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STATE OF NEW YORK

PUBLIC SERVICE COMMISSION

At a session of the Public Service


Commission held in the City of
Albany on December 16, 2009

COMMISSIONERS PRESENT:

Garry A. Brown, Chairman


Patricia L. Acampora
Maureen F. Harris
Robert E. Curry, Jr.
James L. Larocca

CASE 09-S-0029 – Proceeding on Motion of the Commission to


Consider Steam Resource Plan and East River Re-
powering Project Cost Allocation Study, and
Steam Energy Efficiency Programs for
Consolidated Edison Company of New York, Inc.

ORDER REGARDING THE HUDSON AVENUE GENERATING FACILITY

(Issued and Effective December 17, 2009)

BY THE COMMISSION:

INTRODUCTION
Deliberations over the future of the Hudson Avenue
steam generating station have been underway for several years.
Much of the analysis has centered on the question of whether the
existing boilers should be replaced by new boilers or by a
cogeneration facility. Consolidated Edison Company of New York,
Inc. (“Con Edison” or “the Company”) plans to obtain permits to
install new steam boilers and to demolish the existing boilers.
Based on our review of the record, and subject to the conditions
described in this Order, we decline to order Con Edison to
pursue a cogeneration option.
CASE 09-S-0029

BACKGROUND AND PROCEDURAL HISTORY


Procedural History

In October 2006, Con Edison filed with the Commission


a report titled Steam Production Options Study (SPOS). The SPOS
included a detailed assessment of the condition of the Company’s
generating stations, including Hudson Avenue. The SPOS
recommended that the existing boilers at Hudson Avenue be
replaced. The SPOS analyzed 14 different replacement options
for Hudson Avenue.
In a September 22, 2006, Steam Rate Order, 1 the
Commission required the Company to undertake an investment-grade
study of options for repowering or replacing Hudson Avenue and
to develop a steam resource plan addressing the Company's future
steam requirements. The Company retained a consultant to
conduct investment-grade studies for two of the options that
were analyzed in the SPOS. These two cost studies were for the
New Boiler Option and the Annex Retrofit Option; the studies
were completed in July 2007. The Steam Resource Plan (SRP) was
filed with the Commission in October 2007. The SRP recommended
the replacement of the existing boilers at Hudson Avenue with
the New Boiler Option, i.e., an option involving new steam-only
boilers without cogeneration.
In its 2008 Steam Rate Order, 2 the Commission required
the Company to file a Steam Resource Plan Supplement (SRPS)
containing an investment-grade cost study for a combined-cycle
cogeneration facility at Hudson Avenue with a nominal rating of
up to 500 MW. The supplement was filed by the Company on

1
Case 05-S-1376, Order Determining Revenue Requirement and Rate
Design, September 22, 2006.
2
Case 07-S-1315, Order Establishing Rate Plan, September 22,
2008, Attachment 1, p. 29.
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CASE 09-S-0029

December 31, 2008. The SRPS repeated the recommendation that


new steam-only boilers were the best replacement option. 3
On January 15, 2009, we instituted this proceeding. 4
Among other things, the Instituting Order required that this
proceeding “should examine options for the Hudson Avenue
station, taking into account impacts on steam customers and also
impacts on electric and gas customers, fuel efficiency,
reliability, and emissions.” 5
At a March 31, 2009 technical conference, the Company
made a presentation, and parties had an opportunity to ask
questions, regarding the various options for Hudson Avenue. The
presentation, supplemented by analysis of issues raised during
the conference, was filed by the Company on May 1, 2009.
On May 19, 2009, the Company filed an analysis
regarding eligibility for the New York City Industrial and
Commercial Incentive Program (ICIP).

3
The Company, in filing the Steam Resource Plan and Supplement,
redacted information regarding commodity pricing forecasts,
capital cost estimates, levelized cost calculations, and
Ravenswood Steam Station options. On February 17, 2009, the
Company filed its demonstration of why the redacted
information was entitled to an exemption from the disclosure
requirements of §87 of the Public Officers Law. Parties
replied on February 27, 2009. On March 6, 2009, the
administrative law judge issued a ruling that denied trade
secret protection to the cost estimate and levelized cost
projections that were included in the documents. The Ruling
found that commodity price forecasts used by the Company were
entitled to trade secret protection. The Ruling was appealed
by the Company, and affirmed on May 12, 2009.
4
Case 09-S-0029, Order Instituting Proceeding, January 15,
2009.
5
Id., p. 3.
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CASE 09-S-0029

On June 17, 2009, parties filed Statements of


Position. 6 The purpose of the Statements of Position was to
provide non-binding indications of parties’ positions regarding
the options at Hudson Avenue, in order to inform the development
of further procedures. Full comments were filed by parties on
July 28, 2009. 7 On August 14, 2009, reply comments were filed by
The City of New York and by Con Edison. 8
Con Edison and Staff argue that enough time has been
spent analyzing the options for Hudson Avenue, and that the
Company needs clear guidance from the Commission in order to
move forward with permitting and construction. The City of New
York argues that there is still great uncertainty regarding the
cost estimates for the Hudson Avenue options and that a further
process seeking expressions of interest from potential merchant
developers would result in a better-informed decision. For the
reasons explained below, we agree with Con Edison and Staff that
a decision on this matter is timely and that the benefits of
further process are outweighed by the benefits of providing the
Company clear guidance at this time.

6
Statements of Position were filed by DPS Staff, Con Edison,
The City of New York, Independent Power Producers of New York,
Inc., Consumer Power Advocates, PSEG, Pace Energy and Climate
Center, Natural Resources Defense Council, NYS Department of
Environment Conservation, County of Westchester, Astoria
Generating Company, and New York Energy Consumers Council.
7
Comments were filed by DPS Staff, Con Edison, The City of New
York, and Independent Power Producers of New York, Inc. Prior
to filing comments, parties conducted discovery.
8
A Notice of Proposed Rulemaking related to the Hudson Avenue
facility was published in the State Register on April 29,
2009.
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CASE 09-S-0029

