LIPA's $6.9 billion debt load, long portrayed as a hindrance to rate relief and new energy projects, also stands in the way of efforts to protect the Long Island grid from the impact of the next major storm.

Despite storm-hardening initiatives and capital projects that saw much of the grid replaced in the past 12 years, superstorm Sandy took out 50 of LIPA's 185 substations, 4,500 utility poles and 400 miles of electric lines.

Top utility officials say the outsize debt, costing ratepayers $569.3 million in principal and interest in 2012, severely inhibits LIPA's ability to consider projects that could fortify the system even more.

Around 15 cents of every dollar customers pay LIPA goes to reduce that debt. LIPA, with annual revenue of $3.6 billion, pays $349 million a year in interest alone, about a third of which dates to the 1998 takeover of the Long Island Lighting Co. and the closure of the Shoreham nuclear plant. Borrowing for subsequent improvements also contributes to the LIPA debt.

"It is a terrible constraint on our ability to do things," said former LIPA chairman Howard Steinberg, who resigned Friday, in an interview last month. "It's a fact that we've been living with it since day one."

This year, Steinberg unveiled a plan to reduce the debt by $2 billion by 2022, using expected revenue from tax grievances and other sources. But in a post-Sandy world, he said, LIPA's priorities must shift to consider additional measures to batten down the electric infrastructure.

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"The reality is we are going to have to reassess our priorities," Steinberg said. "We have to look at what the priorities are and see where the money we have, limited as it is, needs to be spent to secure the reliability of the system. It's a very, very difficult thing to do."

The financial tightrope LIPA must walk was clear in a posting by Fitch Ratings last month. The firm cut LIPA's outlook to negative from stable, reflecting the view that "the effects of Hurricane Sandy will challenge LIPA's already tight financial flexibility and frustrate the authority's efforts to achieve improved financial performance and metrics as forecast."

Sen. Charles Schumer (D-N.Y.), who in 2009 proposed legislation that would have made LIPA eligible for a federal program to refinance its debt at half its current interest rate, said the outsize debt may have posed a hindrance to LIPA in storm preparation.

"There are a whole lot of reasons that LIPA failed in their storm response, and the debt they have . . . could certainly have been one of them," Schumer said.

A report this summer by the state Department of Public Service found that upgrades to the system that LIPA could have made -- and that a LIPA-funded study had recommended -- were implemented "slowly or incompletely."

Among the recommendations was installing inexpensive equipment to protect overhead wires from falling tree limbs during storms. The Public Service department said the plan would likely cost LIPA and ratepayers money to implement.

Most of the damage from Sandy and Tropical Storm Irene last year involved trees or branches falling on wires. The report recommended a more aggressive tree-trimming program.

Adrienne Esposito, executive director of Citizens Campaign for the Environment, led an effort several years ago to force LIPA and the federal government to recognize the impact the debt has on just about everything LIPA does. She said Gov. Andrew M. Cuomo and other state leaders must address the issue in any LIPA overhaul.

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"Even if they change the management, nothing meaningful will change because the debt controls LIPA," she said. "If the governor wants to figure out how to fix LIPA, he has to figure out how to control the debt."

Hervey: LIPA system viable

But Michael Hervey, who is resigning Dec. 31 as the authority's chief operating officer, said the system has seen annual investments of around $250 million, and tops the list of the most reliable overhead systems in the state. He called it "a myth" that "somehow the system wasn't in good shape."

LIPA was born in 1986 to bail out LILCO, a private utility that bet billions on nuclear power and lost. In 1998, LIPA took on all the debt from the never-opened Shoreham nuclear power plant -- about $4.2 billion -- in the $6.87 billion leveraged buyout that rescued shareholders of the former LILCO.

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In return, LIPA ratepayers got the local electric grid -- the wires, poles, transmission towers and substations -- while the newly formed KeySpan Energy Corp. got the power plants in a stock swap with Brooklyn Union Gas. LIPA owns an 18 percent stake in the Nine Mile Point 2 nuclear generating facility in Oswego. Debt payments with interest were expected to cost $15.47 billion over 35 years.

