LIPA 2010 study: Rate hike likely with privatization

LIPA technicians work on one of two transformers LIPA technicians work on one of two transformers being installed at the LIPA Newbridge Road Substation in Levittown in preparation for the connection of the Neptune Regional Transmission System cable, which will bring 660 megawatts of electricity (the equivalent of two power plants) to Long Island. (Aug. 16, 2006) Photo Credit: Jim Peppler

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A study commissioned by the Long Island Power Authority in 2010 found that even the most optimistic scenarios for privatizing the agency would result in the need for more revenue through higher electric rates.

It's the second LIPA-commissioned study in three years that has concluded as much. Another, by the Brattle Group in 2011, found that privatization could hike rates 15 percent to 20 percent.

The confidential draft report by Navigant Consulting in Westbury was provided to Newsday by the Suffolk County Legislature's LIPA Oversight Committee, which obtained the report under the Freedom of Information law.

The report laid out two scenarios for privatizing LIPA: one in which LIPA was sold for $5.7 billion and retained a small portion of debt, and another that assumed the new owner found a way to pay off all of LIPA's $7 billion debt.

Under both scenarios, the new owner would have to hike rates to collect between 7 percent and 12 percent more revenue from ratepayers than under the existing public-private structure, the study said.

"Of the strategic options under consideration, the privatization option would likely result in significant revenue requirement increases for energy delivery to Long Island electric customers," the report said. Navigant officials weren't reachable Tuesday.

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The study ties most of the cost increases to higher taxes, a 10 percent equity rate of return, higher borrowing costs, and fees associated with becoming a state-regulated private utility.

By comparison, converting LIPA to a fully municipal utility would require roughly 1 percent less in revenue to operate the system, while maintaining the status quo wouldn't require a rate hike, the report said.

The privatization plan proposed by Gov. Andrew M. Cuomo envisions a three-year rate freeze and rates beyond that of no higher than they would have been under LIPA.

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Matthew Wing, a spokesman for Cuomo, called the Navigant report "out of date," and said it "relies on assumptions that have changed." In any case, he said, "We want the option that will keep rates affordable, protect property taxpayers, and improve customer service and disaster preparedness and response."

Navigant assumed LIPA assets had a book value of $5.4 billion. The Moreland Commission, the group empaneled by Cuomo to look into state utilities' response to superstorm Sandy, assumed a value of $3.5 billion.

Wednesday, state Sen. Carl Marcel-lino (R-Syosset) is scheduled to hold LIPA hearings in Albany.

Cynthia Kouril, a Melville contract attorney and former special assistant U.S. attorney who is testifying at the hearing, noted the Navigant report finds a need for higher rates even under more favorable privatization assumptions.

Kouril said she'll testify that municipal utilities "generally are a much better value for ratepayers, with better reliability." And she noted, "Right now the provision of electric service on Long Island is almost entirely in private hands," with National Grid operating the system for LIPA. "Going private isn't going to remove the problems."

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Matthew Cordaro, co-chairman of the LIPA Oversight Committee, which is meeting Wednesday in Hauppauge, noted that the Navigant report generally mirrors the findings of the Brattle report -- that "privatization among all the al- ternatives is the least attractive."

"In the end, privatization has got certain costs associated with it," said Cordaro, who is stepping down from the committee to become a LIPA trustee. Those costs include higher taxes and a private company's profit, he said, noting, "You can disguise it, but those bills will have to be paid. You can't make these costs disappear."

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