Cayuga agreement with NYSEG

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STATE OF NEW YORK PUBLI C SERVI CE COMMI SSI ON

At a sessi on of t he Publ i c Ser vi ceCommi ssi on hel d i n t he Ci t y of

Al bany on December 13, 2012

COMMI SSI ONERS PRESENT:

Gar r y A. Br own, Chai r manPat r i ci a L. Acampor aMaur een F. Harr i s J ames L. Lar occaGr egg C. Sayr e

CASE 12- E- 0400 - Pet i t i on of Cayuga Operat i ng Company, LLC t oMothbal l Gener at i ng Uni t s 1 and 2.

ORDER DECI DI NG RELI ABI LI TY I SSUESAND ADDRESSI NG COST ALLOCATI ON AND RECOVERY

( I ssued and Ef f ect i ve December 17, 2012)

BY THE COMMI SSI ON:

I NTRODUCTI ON

On J ul y 20, 2012, Cayuga Oper at i ng Company, LLC

( Cayuga) f i l ed a not i ce pur suant t o the Ret i r ement Not i ce Or der , 1

whi ch st at ed t hat Cayuga i nt ended t o mot hbal l Uni t s 1 and 2 at

i t s Cayuga Gener at i ng Faci l i t y i n Lansi ng, New Yor k, ( Cayuga

Faci l i t y) by J anuar y 16, 2013. 2

1 Case 05- E- 0889, Pol i ci es and Procedur es Regardi ng Gener at i ngUni t Ret i r ement s, Or der Adopt i ng Not i ce Requi r ement s f or

Generat i on Uni t Ret i r ement s ( i ssued December 20, 2005)( Ret i r ement Not i ce Or der ) .

I n response t o Cayuga’ s not i ce,

2 Accor di ng t o Cayuga, i t i nt ends t o pl ace t he Cayuga Faci l i t yi n “pr ot ect i ve l ay- up” t o l i mi t t he cost s t hat ar e i ncur r ed att he f aci l i t y. Cayuga Ret i r ement Not i ce, p. 1. The t er ms“mothbal l ” and “pr otect i ve l ay- up” ar e synonymous wi t h a“r et i r ement ” f or pur poses of pr ovi di ng not i ce under t heRet i r ement Not i ce Or der .



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New Yor k St at e El ect r i c & Gas Corporat i on ( NYSEG) conduct ed an

anal ysi s of t he pr oposed mot hbal l i ng and i dent i f i ed adver se

r el i abi l i t y i mpact s t hat coul d occur i f t he mot hbal l i ng pr oposal

wer e ef f ect uat ed. Al t hough NYSEG al so i dent i f i ed syst em

r ei nf or cement s as one pot ent i al mi t i gat i on measur e t hat woul d

r emedy those r el i abi l i t y i mpact s, i t est i mat ed t hat al l of t hose

r ei nf or cement s woul d not l i kel y be compl et ed unt i l at l east t he

end of 2016. Because t he upgr ades necessary t o mi t i gat e t he

r el i abi l i t y i mpacts woul d not be i n- ser vi ce unt i l af t er t he

pr oposed mot hbal l dat e f or t he Cayuga Faci l i t y ( i . e. , J anuar y

16, 2013) , NYSEG determi ned that t he Cayuga Faci l i t y woul d need

t o remai n capabl e of oper at i ng and avai l abl e f or commi t ment i n

or der t o mai nt ai n syst em r el i abi l i t y on an i nt er i m basi s.

On Oct ober 29, 2012, NYSEG submi t t ed a proposed Ter m

Sheet f or Rel i abi l i t y Support Ser vi ces ( RSS) bet ween NYSEG and

Cayuga t hat woul d suppor t t he cont i nui ng avai l abi l i t y of t he

Cayuga Faci l i t y f or mai nt ai ni ng r el i abi l i t y. The Ter m Sheet

pr ovi des t hat RSS woul d be pr ocur ed f r om t he Cayuga Faci l i t y f or

one year begi nni ng J anuary 16, 2013, and endi ng J anuary 15,

2014. Dur i ng t hi s per i od, NYSEG woul d i dent i f y and consi der

al t er nat i ve r el i abi l i t y sol ut i ons. NYSEG and Cayuga r equest ed

appr oval of t he Ter m Sheet , wi t hout mat er i al modi f i cat i on,

bef or e ent er i ng i nt o a bi l at er al cont r act i mpl ement i ng i t s

t erms. NYSEG al so pr oposed t o r ecover t he cost s t hat woul d be

i ncur r ed under t he cont r act f r om i t s ret ai l del i ver y cust omer s

t hr ough i t s Non- Bypassabl e Charge (NBC) .

BACKGROUND

The Cayuga Faci l i t y consi st s of t wo coal - f i r ed uni t s

wi t h a combi ned capaci t y of over 312 MW. Cayuga Uni t 1 was

pl aced i n servi ce i n 1955, and has a net capaci t y r at i ng of 154

MW. Cayuga Uni t 2 ent ered ser vi ce i n 1958, and has a net



CASE 12- E- 0400

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capaci t y of 158. 7 MW. 3

On J ul y 25, 2012, Depar t ment of Publ i c Ser vi ce St af f

( DPS St af f ) r equest ed t hat t he New Yor k I ndependent Syst em

Oper ator , I nc. ( NYI SO) and NYSEG anal yze t he ef f ect s of

mot hbal l i ng t he Cayuga Faci l i t y on bul k and l ocal el ect r i c

syst em r el i abi l i t y. I n addi t i on, DPS St af f r equest ed t hat

sol ut i ons be pr oposed t o addr ess any adver se rel i abi l i t y i mpact s

t hat wer e i dent i f i ed.

Cayuga’ s not i ce expl ai ned t hat t he

pr oposed mot hbal l i ng was at t r i but abl e t o i t s concl usi on t hat

cur r ent and f or ecast ed whol esal e el ect r i c pr i ces i n New Yor k

ar e, and wi l l be, i nadequat e to suppor t cont i nued oper at i ons.

I n l et t ers dat ed August 24, 2012, NYSEG and t he NYI SO

pr ovi ded anal yses t o DPS St af f . 4

3

The Cayuga Faci l i t y was f or mer l y owned by NYSEG, and wasr ef er r ed t o as t he Mi l l i ken St at i on.

NYSEG advi sed t hat mot hbal l i ng

t he Cayuga Faci l i t y woul d cause adver se r el i abi l i t y i mpact s

under cer t ai n condi t i ons. NYSEG’ s pr el i mi nar y st udi es

i dent i f i ed a need t o r et ai n bot h uni t s at t he Cayuga Faci l i t y as

avai l abl e and capabl e of bei ng commi t t ed t o mai nt ai n r el i abi l i t y

i n t he i nt er i m. NYSEG al so i dent i f i ed syst em upgr ades t o

r el i eve t he adver se i mpact s i n t he Aubur n area, and pr oposed t o

pur sue t hose upgr ades by f i l i ng an appl i cat i on pur suant t o

Ar t i cl e VI I of t he Publ i c Ser vi ce Law by t he end of 2012. The

f i r st phase of t he r ei nf or cement s i s est i mat ed t o be i n- ser vi ce

by t he end of 2016. NYSEG i ndi cat ed t hat i t needed t o conduct a

coor di nat ed st udy wi t h t he NYI SO and Nat i onal Gr i d t o i dent i f y

4 Let t er f r om Mary R. Smi t h, NYSEG Vi ce Pr esi dent – Engi neer i ngand Asset Management , t o Thomas Dvorsky, Depar t ment of Publ i cSer vi ce ( dated August 24, 2012) . Let t er f r om Wesl ey Yeomans,NYI SO Vi ce Presi dent of Operat i ons, t o Thomas Dvor sky,Depart ment of Publ i c Ser vi ce ( dated August 24, 2012) . TheNYI SO’ s l et t er was pr ovi ded under our r egul at i ons gover ni ngt he submi ssi on of conf i dent i al i nf or mat i on.



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any addi t i onal syst em r ei nf orcement s t hat may be needed out si de

of t he Aubur n ar ea.

