2009 Economic Development Programs Report

NEW YORK POWER AUTHORITY

REPORT TO THE GOVERNOR AND LEGISLATIVE LEADERS
ON NYPA POWER PROGRAMS FOR ECONOMIC DEVELOPMENT
(prepared pursuant to Section 9 of Chapter 217 of the Laws of 2009)

New York Power Authority
Richard M. Kessel, President and Chief Executive Officer
Michael J. Townsend, Chairman
Jonathan Foster, Vice Chairman
D. Patrick Curley
Elise M. Cusack
Eugene L. Nicandri

December 2009

           This report is submitted pursuant to Section 9 of Chapter 217 of the Laws of 2009, which provides:

§ 9. (a) The power authority of the state of New York, in consultation with the department of economic development, shall complete and submit a report on the power authority's low cost power programs. The report shall examine the replacement, expansion, preservation power programs, the industrial economic development power program, the power for jobs programs, and the economic cost saving benefits power programs. Information to be presented in the report shall reflect the state of the programs as of June 30, 2009 and the year prior and shall include but not be limited to:

i. a short history of the programs; [see discussion below]

ii. a complete list of all recipients of these programs grouped by program; [see attached exhibits]

iii. the city or town and county of each recipient; [see attached exhibits]

iv. the allocation allotted to each recipient; [see attached exhibits]

v. annualized retail value of each program; [see discussion below]

vi. the original employment commitment from each recipient; [see attached exhibits]

vii. the current employment level for each recipient; [see attached exhibits]

viii. an assessment of the economic benefits to New York, which shall include, but not be limited to: jobs created and retained, level of capital investment, wage and benefit levels, and the effect of regional economies; and shall include an assessment on the effect of these programs considering the ongoing economic conditions in the state and any methodology used in analyses in this report; and [see discussion below]

ix. the energy procurement practices, including all supply side and demand side activities, the authority uses to meet the capacity and needs of its customers. [see discussion below]

The report shall also include a brief description of the preference power program including the total power available to the program as measured in megawatts, the total power used by the program as measured in megawatt hours for the program as a whole and by utility service area, an estimated annualized retail value for the program and the metric for calculating that value. The report shall be submitted by December 30, 2009 to the governor, the speaker of the assembly, the temporary president of the senate, the minority leader of the senate, the minority leader of the assembly, the chair of the senate finance committee, the chair of the assembly ways and means committee, the chair of the assembly energy committee, the chair of the senate energy and telecommunications committee, and the state comptroller and shall be made available on the authority's website.

I. Introduction – NYPA

Created in 1931, the Power Authority of the State of New York (“NYPA”) is the nation’s largest state-owned electric utility. NYPA operates without the use of tax dollars or state credit, financing its operations with revenues earned from sales of electricity and through the sale of bonds and notes for capital projects. NYPA’s mission includes providing clean, economical and reliable energy, while promoting energy efficiency and innovation for the benefit of its customers and the State. Unique among the State’s public authorities, NYPA:

Operates and maintains 18 generating facilities and 1,400 circuit miles of transmission lines in New York State, and provides about one-fourth of all the electric energy consumed by the State.

Supplies electricity and related energy services to a broad array of energy consumers, including State and local government entities, community-owned electric systems and rural electric cooperatives, New York businesses and other energy consumers

Administers nationally-recognized energy efficiency and energy innovation programs to promote energy efficiency and support the State’s energy efficiency and clean energy goals

Is a member of the New York Independent System Operator (“NYISO”) and a key participant in the State’s energy markets, offering generation into NYISO administered markets, purchasing electricity in the NYISO’s daily markets to serve customer energy needs, and providing a host of ancillary services to the NYISO and NYPA customers to ensure electric grid reliability and mitigate cost impacts for NYPA customers.

In addition to these responsibilities, NYPA administers energy-based economic development programs through which it supplies NYPA-generated hydropower and market-purchased power and other benefits to New York businesses pursuant to statute for the purpose of mitigating energy costs and supporting the State’s economic development goals. Currently, these programs provide low cost or discounted energy to businesses throughout the State that employ approximately 350,000 people.

