MINUTES OF THE MEETING

MINUTES OF THE SPECIAL MEETING

OF THE

POWER AUTHORITY OF THE STATE OF NEW YORK

February 9, 2005

Subject

1. St. Regis Mohawk Land Claim Settlement – St. Lawrence/FDR Power Project Resolution, Exhibit ‘1-A’

3. Motion to Resume Meeting in Open Session

4. Southeastern New York Governmental Customers – Long-Term Supplemental Electricity Supply Agreements Resolution, Exhibits ‘4-A’ & ‘4-B’

5. Next Meeting

Closing

Minutes of the Special Meeting of the Power Authority of the State of New York held at the White Plains Office at 8:50 a.m.

Present: Louis P. Ciminelli, Chairman

Frank S. McCullough, Jr., Vice Chairman

Timothy S. Carey, Trustee

Joseph J. Seymour, Trustee

Michael J. Townsend, Trustee

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Eugene W. Zeltmann President and Chief Executive Officer

David E. Blabey Executive Vice President, Secretary and General Counsel

Robert A. Hiney Executive Vice President – Power Generation

Vincent C. Vesce Executive Vice President – Corporate Services and Administration

Joseph Del Sindaco Senior Vice President and Chief Financial Officer

Angelo S. Esposito Senior Vice President – Energy Services and Technology

Edward Hubert Senior Vice President – Transmission

Louise M. Morman Senior Vice President – Marketing, Economic Development
and Supply Planning

Brian Vattimo Senior Vice President – Public and Governmental Affairs

Carmine J. Clemente Deputy Secretary and Deputy General Counsel

Arthur T. Cambouris Assistant General Counsel – Litigation

Joseph J. Carline Assistant General Counsel – Power and Transmission

Arnold M. Bellis Vice President – Controller

Donald A. Russak Vice President – Finance

Thomas Warmath Vice President and Chief Risk Officer

James H. Yates Vice President – Major Accounts Marketing and Economic Development

Stephen P. Shoenholz Deputy Vice President – Public Affairs

Michael E. Brady Treasurer

Dennis T. Eccleston Chief Information Officer

Angela D. Graves Deputy Secretary

Frederick E. Chase Executive Director – Hydro Relicensing

Jordan Brandeis Director – Supply Planning, Pricing and Power Contracts

Paul F. Finnegan Director – Upstate Public and Governmental Affairs

Lydia Helle Maide Director – Major Accounts Group

Keith G. Silliman Director – Niagara Relicensing

Daniel Wiese Director – Corporate Security/Inspector General

Peter Scalici Deputy Inspector General – Investigations

Albert Swansen Deputy Inspector General – Security

Michael J. Huvane Manager – Business Marketing and Economic Development

Edward Holman Senior Environmental Engineer II

Michael A. Saltzman Senior Information Specialist

Mary Jean Frank Associate Secretary

Lorna M. Johnson Assistant Secretary

Bonnie Fahey Executive Administrative Assistant

Kevin J. Falvey Consultant

Larry Stalika Vice President – BOC Gases

Chairman Ciminelli presided over the meeting. Executive Vice President, Secretary and General Counsel Blabey kept the Minutes.

1. St. Regis Mohawk Land Claim Settlement – St. Lawrence/FDR Power Project

The Executive Vice President, Secretary and General Counsel submitted the following report:

SUMMARY

“The Trustees are requested to acknowledge and ratify their earlier approval of a settlement agreement entitled Agreement of Settlement and Compromise to Resolve the Akwesasne Mohawk Title and Trespass Claims with Respect to Lands Situated in the State of New York, executed on February 1, 2005 (‘Settlement’). Attached hereto as Exhibit ‘1-A’

BACKGROUND

“In 1982 and again in 1989, three groups of Mohawks filed federal lawsuits against the Authority, the State, the Governor of the State, St. Lawrence and Franklin counties and others, claiming ownership to certain lands in St. Lawrence and Franklin counties and to Barnhart, Long Sault and Croil Islands. These islands are within the boundary of the Authority’s St. Lawrence/FDR Project (‘Project’). Settlement discussions were held periodically between 1992 and 1998. In 1998, the federal government intervened on behalf of the Mohawks.

“On May 30, 2001, the United States District Court (the ‘Court’) denied, with one minor exception, the defendants’ motion to dismiss the land claims. In April 2002, the tribal plaintiffs moved to strike certain affirmative defenses and, joined by the federal government, moved to dismiss certain defense counterclaims. In an opinion dated July 28, 2003, the Court left intact most of the Authority’s defenses and all of its counterclaims. Thereafter, the defendants filed amended answers and pretrial discovery began. Just last week the court-appointed magistrate agreed to stay the litigation and postpone discovery until March 31, 2005, in view of the Settlement described below.