I n conf ormance wi t h t he St ate Admi ni st r at i ve Procedur e

Act ( SAPA) §202( 1) , not i ce of Cayuga’ s pr oposed mothbal l i ng of

t he Cayuga Faci l i t y was publ i shed i n t he St at e Regi st er on

Sept ember 26, 2012 ( SAPA Not i ce) . I n addi t i on, a Not i ce

Di r ect i ng Fi l i ngs and Sol i ci t i ng Comment s was i ssued by the

Secr et ary on Sept ember 28, 2012 ( Secr et ar y’ s Not i ce) di r ect i ng

NYSEG and Cayuga t o f i l e ei t her an agr eement or proposed t erms

r ecommended by each part y, al ong wi t h j ust i f i cat i ons and

compl et e suppor t i ng document at i on, no l at er t han Oct ober 29,

2012.

On Oct ober 29, 2012, NYSEG submi t t ed a proposed Ter m

Sheet bet ween NYSEG and Cayuga t o pr ocur e RSS f r om t he Cayuga

Faci l i t y f or a one year per i od begi nni ng J anuar y 16, 2013, and

endi ng J anuar y 15, 2014. NYSEG woul d cont i nue t o procur e RSS

f r om t he Cayuga Faci l i t y beyond t hi s per i od, i f necessar y,

dependent upon t he i mpl ement at i on of NYSEG’ s pl anned syst em

r ei nf or cement s or al t er nat i ve r el i abi l i t y sol ut i ons. NYSEG al so

pr oposed t o r ecover t he cost s i t woul d i ncur i n pr ocur i ng RSS

f r om Cayuga t hr ough i t s NBC.

The per i od f or i nt er est ed par t i es t o submi t comment s

i n r esponse to t he SAPA Not i ce and t he Secr et ary’ s Not i ce

expi r ed on November 13, 2012. On November 13, 2012, comment s

wer e f i l ed on t he Ter m Sheet , t he pr oposed use of t he NBC f or

cost r ecover y, and t he pr ocess f or r evi ew, by Nat i onal Gr i d,

Si er r a Cl ub, I ndi cat ed Tr ansmi ssi on Owner s, 5

5 The I ndi cat ed Transmi ss i on Owners i ncl ude Cent r al Hudson Gas &

El ect r i c Corporat i on, Consol i dat ed Edi son Company of New Yor k,I nc. , Or ange and Rockl and Ut i l i t i es, I nc. , t he Long I sl andPower Aut hor i t y, and t he New Yor k Power Aut hor i t y.

Nucor Steel Auburn,

I nc. ( Nucor St eel ) , and Mul t i pl e I nt er venor s ( MI ) . NYSEG f i l ed

a r esponse t o Nucor St eel and MI on November 26, 2012. Nucor



CASE 12- E- 0400

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St eel and MI f i l ed comment s r espondi ng to NYSEG on November 28,

2012, and November 30, 2012, r espect i vel y. The part i es’

comment s ar e summar i zed and di scussed bel ow.

On November 16, 2012, Cayuga f i l ed a pr oposed, but

unexecut ed, r el i abi l i t y must - r un ( RMR) agr eement wi t h t he

Federal Energy Regul at ory Commi ss i on ( FERC) . 6

Al t hough t he RMR

appl i ed t o t he Cayuga Faci l i t y ef f ect i ve J anuar y 16, 2013,

Cayuga request ed t hat t he RMR f i l i ng be hel d i n abeyance pendi ng

our det er mi nat i on i n t hi s pr oceedi ng. Pur suant t o t he pr oposed

RMR, i f appr oved, NYSEG woul d compensat e Cayuga t hrough a

mont hl y f i xed- cost char ge of $6, 633, 307. 70, l ess cer t ai n cr edi t s

f or NYI SO- admi ni st ered mar ket r evenues ear ned by Cayuga. Cayuga

char act er i zed t hese amount s as based on i t s “cost - of - servi ce”

( COS) .

THE PETI TI ON

Term Sheet

The Term Sheet provi des t hat Cayuga woul d provi de RSS

by def er r i ng any mot hbal l i ng act i ons on t he Cayuga Faci l i t y f r om

J anuar y 16, 2013, t hrough J anuar y 15, 2014. I n t he meant i me,

NYSEG woul d consi der al t er nat i ve r el i abi l i t y sol ut i ons. Under

t he Term Sheet , NYSEG woul d pay Cayuga a mont hl y f i xed- pr i ce

charge of $2, 431, 388/ mont h f or RSS, t otal i ng $29, 176, 656 over 12

mont hs. I n addi t i on, NYSEG woul d f und cer t ai n capi t al

expendi t ures up t o $4, 325, 000. NYSEG woul d al so pay Cayuga one-

hal f of t he r easonabl e expense i t i ncur r ed, up t o $150, 000, f or

t he COS st udy f or t he Cayuga Faci l i t y t hat was f i l ed i n t hi s

proceedi ng on November 9, 2012. NYSEG woul d al so r ei mbur se

Cayuga f or cumul at i ve i ncr ement al f orced out age r epai r cost s

t hat exceed $450, 000.

6 FERC Docket No. ER13- 405- 000, Cayuga Operat i ng Company, LLC –RMR Fi l i ng ( f i l ed November 16, 2012) .



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Under t he Ter m Sheet , Cayuga woul d of f er t he I nst al l ed

Capaci t y ( I CAP) associ at ed wi t h t he Cayuga Faci l i t y i nt o t he

NYI SO I CAP auct i on at a “de mi ni mi s” pr i ce, i n compl i ance wi t h

NYI SO market r ul es. Any I CAP r evenues r ecei ved by Cayuga woul d

be cr edi t ed agai nst NYSEG’ s mont hl y payment t o Cayuga. Cayuga

woul d ret ai n any combi ned ener gy and anci l l ary servi ce revenues,

net of var i abl e pr oduct i on cost s, up t o $7 mi l l i on annual l y,

whi l e NYSEG woul d share equal l y i n any such revenues i n excess

of $7 mi l l i on annual l y.

Fur t her mor e, i n the event t hat t he Cayuga Faci l i t y

exper i ences a posi t i ve “Ear ni ngs Bef or e I nt er est , Taxes,

Depr eci at i on and Amort i zat i on” ( EBI TDA) i n one or more of t he

f i ve year s f ol l owi ng expi r at i on of t he Ter m Sheet , a por t i on of

such earni ngs woul d be cr edi t ed t o NYSEG f or t he benef i t of i t s

cust omer s ( Annual Ref und Amount ) . Mor e speci f i cal l y, i f Cayuga

oper ates t he f aci l i t y beyond J anuary 15, 2014, Cayuga woul d

r ei mbur se NYSEG f or one hal f of t he capi t al expendi t ur es t hat

wer e pai d by NYSEG, at t he r ate of 20% per year f or each of t he

next f i ve year s of oper at i on. I n each such year , up t o $432, 500

i n Cayuga’ s EBI TDA woul d be pai d back to NYSEG. I f Cayuga’ s

EBI TDA i n any year i s l ess t han t he Annual Ref und Amount , Cayuga

woul d not have an obl i gat i on t o pay NYSEG more than i t s EBI DTA

f or t hat year . The Ter m Sheet woul d al so subj ect Cayuga t o a

per f ormance penal t y of $787. 67 f or each hour t hat an RSS uni t i s

r equest ed t o r un but does not .

The Term Sheet cont empl at es t he pot ent i al

r enegot i at i on of t er ms and condi t i ons f or any necessar y

ext ensi on of t he cont r act unt i l such t i me as NYSEG i mpl ement s

suf f i ci ent t r ansmi ssi on enhancement s, or al t er nat i ve sol ut i ons

are i dent i f i ed and devel oped t o obvi ate t he need f or t he Cayuga

Faci l i t y. NYSEG f ur t her expl ai ns t hat t he opt i on t o ext end t he

Term Sheet i s necessar y t o account f or devi at i ons i n t he pl anned



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schedul e f or depl oyment of t r ansmi ss i on enhancement s and t o

r et ai n f l exi bi l i t y t o addr ess ot her r el i abi l i t y needs, i f any,

whi ch may be i dent i f i ed as r esul t i ng f r om t he mot hbal l i ng of t he

Cayuga Faci l i t y.

NYSEG and Cayuga seek approval of t he Term Sheet ,

wi t hout mat er i al modi f i cat i on. Fol l owi ng such appr oval , NYSEG

and Cayuga i nt end t o pr epar e, execut e, and f i l e a f i nal cont r act

based on t he Term Sheet .