Summary of Con Edison's Analysis


The central elements of Con Edison’s analysis are
presented in the technical conference presentation made by the
Company on March 31, 2009 and filed, with supplements, on May 1,
2009.
Hudson Avenue has a steam generating capacity of 1,600
Mlb/hr 9 , or approximately 12% of Con Edison’s steam generating
capacity. In a typical year it produces 6% of the Company’s
actual steam send-out. Due to the aging of pressurized parts,
the boilers are in need of replacement.
The in-service target for new boilers is 2014. The
Company's plan is to license the site for 1,600 Mlb/hr of steam
generating capacity, to be provided by four package boilers.
The boilers will be installed sequentially as needed. The
Company does not recommend pursuing a merchant steam supply
option, based on market power concerns and preliminary responses
from potential merchant suppliers.
The Steam Resource Plan Supplement considers three
cogeneration options--a 500 MW combined cycle, a 165 MW combined
cycle, and a 135 MW simple cycle. The Company estimated the
levelized annual cost of these options, using a generic price
forecast developed from publicly available information. The
Company found that each of the cogeneration options was
significantly more expensive than the boiler option on a
levelized basis. Annual levelized costs of 500 MW, 165 MW, and
135 MW cogeneration options were estimated to be $352.6 million,
$240.8 million and $228.1 million respectively, net of electric
revenues, compared with $153.4 million for the boiler option.
The driving force behind the higher net cost of the
cogeneration options is a combination of capital costs and
property taxes, which are not sufficiently offset by electric
9
One Mlb/hr equals one thousand pound per hour.
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capacity and energy payments. The fact that the NYISO has
determined that no regulated backstop electric generation will
be required at least through 2018 has a significant negative
impact on the expected electric revenues for a cogeneration
option.
The Company acknowledges that, outside of price
concerns, cogeneration options would address other energy
planning objectives of the City and State; these include
emission reductions and geographic diversification of electric
generating sites. All of the options produce significant
emission reductions when compared with the existing boilers at
Hudson Avenue, but cogeneration options produce additional
reductions due to increased system efficiency as well as backing
down older electric generation units. The 500 MW cogeneration
option, compared to a scenario with existing steam boilers at
Hudson Avenue and electric energy produced by existing steam
turbine generators, would result in fuel savings of
approximately 13 trillion BTU per year, and result in carbon
dioxide savings of 800,000 tons per year. Cogeneration would
also achieve significant reductions in SO2 and NOX emissions
compared to the boiler option. The cogeneration option might,
however, result in higher emissions of particulate matter at the
site, which in turn could cause a more complex permitting
process.
Operating a new 500 MW generating facility would
produce reductions in state-wide wholesale electricity costs. A
multi-area price simulation (MAPS), run by Con Edison for 2015,
found state-wide price reductions of $115 million, $63 million
of which would occur in Zone J.

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The impact on electric capacity prices could also be


substantial; 10 the Company estimates, based on the slope of the
current in-City demand curve, that capacity prices could be
reduced by approximately $4.36/kW/month. 11 The Company cautions,
however, that NYISO’s recently adopted buyer-side market power
mitigation measures 12 would most likely be triggered in the event
that the Company built a new 500 MW plant, and then the Company
would have to procure an additional 500 MW of capacity at the
market price.
The Company urges that a final decision is needed on
Hudson Avenue options in time for construction to be completed
by the end of 2013. This is the deadline for the New York City
Industrial and Commercial Incentive Program. That program would
provide a tax exemption estimated by the Company to be worth
$28.5 million annually over a 20-year period. Depending on
prolonged operation of the existing boilers also creates risk of
potential capital or O&M costs that could increase dramatically
in the event of failure of the existing boilers. Delaying the
schedule would also delay the realization of environmental
benefits from replacing the old equipment.

10
No significant impact on gas prices is projected.
11
The Company has not provided an annual total estimate for
capacity price reductions. Applying the estimated
$4.36/kW/month to approximately 6,000 MW of merchant
generation affected by the in-city demand curve, could produce
annual wholesale capacity cost reductions totaling
approximately $314 million. This represents an "all-else-
being-equal" snapshot and does not account for potential
buyer-side market power impacts and market participants’
behavioral responses.
12
See, New York Independent System Operator, Inc., Order
Conditionally Approving Proposal, 122 FERC 61,211, March 7,
2008, and Order on Rehearing and Further Order on Compliance
Tariff Sheets, 124 FERC 61,301, September 30, 2008.
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CASE 09-S-0029

Summary of Parties’ Positions


Con Edison’s position is described in great detail in
the SRP, the SRPS, and the technical conference presentation as
filed May 1, 2009. The Company summarizes its arguments as
follows:
• The SPOS, SRP, and SRPS, all based on studies performed by
independent third-party consultants, reached the same
conclusion.
• There is no need for new electric capacity in New York City
until at least 2018; the economic downturn will most likely
extend the need date even further.
• The 20-year levelized annual cost for the new boiler option
is estimated to be $182 million less than the levelized
annual cost for the 500 MW option.
• Con Edison has no need for new electric capacity
procurement, because it supplies less than half of the
electric load in its service area, and already has power-
purchase agreements in place that account for more than
half of the Company's load obligation.
• If the buyer mitigation rules of the NYISO were applied,
the capacity for the 500 MW cogeneration plant would not
count towards meeting Con Edison’s installed capacity
requirement.
IPPNY supports Con Edison’s position that it should
proceed with the steam-only option. IPPNY argues that
construction of a cogeneration plant by Con Edison would harm
competitive electricity markets in New York.
New York City questions whether Con Edison’s cost
estimates for the cogeneration options are reasonable. The City
further states that even if boilers are the least-cost option,
the cogeneration options are superior with respect to
environmental benefits, and it is not clear how the
environmental benefits were factored into the Company's
determination. In particular, the City emphasizes that
quantifying the public health benefits of reduced emissions
could change the economic analysis of the options. The City

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urges that the Commission require an expedited, 75-day process


to (a) determine whether a third party would be interested in
constructing a facility to supply the downtown steam network;
(b) consider the option of buying the required steam from a
third party; and (c) quantify the environmental efficiency and
public health benefits associated with the cogeneration options.
Staff argues that the steam-only option provides the
most cost-effective solution with the least risk to steam
ratepayers. According to Staff, the rate impact of a 500 MW
cogeneration option would be too large, and would carry the
additional risk of uncertainty of future electric market
revenues. Staff is also concerned with the magnitude of the
estimated cost of the steam-only option, and recommends that the
Commission closely monitor the competitive procurement process
used by the Company.
DISCUSSION

Need for Electric Capacity


As a general matter, increasing in-City electric
capacity is beneficial from a reliability standpoint. There is
no evidence, however, that increasing in-City capacity at Hudson
Avenue is needed to meet any specific reliability standards at
this time. The NYISO’s 2009 reliability planning process
projects no need for additional electric capacity through the
planning period ending 2018. Con Edison has stated that there
are no load pocket issues or other local reliability issues that
would be resolved by adding electric capacity at Hudson Avenue,
and no party has disputed this point. For those reasons, we
conclude that electric reliability need, in itself, does not
warrant our intervening in Con Edison’s decision to build
boilers at Hudson Avenue.
The lack of electric capacity need is an important
consideration, but is not dispositive of the issue before us.

