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LIPA ratepayers to pay for inaccurate demand forecast

This is a view of LIPA's Caithness power

This is a view of LIPA's Caithness power plant. The plant, located in Yaphank, is the utility's newest generating facility. (Jan. 20, 2010) Credit: Newsday / John Paraskevas

For years, the Long Island Power Authority warned the lights would go out without $6 billion in new projects, including undersea cables, a wind farm and the $1.49-billion Caithness plant.

But by 2006-7, the utility had accumulated so much excess available power that it agreed to pay Caithness Energy, the plant's owners, $102 million to delay opening the plant in Yaphank for a year.

The overcalculation will cost ratepayers, already saddled with among the highest electric bills in the nation, some $5 million annually for the next 20 years.

Projecting future energy needs can be an imprecise science. LIPA's predictions went awry as the cables under the Long Island Sound and Atlantic Ocean came online sooner than expected and consumer demand leveled off in response to the souring economy and steadily rising rates. Another pressure: The state requires LIPA to provide enough power to be well above the Island's peak summertime demand. LIPA now says it has no need for new power sources until 2020.


Plant stirs emotions

No one argues that Caithness, which began commercial operations last August, is the cleanest-burning and most efficient plant on Long Island. For years, however, it was the subject of litigation by residents, and it stirred passions for and against. Many urged LIPA to forego the Caithness deal and instead upgrade existing plants.

LIPA never announced that the Caithness plant was delayed a year at a cost of $102 million. Newsday discovered the increased cost in a state comptroller database of contracts for LIPA and other public agencies. Recently, the comptroller updated the original $1.49-billion plant cost to $1.59 billion, without explanation. An expert said the delay and its cost were unusual.

"It's very rare," said Dowling College business school dean Matthew Cordaro, who was a top executive at LILCO and managed power projects similar to Caithness while an executive at power-plant developer Long Lake Energy. "Usually utilities when they plan these type of facilities are cautious, they don't want to have too much capacity."

And while slowing a project can be costly to a developer, the amount for Caithness sounded "excessive," Cordaro said.

LIPA chief executive Kevin Law inherited the contract when he took over LIPA in October 2007. "I can't second-guess the decisions that were made before I got here," he said. Nevertheless, he added, planning to have adequate power is always "challenging," and decisions made about Caithness were based on the "best available information" about future demand at the time.

Law's predecessor, Richard Kessel, declined to comment. Previously, he has defended decisions about future power needs based on demand growth early in the last decade. In a 2003 interview, he blasted critics who he said didn't understand the impact of growing demand. "What should I do - sit back and worry about criticism and let the lights go out?" Kessel asked. "I'm not going to let the lights go out."

Caithness spokesman Don Miller would say little about the additional cost. "With respect to the startup delay," he said, "Caithness accommodated LIPA's request pursuant to the power purchase agreement."

LIPA general counsel Lynda Nicolino said the 2006 contract "contemplated that Caithness would have commenced operation in summer 2008, but allowed LIPA to postpone the start" for a fee. "LIPA subsequently requested a summer 2009 commercial operation date because the additional power was not needed in 2008."


A changing landscape

By that time, she said, the Neptune cable project was online, delivering 660 megawatts of power. In addition, demand for power on Long Island had begun to flatten out.

At the time LIPA issued a request for bids on Caithness between 2004 and 2005, Nicolino said, the additional capacity was projected to be needed. "The cables weren't operational yet," she said. But over the next two years, both cables came online. "Our resource landscape changed," she said. And LIPA figured "rather than have an excess of capacity that cost X [with Caithness], we deferred it and paid Y." The original Caithness contract as well as the extension exercised were approved by the state comptroller's office, she added.

Law noted that the $102 million paid over the 20 years amounts to less in "real dollars" than the $74.5 million LIPA would have paid upfront had it allowed the plant to start operating a year earlier.

Decisions such as the Caithness payments demonstrate that "utility planning is important and mistakes can be very costly," said Gordian Raacke, executive director of Renewable Energy Long Island, the nonprofit policy-advocate group.

Back in 2000, Raacke had urged LIPA not to contract for a fleet of small power plants called "peakers," which operate to fill power needs during peak demand times. Raacke argued the units were expensive and impractical. He advised that LIPA work to reduce peak demands by installing more solar energy systems on home and business roofs, but the request fell on deaf ears, he said.

LIPA contracted for more than 1,500 megawatts of power in the past decade amid concerns of major blackouts, including the California blackouts of 2000-2001 and the big Northeast blackout of 2003.

Cordaro called LIPA's persistent claims of the lights going out "fear mongering."

"It was never the case," he said. "We never got to the point of the lights going out. And it resulted in poor financial decisions and expensive contracts."

After a Newsday report last year that revealed the original $1.49-billion cost for Caithness and other previously undisclosed project costs, Law issued a directive that costs for all future contracts will be publicly disclosed before they are approved, including subsequent costs.

Historically, LIPA has resisted inquiries about the cost of its initiatives and its internal finances. LIPA has recently fought proposed state legislation that would subject it to a Public Service Commission review of its rate structure. And for years, it wouldn't state the cost of a proposed wind farm off the South Shore. When the $800-million price for the project became public, the project was scuttled.

The $102 million was added to compensate Caithness for "increased costs" associated with the delay, including for equipment and labor.

Under the original $1.49-billion, 20-year contract, LIPA would have paid around $74.5 million a year to Caithness just for the plant's availability. (LIPA pays a separate fee for energy from the plant; capacity fees compensate the plant owner's costs to develop and construct a facility, to make it available).

Through the four-year Caithness approval and construction process, LIPA and Caithness both declined to release specifics about the cost of the project. Critics were startled in 2008 when the $1.49-billion cost was revealed - in a Newsday story - and the additional $102 million has prompted new anger.

"It's just another reason we should have supported repowering an existing plant instead of opening a new one on green space," said Lisa Tyson, executive director of the Long Island Progressive Coalition, which opposed Caithness. "If we had known the cost at the time, this would never have happened."

Neal Lewis, a director of the Neighborhood Network, which supported Caithness, said he didn't realize the project was delayed, or that LIPA paid a fee for it. But he said he didn't necessarily disagree with the decisions. "My goal is to push for clean energy and renewables. Sometimes that means more costs."

LIPA now seems to be taking a more conservative view of its power needs, even as Caithness says it would like to build a second plant on the site. Law said the authority recently decided to delay the anticipated need for a new power plant or other source of power by three years to 2020.

Despite the slowdown in demand, Nicolino said she didn't think LIPA had too much capacity. LIPA, she said, is required under state rules to have 16 percent above the peak requirements in summer - something all the new sources will address in the future, if usage grows.

The context for Caithness:

2000-2001. Rolling blackouts disrupt the California electric system.

May 30, 2003. LIPA, citing the “ever-growing need for electricity,” issues a request for bids for a new Long Island power plant “and/or” a new cable to link the Island to mainland resources

Aug. 14, 2003. Major blackout hits the Northeast U.S.

June 2004. The 330-megawatt Cross Sound Cable begins full commercial operation, the same month LIPA commits to both the Neptune Cable and Caithness.

January 2005. LIPA trustees approve a contract that starts construction of the Neptune Cable.

December 2006. LIPA exercises a provision of the Caithness contract allowing it to forestall the start date of the 350-megawatt plant, advancing it one year to summer 2009.

April 2007. Construction begins for Caithness in Yaphank.

June 28, 2007. The Neptune Cable begins full commercial operation, adding 660 megawatts of off-island capacity.

August 2009. Caithness begins full commercial operation.

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