I n suppor t of t he Ter m Sheet , NYSEG mai nt ai ns t hat i t

r epr esent s a r easonabl e resol ut i on of t he i ssues present ed, and

i s f ai r , equi t abl e, and i n t he publ i c i nt er est . The i nf or mat i on

NYSEG r el i ed upon i n eval uat i ng t he r easonabl eness of t he Ter m

Sheet cost s was pr ovi ded by Cayuga under conf i dent i al i t y

pr ot ect i on. Cayuga ar gues t hat t he Ter m Sheet r ef l ect s

si gni f i cant compr omi ses on i t s par t , i ncl udi ng: 1) compensat i on

at a l evel bel ow what t he COS st udy i ndi cat es i s appr opr i at e; 2)

accept ance of r esponsi bi l i t y t o pay f or capi t al expendi t ur es

t hat exceed $4, 325, 000; and, 3) r ei mbur sement f or hal f of t he

capi t al expendi t ur es pai d by NYSEG i f cer t ai n condi t i ons ar e

met .

Cost Recovery

The Term Sheet i s al so subj ect t o appr oval of a

compl et e and i mmedi at e cost r ecover y mechani sm f or NYSEG. I n

i t s Oct ober 29, 2012 f i l i ng, NYSEG pr oposed r ecover y of t he RSS

cost s on a vol umet r i c basi s t hr ough i t s NBC. NYSEG expl ai ned

t hat t he NBC i s an exi st i ng mechani sm t hr ough whi ch i t cur r ent l y

r ecovers t he market val ue of NYSEG- owned hydro pl ant out put

val ued at t he gener at i on sour ce; t he net mar ket val ue of t he

pur chased power cont r act s wi t h Non- Ut i l i t y Gener at or s and t he

New Yor k Power Aut hor i t y ( NYPA) ( market val ue of t he pur chased

power cont r act cost s det ermi ned at t he gener at i on sour ce l ess

t he cont r act cost s) ; mont hl y payment s r ecei ved by NYSEG f r om



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NYPA under t he Rechar ge New York Resi dent i al Consumer Di scount

Pr ogr am ( New Yor k Publ i c Aut hor i t i es Law § 1005( 13- b) ) ; al l

act ual t r ansmi ssi on wheel i ng expenses; and, cer t ai n act ual

whol esal e t r ansmi ssi on- r el at ed r evenues. The NBC al so i ncl udes

NYSEG’ s Lost Revenue Recovery Mechani sm. The NBC i s set monthl y

based on a f or ecast and i s subj ect t o a mont hl y t r ue- up f or al l

component s t o r ef l ect act ual af t er - t he- f act cost s and l oad

subj ect t o t he NBC. Al l i t ems col l ect ed t hr ough t he NBC ar e

symmet r i cal l y reconci l ed and t r ued- up mont hl y i n a compet i t i vel y

neut r al manner . The cr edi t s or char ges r el at ed t o t he

r econci l i at i on ar e i ncl uded i n the subsequent mont hl y NBC.

NYSEG cont ends t hat t he NBC i s t he appr opr i at e

mechani sm t o recover al l RSS cost s because i t woul d al l ow f or

t he f ai r , equi t abl e, and nondi scr i mi nat or y r ecover y of t he RSS

cost s f r om vi r t ual l y al l of NYSEG’ s del i ver y cust omer s.

Moreover , NYSEG pr oposes t hat t he NBC be ut i l i zed t o f l ow

t hr ough, f or t he benef i t of r at epayer s, any net I CAP r evenues

t hat may be credi t ed t o NYSEG under t he pr ovi si ons of t he Ter m

Sheet .

NYSEG suggest s t hat i t may be appr opr i ate t o al l ocat e

RSS cost s t o Nat i onal Gr i d, based on t he out come of t he on- goi ng

st udy i t i s conduct i ng wi t h t he NYI SO and Nat i onal Gr i d r el at ed

t o t he f ul l r el i abi l i t y i mpact s st emmi ng f r om t he mot hbal l i ng of

t he Cayuga Faci l i t y. Accordi ng t o NYSEG, t hi s st udy may

demonst r at e t hat cont i nued oper at i on of t he Cayuga Faci l i t y i s

necessar y f or t he r el i abi l i t y of Nat i onal Gr i d’ s l ocal and bul k

syst em, as wel l as NYSEG’ s l ocal syst em.



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COMMENTS

Nat i onal Gr i d

Nat i onal Gr i d di sagr ees wi t h NYSEG’ s suggest i on t hat

i t may be appr opr i at e t o al l ocat e a por t i on of t he RSS cost s t o

Nat i onal Gr i d i n t he f ut ur e, based on t he resul t s of t he st udy

expect ed t o be compl et ed by t he NYI SO, NYSEG, and Nat i onal Gr i d

by t he end of J anuary 2013. Al t hough t hat s t udy i s expect ed t o

i dent i f y any addi t i onal syst em r ei nf or cement s and l ong- t er m

sol ut i ons needed on NYSEG and Nat i onal Gr i d’ s syst ems, Nat i onal

Gr i d mai nt ai ns t hat mot hbal l i ng t he Cayuga Faci l i t y woul d

pr i mar i l y af f ect f aci l i t i es used t o ser ve NYSEG’ s cust omer l oad.

Accor di ng t o Nat i onal Gr i d, t he benef i t s t o Nat i onal Gr i d

cust omer s f r om t hose f aci l i t i es ar e de mi ni mi s.

Despi t e some r el i abi l i t y concer ns r el at ed t o

f aci l i t i es used t o ser ve i t s cust omer s, Nat i onal Gr i d ar gues

t hat t hose concer ns are “f ar l ess i mmedi at e and much more

cont i ngent t han t he si t uat i on f aci ng NYSEG. ”7

Si er r a Cl ub

Nat i onal Gr i d

cont ends t hat i t can st i l l ser ve i t s Syr acuse ar ea l oad under

nor mal syst em condi t i ons and speci f i ed si ngl e cont i ngenci es, and

i t s rel i abi l i t y concer ns ar i se under mul t i pl e- el ement out age

condi t i ons and cer t ai n gener at i on di spat ch condi t i ons.

Accor di ngl y, Nat i onal Gr i d bel i eves t hat i t shoul d not be

al l ocat ed any por t i on of t he RSS cost s.

Si er r a Cl ub cont ends t hat i t i s uncer t ai n whet her

NYSEG has a pl an t o mi ni mi ze adver se i mpact s t o rat epayer s by

“expedi t i ousl y, cost - ef f ect i vel y, and per manent l y el i mi nat [ i ng]

t he r el i abi l i t y need f or Cayuga. ”8

7 Nat i onal Gr i d comment s, p. 4.

I n the absence of such a

pl an, Si er r a Cl ub ur ges t hat NYSEG engage i n a compet i t i ve

sol i ci t at i on f or gener at i on, t r ansmi ssi on, and non- t r ansmi ssi on

8 Si err a Cl ub comment s, p. 2.



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al t er nat i ves, such as demand r esponse, whi ch coul d addr ess t he

r el i abi l i t y needs cr eat ed by mot hbal l i ng t he Cayuga Faci l i t y.

Si er r a Cl ub al so ar gues t hat NYSEG shoul d not cont r i but e t o t he

cost of any capi t al expendi t ur es t hat ar e not absol ut el y

necessar y t o mai nt ai n t he Cayuga f aci l i t y dur i ng t he dur at i on of

t he r el i abi l i t y need.

Fi nal l y, Si er r a Cl ub not es t he var i ous exampl es wher e

New Yor k coal pl ant s are f aci ng chal l enges t o r emai ni ng i n

oper at i on t hat may r ai se r el i abi l i t y i ssues. To el i mi nat e t he

need f or any f ut ur e out - of - mar ket r el i abi l i t y payment s, Si er r a

Cl ub r ecommends t hat det ai l ed r el i abi l i t y anal yses be pr epared

f or t he f our r emai ni ng coal pl ant s ( S. A. Car l son, Hunt l ey,

Somerset , and Danskammer) t o i dent i f y any needed t r ansmi ss i on

upgrades.

