve attention. As you know, the Power for Jobs program was created before New York State restructured its electric utility market (including establishment of the New York Independent System Operator and settlement of many of “Competitive Opportunities” proceedings that revised and reduced industrial electricity rates). Given these sweeping changes in the electric utility industry, it is certainly appropriate that the Legislature re-examine the program.

At the onset of the program, it was estimated that Power for Jobs would provide the average customer with a 25% savings compared to standard utility rates. Savings vary widely depending upon utility service area and actual customer savings also depend heavily on load factor. Currently, Power for Jobs offers comparatively lower savings due to the rising cost of purchased power and it is expected that skyrocketing prices for oil and natural gas, the primary fuels for electric generation in the state, will continue to push the costs of purchased power higher. With electricity supplied by Power for Jobs purchased from the market, the cost of the commodity portion of the electricity will be comparable to the price available for comparable service by a utility or an ESCO. The savings under the program will result largely from the lower delivery costs due to the exemption from stranded cost charges that exist in the Power for Jobs delivery tariff.

In addition to the issue of growing costs for the customer is the matter of the cost of the GRT tax credit provided to host utilities as part of the Power for Jobs program. The burden of financing the GRT tax credit has been transferred by law to the Power Authority. Since 2002, NYPA Trustees have authorized and the Authority has transferred $169 million in Power for Jobs voluntary contributions to the state treasury. While NYPA has been proud to contribute to the ongoing success of the program in this fashion, the Authority is concerned that its future financial resources may not allow continued support for a long-term extension of the program.

In addition to Power for Jobs, the Economic Development Power program provides power to business across the state. The program currently allocates some 268 MW linked to 53,000 jobs.  Program criteria include business expansion, business revitalization in Upstate service areas and job retention in Downstate service areas. For business revitalization and retention allocations applicants must demonstrate risk of closure or relocation out of state. The Economic Development Power Allocation Board (EDPAB) reviews applications and recommends allocations to NYPA.

High Load Factor Power provides power to energy-intensive industries throughout the state. The program currently allocates 164 MW linked to nearly 3,800 jobs. Eligibility for the program is limited to expanding industries demonstrating that electricity costs are equal to at least 7.5% of product costs; an electric load of 5 MW or greater and demand of 540 hours use of demand per month which is the equivalent of a 75% load factor.

Municipal Development Agency Power provides power for downstate MDA’s (New York City Public Utility Service Agency; the County of Westchester County Public Utility Service; the Nassau County Public Utility Service and the Suffolk County Public Utility Service).  It currently supplies 75 MW linked to 22,500 jobs. Program criteria require jobs retention and demonstration that risk of closure or relocation out of state. The individual MDA’s review applications and recommend allocations to NYPA.

Provisions of the New York State Public Authorities Law and the Economic Development Law authorize for the sale of FitzPatrick nuclear power to businesses under this set of power programs. However, the law does not authorize the sale of power from any other source for these programs. NYPA sold the Fitzpatrick project to Entergy in 2000 and continues to honor all contracts under the power programs existing at the time of the plant sale with power purchased in the market. But, as these contracts begin to expire in 2005, NYPA will have no statutory authority to enter into new long-term contracts under the programs unless the references in the existing laws to the FitzPatrick project as a source of power are changed. 

The most recent addition to the array of NYPA power programs for economic development is the World Trade Center Economic Recovery Power program. In the wake of the 9/11 tragedy, omnibus economic stimulus legislation was enacted (Chapter 383 of the Laws of 2001) that included provisions allowing electricity that once powered the World Trade Center to help rebuild the economy of New York. The 80 MW of power, which had been allocated by NYPA to the Port Authority of New York and New Jersey for the World Trade Center, is now supplied under the World Trade Center Economic Recovery Power program to assist downtown businesses displaced or otherwise impacted by the September 11 attacks.

The law creating the program set priorities for allocations and required that eligible recipients must be located in the Liberty Zone (the area of Lower Manhattan south of Canal Street) or the Resurgence Zone (the area between Canal and Houston Streets).Allocations were approved in 2002 to over 100 enterprises employing some 43,000 workers in Lower Manhattan.

Since the allocations were awarded with three-year contracts, the first contracts will begin to expire in late 2005. While the electricity supplied under the program will eventually be used to power the new buildings constructed at the site of the former World Trade Center, the Authority presently expects to proceed with plans to review applications for renewal of the initial contracts with businesses now receiving the power.

That concludes my summary of the economic development power programs administered by the New York Power Authority. I will be pleased to address any questions you may have regarding the programs.