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There are other potential reasons that could support


construction of a cogeneration plant at Hudson Avenue, as
discussed below.

Cost Estimates and Rate Impacts


Con Edison’s estimated costs for cogeneration options
dramatically exceed actual costs cited by the City for recent
and comparable in-City construction, as well as costs predicted
by the NYISO and Con Edison’s own System Reliability Assurance
Study. Con Edison estimates costs for cogeneration options at
Hudson Avenue, ranging from a low of $4,406/kW for a 500 MW
option to a high of $8,938/kW for a retrofit of Unit 10-100. In
contrast, the costs per kilowatt for other projects are much
lower, including $2,162/kW for the East River Repowering Project
(ERRP), $1,996/kW for the SCS Astoria Energy Phase 1 project,
and $1,450/kW for Con Edison’s estimated combined-cycle plant in
its System Reliability Assurance Study. The City’s draft Master
Transmission Study contains an estimated construction cost for a
500 MW combined cycle plant of $1,392/kW. NYISO’s cost of new
entry (CONE) proxy cost is $1,336/kW as of 2008.
The City notes the substantial increase in cost
estimates between the consultant’s investment grade study and
the SRPS presented by the Company. Despite the assumption of an
EPC (engineering purchase and construction) approach, Con Edison
replaced the 10% contingency applied by its consultant with a
25% contingency. Utility overheads were also added, adding
approximately $380 million for the 500 MW option. The City also
questions the assumption of $149 million in steam, gas and
electric interconnections and reinforcements.
In light of the uncertainty created by this analysis,
the City urges that a request for expression of interest be
issued to determine the cost at which market participants would
be willing to construct a facility.

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Staff also analyzed the Company’s cost estimates.


Staff’s analysis provides a partial reconciliation of the cost
differences identified by the City. More importantly, Staff
concludes that the estimated difference between the cogeneration
option and the boiler option is so large, that even assuming a
very high margin of error in the cost estimates, the boiler
option still has the least impact on ratepayers. 13
Staff compared the cost estimates for the 500 MW
cogeneration option in the SRP with the NYISO cost of new entry
estimate and the 500 MW combined-cycle plant studied in NYC’s
Draft Transmission Study. With respect to the NYC study, Staff
reconciled some of the dollar-for-dollar differences, and
generally explained the difference in the total estimate by
referencing two factors: first, that the plant in the NYC study
is designed to produce only electricity, and second, the NYC
study is more general and excluded some cost components. Staff
also noted that the cost of the Astoria SCS 500 MW Phase 1
plant, escalated to 2008 dollars, is greater than the NYC study
estimate by nearly $600/kW, which further suggests that the NYC
study estimate is low. 14 Finally, Staff notes that the NYISO
cost of new entry proxy plant is a peaking facility and not a
combined-cycle plant.
Staff reviewed all of the non-capital inputs to the
levelized cost analysis and found them to be reasonable. Staff
then analyzed several scenarios, varying one input at a time,
and in each scenario the boiler option resulted in the lowest
levelized cost. Staff defined a range of variations to the
inputs, and simulated 1,000 scenarios in which the inputs were

13
Staff focused its analysis on the choice between the boiler
option and a 500 MW cogeneration option.
14
Staff does not, however, reconcile the difference between the
SRP cost estimate and the much lower actual cost of the
Astoria plant.
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allowed to vary randomly within the ranges. In all of the 1,000


scenarios, the boiler option resulted in lower annual levelized
costs than the 500 MW cogeneration option. Most notably, in one
scenario the capital estimate for the cogeneration option was
reduced by 25% and the estimate for the boiler option was
increased by 25%. Under that scenario, the boiler option was
still less expensive for ratepayers by $63 million per year.
The mean difference in the total levelized net costs, under
Staff’s varying scenarios, was $198 million annually.
Using the Company's estimated costs, Staff determined
that the steam-only option would increase steam bills by 19%,
while the 500 MW cogeneration option would increase bills by
43%.
The Company identified numerous reasons why the cost
estimates in the SRP differ substantially from other cost
references:

• Inflation: Cost escalation rates between 2005 and 2009


have been exceptionally high, according to Con Edison. 15
• Interconnection costs: the cost analysis in the NYC
Transmission Study included no allocation for steam and gas
interconnection costs.
• Plant-owner costs and/or contractor “soft costs” were not
included in some of the estimates.
• Plant configurations: The SCS Astoria Energy facility does
not utilize its steam output. NYISO’s CONE is a simple-
cycle peaking plant that lacks a steam generator, steam
turbine and condenser. 16

15
The Company states that it does not expect significant changes
in cost estimates due to the economic downturn.
16
The Company acknowledges that direct waterway access to the
Hudson Avenue site would provide some flexibility during
construction, but does not quantify the value of that access.
The City argues that Con Edison should be required to provide
further analysis of the potential cost savings related to
direct waterway access to the Hudson Avenue site.
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The Company argues that, because the cost estimates


for the boiler-only option and the 500 MW option were developed
using the same estimating philosophy and economic assumptions,
this provides the most appropriate comparison. Any changes in
the assumptions related to the cogeneration option should also
be applied to the analysis of the new boiler option as well.
IPPNY supports Con Edison’s analysis, stating that
some of its members with experience in developing electric
generating facilities in New York City have reviewed Con
Edison’s cost estimates and confirmed that they are in the zone
of reasonableness.
The City notes that the SCS Phase 1 cost analysis
provided by Con Edison includes expenses related to land
acquisition, permitting and construction that are common to both
Phase 1 and Phase 2 of that project. Backing out the common
costs results in a Phase 1 cost of about $1.6 billion, or
approximately $3,200/kW, which is approximately 27% less than
the estimate for the 500 MW Hudson Avenue option.
Most of the parties’ discussion concerning cost
estimates was focused on the 500 MW cogeneration option.
Smaller cogeneration options were also analyzed in the SPOS and
the SRPS, with a similar conclusion that the boiler option was
more cost-effective.
A small cogeneration option is, in theory, compatible
with the Company’s current plans to proceed with permitting and
construction of package boilers. Because the boilers can be
phased in as needed, it would be possible for the Company to
install two of four boilers and then to meet additional steam
needs with a smaller cogeneration plant. 17

