From the archives: LIPA and KeySpan make their deal

This story was originally published in Newsday on Dec. 15, 2005

Flanked by politicians and environmentalists, Gov. George Pataki yesterday announced that the Long Island Power Authority and KeySpan Corp. are extending their partnership by five years in an agreement they said would slightly reduce electric rates and freeze them for two years.

But while the agreement to extend the contract to manage LIPA's transmission system and other operations until 2013 was praised at a news conference at the utility's Mitchel Field headquarters, some energy experts raised concerns about the deal.

They questioned whether LIPA chairman Richard Kessel would be able to keep his promise not to raise rates unless there was a "catastrophic" upheaval in the energy market. They wondered why KeySpan, which agreed to reduce its management fee by an average of $34 million, couldn't have done that sooner. And they are unsure whether LIPA will buy two power plants in Island Park and Far Rockaway for $75 million to repower them with more efficient equipment if its analysis shows it is economically viable.

Pataki, however, had no doubts about the deal. "This is one of those agreements ... where everybody comes out ahead," he said, adding that the deal also includes $1 million in new rebates for roof-top solar electric systems and $250,000 to help low-income customers pay their electric bills.

While LIPA chose not to buy all of KeySpan's17 generating plants on the Island, the two parties resolved contractual disputes over costs with KeySpan paying LIPA $120 million. That money will allow LIPA to lower and freeze electric bills, including energy surcharges, Kessel said.

Renegotiating a reduction in KeySpan's management contract to save $272 million over eight years - a 12 percent reduction over this year's contract - "will enable us to absorb cost increases for fuel going forward," Kessel said.

The deal must still be approved by the LIPA and KeySpan boards and the state comptroller and attorney general.

Matthew Cordaro, a former utility executive and now an administrator at Long Island University, said the agreement "doesn't involve any significant reduction in the rates." Regarding the two-year rate freeze, he added, "I've seen the same commitment before on fuel surcharges and that was short-lived. ... Financially if things get tight, they would back away from their commitment."

However, Kessel said, "It may not be a huge amount but it's a step in the right direction."

As for buying the two plants, Cordaro said getting them at book value is reasonable. "But it's not a very serious commitment to repowering," he said, adding that LIPA can walk away if it deems the upgrade costs to be excessive.

Sheldon Sackstein, a former LIPA board member who is chairman of Action Long Island, a business group, said, "I still don't think we should be buying the plants." He feels KeySpan should bear the cost of repowering them.

In response to a question by Sackstein about why KeySpancouldn't have reduced the cost of its management agreement earlier, company chairman Robert Catell said the past disagreements over costs made changes in the operational system impossible. The new contract is flexible and gives KeySpan a financial incentive to reduce costs. "We can now combine certain operations," Catell said.

Sackstein also questioned how LIPA could extend the KeySpan contract without public bidding. "Public authorities go out for public bids," he said.

Kessel said LIPA lawyers deemed the extension legal and noted that the agreement has already been extended by two years. "It's been a public process with hearings and discussion with public officials," he said. "Had we gone out for competition, it would have been tremendously disruptive, the unions would have been angry, it would have negatively impacted service and we don't think we would have gotten a better deal."

Power purchase

The two KeySpan plants LIPA will buy:

E.F. Barrett (Island Park)

Two units opened in 1956 and 1963

Generate 390 megawatts total

Capacity to power 390,000 homes

Capacity: 390 megawatts

Far Rockaway

One unit opened in 1953

Capacity: 108 megawatts

Capacity to power 108,000 homes