“While the litigation was proceeding, the State and the Authority discussed settlement with the three tribal plaintiffs. Those settlement discussions have now produced a final land claim Settlement, which, as pertains to the Authority, contains terms that from time to time were the subject of Trustee briefings. The Settlement provides, among other things, for the Authority to: (a) convey Croil and Long Sault Islands and a 215acre parcel known as Massena Point to the Mohawks; (b) pay $2 million annually to the Mohawks for the next 35 year; and (c) sell, at the preference power rate, up to 9 MW of Authority hydropower to the Mohawks for use on their reservation. In return, the Mohawks will release, under current law, all claims to Barnhart Island and any land in the State, relinquish any claim for any annual fees from the Project, dismiss their pending lawsuits and withdraw their pending challenges to the Authority’s new license for the Project.

“That Settlement, a copy of which is attached as Exhibit 1-A, was formally approved by votes of all three Mohawk entities. Thereafter, on February 1, 2005, the Settlement was signed by the Governor and authorized representatives of all three tribal entities. The Executive Vice President, Secretary and General Counsel signed the Settlement on behalf of the Authority, after receiving verbal authorization from each of the Trustees. The Settlement will require, among other things, federal and state legislation to become effective.

DISCUSSION

“As has been previously discussed in earlier briefings, this Settlement, when it becomes effective, will resolve a controversy which has lasted over 200 years and questioned the validity of the Authority’s title to the St. Lawrence/FDR Project.

“While the Authority is required to make annual payments, transfer three parcels of land (including two islands in the original claim area) and sell low-cost electricity to the Mohawks, its benefits substantially outweigh its costs. In fact, the components and value of the Authority’s Settlement obligations are not appreciably different than the value of terms offered (or to be offered) to affected communities in the course of settlements involving the Authority’s relicensing efforts. Similar to those cases, the Authority was likely to incur huge costs in terms of time, money and public relations if the disputes and, in this case, the litigation continued for what likely would be several more years. That expense came with no assurance of success or even a result less costly than the settlement. At the end of the day, the risk that the Authority could lose control of the Project or forfeit a large portion of its annual revenues was much greater than the Settlement cost.

“On the other hand, the settlement yields a resolution with considerable benefits to the Authority. First, title to Barnhart Island and other Authority property throughout the State will no longer be the subject of a claim by any of the Mohawk entities, except in the event of a radical and unexpected change in the law. Second, those same entities will withdraw the only currently pending challenges to the Authority’s new license for the St. Lawrence/ FDR Project. Third, the Mohawks will expressly waive any claims under the Federal Power Act for large annual fees from the Authority’s Project revenues.

“In short, this settlement is in the best interests of the Authority and was properly approved and should be formally ratified.

FISCAL INFORMATION

“The annual payments made by the Authority to the Mohawks under this Settlement Agreement will be made from the Operating Fund.

RECOMMENDATION

“The Executive Vice President, Secretary and General Counsel recommends that the Trustees acknowledge and ratify their earlier verbal approval of the Agreement of Settlement and Compromise to Resolve the Akwesasne Mohawk Title and Trespass Claims with Respect to Lands Situated in the State of New York, executed on February 1, 2005.

“The President and Chief Executive Officer, the Executive Vice President – Power Generation and the Senior Vice President – Chief Financial Officer and I concur in the recommendation.”

Mr. Cambouris presented the highlights of staff’s recommendations to the Trustees. In response to a question from Vice Chairman McCullough, Mr. Cambouris said that the State of New York, not the Authority, would indemnify the counties involved for any loss of taxes resulting from the settlement.

The following resolution, as submitted by the Executive Vice President, Secretary and General Counsel, was unanimously adopted.

RESOLVED, That the Trustees’ earlier verbal approval of the Settlement that is described in the foregoing report of the Executive Vice President, Secretary and General Counsel is hereby acknowledged and ratified; and be it further

RESOLVED, That the Trustees’ earlier verbal authorization of the Executive Vice President, Secretary and General Counsel to execute that Settlement on behalf of the Authority is hereby acknowledged and ratified.

2. Motion to Conduct an Executive Session

“Mr. Chairman, I move that the Authority conduct an executive session to discuss: (i) the financial history of particular corporations and matters leading to the award of contracts to particular corporations and (ii) matters related to ongoing or potential administrative litigation relating to particular persons and corporations.” On motion duly made and seconded, an Executive Session was held.

3. Motion to Resume Meeting in Open Session

“Mr. Chairman, I move to resume the meeting in Open Session.” On motion duly made and seconded, the meeting resumed in open session.