17
In order to accomplish this, an additional round of
environmental permits would be needed.
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Like the estimates for the 500 MW option, cost


estimates for smaller cogeneration options are subject to
debate. The SPOS identified two options that were in a
comparable cost range with boilers. One –- a retrofit of the
retired Annex unit -- was developed with an investment-grade
study. The SRP found that this option would be comparable in
cost to the boiler option if only 1,200 Mlb/hr of capacity were
needed from Hudson Avenue. If 1,600 Mlb/hr of capacity is
needed, as currently planned, the Annex retrofit option is more
expensive than the boiler option.
The other cogeneration option specified in the SPOS as
being comparable to boilers -- a 117 MW combustion turbine --
was not developed with an investment grade study. In the SRPS,
a 135 MW combustion turbine plant was analyzed and the cost
differential between it and the boiler option was very
substantial -- much higher than the cost differential between
the 117 MW option and boilers as identified in the SPOS.
The Company explains that the cost estimate for the 117 MW
cogeneration plant in the SPOS did not include Company labor and
overhead or contingency, which dramatically changes the cost
analysis of the small cogeneration options versus the steam
boiler option.
The Company’s use of levelized annual cost estimates,
as a means of comparing options, provides a reasonable
analytical tool. Although the method relies on numerous long-

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term forecasts, each of which is inherently uncertain, 18 annual


levelized cost analysis is an effective means of comparing the
impact of various options over the long term.
Staff’s analysis of the cost differentials is
persuasive, assuming that a 25% margin of error in the capital
cost estimates is reasonable. However, comparison of the SRPS
500 MW cost estimate to other projects does not increase
confidence in the Company’s cost estimates. Other sources --
including estimates developed by consultants as in the NYC
Transmission Study, and actual experience as in the ERRP and SCS
Astoria projects -- indicate capital costs per kW less than half
of those estimated for Hudson Avenue in the SRPS.
These disparities are only partially explained by the
parties. 19 For example, Staff identifies and explains
significant differences between the NYC Transmission Study plant
and the Hudson Avenue option, but also acknowledges large
differences in the cost estimates that are not explained. No
party analyzes why the cost per kW of ERRP is less than half of
the Hudson Avenue estimate. 20 Both the Company and Staff refer
to significant inflation in construction costs. However, in
explaining the cost differential between the Hudson Avenue

18
The difficulty of relying on long-range forecasts is
highlighted by the October, 2009 natural gas price forecast of
the federal Energy Information Administration which predicts,
with a 68% confidence level, that gas prices in 2011 will be
somewhere between $5 and $11 per million Btu. The Company’s
consultant, in preparing the SPOS, employed four different
scenarios for future prices. Under the scenario with the
highest commodity prices, cogeneration options fared
relatively better than they did under low-price scenarios, due
to the increased fuel efficiency of the cogeneration option
and the increased value of electricity revenues.
19
IPPNY states only that its members have described the
estimates as “in the zone of reasonableness.”
20
To further complicate the analysis, the final cost of ERRP was
higher than original estimates by a wide margin.
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option and the Astoria plant, Staff applies an inflation factor


of 17% from 2006 to 2008. The Company’s own estimate for the
Hudson Avenue option increased from $1.38 billion in the SPOS
(2006) to $2.2 billion in the SRPS (2008), a 58% increase. A
substantial portion of this increase reflects overhead and
contingency costs, but it is not clear whether the estimates of
cost inflation used by Staff and by the Company are comparable.
More important, it is not clear what effect the economic
downturn may have on construction prices.
The variations run by Staff were made necessary by the
uncertainty surrounding the cost estimates themselves. The
difficulty encountered by Staff is highlighted by Staff’s
caution that the cost estimate for the boiler option will also
require close scrutiny of the Company’s acquisition and
construction process.
Based on the record before us, it is impossible to
draw a definitive conclusion regarding the relative costs of the
Hudson Avenue options. Staff’s analysis, however, establishes a
strong likelihood that a boiler option will result in lower
annual costs than a 500 MW cogeneration option.
With regard to the smaller cogeneration options, the
record is less developed and the apparent cost difference among
options is smaller. In particular, the difference between the
2006 SPOS finding -- that a 117 MW combustion turbine option was
comparable in cost with the boiler option – and the 2008 SRPS
finding – that a 135 MW combustion turbine option is
prohibitively expensive compared to the boiler option – is not
adequately explained. The Company describes the 117 Mw and 135
MW options as both “very similar” and “quite different.” The
principal cost difference, as detailed by the Company, is the
omission of company labor, overhead, and contingency from the
2006 analysis of the 117 MW option. However, those costs were

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also excluded from the boiler option analysis in 2006; this does
not explain why the close difference in 2006 between a 117 MW
option and boilers became a large difference in 2008 between a
135 MW option and boilers.

Fuel Efficiency and Emission Reductions


All of the options under consideration would result in
substantial reductions in emissions, compared with the existing
boilers at Hudson Avenue. 21 Comparing the new boiler option with
cogeneration options, analysis of emissions and fuel efficiency
benefits tends to show greater emission reductions from
cogeneration.
A 500 MW combined cycle cogeneration plant at Hudson
Avenue, operating at a 80% capacity factor, would reduce system-
wide carbon dioxide emissions by 800,000 tons per year, compared
to a scenario with existing steam boilers at Hudson Avenue and
electric energy produced by existing steam turbine generators.
Of these reductions, approximately 150,000 tons can be
attributed to the efficiency benefits of cogeneration and
approximately 580,000 tons are due to the new electric
generation facility backing down older, more polluting
facilities. 22 The remaining carbon dioxide reductions result
from the new steam boilers burning gas instead of fuel oil. The
same analysis for SO2 finds reductions of 500 tons per year
mostly attributable to replacement of the existing oil-fired
steam boilers; for NOx the reduction would be approximately
1,300 tons per year. However, to the extent that the displaced