II. NYPA’s Energy-Based Economic Development Programs – Background

NYPA administers four economic development programs that provide low cost hydropower generated by NYPA’s two major hydroelectric facilities, the Niagara Power Project and the St. Lawrence-FDR Power Project: (1) Replacement Power; (2) Expansion Power; (3) Industrial Economic Development Power; and (4) Preservation Power. Program participants benefit from these sales because the cost of NYPA-generated hydropower is much less than the cost of power available in the energy market.

NYPA also administers statutory-based programs through which it sells program participants power purchased from the energy market: (1) Power for Jobs (“PFJ”), (2) Economic Development Power, (3) High Load Factor Power, and (4) Municipal Distribution Agency Power. The cost of NYPA-purchased power is generally less than what program participants would pay for market power because generally the NYPA customers do not pay the delivery utilities' stranded costs (a vestige of restructuring), and also due to the commodity discounts derived from the financial support provided by NYPA under the various statutory programs.

In addition, to these programs, NYPA administers the Electricity Cost Savings Benefit (“ECSB”) program through which it provides at a discount power purchased in the market to business customers formerly served from the FitzPatrick Nuclear Power Plant under three preexisting NYPA power programs explained in further detail below:

High Load Factor Power

Economic Development Power

Municipal Distribution Agency Power

Created in 2005, the ECSB discount is financed in part by the sale of unused portions of hydropower, to moderate the cost of power purchased by NYPA to serve 94 businesses (with over 93,000 jobs) in these programs facing price increases before the end of 2006. Up to 70 megawatts (“MW”) of unallocated power from the Niagara Power Project and up to 20 MW of currently unallocated power from the St. Lawrence-FDR Project may be sold into the market to help NYPA finance the ECSB.

NYPA administers the PFJ program, the Economic Development Power program and the ECSB program with the assistance of the New York State Economic Development Power Allocation Board (“EDPAB”). Created in 1987, the EDPAB makes recommendations to the NYPA Trustees for allocations of benefits under these programs.

In addition, NYPA routinely works and coordinates with state agencies and other state public authorities concerning economic development matters. NYPA has strong working relationships with the Empire State Development Corporation (“ESDC”) at both the regional and corporate levels. NYPA works closely with the ESDC on all potential economic development projects and incentive proposals. ESDC is a member of the NYPA-formed Western and Northern NY Advisory Groups relating to allocations of Expansion, Replacement and Preservation Power. In addition, ESDC and Department of Public Service staffs provide input into all PFJ allocations.

Hydropower-Based Programs

1.        Expansion Power (see Exhibit I)

Dating back to the 1960s, and codified in state law in 1987, the Expansion Power program provides up to 250 MW of hydropower to businesses located 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 (“kW”) of demand.

2.         Replacement Power (see Exhibit I)

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. Congress in 1957 approved the Niagara Redevelopment Act (“NRA”), 18 U.S.C. §§ 836, 836a, mandating that the Federal Power Commission issue a license to NYPA 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 was January 1, 2006.

Chapter 313 of the New York Laws of 2005 provided a state law basis for the allocation and sale of Replacement Power following expiration of the federal authority under the NRA on December 31, 2005. This legislation also established the eligibility criteria for allocating Expansion Power, which are identical to the criteria governing Replacement Power.

Replacement Power provides up to 445 MW of hydropower to industries within a 30-mile radius of the Niagara Power Project. Allocations are awarded on a competitive basis to businesses that commit to create new jobs and new electric load.

3.         Preservation Power (see Exhibit II)

Established in State law in 2005, Preservation Power is a block of 490 MW of firm and interruptible power from the St. Lawrence-Franklin D. Roosevelt Power Project. Preservation Power may be allocated to businesses in Jefferson, St. Lawrence, and Franklin counties and uses the same allocation criteria (regarding commitments for jobs, investment, etc.) as Replacement and Expansion Power. 478 MW of this power (374 Firm and 104 MW Interruptible power) has recently been extended in a 30-year contract with Alcoa.

4.         Industrial Economic Development Power (see Exhibit III)

The Industrial Economic Development Power program, established by NYPA and the municipal systems in 1991, provides the State’s 47 municipal electric systems and 4 rural electric cooperatives with 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. Allocation criteria require 50 jobs per MW and creation of at least 100 kW of new load.

Purchased Power-Based Programs

1. PFJ (see Exhibit IV)

Chapter 316 of the Laws of 1997 established the PFJ program to provide discounted NYPA-purchased power to businesses and not-for-profit corporations that agree to create or retain jobs in New York State. In return for such commitments, successful applicants received three-year contracts for PFJ electricity.