I ndi cat ed Transmi ssi on Owner s

The I ndi cat ed Tr ansmi ssi on Owners do not t ake a

posi t i on on t he subst ance of t he Ter m Sheet Agr eement . They

r equest , however , t hat i t be expr essl y st at ed t hat any deci si on

r ender ed i n t hi s pr oceedi ng wi l l not have a pr ecedent i al ef f ect

i n f ut ur e r equest s f or out - of - mar ket compensat i on. Accor di ng t o

t he I ndi cated Tr ansmi ssi on Owner s, al t er nat i ve appr oaches may be

appr opr i at e to addr ess t he speci f i c f act s and ci r cumst ances

sur r oundi ng f ut ur e r equest s.

Nucor St eel

Nucor St eel acknowl edges t he need t o ensure r el i abl e

el ect r i c ser vi ce i n t he Aubur n ar ea and, t her ef or e, does not

oppose t he appr oval of t he Ter m Sheet Agr eement . I t i s

concerned, however , t hat NYSEG i s not maki ng t he necessary

t r ansmi ssi on upgr ades i n a t i mel y manner i n or der t o mi t i gate

t he ut i l i t y’ s cont i nued r el i ance on t he oper at i on of t he Cayuga

f aci l i t y. Nucor Steel mai nt ai ns that t he Aubur n 345 kV

t r ansmi ssi on upgr ade appear s t o be at l east a f ul l year behi nd



CASE 12- E- 0400

- 11-

schedul e, based on NYSEG’ s r educed capi t al expendi t ur e est i mates

f or t he pr oj ect t hr ough t he end of 2013. Nucor St eel suggest s

t hat NYSEG be di r ect ed t o pr i or i t i ze t he Aubur n 345 kV upgr ade

by est abl i shi ng an expedi t ed schedul e, and t o i ncent t i mel y

compl et i on by suspendi ng f ur t her RSS cost r ecover y unt i l NYSEG’ s

next r at e case i n t he event t hat i t f ai l s t o meet est abl i shed

mi l est ones.

I n addi t i on, Nucor St eel suggest s t hat r ecover y of t he

RSS cost s shoul d be def er r ed unt i l NYSEG’ s next el ect r i c base

r ate case. Nucor St eel asser t s t hat NYSEG’ s pr oposed r ecover y

t hr ough a vol umet r i c ( i . e. , per kWh) NBC i s “i nadequat e,

i nef f i ci ent and wi l l i mpose excessi ve cost s on NYSEG r at epayer s

i n an i nappr opr i at e manner f or t oo l ong. ”9 Al t er nat i vel y, Nucor

St eel r equest s t hat t he RSS cost s be r ecover ed on a demand

( i . e. , per kW) basi s, whi ch, i t ar gues, woul d ensur e cost s ar e

r ecover ed i n a manner t hat r ef l ect s cost causat i on. Nucor St eel

l i kens t he RSS cost s t o t hose i ncur r ed t o ensur e r el i abi l i t y and

poi nt s out t he cost s are a subst i t ut e f or f or t hcomi ng

i nf r ast r uct ur e i nvest ment s. Thus, i t cont ends, RSS cost s ar e

“by nat ur e demand rel at ed. ”10

Mul t i pl e I nt er venor s ( MI )

MI suppor t s t he deci si on t o keep t he Cayuga f aci l i t y

i n oper at i on f or t he pur pose of mai nt ai ni ng r el i abi l i t y, but i s

concer ned t hat t he Ter m Sheet has not been adequat el y j ust i f i ed

t o suppor t a concl usi on t hat i t i s r easonabl e. I t suggest s that

t he Ter m Sheet shoul d be rej ect ed or modi f i ed pendi ng addi t i onal

j ust i f i cat i on.

MI ar gues t hat i t i s not i n a posi t i on t o eval uat e t he

Term Sheet because of t he “excl usi on of i nt er vener par t i es f r om

set t l ement negot i at i ons, ” t he “l i mi t ed amount of t i me al l ot t ed

9 Nucor Steel comment s, p. 3.

10 Nucor Steel comment s, p. 9.



CASE 12- E- 0400

- 12-

f or comment s, ” and t he “l ack of j ust i f i cat i on pr of f er ed publ i cl y

f or t he negot i at ed compensat i on l evel f or RSS. ”11

Not wi t hst andi ng t he const r ai nt s on i t s abi l i t y t o

par t i ci pat e, MI mai nt ai ns t hat t he Ter m Sheet compensat i on i s

“exor bi t ant ” and woul d over - compensat e Cayuga i f one or bot h

uni t s ar e unavai l abl e due t o a f or ced out age. MI asks t hat t he

r ecovery of RSS cost s t hrough t he NBC, as pr oposed by NYSEG, be

r ej ect ed and t hat i ssues per t ai ni ng t o the recover y of RSS cost s

be def er r ed t o NYSEG’ s next r at e case, whi ch coul d be f i l ed as

soon as Febr uar y 1, 2013.

MI proposes

t hat an al t er nat e pr ocess shoul d be devel oped f or eval uat i ng RSS

agr eement s, whi ch i ncl udes: 1) speci f i ed cost and ot her r ecor ds

t hat must be di scl osed; 2) use of nondi scl osur e agr eement s and

pr ot ecti ve or der s t o f aci l i t at e par t i ci pat i on by i nt er est ed

i nt er vener s whi l e pr ot ect i ng conf i dent i al gener at or cost

i nf or mat i on; 3) t echni cal conf er ences and/ or set t l ement

negot i at i ons on not i ce t o al l par t i es; and, 4) desi gnat i on of a

set t l ement j udge t o over see conf i dent i al i t y mat t er s, expedi t e

di scover y, and pr ovi de i nf or mat i on r egar di ng t he reasonabl eness

of any set t l ement .

Al t er nat i vel y, i f t he i ssue of cost r ecover y i s

deci ded i n t hi s pr oceedi ng, MI asks t hat vol umet r i c recover y of

cost s vi a t he NBC be r ej ect ed. MI ar gues t hat vol umet r i c

r ecover y woul d be i nconsi st ent wi t h cost causat i on pr i nci pl es,

i nequi t abl e t o hi gh- l oad- f act or cust omer s, and unf ai r l y exempt

whol esal e cust omer s f r om payi ng RSS cost s. MI suggest s t hat t he

RSS cost s shoul d be t r eat ed i n a manner comparabl e t o cost s of

el ect r i c syst em i nvest ment s t hat ar e made t o ensur e r el i abi l i t y,

whi ch are r ecover ed on a demand- r el at ed basi s. For exampl e, MI

poi nt s t o the t ent at i ve agr eement i n Nat i onal Gr i d’ s pendi ng

r at e case as a model , whi ch woul d al l ocat e RSS cost s t o ser vi ce

11 MI comments, p. 2.



CASE 12- E- 0400

- 13-

cl asses “based on t he most r ecent t r ansmi ssi on pl ant al l ocat or

and assessed on a vol umet r i c basi s; per kWh f or non- demand

ser vi ce cl assi f i cat i ons and per kWf or demand ser vi ce

cl assi f i cat i ons. ”12

Fur t her , MI cont ends t hat , i n addi t i on t o

t he pr oposed recover y f r om r et ai l cust omer s, RSS cost s shoul d

al so be r ecover ed on an equi t abl e basi s f r om whol esal e

cust omer s.