21
This is due to three factors: the use of gas rather than oil,
the increased efficiency of modern equipment, and the
application of more stringent emission standards.
22
This figure is indicated by the estimated steam output from
Hudson Avenue, and confirmed by workpapers provided by the
Company.
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power generation was from cleaner and more efficient combined


cycle plants, the emission reductions would be smaller.
The figure of 800,000 tons represents a theoretical
maximum. The extent of emission reductions would depend on the
size and configuration of a cogeneration option, the manner in
which a unit is dispatched, and the extent to which electric
generation efficiency gains might be realized through other
projects.
Parties disagree as to the importance of the system-
wide emission benefit comparisons. The Company emphasizes that
there is a trade-off between system-wide benefits and localized
benefits. The new boiler option would provide greater local
benefits. The local increase in particulate emissions that
would result from a cogeneration option would have the potential
to create permitting problems. The City acknowledges that both
local and system-wide emission benefits are important to
consider, but argues that in the context of this proceeding the
system-wide benefits are more significant.
The City emphasizes that cogeneration is consistent
with City and State environmental goals. Reduction of 800,000
tons per year of carbon dioxide emissions would accomplish a
substantial portion of the PlaNYC goal of an annual reduction of
10.6 million tons per year by 2030. The City also cites
Governor Paterson’s goal, embodied in Executive Order No. 24, of
reducing the State’s greenhouse gas emissions to 80% below the
level of emissions in 1990, by no later than 2050.
Staff notes that the monetary value of CO2 reductions
is very difficult to predict, and could range from $22 million
to $128 million annually. To the extent that the price of
carbon allowances increases, purchase allowances would increase
in a commensurate manner. The City notes, however, that
although a higher value on the cost of carbon would increase the

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cost of purchasing allowances, that cost would be even higher


for older, less efficient facilities and would create a net-
positive incentive for a clean, efficient cogeneration option.
The City also argues that the health benefits of
emission reductions should be factored into the economic
analysis of the Hudson Avenue options. Citing recent research
reports, the City estimates that emission reductions from the
500 MW cogeneration option may be worth as much as $80 million
per year in health benefits.
The Company states that it shares many of the City’s
goals, but that the cogeneration option is simply too expensive
for customers. The Company compared the cost of reducing carbon
emissions, on a dollars-per-ton basis, from a 500 MW
cogeneration option versus energy efficiency and renewable
generation. Assuming costs for efficiency programs as filed by
Con Edison in its Energy Efficiency Portfolio Programs, at $2
million per MW, and assuming installed costs of land-based wind
energy at $2,500/kW, and assuming electric annual capacity
factors of 60%, 35%, and 25% for cogeneration, efficiency, and
wind energy, respectively, and assuming a factor of 0.5 tons of
CO2 avoided per megawatt hour saved, the cost of reducing a ton
of CO2 emissions is approximately $260 for efficiency, $460 for
wind, and $960 for the 500 MW cogeneration option, according to
Con Edison.
For purposes of this analysis, we will focus on
system-wide emission reductions. Local emissions are a
significant concern that will be considered in the environmental
permitting process. Local impacts take on greater weight where
a community has been overburdened with polluting facilities,
i.e. in the case of an environmental justice community. The
community surrounding the Hudson Avenue facility has been
identified by the Department of Environmental Conservation (DEC)

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CASE 09-S-0029

as an environmental justice area. Accordingly, the Company


performed outreach in the community, in cooperation with DEC and
Staff. An environmental justice advocate participated in the
proceeding. The Administrative Law Judge made it known to these
parties that opportunities would be made available, in addition
to the written comment process, for community members to provide
input. Despite these measures, no community input was
forthcoming.
New York City argues that the health care savings and
avoided health impacts of emission reductions should be
quantified and considered in the comparison of options. The
City is correct in theory; however, the integration of health
factors into economic analysis of environmental measures is a
complex undertaking that is not within the purview of this
proceeding. At this time, we recognize that there are public
health benefits, and reduced health care costs, associated with
a lower-emission option, and we take that fact into account in
making our determination, without attempting to quantify the
impacts in economic terms.
In considering whether to pursue a cogeneration option
for the policy benefits of emission reductions, it is
informative to analyze the cost of achieving those policy
purposes through other means. The Company is the only party
that has provided such an analysis, and it has found that the
500 MW cogeneration option, using the Company’s cost estimates,
is considerably more expensive than energy efficiency and wind
generation on a dollars per ton of carbon basis. This analysis
by Con Edison provides a useful indicator, but it has not been

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CASE 09-S-0029

examined extensively. The analysis does not appear to reflect


net benefits other than carbon reductions. 23
A comparison of different types of carbon reduction
measures, though relevant, is not dispositive of the issue. The
Commission has encouraged measures that reduce emissions across
a range of technological areas, including efficiency,
renewables, and cogeneration. The Commission has not restricted
its efforts to any single area, but rather has pursued the most
cost-effective measures within each area.
The cogeneration option would produce system-wide
emission benefits compared with a full build-out of the boiler
option. As explained below, however, the Hudson Avenue site
would remain available for electric generation even if the
boiler option is fully implemented. For that reason, the
emission reductions attributable to backing down older, more
polluting electric generation could still be realized at a
future time. Moreover, our decision is strongly influenced by
the potential under the boiler option to reduce steam capacity
needs through greater energy efficiency and customer-sited
cogeneration.

