Debt-saddled LIPA should hike rates to curb future borrowing needs, adviser recommends

A private financial adviser to the Long Island Power Authority is recommending the debt-strapped utility collect more from ratepayers to reduce its reliance on borrowing, improve its financial standing, and fund long-term projects with cash rather than excessive new debt.

The recommendations, presented to LIPA trustees Monday, came as LIPA released its 2015 budget and prepares to make its case for a separate three-year rate-setting request for 2016-18 that is widely expected to include a rate hike. The three-year rate freeze promised as part of the LIPA Reform Act, which gave PSEG Long Island day-to-day control of the electric grid, expires at the end of 2015.

Any rate hike would come in addition to separate costs for fuel and power -- monthly charges that have jumped more than 50 percent in the past two months.

At a presentation to LIPA trustees' finance and audit committee, PFM Public Power Group noted that LIPA had "the lowest credit ratings of any major public power" entity in the country and more than $10 billion in debt and capital leases, according to the documents. PFM has been LIPA's financial adviser since 2009 and was awarded a new $1.1 million annual contract earlier this year.

PFM is proposing that LIPA increase its cash position beyond its existing expenses to fund long-term expenditures and better "manage debt." At present, LIPA is limited by its own bylaws from accumulating excessive "net income," and typically limits that excess to $75 million a year.

The increased cash position would mean LIPA has more on hand to "offset future debt needs," and "less exposure to financial risk," according to the presentation, but it would certainly mean higher rates. LIPA chief financial officer Tom Falcone, in an interview, declined to say exactly how much the plan could hike rates starting in 2016.

The PFM presentation alludes to the exhaustive case LIPA and PSEG are now preparing for new rates -- referred to on monthly bills as the "delivery charge" -- for the 2016 through 2018 period. The request would for the first time receive "review and recommend" scrutiny by the state Department of Public Service.

LIPA's 2015 budget, also released Monday, introduces the concept of revenue decoupling to the utility's finances. The measure allows utilities to recoup system costs even as demand declines -- which is intended to provide an incentive to cut user consumption even in the face of revenue decline. Falcone said the LIPA version would incorporate efficiency and renewables reductions, and allow LIPA to recoup expenses even if sales are influenced by unexpected weather.

LIPA's proposed 2015 budget of $3.6 billion is a $74 million increase over last year, reflecting an anticipated $80.4 million jump in fuel and power costs next year.

A separate capital budget proposes spending a record $677.8 million on longer-term system improvements, with most of the money coming from government grants.

LIPA is projecting a slight increase in electric sales next year, despite several years of flat or declining sales. PSEG Long Island operating expenses for 2015 are budgeted at $458 million, a $37.6 million reduction from 2014.

LIPA's internal expenses are expected to drop next year as it cuts staff to 40 people from a current 50. Salaries and benefits for the 40 remaining executives and staff are a proposed $10.1 million; administrative costs are $5.5 million, a drop of $1.2 million. Professional services and consulting costs are expected to decline $7.9 million from 2014, to $9.9 million.

While overall rates will hold steady next year, the delivery charge for 2015 will be increased to 10.7 cents a kilowatt hour from a current 10.46 cents, LIPA said, to offset reductions in the efficiency and renewables charge on bills and a lower state assessment.

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

Mark Harrington, a Newsday reporter since 1999, covers energy, wineries, Indian affairs and fisheries.