This is a very unfortunate situation, Greg Starheim, DCEC chief executive officer, said in a media release. We understand and were willing to agree to terms the city proposed that would ensure protection of their water-supply interests, but despite complying with their requests, they still fought us on it.

Mercedes Padilla, DEC spokeswoman said, We remain interested in working with the DCEC. We believe that there is a path to allowing for hydroelectric development at the NYC reservoirs in the Catskills that would be mutually beneficial to New York City and DCEC; however, if DCEC has made a business decision to no longer pursue discussions, then we will respect their decision.

The city Department of Environmental Protection submitted a competing application for the project in November. The DEP is the New York City agency that oversees city-owned reservoirs.

FERC awarded the city the permit in March while denying the DCEC’s application, citing preference to municipal applicants.

DCED appealed the FERC decision in April, but the DEP protested the appeal.

We understood the city was interested in DCEC developing the project for the benefit of watershed communities as long as their water-supply interests were protected, Frank Winkler, DCEC president, said in the release. Unfortunately, their actions were inconsistent with our discussions.

The DCEC’s proposed Western Catskills Hydro Project would have involved installing modular-design independent intake structures on the reservoirs’ dams, Starheim said.

But in a statement released in November, DEP Commissioner Emily Lloyd cited dam safety, concern about maintaining operational control of the reservoirs and the need to meet obligations set by the Supreme Court, including flow management agreements, as the reasons behind the city’s application to harness hydro power.

Starheim said previously the DCEC’s plan is environmentally sound and safe. It would also generate more electricity than what the DEP is proposing, which he said is based on a design from two decades ago, Starheim added.

DCEC was hoping to get final approval in 2011 and have the hydro plants open within a year or two after that.

The DEP’s $600 million renovation project for the Gilboa Dam was the impetus for the idea, Starheim said.

Starheim said there are no generating facilities at the four dams included in the project.

The project was part of the DCEC’s effort to explore ways to secure its entire electricity supply using renewable local energy sources.