Project Timing and Flexibility


The SPOS recommended that the existing boilers at
Hudson Avenue should be replaced in 2014. The Company is
currently in the permitting process for the boiler option, with
a timetable that plans completion of construction in 2013.
According to the Company, one of the benefits of the boiler
option is that the four package boilers are modular and can be
installed in increments, as needed, rather than all at once.
Con Edison also points out that any delay related to a more

23
Assuming, for example, that an energy efficiency measure
scores higher than 1.0 on the Total Resource Cost test, then
the resulting carbon reduction comes at no net cost.
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CASE 09-S-0029

complex cogeneration option would delay the environmental


benefits of replacing existing Hudson Avenue steam boilers.
A practical deadline for project completion is
established in section 489-dddd(10) of the NYS Real Property Tax
Law, which provides that the City’s Industrial and Commercial
Incentive Program (ICIP) – a property tax abatement program for
industrial development – is only available to projects that are
completed by December 31, 2013.
The Company projects the potential value of the ICIP
abatement as approximately $28.5 million per year, levelized,
over twenty years. The Company does not assume any savings from
ICIP in its cost estimates for the boiler option, because the
Company cannot guarantee completion by the deadline. The
Company is understandably reluctant to make such a commitment,
since it does not control the permitting process and there may
be other unexpected delays. Nevertheless, given the relative
simplicity of permitting and installing package boilers, and
given that the ICIP deadline is a significant element of our
decision not to order further exploration of cogeneration
options, we expect that all diligent efforts will be made to
meet the ICIP deadline. Failure to meet the deadline will
require a demonstration of cause by the Company, if it seeks
rate recovery for expenses that might have been foregone had the
deadline been met.
If the Company implements a phased approach to
installing boilers, the extent to which the ICIP tax benefits
would be available is unclear. If the Company obtains permits,
performs all necessary site work, and installs only two or three
of the four boilers prior to 2014, while seeking to defer or
eliminate the need for additional boilers, an interpretation of
the “completion” requirement of the ICIP statute will be needed.
This is an important concern because, as explained further

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CASE 09-S-0029

below, the flexibility offered by the incremental approach is a


primary reason for our support of the boiler option at this
time.
Other than the ICIP deadline, the timing of the Hudson
Avenue project is driven largely by the risk of failure at the
existing plant, which could cause expensive capital investments.
The Company’s capital plan for the existing plant includes sharp
reductions in capital expenditures, from an average of $11
million per year before 2008 to less than $2 million per year
from 2011 on. This reflects the expected demolition of the
plant after the new boilers begin operating.
The Company demonstrates that delay would increase the
risk of equipment failure in the existing boilers, which would
require major capital spending. In an extreme case, such
spending could trigger new source environmental requirements,
which would be prohibitively expensive for a plant that is
scheduled to be closed. If there is a likelihood of significant
delay, the Company might need to revise its capital spending
plan for Hudson Avenue, which would deprive customers of the
benefits of the reduced capital spending.
Timing concerns are a significant reason, in addition
to the cost analysis, for Staff’s advocacy of the boiler option.
Staff argues that it is more likely that the boiler option will
be completed by December 21, 2013 and able to take advantage of
the ICIP property tax exemption. Based on the complexity of
permitting and constructing, a 500 MW cogeneration plant is less
likely to be completed by that date. 24 Staff states that this
added risk of complexity further supports the boiler option.
Staff also emphasizes the importance of the flexibility the

24
Staff also questions whether the cogeneration option, as
currently configured, could be constructed without substantial
redesign, based on advice given to the Company from the
manufacturer.
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CASE 09-S-0029

Company would have under the steam option, to phase in


installation as needed, reducing the impact on steam ratepayers.
Another timing concern involves the optimal use of the
Hudson Avenue site and the need, or lack thereof, for additional
electric capacity. Siting a major electric generation facility
within the City is difficult, and the Hudson Avenue site is an
important asset. The steam boilers need to be replaced by 2014,
and NYISO does not anticipate a need for new electric generation
before 2018 at the earliest; this creates a potential dilemma in
which a decision must be made now regarding the use of the site,
while the absence of a reliability need for electric capacity
undermines the economics of electric generation options.
This dilemma is resolved, at least in part, by the
fact that the site is large enough to accommodate an electric
generation facility in addition to the proposed steam boilers.
According to the Company, the new boiler option would occupy
approximately 1.14 acres, or approximately 10% of the available
property at Hudson Avenue. A 500 MW electric generating
facility would require approximately 7 acres. Therefore
constructing the new boiler option would not preclude the
development of an electric-only facility at a later date –
presumably some time after 2018. If that were to happen,
however, the efficiency benefits of cogeneration would be lost,
in the absence of an unexpectedly large increase in steam
demand.
The benefits of cogeneration could also be obtained at
the site if the installation of two of the package boilers were
deferred, and a smaller cogeneration plant were constructed to
meet the remainder of the steam needs. The Company has
confirmed that this scenario is feasible from an engineering
standpoint, although the current permitting process for steam
boilers would not authorize installation of electric generation

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CASE 09-S-0029

equipment, so that an additional permitting process would be


needed. As discussed below, maintaining the flexibility to
explore options such as this, which may be essential to keeping
steam rates at sustainable levels, highlights the importance of
demand response, energy efficiency, and customer-sited
generation initiatives.
Regarding the risk that a cogeneration option would
lose the benefits of the ICIP programs, the City observes that
other incentive programs could be available. For example, the
New York City Industrial Development Agency (IDA) might provide
benefits that offset the potential loss of ICIP benefits. Such
benefits could include property tax abatements, mortgage
recording tax exemptions, and sales tax exemptions on
construction materials, as well as financing. In the absence of
a specific proposal for IDA support, however, we consider the
ICIP abatement to be the only local incentive that is relevant
to our decision.
In the event the City makes a specific proposal to
provide financial support, in order to obtain the public policy
benefits of cogeneration, such a proposal should be given
serious consideration by Con Edison. 25 Any such proposal, if it
would have the effect of moving construction timetables beyond
the December 31, 2013 ICIP deadline, should at a minimum ensure
that Con Edison customers do not lose the benefit of the ICIP
tax abatement or its equivalent. Given the uncertainty
surrounding cost estimates for the various cogeneration options,
as well as the inherent uncertainty of electric revenue

25
A plan for the construction of a cogeneration option, whether
it results from a New York City IDA proposal or from an
independent initiative of Con Edison’s, will raise numerous
issues that are not decided in this order and which will
require further consideration. These include questions of
utility ownership of electric generation, market power, and
cost allocation.
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CASE 09-S-0029

estimates, any cogeneration proposal should be no more costly to


Con Edison customers than the boiler option, although emission
benefits of cogeneration may be taken into consideration. 26

