Costs from Sandy could hit LIPA ratepayers

Two LIPA employees look over plans in Garden Two LIPA employees look over plans in Garden City, a week after superstorm Sandy. (Nov. 6, 2012) Photo Credit: Patrick E. McCarthy

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After knocking out power for hundreds of thousands of Long Island Power Authority customers, superstorm Sandy could jack up their bills, an analyst who covers the utility said yesterday.

It's still unknown how much of the repair tab the federal government will pick up, but ratepayers could be on the hook for the difference.

"For a municipal utility, there really are no other means to pay for these costs other than the ratepayers," said Dennis Pidherny, an analyst at Fitch Ratings who covers LIPA."There are no shareholders to bear the costs," he said.

The Federal Emergency Management Agency generally reimburses a utility like LIPA for 75 percent of its disaster expenses. Gov. Andrew M. Cuomo has asked President Barack Obama to direct FEMA to reimburse the state 100 percent for Sandy, but it's still unclear how much New York will actually get. If LIPA is left on the hook for 25 percent of the costs, it could borrow millions of dollars by issuing bonds.

"If we do get reimbursement then we probably won't have to bond it out," said LIPA chief financial officer Michael Taunton. "If we don't get the full reimbursement, we may have to consider doing that."

Part of every utility bill goes to pay down LIPA's nearly $7 billion in debt. If that debt total grows because of Sandy, so too does the amount of money needed to pay it off.

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Tropical storm Irene cost the authority more than $170 million. Taunton said they expect to receive roughly $125 million from FEMA but they are still waiting on $100 million of that.

After Irene, LIPA tapped its retained earnings -- essentially a surplus built up over years -- to pay for those costs without having to raise rates. Taunton said if FEMA covers 90 percent or more of LIPA's costs from Sandy, they could probably avoid long-term borrowing by using cash on hand and short-term credit.

The cost of Sandy is still being totaled, but Taunton said "it's going to be more than Irene."

Raising rates would be politically unpopular even if it makes economic sense. Political pressure to keep rates low in the short-term, however, can end up costing more in the long-term. Moody's Investors Service on Monday warned the storm could weaken LIPA's financial position in part because raising rates could be challenging after Cuomo threatened to punish utilities if they don't restore power quickly. If credit rating agencies believe that the authority won't raise its rates to meet its obligations, they could lower its credit rating. Just as a lower consumer credit rating increases the costs of borrowing to buy a car or a house, a lower credit rating for LIPA would increase its cost of borrowing -- a cost borne by ratepayers.

"I don't want to lose the credit rating; it's extremely important," Taunton said. LIPA has a plan in place to reduce its debt, but after Sandy it will need to re-evaluate that plan, he said.

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