REPLY COMMENTS

NYSEG

I n comment s f i l ed out - of - t i me on November 26, 2012,

NYSEG r esponded t o sever al of t he poi nt s r ai sed by Nucor St eel

and MI . NYSEG argues t hat def er r i ng cost r ecover y f or a year or

l onger unt i l NYSEG’ s next r ate case, as suggest ed by Nucor St eel

and MI , i s i nappr opr i at e. NYSEG asser t s t hat mat chi ng cost

r ecover y wi t h t he t i mi ng of cost i ncur r ence i s appr opr i at e “t o

ensure t hat t he cash f l ows of NYSEG are not negat i vel y i mpact ed,

whi ch coul d have det r i ment al i mpact s on t he f i nanci al and cr edi t

met r i cs of [ NYSEG] . ”13

To addr ess Nucor St eel and MI ’ s obj ect i ons t o

r ecover i ng RSS cost s t hr ough t he NBC, NYSEG i ndi cat es t hat i t i s

amenabl e to creat i ng separate RSS surcharges by servi ce cl ass

based on t he 2008 embedded cost of servi ce st udy f r om i t s l ast

r ate f i l i ng. NYSEG woul d cr eate vol umet r i c and demand- based

cl ass speci f i c sur char ges f r om t hat st udy’ s t r ansmi ssi on pl ant

al l ocat i on f act or s ( t he aver age of t he 12 mont hl y coi nci dent

peaks by servi ce cl ass) , wi t h a mi nor adj ust ment t o i ncl ude t he

st andby cl ass. To al l ocat e t he cost s t o each ser vi ce cl ass,

NYSEG woul d t hen set cl ass- speci f i c surcharge rates on a ¢/ kWh

basi s f or non- demand met ered cl asses and on a $/ kW basi s f or

12 MI comments, p. 22.

13 NYSEG r epl y comments, p. 2.



CASE 12- E- 0400

- 14-

demand met er ed servi ce cl asses. NYSEG' s pr oposed al l ocat i on

f act or s are set f or t h i n At t achment A of i t s r epl y comment s.

NYSEG est i mat es t hat t hi s appr oach coul d be

i mpl ement ed by March 1, 2013. I f such sur char ges are

aut hor i zed, however , NYSEG r equest s t hat any def er r ed cost s be

r ecover ed, wi t h i nt er est , over t he r emai ni ng bi l l i ng mont hs of

cal endar year 2013 t o al l ow f or f ul l r ecover y dur i ng t he

appl i cabl e per i od i n whi ch cost s ar e i ncur r ed.

Fi nal l y, NYSEG cont est s MI ’ s suggest i on t o r ecover RSS

cost s f r om NYSEG’ s whol esal e cust omer s, si mi l ar t o t he appr oach

t aken i n t he Dunki r k Ret i r ement Or der . Accor di ng t o NYSEG,

whol esal e cust omer s woul d onl y account f or appr oxi matel y 7. 0% of

t he t ot al RSS cost s, based on t hei r por t i on of NYSEG’ s t ot al

t r ansmi ss i on l oad ser ved over t he most r ecent 12 mont h per i od

endi ng Oct ober 2012. NYSEG poi nt s out t hat unl i ke Nat i onal Gr i d

i n t he Dunki r k Ret i r ement Or der , NYSEG does not have a

t r ansmi ssi on f or mul a r at e whi ch al l ows f or annual updat es. To

i mpl ement such a f ormul a, NYSEG woul d need t o f i l e a proposed

Tr ansmi ssi on Servi ce Charge r at e change at FERC.

Nucor St eel

I n comment s f i l ed out - of - t i me on November 28, 2012,

Nucor St eel r ei t er at ed i t s i ni t i al posi t i on. I n t he event

i mmedi at e r ecover y of RSS cost s i s aut hor i zed, Nucor St eel

suppor t s t he al t er nat i ve appr oach i dent i f i ed i n NYSEG’ s r epl y

comment s.

MI

I n comment s f i l ed out - of - t i me on November 30, 2012, MI

i ndi cat ed i t s gener al suppor t of t he al t er nat i ve appr oach

i dent i f i ed i n NYSEG’ s r epl y comment s, whi ch i t cont ends i s

consi st ent wi t h cost causat i on pr i nci pl es and i s equi t abl e t o

al l cust omer s. MI cont i nues t o mai nt ai n, however , t hat t he

updat ed appr oach i nappr opr i at el y excl udes r ecover y f r om t he



CASE 12- E- 0400

- 15-

ut i l i t y’ s whol esal e cust omer s. Fur t her , MI asks t hat t he 2008

dat a r el i ed upon t o al l ocat e cost s t o NYSEG’ s servi ce

cl assi f i cat i ons shoul d be updat ed per i odi cal l y, such as par t of

NYSEG’ s next el ect r i c r at e case. Last l y, MI r equest s t hat

st andby cust omers be t r eat ed comparabl y wi t h cust omers i n t hei r

par ent cl assi f i cat i ons f or pur poses of r ecover i ng RSS cost s.

DI SCUSSI ON

I n t he Dunki r k Ret i r ement Or der addr essi ng t he

pr oposed mot hbal l i ng of t he Dunki r k gener at i ng st at i on, we not ed

t he chal l enges t hat ar i se i n t he cont ext of t he compet i t i ve

el ect r i ci t y mar ket s i n mai nt ai ni ng adequat e gener at i on resour ces

t o ensur e r el i abi l i t y. 14

The mot hbal l i ng of t he Cayuga Faci l i t y

r ai ses pot ent i al adver se r el i abi l i t y i mpacts si mi l ar t o t hose

addr essed i n t he Dunki r k Ret i r ement Or der . Accor di ngl y, we ar e

t aki ng act i on her e t o ensure t he cont i nued mai nt enance and

avai l abi l i t y of t he Cayuga Faci l i t y i n or der t o avoi d any

adver se i mpact s t hat i t s mot hbal l i ng may have on syst em

r el i abi l i t y.

Rel i abi l i t y Needs

I n r esponse to Cayuga’ s not i ce of i nt ent t o mot hbal l

i t s Cayuga Faci l i t y, NYSEG per f or med r el i abi l i t y st udi es t hat

i ndi cat ed t hat t he mot hbal l i ng on J anuar y 16, 2013 woul d r esul t

i n r el i abi l i t y cr i t er i a vi ol at i ons on t he l ocal t r ansmi ssi on

syst em i n t he Aubur n, New Yor k ar ea. Not hi ng i n t he

conf i dent i al NYI SO anal ysi s suggest s t hat we shoul d not t ake

14 Case 12- E- 0136, Dunki r k Power LLC and NRG Energy, I nc. , Or derDeci di ng Rel i abi l i t y I ssues and Addr essi ng Cost Al l ocat i on andRecover y ( i ssued August 16, 2012) ( Dunki r k Ret i r ement Or der ) ,p. 14. The Dunki r k Ret i r ement Or der al so conf i r med our j ur i sdi ct i on over r el i abi l i t y mat t er s, i ncl udi ng proposedr et i r ement s t hat may requi r e t he use of RSS payment s.



CASE 12- E- 0400

- 16-

act i on based on NYSEG' s anal ysi s. NYSEG pl ans sever al syst em

r ei nf or cement s t o addr ess t hese r el i abi l i t y vi ol at i ons. The

f i r st phase of t he r ei nf or cement s t o addr ess t he i dent i f i ed

r el i abi l i t y needs i s schedul ed t o be compl et ed by the end of

2016. Al t hough we are not prej udgi ng t he out come of any

appl i cat i ons t hat may come bef or e us f or appr oval , i t i s

ext r emel y i mpor t ant t hat t hese f aci l i t i es be pur sued

expedi t i ousl y i n order t o mi ni mi ze the RSS cost s i mposed on

r at epayer s. Accor di ngl y, NYSEG shal l devel op, i n coor di nat i on

wi t h DPS St af f , a det ai l ed schedul e, wi t h maj or mi l est ones, f or

t he devel opment and depl oyment of i t s pl anned r ei nf orcement s.

NYSEG shal l al er t DPS St af f t o any i ssues t hat may j eopar di ze

t he t i mel y achi evement of i t s devel opment mi l est ones. We are

al so di r ect i ng NYSEG t o i dent i f y any al t er nat i ves t hat may

sat i sf y t he i dent i f i ed r el i abi l i t y needs mor e cost - ef f ecti vel y

and ef f i ci ent l y than ei t her cont i nued r el i ance on t he Cayuga

Faci l i t y or t he syst em r ei nf or cement s i dent i f i ed by NYSEG.