4. Southeastern New York Governmental Customers – Long-Term Supplemental Electricity Supply Agreements

The President and Chief Executive Officer submitted the following report:

SUMMARY

“The Trustees are requested to authorize the execution of new long-term supplemental electricity supply agreements with governmental customers located in New York City as listed in Exhibit ‘4-A.’

BACKGROUND

“The Authority has served governmental customers in southeastern New York State since their transfer from the Consolidated Edison Company of New York, Inc. (‘Con Edison’) beginning in 1976 as part of the Authority’s purchase of the Indian Point 3 Nuclear and Charles Poletti Power (then the Astoria 6) Plants. A total of 115 governmental customers located in New York City and Westchester County purchase Authority electricity in order to serve a myriad of government facilities, including office buildings, the subway system, public schools, public housing, hospitals, water and wastewater treatment plants, parks, police and fire stations, bus depots and airports. In 2004, the governmental customer group accounted for about $750 million in total revenue to the Authority, of which two-thirds was for electricity supply.

“Nearly 10 years ago, the Authority entered into long-term supplemental agreements with almost all of its governmental customers. The objective of these agreements was twofold – to provide price predictability and stability for the customers as well as a stable customer base and revenue stability for the Authority. A major feature of these agreements was that rates were frozen for nearly 10 years. However, due to electric industry restructuring and changes in the Authority’s supply portfolio to serve this customer group (e.g., the sale of Indian Point 3, the purchase of much larger quantities of electricity from the market and the construction of the new 500 MW combined cycle plant), the cost to serve these customers has increased and become more volatile. In addition, due to the scheduled retirement of the Poletti Power Plant as early as 2008, the Authority was faced with a need for in-city capacity to meet the needs of these customers.

“Because the agreements signed almost a decade ago did not accommodate these significant changes in costs and industry structure, the Authority gave the customers the requisite three-year notice of termination to be effective at the end of 2006, pending negotiation of suitable new agreements under which the Authority could recover these increased costs and customers would participate in securing new production resources to meet their needs.

DISCUSSION

“The attached form of agreement (Exhibit ‘4-B’) is a result of those discussions and reflects a proposed new, collaborative relationship between the governmental customers in New York City and the Authority.

“The principal features of the agreement are as follows:

· The governmental customers will purchase their electricity from the Authority through December 31, 2017, with the right to supply limited amounts of their load with renewable energy or distributed generation. In addition, customers can terminate service from the Authority at any time on three years’ notice, and under certain limited conditions on one year’s notice, provided that they compensate the Authority for any above-market costs associated with certain of the resources used to supply the customers.

· As noted at the Trustees’ meeting of December 14, 2004, the customers have agreed to new fixed rates for 2005 in contemplation of a new long-term agreement. For 2005, the Authority will collect an additional $105 million from the customers instead of the $133 million originally proposed in September 2004.

· Each year for the next annual rate year, the Authority will provide the customers a fully supported cost of service showing the fixed and variable costs necessary to serve the customers, which shall be subject to review and comment by the customers.

· Changes in the Authority’s fixed costs will require formal rate cases. Variable costs such as fuel, purchased power and NYISO costs will be flowed through to the customers based on a consultative process among the parties and subject to the cost-recovery mechanism chosen by the customers, as discussed below.

· Beginning in 2005, and likewise each year thereafter, the Authority will implement an annual planning process during which the customers will select a cost-recovery mechanism for each succeeding rate year. The mechanisms offered will consist of a conventional full pass-through arrangement (i.e., an Energy Charge Adjustment Option or ‘ECA Option’), an ECA with some additional risk management or ‘hedging’ by the Authority (‘ECA with Hedging Option’), other risk-management options subject to a ‘Sharing Plan’ (defined below) and, to be offered beginning with the 2008 rate year, a ‘Minimum Price Volatility Option’ under which the Authority’s production prices would be set for the rate year, subject to change only for cost increases relating to bond covenant and certain tax and similar enumerated external cost elements.

· For the cost-recovery mechanisms that the customers wish to consider during each annual process, the Authority will develop prices inclusive of all necessary and appropriate hedging costs. The Authority and the customers shall consult in the development of these mechanisms and the customers shall select a single such cost-recovery mechanism to be implemented from among those subject to the Sharing Plan, an ECA with Hedging Option or the ECA Option. The Minimum Price Volatility Option, however, shall not be subject to this consultative process.