The PFJ program originally made 400 MW of power available and was to be phased in over three years. As a result of the initial popularity of the program, the PFJ statute was amended by Chapter 386 of the Laws of 1998 to accelerate the distribution of the power and increase the size of the program to 450 MW. Chapter 63 of the Laws of 2000 and Chapter 226 of the Laws of 2002 amended the statute to authorize additional power to be allocated under the program and to authorize certain participants to apply for reallocations of power under the program.

Chapter 59 of the Laws of 2004 extended program benefits for PFJ customers whose contracts expired before the end of the PFJ program in 2005. Such customers were required to choose to receive an “electricity savings reimbursement” rebate or a power contract extension. NYPA was authorized to voluntarily fund the rebates if deemed feasible and advisable by NYPA’s Trustees.

PFJ customers whose contracts expired on or prior to November 30, 2004 were eligible for a rebate to the extent funded by NYPA from the date their contract expired through December 31, 2005. As an alternative, these customers could have chosen to receive a rebate to the extent funded by NYPA from the date their contract expired as a bridge to a new contract extension, with the contract extension commencing December 1, 2004. The new contract would be in effect from a period no earlier than December 1, 2004 through the end of the PFJ program on December 31, 2005. PFJ customers whose contracts expired after November 30, 2004 were eligible for rebate or contract extension from the date their contracts expired through December 31, 2005.
Approved contract extensions entitled customers to receive the power from NYPA pursuant to a sale-for-resale agreement with the customer’s local utility. Separate allocation contracts between customers and NYPA contained job commitments enforceable by NYPA.

In 2005, provisions of the enacted state budget extended the period during which PFJ customers could receive benefits until December 31, 2006. Chapter 645 of the Laws of 2006 included provisions extending program benefits until June 30, 2007. Chapter 89 of the Laws of 2007 included provisions extending program benefits until June 30, 2008. Chapter 59 of the Laws of 2008 included provisions extending the program benefits until June 30, 2009. Chapter 217 of the Laws of 2009 included provisions extending program benefits until May 15, 2010.

2. Economic Development Power (see Exhibit V)

Created in 1987, the Economic Development Power program provides for the allocation of NYPA-purchased power to eligible businesses across the State. Program criteria include business expansion, business revitalization in the Upstate service areas of New York State Electric & Gas, Rochester Gas & Electric and National Grid and job retention in Downstate service areas served by Orange & Rockland Utilities, Con Edison and the Long Island Power Authority. For business revitalization and retention allocations applicants must demonstrate risk of closure or relocation out of New York State.

3. High Load Factor Power (see Exhibit VI)

Created in 1968, the High Load Factor Power Program provides for power to energy-intensive industries throughout the State. Eligibility for the program is limited to expanding industries which demonstrate that: (1) electricity costs are equal to at least 7.5% of product costs; (2) an electric load of 5 MW or greater; and (3) 540 hours use of demand per month which is the equivalent of a 75% load factor.

4. Municipal Distribution Agency Power (see Exhibit VII)

Created in the mid-1980s, Municipal Distribution Agency Power program provides power for downstate Municipal Distribution Agencies (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). Program criteria require jobs retention and demonstration that risk of closure or relocation out of state. The individual distribution agencies review applications and recommend allocations to NYPA.

5. ECSB Program

Chapter 313 of the Laws of 2005 created an ECSB Program. Pursuant to the ECSB Program, NYPA makes discounted market power available to 94 businesses in the Economic Development Power, High Load Factor Power and Municipal Distribution Agency Power programs that were facing price increases before the end of 2006. (ECSB allocations did not begin for some customers (“option 5”) until 2007). Up to 70 MW of unallocated power from the Niagara Power Project and up to 20 MW of currently unallocated power from the St. Lawrence-FDR Project may be sold into the market to fund the ECSB Program.

6. NYPA Energy-Based Economic Development Programs – Participant Data

For ease of reference, a list of program recipients grouped by program, as well as the address of each recipient, the current employment level of each recipient and the allocation currently received by each recipient is set forth in the exhibits appended to this report.

NYPA does not maintain current information on wage and benefit levels or levels of capital investment of program participants. This information is required to be supplied only at the time a business files its initial application to a program. In addition, in NYPA’s experience, it is unlikely that a recipient’s wage and benefit levels or its level of capital investment could be linked to program benefits given that many considerations in addition to energy prices factor into business decisions about these matters.

