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Better Planning Needed to Avoid Cost Overruns, Operating Losses and Stunting Development of Private Electricity Market
The New York Power Authority’s poor planning and use of unreliable cost estimates in constructing the new Poletti Power Plant in New York City increased the projected cost of the plant by $275 million or 73 percent, according to an audit issued today by State Comptroller Alan Hevesi.
The audit also found that:
- NYPA decided to build the plant using a cost estimate of $375 million and a projected $5/megawatt hour profit. If NYPA had used the more accurate $650 million cost estimate, its projections would have shown a $2/megawatt hour loss. If NYPA’s projections had been more accurate, it might have decided not to build the plant itself, but rather pursue other more cost effective options.
- The Power Authority ‘s “PowerNow!” project, 11 small generators installed quickly to avoid an energy shortage in the New York City metropolitan region, cost $640 million, $190 million or 42 percent more than projected.
- NYPA lost about $175 million during the first two years of operating the PowerNow! generators and has no long-term plan for them.
- NYPA is expected to continue to lose money in its New York City and Westchester market, despite the financial advantages NYPA enjoys as a public authority, according to its own documents. In those same documents, NYPA states it expects to cover losses in its downstate operations with the profits from its upstate hydroelectric plants. In its response to the audit, Authority officials disputed this finding.
"New York City needs reliable, affordable and clean power, but the need for power is no excuse for wasting valuable public resources,” Hevesi said. “The PowerNow project was built in response to an emergency and helped avoid shortages. However, if NYPA fails to manage its resources effectively, it will not be in a strong position to respond when needed in an emergency. NYPA lacks incentives to control waste and inefficiency. This audit is a red flag that NYPA is not managing these enormous public assets based on sound business practices."
“NYPA is a textbook case of an Authority adrift. Earlier this year I proposed public authority reform legislation. A central element was the creation of a Commission to review the mission and direction of the State’s more than 640 public authorities,” Hevesi said. “The State is deregulating its energy markets requiring Con Edison and other privately run utilities to sell their power plants at the same time that NYPA – a public authority --continues to design, build and run power plants with little concern about any harm it may be doing to the private market.”
The audit found that NYPA committed nearly $31 million to the Queens electric plant project without evaluating alternatives commonly considered by private utilities, including looking at opportunities for forming partnerships with other energy suppliers. Instead the Power Authority has insisted on building plants itself and failed to consider the impact of its actions on competition and the development of private sources of energy.
On May 10, well after the Comptroller’s Office shared a draft of the audit with the Power Authority, NYPA announced it was issuing an RFP for a private supplier for a long-term agreement to provide 500 megawatts of electricity. This is the kind of step NYPA should have taken when deciding whether to build Poletti to determine the most cost effective means of acquiring additional power sources.
“I welcome NYPA’s decision to seek a private supplier of power. That is exactly the approach we were encouraging the Authority to take,” Hevesi said.
The audit also found that the following contributed to NYPA incorrectly estimating the costs of the Poletti power plant:
- Most of NYPA’s downstate customers are government agencies who pay below market rates. Yet, NYPA used market prices to project potential revenues. In addition NYPA projected the plant would operate at 75 percent capacity, which is much higher than new plants typically operate in the initial years.
- Several of the costs attributed to the increase should have been, but were not, part of the original estimate, such as adjustments to allow the use of two types of fuel, modify the natural gas pressure supply, and expedite the normal delivery time of the pipes for the plant.
- NYPA presented only a three to four year projected operation analysis of the new plant to its Board of Trustees instead of the industry standard of 10 year.
For the 11 small generators of the PowerNow! project, the Authority does not have a formal long-term plan, even though its environmental permits expire this year. According to a rough estimate prepared by NYPA staff in early 2003, the market value for the 10 units in New York City was between $200 and $300 million. In March 2001, NYPA’s senior executive stated that with the three-year environmental permit for the units, it would be good public policy to evaluate whether the units should be sold before renewing the permits. Yet NYPA has taken no action to begin such an evaluation.
NYPA initiated planning to build the Poletti plant in New York City in 1997 to comply with anticipated rules requiring power suppliers to obtain at least 80 percent of New York City customers’ power from generating facilities located within the City, and to protect it against problems caused by possible transmission failures and other unforeseen disruptions in the supply of electricity. NYPA expects the new plant to be operational by Spring 2005.
NYPA claims no responsibility for the 73 percent increase in estimated costs, citing prevailing gas turbine market conditions, regulatory environment and construction issues as the culprits for the increase. However, NYPA is responsible and should be held accountable for its planning and estimating practices. NYPA estimated that the general work contract to construct and install the power plant equipment would cost about $97 million, but the bid accepted by NYPA was for $243 million. NYPA used the same contractor to construct the PowerNow! Units and should have been better able to estimate construction costs. Further, several of the estimate add-ons, such as an equipment change to provide the plant with the correct gas pressure, were for items that NYPA should have considered and included earlier in the process.
NYPA sells most of its electricity to investor-owned utilities in New York State, large industrial customers in New York State and governmental agencies in the New York City area. The peak demand of the three government customers’ accounts for about 16 percent of New York City’s total peak demand. The three customers are: the City of New York, the Metropolitan Transportation Authority, and the New York City Housing Authority.
NYPA is a public benefit energy corporation created by the State Legislature in 1931. NYPA is governed by a Board of Trustees that is appointed by the Governor and confirmed by the Senate. NYPA receives no State appropriations, and sells electricity to obtain operating revenue and issues bonds to finance construction projects.
NYPA officials strongly disagreed with almost all of the findings of the audit, which was conducted by career auditors in the State Comptroller’s Office and a nationally recognized utility management consulting firm with considerable experience evaluating the management and operations of public and private utilities.
This audit is the second part of an audit completed in 2001. The first audit was concluded and issued after NYPA refused to provide information regarding the Poletti Power Plant. This second audit was completed after NYPA agreed to provide information it withheld during the original audit.
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