· For any cost-recovery mechanism subject to the Sharing Plan, if actual costs in the rate year turn out to be different than were projected during the prior annual planning process, the first $60 million of under-recoveries (losses) experienced in each rate year will be split evenly between the Authority and the customers. The customers’ half of such under-recovery will thus be limited in the aggregate to $30 million. This will be included as a surcharge spread out over the customers’ bills in the succeeding rate year. Under-recoveries exceeding $60 million in any rate year will be absorbed entirely by the Authority. The first $10 million of all over-recoveries (savings) experienced over the life of the agreement in years during which the Sharing Plan applies will be credited to the customers. Any over-recoveries in excess of $10 million experienced during years in which the Sharing Plan applies will be split evenly between the Authority and the customers, with appropriate mechanisms to credit the customers.

· The Authority will also develop a ‘default’ cost-recovery option to implement if the customers cannot agree on one of the cost-recovery options they requested the Authority to develop, which will also be subject to the Sharing Plan.

· The ECA Option, an ECA with Hedging Option and the Minimum Price Volatility Option are not subject to the Sharing Plan.

· The Authority agrees to use ‘commercially reasonable’ efforts to have the means in place to allow individual customers to select separate cost-recovery mechanisms by the 2008 rate year. Until such choice is available, all of the customers are subject to the mechanism they select collectively.

· The Authority agrees to complete cost-of-service studies of its production rates and its rates for the pass-through of Con Edison delivery charges by March 31, 2008, with appropriate tariff changes being proposed for adoption thereafter, subject to customer input and recognition of customer impacts.

· The Authority will provide the customers with updated cost-of-service information and actual-versus-budget variance reports on a quarterly basis, and will provide a report to the customers on key plant operational statistics each year.

· If a customer terminates the agreement, it will be subject to an exit fee that represents the customer’s pro-rata share of RFP #3 resources (or any other resources that are added to the Authority’s portfolio of production resources through a collaborative process similar to that used in RFP #3).

· The agreement also has provisions for incremental pricing for certain unexpected new load and waivers of exit fees for certain customer-arranged distributed generation and renewable resources projects.

· The Authority and the customers will continue to work in partnership to identify energy efficiency and clean energy technology projects at the customers’ facilities and to implement such projects that the parties agree are economically feasible. The Authority commits to finance up to $100 million of energy efficiency and clean energy technology programs each year over the term of the Agreement for the benefit of governmental customers in southeastern New York. The costs of such programs shall be borne by the customers in the same manner as under the current cost-recovery mechanisms for Authority energy efficiency projects.

· The customers are committed to pay for any supply secured for them by the Authority under RFP #3 and any subsequent RFP awarded in a similar collaborative method.

· Upon full termination of service under the Agreement, a customer can request continued service under terms and conditions consistent with the Authority’s statutes. The original Application for Service would be terminated.

· As a special condition in the agreement with the City of New York (‘City’), the Authority has agreed to operate two City-owned hydro facilities, subject to both satisfactory completion of a due-diligence investigation by the Authority and the Authority’s recovery of costs from the City to operate these facilities.

“The agreement, substantially in the form attached as Exhibit ‘4-B,’ has been approved by the Metropolitan Transportation Authority, and will be submitted for approval to the governing boards or responsible public official of the City, the New York City Housing Authority, the Port Authority of New York and New Jersey, the New York State Office of General Services and the Jacob K. Javits Convention Center. These customers account for nearly 90% of the revenues in the southeastern New York market. In addition, this agreement will also be offered to other governmental customers noted on Exhibit ‘4-A.’

FISCAL INFORMATION

“Once executed, these supplemental agreements will secure more than $7 billion in production revenues to the Authority over the term of the agreements.

RECOMMENDATION

“The Director – Major Accounts, Governmental recommends that the Trustees authorize the execution of agreements, substantially in the form attached hereto as Exhibit ‘4-B,’ with governmental customers in New York City.

“The Executive Vice President, Secretary and General Counsel, the Senior Vice President – Marketing, Economic Development and Supply Planning, the Senior Vice President and Chief Financial Officer, the Vice President – Major Account Marketing and Economic Development, the Director – Supply Planning, Pricing and Power Contracts and I concur in the recommendation.

Ms. Maide presented the highlights of staff’s recommendations to the Trustees. In response to a question from Trustee Seymour, Ms. Maide said that the Port Authority’s Trustees still need to approve the new agreement. President Zeltmann complimented Ms. Morman and her staff, as well as the governmental customers, for their hard work on negotiating these agreements. Mr. Yates added that these new agreements represent a “sea change” in the Authority’s relationships with its customers.

The following resolution, as submitted by the President and Chief Executive Officer, was unanimously adopted.

The next Regular Meeting of the Trustees will be held on Wednesday, February 23, 2005, at 11:00 a.m., at the New York Office, unless otherwise designated by the Chairman with the concurrence of the Trustees.

Upon motion duly made and seconded, the meeting was adjourned by the Chairman at approximately
9:55 a.m.

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