NYPA also does not maintain information on the “original employment commitment from each recipient.” For programs of short duration, such as the PFJ program which has been extended annually, an applicant’s employment commitments are set forth in its annual application. For programs of longer duration, NYPA reviews employment commitments annually. Where a beneficiary materially fails to meet an employment commitment, or it proposes a material reduction in a previous commitment, the NYPA Trustees may reduce an allocation of benefits to the recipient upon consideration of program criteria and other appropriate factors.

The authorizing statutes also do not call for the collection of information sufficient to make an assessment of the “annualized retail value” of each program or “the effect of regional economies.” Generally speaking, it is NYPA’s view that the value of the hydropower programs represents the difference between the commodity tariff rate charged by NYPA and the comparable alternative wholesale market price of electricity. For the purpose of this comparison, the market price for capacity and energy in the appropriate NYISO zone is used. Given the recent, volatile history of market prices and the stability of NYPA’s prices, the value of the power has seen some wide variations.

Based on this metric, NYPA estimates that the value of Expansion Power and Replacement Power is about $230,000 per MW per year based on an average of the market prices over the last five years. As these programs total 695 MW, it is estimated that the annual value of these programs totals as much as $160 million. Also, given that 2009 prices dropped dramatically as compared to the prior years, it is noteworthy that the 2009 value is only estimated to be about $100,000 per MW or a total of about $70 million for the two programs for the year.

The Preservation Power program, due to differing load characteristics and the different NYISO zone, has seen an estimated average value of about $340,000 per MW per year or a total of about $170 million per year. Based on the lower 2009 prices, however, the value has been estimated to be about $175,000 per MW per year or about $75 million in total assuming full allocation of the power.

With respect to the PFJ program, those customers purchasing their energy requirement from NYPA see a benefit in the form of a delivery rate discount from the delivering utility. The estimated delivery discount has been about 1.7 cents per kWh over the past few years, and on that basis, the value is estimated to be about $10 million for the year. For those customers receiving rebates, the total estimate for the rebate payments associated with 2009 service is between $50 million and $55 million for the year.

The value of the ECSB program has been estimated to be the difference between NYPA’s tariff rate for commodity services and the comparable alternative wholesale market price of electricity. Over the past few years, the value has been estimated to range between $20 million and $40 million annually, however, with the dramatic drop in market prices during 2009, the program delivered commodity prices that were about comparable to the wholesale market price of energy.

IV. “Preference” Power

A. Niagara Redevelopment Act

Section 836 of the Niagara Redevelopment Act (“NRA”), 16 U.S.C. § 836, includes a provision identifying a preference in the use of certain Niagara Power Project power often referred to as the “preference” clause. NYPA allocates a portion of Niagara Project Power in compliance with the NRA.

Specifically, Section 836 (b)(1) of the NRA states: “In order to assure that at least 50 percent of the project power shall be available for sale and distribution primarily for the benefit of the people as consumers, particularly domestic and rural consumers, to whom such power shall be available at the lowest rates reasonably possible and in such a manner as to encourage the widest possible use, the licensee in disposing of 50 percent of the project power shall give preference and priority to public bodies and nonprofit cooperatives within economic transmission distance.”

In addition, the NRA further directs NYPA, as licensee, to make power available under the preference clause to neighboring states. Section 836 (b)(2)(2) provides: “The licensee shall make a reasonable portion of the project power subject to the preference provisions of paragraph (1) of this subsection available for use within reasonable economic transmission distance in neighboring States, but this paragraph shall not be construed to require more than 20 percent of the project power subject to such preference provisions to be made available for use in such States.”

Currently, NYPA provides a total of 764.8 MW to 51 municipal and rural electric cooperatives in New York State and 191.2 MW to eligible entities in neighboring states to implement Section 836 of the NRA. (See Exhibits III and VIII.)

