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Cuomo expected to announce LIPA privatization plan

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) Credit: Jim Peppler

The Cuomo administration is expected to announce Wednesday a plan to privatize LIPA -- and senior administration officials said the blueprint calls for a three- to five-year rate freeze and new borrowing to pay the utility's debt.

The plan to sell the Long Island electric grid to a private utility, to be described during Gov. Andrew M. Cuomo's State of the State address about 1:30 p.m. in Albany, also envisions some higher costs associated with the sale. But it would bank on savings through operating "efficiencies," including the elimination of outside contractors and sharply reducing LIPA staff, to offset them, the officials said.

"We believe based on meetings we've had that a privatization deal could be had that could result in a three- to five-year rate freeze," one high-ranking official said. "Beyond that, any future increases would be less or not greater than what LIPA would have imposed had it remained in place."

Three utilities have expressed an interest in the assets, the official said, although he declined to name them.

While details are still to be worked out, under one scenario envisioned by the Cuomo-empaneled Moreland Commission, the New York Power Authority could take on the operation of LIPA during a transition period. The current operator, National Grid, and PSEG, which is scheduled to take over next January, also would help.

"It is important that consideration be given to taking interim steps in the short term to ensure that Long Island residents have safe, adequate and reliable service," the commission wrote. "To this end, one option the commission has considered is to enable NYPA management to oversee LIPA's management and operations as it transitions to whatever final structure that the state decides to implement."

Under that idea, LIPA would maintain "a small number" of employees, under NYPA, and those employees "would remain exclusively in charge of managing the flow of funds to bondholders in accordance with their contractual obligations and the original mission of LIPA as a 'holding company.' "

Privatization of the grid has received a cool reception from some local political leaders, who fear ratepayers would see their electric bills increase, and two Wall Street credit rating agencies also raised doubts Tuesday.

The plan largely mirrors an analysis by the Moreland Commission in a 58-page report released Monday. The report acknowledged that ratepayers would be on the hook for an estimated $3.5 billion in "stranded" debt remaining after the local grid is sold, as well as other costs associated with buying LIPA and operating a private utility without tax-exempt borrowing.

"That incremental funding cost, along with the new owner's need to pay tax on profits, adds several hundred million dollars to the transaction cost," the report stated. "The challenge associated with privatization would be to sell LIPA's assets and address its existing debt burden in such manner that minimizes any potential increase in electric rates in LIPA's service territory."

Still, the administration officials said privatization would stabilize rates and reduce debt in a way LIPA has not. It also would provide more efficient operations overseen by a newly empowered Public Service Commission with more resources and new investigative and enforcement powers. Privatizing LIPA would result in a "better utility provider with better oversight," one official said.

For example, several hundred million dollars of new costs could be offset if LIPA were to sell off its interest in the Nine Mile Point nuclear facility near upstate Oswego.

In addition, the $3.5 billion that would remain of LIPA's long-standing debt, they said, would be paid off within 20 years. That "could produce rates that are stable in the short run, while private ownership and operation could improve the level of service by addressing the many problems associated with the current operating structure," the report concluded.

But the promise of stable rates flies in the face of a 2010 report prepared for LIPA by the Brattle Group, which found that privatizing would result in a rate increase of from 15 percent to 20 percent.

Some on Wall Street also were skeptical.

Fitch Ratings said the privatization of LIPA "could be extremely expensive and may not result in the ratepayer benefits projected."

"Our math and our calculations just don't see how you could keep rates the same or lower rates as a result of simply privatizing without some broader plan," said Dennis Pidherny, Fitch's managing director of public finance, U.S. public power.

Equally skeptical, Moody's noted a private utility would lose the benefit of tax-exempt debt and would be ineligible for major storm cost reimbursements. The firm said the cost was "likely greater than any potential synergies or economies of sale that could be achieved by combining with another utility."

Matthew Cordaro, chairman of the Suffolk Legislature's LIPA Oversight Committee, said the deal would offer clear benefits for one group of professionals: lawyers and investment bankers who will put it together. "This is a goldmine for these Wall Street guys," he said. "They go through two or three layers of deals and they make a fortune."

Assemb. Robert Sweeney (R-Lindenhurst) said given the complexity of privatization and the many questions he has, "I don't see anything happening quickly because there are so many factors that can affect the outcome, and the bottom line for the ratepayers."

The Moreland Commission, which primarily looked at LIPA's performance during superstorm Sandy, examined structural alternatives to LIPA's current system of relying on National Grid under a $224 million annual contract, to operate the grid. One was making LIPA fully public, which Cuomo rejected outright. Another saw a greater role for the NYPA.

With Joan Gralla

and Yancey Roy

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