Thursday, June 20, 2013

LIPA Agreement Announced

Legislative agreement has been announced regarding revision of the operating structure of the Long Island Power Authority ((LIPA).  The announcement includes a chart comparing the existing and fully privatized scenarios with the new arrangement, which retains public ownership in LIPA but gives the private operating company more powers to change its rates, terms and conditions of service, reduces the role of LIPA in overseeing its contractor, which will be PSEG, and substitutes an advisory role of the PSC to "recommend" but not actually determine matters, including rates and customer complaints under HEFPA.
The draft bill would exempt PSEG from the consumer protection duties of an electric company under Article 2 of the Public Service Law, the Home Energy Fair Practices Act. It is not clear how customers will fare under the new arrangement, for example, whether PSEG will keep service on while customer complaints are pending PSC review or whether PSEG will follow the "recommendation" of the PSC is complaint matters. See PULP Network, Will LIPA "Reform" Provide Equal Consumer Protections for Long Island Electric Customers?, May 20, 2013.

The announcement says the LIPA deal "will also achieve savings to allow the new utility to seek a rate freeze for 2013, 2014 and 2015." The rate "freeze" discussed in the announcement, however, is apparently a freeze only of the transmission and distribution rates, and would not foreclose changes in the price of generation service.

It is unclear how energy will be purchased for Long Island customers after the change, which will sharply reduce activities of LIPA and shift duties to the contractor. In New Jersey, PSEG conducts a generation supply auction to obtains energy for its basic service customers.  LIPA is in a "load pocket" which limits the availability of competitively priced generation supply,  LIPA has obtained diverse sources of generation supply through contracts and other means, but it appears this role will shift to PSEG.

The option of full LIPA reprivatization urged by some was apparently not feasible, as this would require rate increases to cover higher interest private debt and to garner a fair return on private investors' capital, currently in the range of 9%.  When LIPA purchased the electric assets of the Long Island Lighting Company (LILCO), LILCO's rates were highest in the state.  Simply by shifting to public ownership by LIPA, bills were reduced by 20%, and leadership for the dubious honor of highest rates of a major electric utility in New York state has been held ever since by investor-owned Con Edison.

According to the American Public Power Association, publicly owned electric utilities generally have lower rates than investor owned utilities.  Consultant reports have found that undoing public ownership of LIPA, which allowed cheaper financing of the stranded costs of an unused nuclear power plant, and which avoided the need for rates to cover a 9% or so profit return on investors' equity, would require rates to go up. A 2005 report suggested that the opportune time to transition LIPA to private ownership is after 2013, when the higher costs of private ownership could be offset after more LIPA bond repayments were made and rates would otherwise go down.

LIPA has bonds scheduled to be paid off in September 2013 and in 2014, which will reduce costs, and any refinancing of current debt will likely result in savings because interest rates are low.  So other things being equal, if its transmission and distribution rates are frozen at the current level, and if all power purchasing costs are passed through to customers, LIPA may be able to earn a surplus or cover new expenses without rate increases as financing costs come down.


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