B. PAL § 1005(5)

PAL § 1005(5) contains language addressed generally to the end that the primary “purpose” and “use” of the power generated by the Niagara and St. Lawrence projects is for the benefit of residential customers often described as the State preference customers, and providing also that municipalities and other political subdivisions of the State authorized to engage in the distribution of electric power may secure a “reasonable share” of the power generated by these Projects:

5. To develop, maintain, manage and operate those parts of the Niagara and Saint Lawrence hydroelectric projects owned or controlled by it in such manner as to give effect to the policy hereby declared (and all plans and acts, and all contracts for the use, sale, transmission and distribution of the power generated by such projects, shall be made in the light of, consistent with and subject to this policy), namely, that such projects shall be in all respects for the aid, improvement, and benefit of commerce and navigation in, through, along and past the Niagara river, the Saint Lawrence river and the international rapids section thereof, and that in the development of hydro-electric power therefrom such projects shall be considered primarily as for the benefit of the people of the state as a whole and particularly the domestic and rural consumers to whom the power can economically be made available, and accordingly that sale to and use by industry shall be a secondary purpose, to be utilized principally to secure a sufficiently high load factor and revenue returns to permit domestic and rural use at the lowest possible rates and in such manner as to encourage increased domestic and rural use of electricity. In furtherance of this policy and to secure a wider distribution of such power and use of the greatest value to the general public of the state, the authority shall in addition to other methods which it may find advantageous make provision so that municipalities and other political sub-divisions of the state now or hereafter authorized by law to engage in the distribution of electric power may secure a reasonable share of the power generated by such projects, and shall sell the same or cause the same to be sold to such municipalities and political subdivisions at prices representing cost of generation, plus capital and operating charges, plus a fair cost of transmission, all as determined by the trustees, and subject to conditions which shall assure the resale of such power to domestic and rural consumers at the lowest possible price, provided, however, that in disposing of hydroelectric power pursuant to and in furtherance of the aforementioned policy and purposes, appropriate provision may also be made to allocate a reasonable share of project power to agencies created or designated by other states and authorized to resell the power to users under the same terms and conditions as power is disposed of in New York state. To that end, the authority may provide in any contract or contracts which it may make for the sale, transmission and distribution of the power that the purchaser, transmitter or distributor shall construct, maintain and operate, on such terms as the authority may deem proper, such connecting lines as may be necessary for transmission of the power from main transmission lines to such municipalities or political subdivisions.

Currently, NYPA provides a total of 455 MW to three upstate investor owned utilities in New York State (Rochester Gas & Electric, 99 MW; New York State Electric & Gas, 167 MW; and National Grid, 189 MW) under the authority of this provision.

Using the metric described above, NYPA estimates that the value of the preference power allotments represents the difference between the commodity tariff rate charged by NYPA and the comparable alternative wholesale market price of electricity. With regard to the allocation to New York State municipal and rural electric cooperatives, for 2009, the value has been estimated to be about $110 million. With regard to the 445 MW sold for resale to residential and rural consumers of the three upstate utilities, the value has been estimated to be about $70 million for 2009.

V. Energy Procurement Practices

As discussed above the capacity and energy requirements of customers participating in NYPA’s low cost power programs are provided either through NYPA generating resources (hydropower) or from market power. The Niagara and St. Lawrence Projects supply the Replacement Power, Expansion Power, Preservation Power and Industrial Economic Development Power programs and the power and energy is sold to program participants through bilateral contracts. Energy for the market power-based programs is procured from NYISO day-ahead and real-time markets.

In addition, NYPA negotiates over-the-counter financial hedging instruments to provide stable energy prices for its customers, including the Metropolitan Transit Authority, New York City and the Port Authority of New York and New Jersey, and to facilitate price stability in its own energy programs (e.g., PFJ, ECSB) by fixing “forward” prices. NYPA engages in approximately 400 of these transactions annually, often at the specific direction of affected customers as required by contract.

NYPA also offers critical energy efficiency services (e.g., lighting, HVAC, insulation, fuel cells and renewable energy) to State and local governmental entities and other NYPA customers throughout New York. Under these programs, NYPA contracts to perform energy efficiency services and then contracts with contractors and suppliers to perform the work. These programs have been extremely effective in reducing energy consumption, conserving natural resources and mitigating air pollution, including greenhouse gas emissions. In recognition of the success of these programs and their potential for supporting the State’s energy efficiency and environmental priorities, the Legislature recently passed legislation (A.9040) that expanded the energy efficiency services that NYPA can perform and make NYPA’s energy efficiency services available to a broad range of public entities (including any State agency, public authority, public benefit corporation, public corporation, municipal corporation, school district, board of cooperative educational services, SUNY or CUNY four year college and community college).