Impacts on Wholesale Electric Prices


The difference in cost between the boiler option and
the cogeneration option could potentially be offset by reduced
electric wholesale prices. The Company’s MAPS runs indicate
that a 500 MW plant would reduce energy prices in New York City
by approximately $63 million per year. Capacity prices would be
reduced by $4.36/kW/month, which as discussed above could
produce price reductions as large as $314 million per year.
Taking potential capacity price reductions into account along
with energy price reductions, overall wholesale price reductions
could approach $400 million per year. Naturally, these estimates
are based on a number of highly variable inputs. 27
Taking price reductions into consideration gives rise
to numerous issues. The duration of price impacts over the long
term is questionable. Equally important are legal and policy
issues concerning potential disruption of markets.
Staff argues that wholesale price impacts would be
short term and should not be considered sustainable for the
entire life of the project. This argument assumes that the
market, over a period of years, would adjust to the introduction
of new capacity and would produce an equilibrium price that is
unaffected by the past entry of a 500 MW unit. In other words,
the reduction in price might forestall other new entry or hasten

26
A proposal should also be timely, i.e. should take into
account the Company’s need to make financial or other
commitments in implementing its current plan.
27
IPPNY observes that Con Edison’s capacity price forecast
represents the higher range of possible capacity prices and is
significantly higher than prices the market is currently
experiencing.
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CASE 09-S-0029

plant retirements, and over time would cause prices to rise.


Staff suggests that any consideration of wholesale price impacts
be limited to three to five years.
Con Edison and IPPNY argue that any reduction in
wholesale electric prices would most likely trigger the NYISO’s
buyer-side mitigation measures. These measures would cause the
500 MW of capacity to be bid into the market at a floor price
that would often fail to clear in the auction. As a
consequence, according to Con Edison, the capacity would not be
counted toward meeting the Company's capacity obligation, and
then the Company would have to procure an additional 500 MW of
capacity at the market price. IPPNY adds that the economic
downturn could reduce energy prices and extend the date by which
new capacity would be needed.
IPPNY argues that, independent of the NYISO buyer
market power rule, construction of a cogeneration plant by Con
Edison should be prohibited by the Commission because of its
impacts on the operation of wholesale markets. IPPNY states
that construction and operation of a cogeneration plant to meet
steam needs, where there is no need for electric capacity, would
result in uneconomic operation of the electric facility.
According to IPPNY, uneconomic operation would have two adverse
impacts on the market. First, it would displace a unit that
otherwise would have been operated economically, thus
inefficiently depriving it of revenues. Also, it would
artificially suppress the market-clearing price for all the
units that are dispatched.
In approving the buyer market power mitigation
measures, FERC provided that the Commission could make a filing
under §206 of the Federal Power Act to justify an exemption for
entry of new capacity that is required by a state-mandated

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CASE 09-S-0029

requirement furthering a specific legitimate state objective. 28


Arguably, a substantial increase in fuel efficiency and
reduction in emissions could satisfy this criterion, if we were
to order Con Edison to build a cogeneration plant at Hudson
Avenue.
The City argues that this proceeding cannot resolve
whether buyer-side mitigation measures would apply. Because the
FERC has not yet issued a determination on this matter, the City
states the application of buyer-side measures should not be
assumed. The City further argues that, if a developer owns and
operates a cogeneration plant with a long-term steam sales
agreement with Con Edison, mitigation measures might not apply
because the developer might not meet the definition of market
power. The Company disagrees, arguing that the City’s
participation in FERC proceedings represents an acknowledgement
that the buyer mitigation measures would have a significant
impact on proposals for new power plants.
IPPNY argues that ownership of electric generation by
Con Edison would conflict with the Commission's long-standing
policy that generation should be separate from transmission and
distribution. IPPNY refers to the Commission's Vertical Market
Power Policy Statement (VMP Policy Statement), in which the
Commission established a rebuttal presumption that ownership of
generation by a utility company affiliate would unacceptably
exacerbate the potential for vertical market power. IPPNY

28
New York Independent System Operator, Inc., ER-08-695-01,
Order on Rehearing and Further Order on Compliance Tariff
Sheets, 124 FERC 61,301 at 13 (September 30, 2008).
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CASE 09-S-0029

refers to recent decisions in which the Commission has applied


the VMP Policy Statement. 29
Con Edison argues that the Commission's VMP Policy
Statement would not be applicable to a plant built directly by
Con Edison. The VMP Policy Statement creates a presumption that
ownership of generation by an affiliate of a T&D company would
be an exercise of vertical market power. When generation is
owned by a utility, subject to a regulated return, the Company
argues that the vertical market power concerns of the VMP Policy
Statement do not apply.
The City agrees with Con Edison that the VMP Policy
Statement would not apply. The City argues that there would be
no incentive for Con Edison to exercise vertical market power at
Hudson Avenue. Because of the market adjustment charge, the
Company would be indifferent to the impact of the facility on
electric rates. The City argues that the Company would make
dispatch decisions on a total resource-cost basis--i.e.,
assessing the electric market value plus the value of avoided
steam generation from other Con Edison units — it would not be
uneconomic for the cogeneration facility to displace other
generators that are less efficient on a total-cost basis.

29
See Case 07-M-0906, Joint Petition of Iberdrola S.A., Energy
East Corporation, RGS Energy, Group, Inc., Green Acquisition
Capital, Inc., NYSEG and RGE for Approval of the Acquisition
of Energy East Corporation by Iberdrola, S.A., Order
Authorizing Acquisition Subject to Conditions, January 6,
2009, p. 104; Case 06-M-0878, Joint Petition of National Grid
PLC and KeySpan Corporation for Approval of Stock Acquisition
and other Regulatory Authorizations, Order Authorizing
Acquisitions Subject to Conditions and Making Some Revenue
Requirement Determinations for KeySpan Energy Delivery New
York and KeySpan Energy Delivery Long Island, September 17,
2007, pp. 137-138; Case 96-E-0900, In the Matter of Orange and
Rockland Utilities, Inc.'s Plans for Electric
Rate/Restructuring Pursuant to Opinion No. 96-12, Appendix 1,
Statement of Policy Regarding Vertical Market Power, July 17,
1998, p. 1.
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CASE 09-S-0029