We agr ee wi t h Si er r a Cl ub t hat a compet i t i ve

sol i ci t at i on pr ocess i s needed t o det er mi ne whet her any

al t er nat i ve sol ut i ons can meet t he r el i abi l i t y needs ar i si ng

f r om t he mot hbal l i ng of t he Cayuga Faci l i t y. As par t of t hi s

pr ocess, NYSEG shoul d al so i dent i f y whet her any market - based

sol ut i ons exi st t hat woul d r esol ve t hose r el i abi l i t y needs

wi t hout di r ect r at epayer suppor t . These pr ocedur es shoul d

ensur e t hat r at epayers pay no more than necessary t o pr eser ve

r el i abi l i t y, and ar e consi st ent wi t h our pol i ci es suppor t i ng

r el i ance on compet i t i ve mar ket s. Ther ef or e, we di r ect NYSEG t o

consul t wi t h DPS St af f and Nat i onal Gr i d, and t o f i l e a pr oposed

schedul e and pr ocess f or sol i ci t i ng al t er nat i ve r egul at ed and

mar ket - based sol ut i ons. We expect DPS St af f wi l l wor k wi t h

NYSEG and Nat i onal Gr i d t o revi ew any r esponses t o t he



CASE 12- E- 0400

- 17-

sol i ci t at i on and t o r epor t t o us on speci f i c pr oj ect s t hat may

war r ant our f ur t her consi der at i on.

Term Sheet Agreement

I n the Dunki r k Ret i r ement Or der , i t was deci ded t hat

when r evi ewi ng whet her t he cost s i ncur r ed under an RSS Ter m

Sheet are j ust and r easonabl e, our i nqui r y begi ns wi t h an

exami nat i on of t he economi c i mpact s of a t empor ary shut - down of

a gener at i ng f aci l i t y ( i . e. , mot hbal l i ng) as an ef f i ci ent mar ket

r esponse t o cur r ent l y unf avor abl e economi c condi t i ons. I n such

ci r cumst ances, an appr opr i ate l evel of compensat i on may i ncl ude

t he cost s t hat a gener at i on owner coul d avoi d by mothbal l i ng a

gener at i on uni t . Exampl es of t he t ypes of cost s t hat an owner

may “avoi d” or mi ni mi ze by mot hbal l i ng a generat i ng uni t

i ncl ude: 1) l abor and ot her oper at i ng and mai nt enance cost s; 2)

capi t al expendi t ur es; 3) t axes or agr eement s f or Payment s I n

Li eu Of Taxes; 4) oper at i ng r i sks ( e. g. , r i sks of equi pment

f ai l ur es dur i ng oper at i on) ; and, 5) cor por at e over head cost s.

These “avoi dabl e” cost s do not i ncl ude “sunk” cost s, such as

past i nvest ment s i n envi r onment al cont r ol s. Si mi l ar l y, debt and

equi t y cost s ar e consi der ed sunk cost s. Whi l e depr eci at i on

cost s begi n as sunk cost s, t hey ref l ect expect ed ser vi ce l i f e of

t he pl ant . By mot hbal l i ng a uni t , t he owner can avoi d oper at i ng

r i sks and t her eby ext end t he r emai ni ng ser vi ce l i f e of t hat uni t

once more f avor abl e economi c condi t i ons exi st ( e. g. , hi gher

nat ur al gas pr i ces r el at i ve t o coal ) and t he pl ant can r et ur n t o

pr of i t abi l i t y. Thus, depr eci at i on cost s coul d be r egar ded as a

pr oxy f or t he oper at i ng r i sks avoi dabl e thr ough mot hbal l i ng.

Taki ng al l t hese f act or s i nt o account , we est i mat e

t hat avoi dabl e cost s f or pr ocur i ng t he Cayuga Faci l i t y under t he

Term Sheet woul d be between appr oxi mat el y $20. 9 mi l l i on and

$38. 3 mi l l i on, dependi ng on t he t r eat ment of Admi ni st r at i ve &



CASE 12- E- 0400

- 18-

Gener al ( A&G) cor por at e expenses, capi t al expendi t ur es, and

depr eci at i on. 15

Cayuga’ s f i l i ng at FERC, whi ch was char act er i zed as a

COS rat e, pr ovi des anot her means f or measur i ng the

r easonabl eness of t he cost s i ncur r ed under t he RSS Ter m Sheet

Agr eement . I n t he COS f i l i ng at FERC, Cayuga cl ai med t hat t he

compensat i on f or cont i nui ng both Cayuga uni t s shoul d be set at a

r at e of appr oxi mat el y $79. 6 mi l l i on. Thi s rat e, however ,

i ncl udes r ecover y of sunk cost s on t he same basi s as i f Cayuga

wer e a regul at ed suppl i er .

We r evi ewed t he suppor t i ng document s and dat a

pr ovi ded by Cayuga t o eval uat e t he r easonabl eness of t he Ter m

Sheet , t hough t he accur acy of t he i nf or mat i on was not ver i f i ed

i n al l of i t s det ai l .

A COS r at e, however , yi el ds poor oper at i ng i ncent i ves

because, under t hat appr oach, Cayuga woul d l ack t he i ncent i ve t o

operat e i t s uni t s ef f i ci ent l y. Moreover , a COS approach i s

pr obl emat i c f r om t he per spect i ve of pr omot i ng compet i t i ve

market s, as i t al l ows a gener at i on owner such as Cayuga t o earn

mar ket - based r et ur ns ( pot ent i al l y i n excess of a COS r at e) when

mar ket condi t i ons ar e f avor abl e, and t o obt ai n a regul at ed COS

r at e, i ncl udi ng pr of i t s, when mar ket condi t i ons ar e not

f avor abl e. By mot hbal l i ng i t s f aci l i t y i nstead of r et i r i ng i t ,

Cayuga coul d r et ur n i t s gener at i on uni t t o a mor e l ucr at i ve

15 Based on t he cost s i dent i f i ed by Cayuga i n i t s RMR f i l i ng wi t hFERC, t he upper bound of t he avoi dabl e cost s f or t wel ve mont hs( $38. 3 mi l l i on) coul d be est i mat ed by r educi ng t he f ul l yembedded COS amount ( $83. 9 mi l l i on based on Exhi bi t 1,Schedul e 1, RMR cost of $79. 6 mi l l i on pl us $4. 3 mi l l i on i ncapi t al expendi t ur es) by cost of capi t al ( $23 mi l l i on, net of wor ki ng capi t al ) and r el at ed i ncome t axes ( $22. 6 mi l l i on) . The l ower bound of t he avoi dabl e cost s ( $20. 9 mi l l i on) coul dbe est i mated by f ur t her r educi ng f r om t he upper boundpot ent i al l y sunk cost s associ at ed wi t h depr eci at i on ( $11. 2mi l l i on) , A&G ( $1. 9 mi l l i on) , and capi t al expendi t ur es ( $4. 3mi l l i on) .



CASE 12- E- 0400

- 19-

market - based r at e i f market condi t i ons i mprove, as Cayuga hopes

t hey wi l l . By t aki ng t hi s appr oach, some mer chant gener at i on

owner s coul d avoi d mar ket r i sks and shi f t t he r i sks of hi gher

cost s t o r at epayer s.

The Term Sheet Agreement cover s a t er m of t wel ve

mont hs, at a cost of appr oxi mat el y $29 mi l l i on, pl us capi t al

expendi t ur es of up t o $4. 3 mi l l i on. The pr oposed condi t i on i n

t he Term Sheet , whereby Cayuga woul d be requi r ed t o ref und a

por t i on of i t s capi t al expendi t ur es when r evenues ar e above a

cer t ai n t hr eshol d amount , coul d f ur t her r educe r at epayer cost s.

The ul t i mat e cost s t hat woul d be borne under t he RSS ar e l ess

t han what Cayuga sought i n i t s COS f i l i ng at FERC and are wi t hi n

t he r ange of est i mat es of avoi dabl e cost s.

Al l owi ng Cayuga t o r et ai n t he f i r st $7 mi l l i on of net

energy revenues, and 50% of any such revenues beyond t hat

amount , i s r easonabl e si nce i t cr eat es an i ncent i ve f or t he

ef f i ci ent oper at i on of t he f aci l i t y. Net ener gy r evenues i n

excess of $7. 0 mi l l i on annual l y woul d be shared evenl y bet ween

NYSEG and Cayuga. NYSEG’ s Stat ement i n Suppor t of t he Term

Sheet i s si l ent on t he t r eat ment of i t s pot ent i al 50% shar e of

t he net ener gy and anci l l ar y servi ces r evenues r ecei ved f r om

Cayuga. Because NYSEG’ s cust omers woul d bear t he cost s i ncur r ed

i n pr ocur i ng RSS f r om t he Cayuga Faci l i t y, we f i nd i t r easonabl e

t o i nt erpr et t he Ter m Sheet such t hat NYSEG woul d cr edi t any net

ener gy and anci l l ar y servi ces r evenues i t r ecei ves t o cust omer s.