The logic of the takeover was that a public authority could borrow much more cheaply than a private company, allowing LIPA to save hundreds of millions of dollars by refinancing LILCO's debt and borrowing at lower rates. The authority doesn't have to pay corporate income taxes, is not beholden to shareholders to turn a profit, and sets its own rates.

Shoreham's lingering impact

LILCO shareholders did well: The share price closed at $31.50 on March 31, 1998, compared with $24 a year earlier and $16.38 at the end of 1995, according to Bloomberg data. The company's chief executive, William Catacosinos, left with a much-criticized $42 million golden parachute. The takeover also brought relief to ratepayers: Bills were reduced by an average of 20 percent in 1998, LIPA's first year managing the system.

The debt burden has left LIPA performing a tough balancing act even as it has invested $3 billion in maintaining and upgrading the power transmission system over the past 14 years.

"The Shoreham debt is a substantial burden on their debt profile," said Standard & Poor's analyst Jeffrey Panger. "It does have an impact on their overall flexibility."

But LIPA officials take issue with the notion that the system wasn't prepared for a hurricane, or that they have mismanaged the debt.

Hervey also argued that LIPA customers, who already pay high rates, may not have the appetite for massive spending to secure the system.

"I doubt customers would want to pay for a system that is able to survive hurricanes without a problem," Hervey said. "To build a system that can survive this type of storm untouched would be extraordinarily expensive. It would skyrocket rates."

Other utilities have sizable debts, as well.

The Los Angeles Department of Water and Power's power system -- the largest municipal power utility in the nation, serving 1.46 million customers -- has about $6.8 billion in debt and paid $400.8 million in debt service in its 2011 fiscal year. Its annual revenue is $3.1 billion compared to LIPA's $3.6 billion.

Investor-owned Consolidated Edison Inc., which serves 3.3 million customers in New York City and Westchester County, has $9.84 billion of long-term debt, $930 million of which was due within 12 months of Oct. 1. Con Ed's annual revenue was $12.99 billion in 2011.

Gary Krellenstein, a managing director at Kroll Bond Rating Agency, said other large municipal utilities generally have higher credit ratings than LIPA. LIPA was financially handicapped from the start because of Shoreham and its antiquated infrastructure, he said.

"Given the age of the system, they had to spend more than other utilities did to upgrade," Krellenstein said. LIPA suffered from a "revolving door" of politically appointed leaders who were reluctant to raise rates enough to make investments to upgrade infrastructure and pay down debt faster, he said.

"They probably would have been better having rates 2 to 3 percent higher, and it probably wouldn't have been noticeable," Krellenstein said.

If authority officials decide to borrow more for infrastructure improvements, they will have little choice but to raise rates if "they are to maintain their financial standing and their coverage of their debt service requirements," Panger said.

Before Sandy, LIPA had planned to invest $1.65 billion in the system through 2016. Even as the utility pays down its debt, it continues to borrow -- investors hold roughly $7 billion in LIPA bonds. And Shoreham costs remain on ratepayers' bills: Moody's Investors Service reported last year that ratepayers are on the hook for about $2.5 billion of the nuclear plant's debt.

But LIPA chief financial officer Michael Taunton said the debt, while large, remains manageable. "I don't think it's holding us back at all," he said.

"What we really need to look at is what's the appropriate level of spending going forward" to fortify the system, said Taunton. "It may not be as much as people think," he said, noting that restoration work from the last two storms has allowed LIPA to "replace a lot of our system."

Still, Taunton said the $570 million in annual debt payments "does limit us to some degree. If we had no debt, we'd have a lot more flexibility in terms of what we wanted to do."

Sheldon Sackstein, executive director of the business advocacy group Action Long Island and a former LIPA trustee, questioned whether the debt has led to a lack of preparedness. He noted that the authority has spent billions upgrading the electric grid since the LILCO deal.

Nonetheless, the Shoreham debt "should never have been on the backs of the ratepayers," Sackstein said.

He said the key goal now should be to turn LIPA into what it could have been from the start.

"LIPA has got to come out of the realm of it being a political football and it's got to become a fully operating utility," Sackstein said.