Tuesday, September 01, 2009

NYPA Holding Hearings on Reduced Hydropower Allocation for Residential Customers

In a terse revised notice, the New York Power Authority announced hearings being held September 1 in Lewiston at the Niagara Power Project, and September 2 in Syracuse regarding proposed extension of contracts for the sale of inexpensive hydropower produced at its Niagara Project for the benefit of residential customers.

The Notice says the proposed contract extensions are for
a total of 455 MW of firm and 360 MW of firm peaking hydropower currently being sold to the Utilities for the benefit of domestic and rural consumers
When one follows links in the notice to the existing and proposed contracts with Niagara Mohawk d/b/a National Grid, NYSEG, and RG&E, we learn that the Authority reduced the allocation of hydropower to residential customers.
  • The Niagara Mohawk contract for firm (24/7) power "will be reduced from 230 MW to 189 MW," a reduction of 41 MW;
  • The NYSEG contract for firm power "will be reduced from 203 MW to 167 MW," a reduction of 36 MW;
  • The R&E contract for firm power "will be reduced from 120 MW to 99 MW," a reduction of 21 MW.
Thus, the real deal is that under the old contracts, firm power from the Niagara project sold to these utilities for the benefit of domestic and rural consumers was 533 MW, and has been reduced to 455 MW, a net reduction of 78 MW, or 14.6%. This reduction first occurred when the contracts were previously extended, and the new one-year extension would continue the reduction.

Section 1005 of the New York Public Authorities Law provides that the primary beneficiaries of the Niagara and St. Lawrence hydropower should be rural and domestic customers.
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....
More specifically, the federal Niagara Redevelopment Act requires at least half the output of the Niagara Redevelopment Project to be allocated to residential customers. As described by FERC in its 2007 Order granting NYPA's application for relicensing of the Niagara Project:
Niagara Redevelopment Act section 836... authorizes and directs the Commission to issue a license to the Power Authority for the construction and operation of a project with the electric generation capacity to use all of the United States’ share of the Niagara River water available for power generation. It requires the Commission to include among the license conditions, in addition to those deemed necessary and required under the terms of the FPA, provisions to:
  • Assure that at least 50 percent of the project power is available primarily for the benefit of consumers, particularly domestic and rural consumers, and to make such power available at the lowest rates reasonably possible to encourage the widest possible use, and to give preference to public bodies and nonprofit cooperatives within economic transmission distance.
The 2006 annual sales report filed by NYPA with FERC indicates that in 2006, 3,752,235 MWH of total Niagara Project 2216 firm sales of 7,488,640MWH, or 50.1%, were for the benefit of rural and domestic customers.

The 2007 NYPA report to FERC, dated August 25, 2007, indicates that 3,491,757MWH of total firm energy sales of 7,283,970, or 47.9%, were for the benefit of rural and domestic customers.

The FERC docket for the Niagara Project P2216 does not indicate that any 2008 NYPA report to FERC on 2007 sales has been filed.

It is not clear from the NYPA notice how continuing the reduction of hydropower away from residential customers will affect compliance with the requirements of the statute. If the 78MW shifted away from residential customers is multiplied by 24 hours times 365 days, it represents a reduction of 683,280 MWH on an annual basis. If that were added back in 2007, residential customers would have received more than 50% of the power, rather than less.

Where did the 78 MW of cheap power, costing less than one cent/kwh, go? The NYPA Notice does not explain.

In all likelihood the power is being reallocated to reduce electricity costs for large business customers who have lobbied vigorously to salve their largely self-inflicted wounds in the aftermath of the failure of New York's adventure with wholesale electricity deregulation, which large business customers clamored for a decade ago. Instead of fighting hard for reforms of the flawed and often manipulated market-based rate regime at FERC, the NYISO, and the PSC to fix the regulatory problems, as large commercial and industrial customers are doing with greater vigor in other areas, New York's largest business customers may have successfully diverted the stream of hydropower intended for residential customers.

The allocation of blocks of cheap power to large businesses is usually justified on a theory that it helps save or grow jobs and benefits the economy. Indeed, the Pataki administration appointed a commission - with no residential consumer representative - which advocated taking even more cheap hydropower away from the residential customers. See Tim Knauss, State Panel Wants You to Pay Electric Bills For Businesses, Syracuse Post Standard, December 1, 2006; Tim Knauss, Clock Ticks on Cheap Power: Panel Recommended Passing Benefits to Industrial Customers, Post Standard, July 29, 2007. The promises of more jobs for cheap power, however, may be illusory, and the notion that greater economic good is achieved by taking away the power from residential customers (who may be much more likely to spend the savings in the local economies) and giving it to large companies is questionable. See NYSEG/RG&E's testimony to the hydro commission, pointing out that the putative benefits of giving cheap power to business is offset by the economic losses due to taking that benefit from residential customers and raising their costs.

Another issue is how the utilities that receive the cheap power transfer its benefit to residential consumers. We think the utilities resell the power into the NYISO spot markets, which set the price based on much higher prices usually set by fossil-fueled plants. The profit from the sale is then used to reduce total power purchasing costs. Today, the utilities include a bill message that indicates the value to the customer of NYPA hydropower, based on an opaque methodology.
The benefit is based on the number of kilowatt hours used, so the more a customer uses, the greater the benefit from the Niagara hydropower. A sounder and more egalitarian approach to distributing the benefit of the Niagara project would be to give the same benefit to all customers.

By distributing the benefit on a per kWh basis, a price signal is created to support increased consumption. If the benefit were distributed on a per customer basis, a stronger economic message encouraging energy conservation would be created.The decision to distribute the benefit in this way, benefitting the consumers who use the most, rather than on a per customer basis, is a policy choice made by the utilities and NYPA, and is not required by the statutory scheme or the related decisional law. The proposed contracts contain no provision to modify the existing method for distributing the hydro benefit.

Under New York Public Authorities Law ("PBL") § 1009, all proposed NYPA hydro contracts must be submitted to legislative leaders for their review and eventually must be approved and signed by the Governor.

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