Accor di ngl y, t he Ter m Sheet i s appr oved cont i ngent upon t hi s

i nt er pr et at i on.

Under t he pr oposed Ter m Sheet , al l capaci t y r evenues

ar e credi t ed t o r at epayer s. Thi s i s reasonabl e, as t he capaci t y

r evenues wi l l hel p to reduce the bur den on rat epayer s of t he

cont r act payment s. However , because Cayuga wi l l not r et ai n t he

capaci t y revenues, t hi s pr ovi si on coul d vi t i at e Cayuga’ s



CASE 12- E- 0400

- 20-

i ncent i ve t o of f er t he Cayuga Faci l i t y compet i t i vel y i nt o t he

capaci t y mar ket . I ndeed, Cayuga mi ght prof i t f r om of f er i ng t hem

at a pr i ce so hi gh t hey woul d f ai l t o cl ear t he capaci t y mar ket ,

ef f ect i vel y wi t hhol di ng t hat capaci t y i n or der t o i ncrease t he

mar ket pr i ce of capaci t y recei ved by i t s other gener at i ng uni t s

r emai ni ng i n t he market . The Ter m Sheet addr esses thi s concer n

by commi t t i ng Cayuga to of f er i t s uni t s i nt o the capaci t y mar ket

at a de mi ni mi s pr i ce.

We r ej ect MI ’ s asser t i on t hat t he Ter m Sheet

compensat i on woul d over - compensat e Cayuga i f one or bot h uni t s

ar e unavai l abl e due t o a f or ced out age. MI pr ovi des no basi s

support i ng i t s t heory t hat Cayuga woul d be over - compensat ed. I n

f act , Cayuga woul d i ncur cost s under f or ced out age condi t i ons,

whi ch woul d have been avoi ded i f t he Cayuga Faci l i t y were

mot hbal l ed. Ther ef or e, we f i nd t he compensat i on i s r easonabl e

under t he ci r cumst ances.

We f i nd t hat t he Term Sheet Agreement bet ween NYSEG

and Cayuga f or t he pr ovi si on of RSS on an i nt er i m basi s woul d

ensur e t he mai nt enance of adequat e generat i on r esour ces

necessary f or saf e, adequat e, and r el i abl e ser vi ce.

Accor di ngl y, t he Ter m Sheet i s appr oved, subj ect ed t o t he f i l i ng

of an execut ed copy of t he cont r act i mpl ement i ng i t s t er ms and

condi t i ons.

Cost Recovery

As MI and Nucor St eel cont end, vol umet r i c r ecover y of

RSS cost s t hrough t he NBC, as proposed by NYSEG, i s

i nappr opr i at e because i t does not suf f i ci ent l y r ef l ect cost

causat i on pr i nci pl es. Those par t i es, however , have not

j ust i f i ed t hei r cont ent i on t hat NYSEG shoul d be r equi r ed t o

def er r ecover y of RSS cost s unt i l i t s next el ect r i c rat e case.

Unl i ke t he ci r cumst ances consi der ed i n t he Dunki r k Ret i r ement



CASE 12- E- 0400

- 21-

Or der , NYSEG i s not curr ent l y engaged i n a pendi ng r at e case and

i t does not hol d si gni f i cant def er r ed cust omer cr edi t s. By

del ayi ng cost r ecover y f or up t o one year , as woul d be needed t o

conduct a r at e case, NYSEG woul d i ncur si gni f i cant car r yi ng

char ges on t he RSS cost s. These char ges coul d unr easonabl y

i ncr ease t he t ot al cost s pai d by cust omer s. Ther ef or e, a new

r at e mechani sm shoul d be devel oped and i mpl ement ed t o ensure

cost r ecover y on a cur r ent basi s i n an equi t abl e manner .

We f i nd t hat t he al l ocat i on of RSS cost s shoul d be

done i n a manner consi st ent wi t h ot her appr oaches f or al l ocat i ng

cost s associ at ed wi t h mai nt ai ni ng r el i abi l i t y, such as t he cost s

of necessar y t r ansmi ssi on upgr ades. NYSEG shal l f i l e t ar i f f

amendment s t o ef f ect uat e such a recovery mechani sm, consi st ent

wi t h i t s r epl y comment s, as soon as pract i cabl e, but no l at er

t han March 1, 2013. The RSS cost s shal l be al l ocat ed based on

t he r espect i ve cont r i but i on of each ser vi ce cl ass t o t he

coi nci dent peak demand accordi ng t o t he t r ansmi ssi on pl ant

al l ocat i on f act or s pr oposed by NYSEG. The cl ass- speci f i c RSS

surcharge rates shal l be set on a ¢/ kWh basi s f or non- demand

metered cl asses and on a $/ kW basi s f or demand metered ser vi ce

cl asses. Any RSS cost s i ncur r ed pr i or t o t he i mpl ement at i on of

t he RSS sur charge shal l be def er r ed, and r ecover ed vi a t he RSS

sur char ge over t he remai ni ng bi l l i ng mont hs of cal endar year

2013.

We agr ee wi t h MI t hat t he 2008 dat a proposed by NYSEG

f or al l ocat i ng RSS cost s t o t he var i ous ser vi ce cl assi f i cat i ons

shoul d be updat ed per i odi cal l y, and accor di ngl y di r ect NYSEG t o

updat e t he al l ocat i ons as appr opr i at e ( e. g. , as par t of NYSEG’ s

next el ect r i c r at e case) . We al so shar e MI ’ s concer ns t hat

NYSEG’ s pr oposed al l ocat i on t o st andby cust omers may be

i nappr opr i at e, and ar e ther ef or e est abl i shi ng a pr ocess f or



CASE 12- E- 0400

- 22-

r ecei vi ng comment s on t he pr oposed t ar i f f r evi si ons bef or e

appr ovi ng t he pr oposed r evi si ons on a permanent basi s.

Whi l e NYSEG est i mat es t hat whol esal e cust omers’

cont r i but i on t o RSS cost s i s appr oxi mat el y 7. 0%, t her e i s no

r eadi l y avai l abl e mechani sm t o accompl i sh recover y f r om such

cust omer s, unl i ke t he ci r cumst ances present i n t he Dunki r k

Ret i r ement Or der . To t he ext ent t hat such a mechani sm becomes

avai l abl e i n t he f ut ur e, such as a NYSEG f i l i ng t o amend i t s

t r ansmi ss i on r evenue r equi r ement at FERC, we expect NYSEG t o

i ncl ude i n i t s f i l i ng an al l ocat i on of RSS cost s t o whol esal e

cust omers. The whol esal e cust omer s’ shar e of t he cost s,

expect ed t o be recover ed t hr ough t he FERC Transmi ss i on Servi ce

Char ge, woul d be cr edi t ed t o ret ai l cust omer s.

Turni ng t o Nat i onal Gr i d’ s obj ect i ons agai nst an

al l ocat i on of t he RSS cost s t o i t , we f i nd t hat NYSEG has not

adequat el y j ust i f i ed t hat al l ocat i on at t hi s t i me. Based on t he

r el i abi l i t y st udi es pr esent ed, NYSEG’ s cust omer s wi l l r eal i ze

di r ect and si gni f i cant r el i abi l i t y benef i t s i n pr ocur i ng RSS,

whi l e Nat i onal Gr i d’ s cust omer s woul d onl y exper i ence

r el i abi l i t y benef i t s under mul t i pl e cont i ngency scenar i os. I f

t he on- goi ng r el i abi l i t y st udi es ci t ed by NYSEG event ual l y

demonst r at e t hat Nat i onal Gr i d’ s benef i t s ar e mor e t han de

mi ni mi s, NYSEG shoul d pr opose an appr opr i at e al l ocat i on

met hodol ogy f or our consi der at i on t hen.

