Here is Joe Brennans site about the law, i copied it due to people saying link was dead.
Steam Railroad Laws in New York City
Folklore among railfans and New York City buffs is that there is a law against operating steam engines in tunnels in Manhattan, or something similar. This has earned the status of a FAQ on railroad newsgroups.
Here are the facts.
The Grand Central Law
Chapter 425 of the Laws of 1903 is titled “An Act to provide for further regulation of the terminals and approaches thereto of the New York and Harlem railroad at and north of Forty-second street in the city of New York. . .”. This law was passed and effective 7 May 1903.
The lengthy text of this law generally provides the powers needed to close and regrade public streets, condemn property, and so on, to make possible the construction of Grand Central Terminal.
Section 3 requires plans for the reconstruction to be submitted within 30 days of the Act (i.e. by 6 June 1903) to the Board of Estimate and Apportionment of the city of New York. This board was until recently the legislative body of the city.
Section 4 states that, beginning 5 years after approval of the plans (i.e. by about June 1908 or slightly later), "it shall not be lawful, except only in case of necessity, arising from the temporary failure of such other motive power as may be lawfully adopted, for any railroad corporation to operate trains by steam locomotives in Park avenue in the city of New York south of the Harlem river. If . . . trains shall be operated by steam locomotives in said Park avenue south of the Harlem river for a period of more than three days, the railroad corporation operating such trains shall pay to the city of New York a penalty of five hundred dollars for every day or