Parties dispute the extent to which FERC has ruled on


this issue. This is largely a semantic dispute, as the posture
of this proceeding vis-à-vis FERC is clear. FERC has recognized
that an exemption to the buyer-side market power mitigation
measures is potentially available in the case of a State
requirement serving a public policy interest. Whether the
mitigation measures, or the exemption, would apply to a Hudson
Avenue cogeneration plant would be a matter of litigation before
FERC. This proceeding cannot decide the matter, and can only
take it into consideration as a risk factor.
Staff argues that the wholesale price impacts of a new
plant should not be assumed to endure over the life of the
plant. This argument appears to be based on sound economic
theory. Its practical implications – i.e. the actual duration
of the impacts -- are not known. We note that this question has
also arisen in the context of the ERRP allocation issue.
IPPNY argues that construction of a cogeneration plant
at Hudson Avenue would be uneconomic and would inhibit economic
entry into the market. This is more than an academic concern.
Other potentially valuable projects, such as the proposal of NRG
to replace the antiquated peaking units at Astoria, 30 could be
directly affected by developments at Hudson Avenue.
Because we are not, at this time, ordering Con Edison
to develop a cogeneration plant at Hudson Avenue, there is no

30
NRG Astoria Gas Turbine Power LLC -- Repowering Project State
Environmental Quality Review (SEQR) Scoping Document for Draft
Environmental Impact Statement October 8, 2008
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CASE 09-S-0029

need for us to decide the policy issues related to wholesale


electric markets. 31

CONCLUSION

We will not intervene to alter Con Edison’s plan to


proceed with the boiler option at Hudson Avenue.
We recognize New York City’s argument that a
cogeneration option could lead to lower emissions compared to
the boiler option. If New York City makes a timely proposal for
IDA (or other) support of a cogeneration option, which is no
more costly to customers than a boiler option, it should be
considered by Con Edison. In any event, construction of boilers
would not foreclose the opportunity for the construction of an
electric plant at this site in the future, which would obtain a
majority of the emission reduction benefits that have been
identified.
The fact that no electric capacity will be needed in
the near future is significant, but does not end discussion of
the issue. Staff’s sensitivity analysis of the cost estimates
demonstrates a strong likelihood that the boiler option would
result in lower ratepayer costs over the life of the project.
Weighing against the cost factor are the potential environmental
and fuel efficiency benefits that could be obtained through
cogeneration, as well as the potential wholesale price
reductions, albeit temporary and problematic, that might reduce
or eliminate the cost difference.

31
If we did find that the construction of a cogeneration plant
under the current circumstances would be suboptimal from the
standpoint of energy markets, the issue would not be closed.
The functioning of energy markets must be balanced with
important policy concerns such as fuel efficiency and emission
reductions.
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CASE 09-S-0029

The Governor’s goal of reducing CO2 emissions by 80% by


2050 32 is very challenging and requires that every opportunity to
reduce carbon emissions should be carefully considered.
Replacing older fossil-burning generation with more efficient
fossil-burning generation can provide important incremental
benefits. Such measures will not, however, advance the state
toward its goal if they are cost-prohibitive and thereby divert
resources from other methods of carbon reduction, such as energy
efficiency and carbon-neutral generation technologies.
The Company’s ratepayers and the public interest are
best served by a clear decision on our part at this time. The
timing is partially driven by the Company’s need to move forward
with permitting and bidding in order to meet the December 31,
2013 deadline for the ICIP tax abatement. It is also driven in
part by the need for prospective developers of other electric
generation and transmission projects to know whether electric
capacity will be added at Hudson Avenue.
Even the lowest-cost option presented by Con Edison –
the boiler option – is estimated to have annual costs exceeding
$150 million per year, a 19% bill impact as calculated by Staff.
This is all the more important, given the context of this
proceeding, which is a strong concern over the mounting pressure
on steam prices and the cumulative rate impacts of the Company’s
various capital planning needs.
A decisive factor, in our view, is Con Edison’s
ability to install the package boilers in increments as needed.
This flexibility offers the potential that Hudson Avenue costs
can be held to a minimum by other, potentially more cost
effective, means of satisfying steam reliability requirements,
i.e., measures to reduce the need for steam generation at Hudson
Avenue.

32
Executive Order No. 24, issued August 8, 2009.
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CASE 09-S-0029

It would be unrealistic to expect that the capital


costs of the facility could be reduced in direct proportion to
the number of boilers that are installed. The majority of fixed
costs will be incurred regardless of the number of boilers.
Potential savings available from deferring or eliminating the
need for boilers are substantial, however, and take the form not
only of reduced capital costs but also of reduced taxes, O&M,
fuel use, and emissions.
Another benefit from the flexibility of the boiler
option is that it leaves open the possibility of developing
cogeneration at the site in the future. This could occur, for
example, if the installation of two of the four boilers can be
deferred until a time when expected electric revenues would
create favorable economics for a cogeneration plant to serve the
remainder of the steam demand.
We expect this proceeding to examine – and the Company
to undertake where warranted – cost-effective measures to reduce
the need for generation at Hudson Avenue, thereby deferring or
eliminating the need to install all of the planned package
boilers at the site. Such measures could include, for example:
a standard offer for customers to propose efficiency measures or
customer-sited generation that would reduce steam demand; a
comprehensive energy efficiency program available to all
customers; or a program to assist low-margin customers in
switching to alternative heating sources. This list is neither
prescriptive nor exhaustive; it is intended only to provide
guidance for the parties.
Staff, in supporting the boiler option, expresses
concern that the estimated costs of the boiler option may also
be too high. Staff recommends that the Company’s procurement
and construction process be closely monitored, and we agree.

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CASE 09-S-0029

We emphasize that in adopting this order, we are not


providing pre-approval of Con Edison’s plans regarding Hudson
Avenue; nor are we making any finding of prudence. We continue
to have concerns regarding the estimated costs and rate impacts
of the Company’s plan for Hudson Avenue. Our concerns are
twofold: first, the actual costs of the Hudson Avenue project
must be kept as low as possible consistent with reliability and
environmental constraints; and second, even assuming
accomplishment of the first objective, capital projects at
Hudson Avenue should be undertaken within a strategic framework
that recognizes the mounting pressures on steam rates and the
effect of those pressures on the future of the steam business.
The course of action we adopt in this order represents
a balanced approach to minimize steam rates, advance efficiency
and environmental objectives, and provide clarity to market
participants, within the broader context of issues still under
consideration in this proceeding.

The Commission orders:


1. As described in the body of this Order, this
proceeding will examine energy efficiency, demand reduction, and
other measures to reduce the need for steam generation at the
Hudson Avenue facility and/or other Con Edison steam generation
facilities in order to reduce capital costs and other impacts on
steam rates.
2. This proceeding is continued.

By the Commission,

(SIGNED) JACLYN A. BRILLING


Secretary

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