The proposal by PSEG Long Island and LIPA to increase rates in the next three years includes a fundamental change in the way the utility pays for big infrastructure projects, according to senior officials and an analysis of spending.
The Long Island Power Authority next year will begin a program to fund more long-term costs from the money it collects each month from ratepayers, a change that will allow it to reduce its reliance on borrowing, state and utility officials said.
The change will allow LIPA to have more cash on hand at any given time, a measure known as coverage, which generally improves LIPA's financial standing and its credit rating in the eyes of Wall Street. Between 2016 and 2018, LIPA will amass at least $127 million in new revenue under this program, the officials said.
"It's a material component of the rate award," said a senior state Department of Public Service official familiar with the rate case. "We saw it as a legitimate thing to do."
The figure, like many other large components of LIPA rates, is not easily discernible from the thousands of documents and exhibits that have been filed in the rate case since February, a factor that has some LIPA board members uneasy. At least three LIPA trustees said there isn't clarity in terms of how the coming rate hike will benefit customers, and some may express objections to the rate hike at a scheduled meeting on Monday.
Factors behind increaseOther large factors driving the rate increase include a $50 million a year payment to fund a PSEG employee pension and benefit plan, and a $68.6 million, three-year increase in PSEG Long Island's management fee.
To date, much of the justification for higher rates has publicly revolved around PSEG's efforts to expand programs such as tree-trimming and pole inspections, the loss of state and federal grants, taxes and inflation.
The state DPS last month issued a final recommendation that PSEG and LIPA raise rates a combined 9 percent over the next three years to collect $325.4 million in new revenue -- $30.4 million in 2016, $77.6 million in 2017 and $78.9 million in 2018. PSEG wants $387 million in new revenue.
For ratepayers, the DPS recommendation means the delivery charge portion of their bills will increase 1.5 percent in 2016, and 3.8 percent in each of the following years.
As has been previously reported, PSEG's management fee for running the system will increase to $73 million a year between 2016 and 2018, from a current $45 million. The $28 million over three years amounts to $84 million. Of that amount, $68.6 million will be paid through rates, according to rate-case documents.
LIPA has noted that PSEG took a lower operating fee in 2014 and 2015 to maintain a rate freeze, and that PSEG's fee increase was negotiated as part of the LIPA Reform Act. PSEG declined to comment or to provide officials for interviews.
LIPA projects increased taxes will amount to $37.2 million during the three-year period, while loss of federal and state grants will require ratepayers to pay $78.8 million through rates over the next three years.
At the same time, PSEG's operating expenses will increase from $455 million this year to just over $480.7 million in 2016, $500 million in 2017 and $514.7 million in 2018. The total $129.7 million increase will pay for more aggressive tree-trimming, pole inspections, safety and customer culture programs, substation and distribution improvement, and other maintenance improvements.
The total utility budget exceeds the $325.4 million the state says PSEG and LIPA can spend because the utilities are projecting savings through lower interest payments as a result of refinancing $2.5 billion in old LIPA debt by issuing new securities through a separate state authority. LIPA says the transactions, the first of which will be issued for $1 billion this week, will save around $172 million over the next three years.
The state official noted that many of the higher costs in the rate proceeding are offset by savings and other measures. "There's a lot of pushes and pulls but when you net all the costs, the increases are very much in line with inflation," he said.
Rising debtWhile LIPA's interest costs related to that debt are being reduced, LIPA's overall debt will increase over the course of the rate case, leading to an overall increase in debt costs of $26.6 million over the three years. By this year's end, LIPA projects having $7.9 billion in debt (up from $7.6 billion at the end of 2014). By the end of 2018, according to LIPA, debt is expected to increase to $8.3 billion.
But LIPA emphasized that by the end of that period, system improvements will amount to $1.8 billion, including those tied to federal grants. And it noted that debt could increase beyond projected levels if it doesn't implement the reforms tied to the coverage programs.
The LIPA board on Monday will get a chance to weigh in on the rate plan recommended by the state department. But trustees will have a somewhat limited role. To reject the increase, five board members would have to vote that the state's $325.4 million recommendation is "inconsistent" with one of three criteria established in the LIPA Reform Act, including the authority's "sound fiscal operating practices," existing contractual obligations, or provision of "safe and adequate service."
It's not considered likely, but if enough trustees do vote to reject the recommendation, LIPA would hold public hearings within 30 days, and the board would make a final determination on rates by December.
But PSEG could alter that course. Its contract with LIPA allows for it to file for binding arbitration if it disagrees with the state recommendation.