Pr ocedur al Mat t er s and Pr ecedent i al Val ue

MI mi sappr ehends t he natur e of t he pr ocess i n t hi s

pr oceedi ng. The Dunki r k Ret i r ement Or der cont r adi ct s MI ’ s cl ai m

t hat i t was excl uded f r om set t l ement negot i at i ons, whi ch must be

pr edi cat ed on a bel i ef t hat our set t l ement gui del i nes ar e

appl i cabl e. As deci ded i n t hat Or der , a pr oposed RSS Ter m Sheet

i s not a set t l ement of i ssues pur suant t o t he set t l ement



CASE 12- E- 0400

- 23-

gui del i nes. I nst ead, t he RSS Ter m Sheet was a deci si on made by

NYSEG i n f ur t her ance of i t s r esponsi bi l i t i es as a f ul l y-

r egul at ed el ect r i c r et ai l ut i l i t y. I n so doi ng, NYSEG pr oceeded

i n accor dance wi t h t he usual Publ i c Ser vi ce Law r egul at or y

pr ocess, wher e deci si ons a r egul at ed ut i l i t y makes ar e subj ect

t o subsequent r evi ew. Ther ef or e, t he set t l ement gui del i nes ar e

not appl i cabl e i n t hi s si t uat i on, and ar gument s t o the cont r ar y

ar e r ej ect ed.

We not e, however , t hat our r egul at i ons r egar di ng

di scovery cont ai ned i n 16 NYCRR Par t 5 pr ovi ded an opport uni t y

f or i nt er est ed par t i es t o ascer t ai n i nf or mat i on r el evant t o

devel opi ng t hei r posi t i ons, subj ect t o appl i cabl e

conf i dent i al i t y r est r i ct i ons. We ar e unawar e t hat any par t i es

avai l ed t hemsel ves of t hi s pr ocess i n t hi s pr oceedi ng, but

encour age part i es t o do so i n any f ut ur e pr oceedi ngs. We wi l l

not adopt MI ’ s suggest ed al t er nat i ve pr ocess and pr ocedur es at

t hi s t i me, gi ven t hat t he exi st i ng di scover y pr ocess has not

been demonst r at ed t o be i nadequat e. Moreover , we not e t hat such

al t er nat i ve pr ocesses and pr ocedur es shoul d not be per mi t t ed to

unnecessar i l y del ay resol ut i on of an i mmi nent adver se

r el i abi l i t y i mpact under a ret i r ement not i ce pr ocess, especi al l y

gi ven t hat an adver se i mpact may not be i dent i f i ed unt i l wel l

i nt o t he si x- mont h not i ce per i od.

I ndi cat ed Tr ansmi ssi on Owner s r equest an expl i ci t

det er mi nat i on t hat t he deci si ons r eached her e wi l l not have a

pr ecedent i al ef f ect on f ut ur e pr oceedi ngs. We not e t hat t he

f act s i nvol ved i n t he r evi ew of each not i ce submi t t ed i n

compl i ance wi t h t he Ret i r ement Not i ce Or der are uni que, and may

war r ant di f f er ent t r eat ment on a case- by- case basi s.



CASE 12- E- 0400

- 24-

Ot her Rel i abi l i t y St udi es

Fi nal l y, wi t h r espect t o Si er r a Cl ub’ s r equest t o

conduct r el i abi l i t y st udi es of t he ot her coal pl ant s wi t hi n t he

St at e, we wi l l not f or mal l y r equi r e such st udi es at t hi s t i me.

We note t hat DPS St af f has been worki ng cl osel y wi t h the

af f ect ed ut i l i t i es t o i dent i f y syst em r ei nf or cement s t hat may be

needed t o addr ess any rel i abi l i t y i mpact s at t endi ng t he

r et i r ement of t he ot her coal f aci l i t i es i n t he St at e. To t he

ext ent a more f ormal process may be needed i n the f uture, we

not e t hat we have r ecent l y i ni t i at ed a pr oceedi ng t o devel op

“Rel i abi l i t y Cont i ngency Pl ans” t hat ant i ci pat e and pl an f or t he

pot ent i al r et i r ement of si gni f i cant gener at i on r esour ces i n t he

St at e. 16

CONCLUSI ON

I t i s essent i al t hat t he mot hbal l i ng of gener at i on

uni t s t hat ar e subj ect t o a l i ght ened r at emaki ng r egul at i on

r egi me not j eopar di ze t he r el i abi l i t y of t he el ect r i c syst em.

We have t aken here t he necessary st eps t o ensur e t hat NYSEG

cont i nues t o pr epar e t r ansmi ssi on r ei nf or cement s, whi l e al so

pr ovi di ng an oppor t uni t y f or al t er nat i ve sol ut i ons t o come

f orward. The Ter m Sheet governi ng NYSEG’ s procur ement of RSS

f r om Cayuga f or t he i nt er i m per i od r epr esent s a bal ance of t he

i nt er est s of el ect r i c consumer s and t he gener at i on owner ,

pr ovi des f or a l evel of compensat i on t hat i s wi t hi n t he zone of

r easonabl eness, and i s ot her wi se j ust and r easonabl e and i n t he

publ i c i nt er est . Ther ef or e, appr oval of t he RSS Ter m Sheet i s

j ust i f i ed.

16 Case 12- E- 0503, Generat i on Ret i r ement Cont i ngency Pl ans, Or derI nst i t ut i ng Pr oceedi ng and Sol i ci t i ng I ndi an Poi nt Cont i ngencyPl an ( i ssued November 30, 2012) .



CASE 12- E- 0400

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The Commi ssi on or ders:

1. New Yor k St ate El ect r i c & Gas Corporat i on shal l

pr ocur e Rel i abi l i t y Suppor t Ser vi ces f r om Cayuga Oper at i ng

Company, LLC, and Cayuga Oper at i ng Company, LLC shal l provi de

Rel i abi l i t y Suppor t Ser vi ces t o New Yor k St at e El ect r i c & Gas

Cor por at i on, i n accor dance wi t h t he Ter m Sheet , whi ch i s

appr oved, as di scussed i n the body of t hi s Or der .

2. New Yor k St ate El ect r i c & Gas Corporat i on and

Cayuga Oper at i ng Company, LLC, shal l f i l e a f i nal execut ed copy

of t he cont r act i mpl ement i ng t he Ter m Sheet at l east f i ve days

pr i or t o t he commencement of Rel i abi l i t y Suppor t Ser vi ces.


consul t wi t h Depar t ment of Publ i c Ser vi ce St af f and f i l e, wi t hi n

30 days of t he dat e of t hi s Or der , a schedul e and pr ocess f or

sol i ci t i ng al t er nat i ve sol ut i ons to addr ess t he i dent i f i ed

r el i abi l i t y needs cr eat ed by t he mot hbal l i ng of t he Cayuga

Faci l i t y.

4. New Yor k St at e El ect r i c & Gas Cor por at i on i s

di r ect ed t o f i l e t ar i f f r evi si ons, t o become ef f ect i ve Mar ch 1,

2013, on not t han 30 days not i ce, as ar e necessar y t o ef f ect uat e

t he pr ovi si ons adopt ed by t hi s or der . New Yor k St at e El ect r i c &

Gas Cor por at i on shal l ser ve copi es of t he f i l i ng on al l par t i es

t o t hi s case. Any comment s on t he f i l i ng must be f i l ed wi t hi n

14 days of ser vi ce of t he pr oposed r evi si ons. The r evi si ons

speci f i ed i n t he f i l i ng shal l not become ef f ect i ve on a

per manent basi s unt i l approved by t he Commi ss i on.

5. The r equi r ements of Sect i on 66( 12) ( b) of t he

Publ i c Ser vi ce Law as t o newspaper publ i cat i on of t he t ar i f f

amendment s descr i bed i n Or der i ng Cl ause No. 4 ar e wai ved.


coor di nat e wi t h Depar t ment of Publ i c Ser vi ce St af f i n devel opi ng

a det ai l ed schedul e f or pur sui ng, on an expedi t ed basi s, t he



CASE 12- E- 0400

needed syst em r ei nf or cement s t o addr ess t he r el i abi l i t y needs

at t endi ng t he mot hbal l i ng of t he Cayuga Faci l i t y, and shal l f i l e

such schedul e, wi t h maj or mi l est ones, wi t hi n 30 days of t he dat e

of t hi s Or der .

7. The Secr et ar y may ext end t he deadl i nes provi ded

f or i n t hi s Or der .

8. Thi s proceedi ng i s cont i nued.

By t he Commi ssi on,

( SI GNED) J EFFREY C. COHEN

Act i ng Secr et ar y

Documents

Cayuga agreement with NYSEG