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How will LIPA solve power puzzle?

KeySpan's power plant at E.F. Barrett in Island

KeySpan's power plant at E.F. Barrett in Island Park.

When it comes to electricity, Long Islanders are most concerned about rates and reliability. Moving into the spotlight right now is a third "r" - for riddle. What strategic long-term choices must the Long Island Power Authority make to maintain quality service at the lowest cost?

The answers may be jolting. At the two extremes, LIPA could be sold to a private utility, or it could expand to become a full-sized public utility with a large workforce. There are also less dramatic ways to control costs. In the next two months, LIPA will be looking for new sources of power and trying to introduce competition into the management of its electrical system.

The final outcome of these complex and interlocking choices will determine the bottom line of LIPA bills for years to come. More directly, 3,000 well-paying jobs could change, and property-tax revenue for the school districts and villages that host older generating plants could decline.

That's why the critical decisions on LIPA's structure for the next two decades should be made on the facts, gathered methodically and meticulously. The initial analysis prepared for the authority by Lazard Freres & Co. is a good start.

Using that information, LIPA chief Kevin Law has already made a smart decision. He took a pass on purchasing from National Grid the five generating plants in Northport, Port Jefferson, Glenwood Landing, East Rockaway and Island Park that provide more than 65 percent of the system's capacity. LIPA just couldn't afford to own them.

The next choices are tougher. How does LIPA do what was once considered unthinkable - unravel the awkward public-private relationship that created it in 1998? This arranged marriage came about after the shutting of the Shoreham nuclear plant caused a meltdown of the Long Island Lighting Co. In the political rescue engineered by New York State, a private company, KeySpan, purchased the plants. A new public authority, LIPA, issued debt and got the transmission and distribution system. The two were wedded together by two contracts; LIPA bought its power from the KeySpan plants, and KeySpan did the actual day-to-day operation of the electrical grid. That deal was made because former Gov. George Pataki didn't want to add LILCO's workers to the state payroll.

Twelve years later, the time has come for LIPA to rethink the marriage. National Grid bought KeySpan in 2006. The two original partners at the altar, KeySpan's Bob Catell and LIPA's Richard Kessel, are in other jobs. And while Grid hasn't publicly put a for-sale sign on the generating plants, it's well known in the energy world that the London-based company wants to get out of the business of making electricity, to focus on the more lucrative area of delivering it, as well as natural gas.

Kessel, who now heads the New York Power Authority, is taking a look at the numbers to see if a state takeover of the five major Long Island plants makes sense. It's not considered likely to happen.

 

So as National Grid prepares to exit the generation business, LIPA must be ready to negotiate with any new operators, for how much power it will buy, from which plants and how to calculate the price.

To determine how much it wants to take from these older and inefficient plants, LIPA will be asking for bids in May for 1,000 megawatts of new power. The response is expected to be from firms seeking to build new underwater cables to the west or construct new baseload plants on the Island. Getting new, cleaner power is likely to make more economic sense than trying to repower some of the existing plants, which date back to the 1940s.

Still, LIPA will need to buy power from some of the Grid plants. And it will be under pressure to repower at least one of them, to comply with new regulations on greenhouse gas emissions.

Those higher costs will collide with LIPA's demand for low rates. There's a legitimate concern that any new merchant owners might reduce maintenance and other operational safeguards at the plants, to cut costs - risking the system's reliability. A more likely route to offering a cheaper bid is seeking a reduction in the very high property tax burden, a total of $182 million annually, which is passed along to ratepayers.

New owners, especially those without local ties, could file the tax grievances that KeySpan or National Grid never did for fear of the political fallout in those communities. The conversation should start now on how these schools, libraries and villages can absorb the loss of this revenue.

While the sale of the plants is a more immediate concern, the bigger decision for LIPA is whether it will renew its contract with National Grid for the operation of its transmission and distribution system. Next month, it will ask for bids on a contract expected to be worth billions over its lifetime. While LIPA can always continue with Grid, there will be competition from several major utilities in the Northeast, the South, as well as Canada to run the system. That's the benefit of the open, competitive approach Law is taking.

The riddle about LIPA's structure will get easier when all the information is gathered. Then it will be time to move on to the puzzle of how its politics will play.

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