OPINION: LIPA rate cut is shortsighted

Matthew Cordaro is a former utility chief executive and was most recently dean of business at Dowling College.

A close examination of the proposed Long Island Power Authority budget for 2011 against the authority's overall financial picture reveals disturbing surprises.

By manipulating an increase in delivery charges and a decrease in the power supply charge on LIPA bills, the agency arrives at a 2.2 percent rate reduction amounting to a monthly savings of a few dollars for the average residential customer. Although any rate decrease, however small, sounds good, in this instance it represents a strategic mistake for LIPA.

This is a public relations gesture that could backfire if a substantial rate increase becomes necessary, probably next year. That's because LIPA's fuel-cost projections are low and do not reflect the impact of a weakening dollar and increasing inflation.

LIPA's track record on projecting fuel costs has not been good. In the last few years, its estimates substantially exceeded the actual costs incurred and resulted in serious over-collections.

For the customer, when the planned borrowing of about $200 million by LIPA for the new budget is taken into account, a 2.2 percent rate reduction is not a great bargain. With the lost revenue from the rate cut in effect being replaced by debt, it essentially becomes a loan to customers and their children to be paid back with interest over the course of 30 to 40 years. Wouldn't it make more sense to use the rate-reduction dollars to offset borrowing by an equal amount rather than having to pay interest on it for years to come?

A way to achieve this is to pay for 2010 storm costs in 2011 through utility-bill collections. Although LIPA received $54 million in federal aid for 2010 storm costs, about another $100 million remains to be paid, including $32 million for Earl, the hurricane that passed us by in September. LIPA maintains that these costs will not be charged to customers but paid for from internal funds, which are actually ratepayer dollars. A better course would then be to avoid the small rate reduction, pay off those storm costs and reduce the amount the utility plans to borrow.

The $3.66-billion LIPA 2011 budget also contains financial projections for 5 years into the future. The authority is estimating significant increases in revenues from year to year without providing justification. This is troubling because, if expenses are not tightly controlled, there is potential for double-digit rate increases. To avoid this, LIPA must use the 2011 budget to seriously trim expenses.

This requires a re-examination of all costs, including those associated with efforts to provide significant rebates for wind and solar projects and incentives for efficiency. These inducements benefit those who can afford them at the expense of those who cannot. Interestingly, this contrasts with a late-payment charge proposed in the 2011 budget. There the agency seeks to protect those able to pay bills on time from subsidizing those who have difficulty doing so. There is merit here on all sides, but with LIPA rates among the highest in the country, hard choices need to be made on what absolutely has to be included in the budget to keep electricity flowing reliably.

LIPA's budget could mean more debt and higher bills in the future, all because of an attempt to sway public opinion with a small rate reduction. LIPA should have to answer this question in the public comment period before this budget is finalized.