Whether it was AIG or Fannie Mae, bailouts have dominated the national economy for the past half-decade, starting with the investment firm Bear Stearns' government-engineered takeover five years ago this week. But a legacy of bailouts shadows Long Island's cost of living, too -- through the Long Island Power Authority.
When Long Island residents and business owners open their electric bills, they may wonder why they pay power bills among the highest in the continental United States for service that is less than stellar, as superstorm Sandy proved.
The reason is simple: Long Islanders aren't just paying for power. They're paying for the legacy of three bailouts.
The first was former Gov. Mario Cuomo's bailout of the old Long Island Lighting Co., starting in 1986. LILCO was a private company with private shareholders and bondholders. It ran into trouble in the '80s in large part because it had made the fateful decision to build an expensive nuclear power plant in a community that didn't want a nuclear power plant.
Whatever your opinion of nuclear power, LILCO's decision was dumb -- and shareholders and bondholders should have taken the hit. Instead, Cuomo bailed them out, borrowing money so that the new LIPA could pay LILCO $4.2 billion more than what its assets were worth, in a process that took a decade.
LIPA's second dose of help was former Gov. George Pataki's bailout of Suffolk County and local governments and school districts. By the late 1990s, a court had ruled that Suffolk governments owed LIPA $1.4 billion for the authority's overpayment of property taxes.
But Suffolk had already spent that money -- in effect, borrowing from LIPA customers to pay for day-to-day county and local budget costs. Pataki's solution? Pressure LIPA into accepting only half the refund it should have received -- and letting LIPA borrow that half in order to have the cash upfront, while Suffolk County ratepayers slowly pay back what they owe.
LIPA's third bailout benefited Pataki himself. The governor never wanted LIPA to pass the cost of rising fuel through to customers; he thought it would hurt his political prospects on the Island, whose voters are critical to statewide elections. So he let LIPA borrow $250 million to "smooth out" -- that is, hide -- the cost of rising fuel.
Thanks to those decisions and others, LIPA hasn't gotten very far in repaying its LILCO debt. The $3.5 billion that LIPA still owes for its original bailout makes up half the company's $7 billion debt. Without this debt burden -- $331 million annually -- LIPA could invest more in a better power system, or pass on savings through lower rates.
The current Gov. Cuomo has some ideas on how to fix LIPA -- including, possibly, privatizing the power system by selling it to a company that would take full responsibility for performance, just as Con Edison does in most of New York City and Westchester. To do so, Andrew M. Cuomo might spin off LIPA's debt into a special state vehicle, so that the new company wouldn't have to pay it.
That's fine. But spinning off the debt doesn't erase it. The bottom line is that Long Islanders will still have to repay that debt -- just in a more complicated fashion.
Cuomo may think he's on firmer footing, as he has $2 billion from the feds to spend on utility upgrades thanks to Sandy. But $2 billion goes fast, even if the governor spends it all in one region. Moreover, it would be only a down payment on a modern power system. It would cost tens of billions, for example, to bury power lines underground.
And Cuomo has no control over the price of fuel, a key part of power costs.
If Long Islanders want a more reliable system, they're still going to have to pay for it. But if they understand how much they're paying for the mistakes of the past, maybe they'll prevent those of the future.
Nicole Gelinas is a senior fellow at the Manhattan Institute and contributing editor to City Journal. This piece is excerpted from her remarks on March 6 to the Long Island Real Estate Group.