Introduction The Long Island Power Authority ("LIPA") has reviewed the report of the Hauppauge Industrial Association ("HIA") entitled Competition Now - A Blueprint for the Long-term Reduction of Long Island's Residential and Commercial Electric Rates (the "Report"). The Report's recommended alternatives are unworkable and will lead to years of litigation regarding the potential write-off of LILCO's Shoreham Regulatory Asset ("Regulatory Asset") and the condemnation of the excess land at its generating sites. It is ironic that while the Report is entitled Competition Now, its recommendations will result in years of litigation with an outcome that is highly uncertain, and rate cuts, if any, that are years away.
Writing-Off the Shoreham Regulatory Assets
The Report's primary recommendation is to enact New York State legislation that would "order the Public Service Commission ("PSC") to direct LILCO to write-off $2.5 billion from its Shoreham Regulatory Asset." The Report's recommendation is unworkable. The Legislature has no inclination to adopt such legislation, especially after its leadership approved the LIPA plan. Furthermore, any new legislation would have to apply to all the State's utilities, making this approach impossible. It is wishful thinking to believe that if the Legislature did act, LILCO's write-off of $2.5 billion from its Shoreham Regulatory Asset would not lead to costly and protracted litigation. LILCO would certainly challenge in the courts any legislative mandate or PSC order to write-off substantial portions of its Shoreham Regulatory Asset. Such a court challenge would take years to resolve and there is no way to predict the outcome.
LILCO shareholders have shared in the cost of the Shoreham Nuclear Power Plant, having previously taken a $1.4 billion prudency write off in 1989. A $2.5 billion write-off of the Regulatory Asset, which would equate to roughly 96% of LILCO's equity value, would bankrupt LILCO, but still leave the electric system in LILCO's hands.
The LIPA/LILCO transaction will result in LIPA paying slightly less than book value for LILCO. As a result, this transaction represents a return of the capital shareholders have previously invested in the company, not a gain. The net proceeds to the Company after the payment by LILCO of various liabilities including the interest rate hedge and taxes is estimated by the Company to be $1.7 billion. BUG/LILCO have agreed to invest $1.3 billion over the next ten years in energy related and economic development projects, and natural gas infrastructure projects in the counties of Queens, Nassau and Suffolk bringing economic benefits to Long Island.
Condemn LILCO's Generating Sites
The Report states, "Suffolk and Nassau Counties or the State should condemn and acquire this surplus land for the purpose of leasing or selling the property to several electric power producers." It is unnecessary and not cost effective for LIPA to condemn this surplus land at LILCO's generation sites, which would take years to conclude. In the Agreement and Plan of Merger, LIPA has negotiated a 99-year right to purchase sufficient land at LILCO's generation sites to provide for LIPA's or independent power producers= development of new generation at these sites.
For the delivery of gas on Long Island, LIPA negotiated a favorable transportation rate of 19 cents/dekaterm for the next 11.5 years regardless of who owns the new generating facilities. This assures that gas will be delivered to both existing and new generating plants at reasonable rates.
LIPA is also exploring options for importing more electricity onto Long Island for competitive purposes. LIPA is currently in discussion with New England Electric System regarding an under-Sound cable which would allow LIPA to import additional lower cost power from New England. In order to maximize cost savings, LIPA is open to private ownership or a private-public partnership for the new cross-Sound cable. The decision to build the under-Sound cable will be based on an economic analysis comparing the cost of new sources of power and demand side management resources on Long Island with the cost of the power to be imported from New England, including the cost of a new cross-Sound cable. The cost of the transmission and distribution system on Long Island will not impact the economic analysis of building an under-Sound cable.
Introduce Legislation to Implement Findings of PSC Staff
The Report states that legislation should be introduced "to direct the PSC to implement the findings of the Staff and order an immediate and sustainable 5.2 percent cut in electric rates." To begin with, the Legislature has never and will never interfere with the independent PSC regulatory process. It is not uncommon in a rate case for several parties to propose significant reductions in the rates requested by the utility. The outcome of the deliberations of the case, however, rarely reflect a single party=s view. In this case, the recommendation of the PSC Staff to reduce LILCO's rates relating to its operating expenses has not been acted upon by the Commission.,p> The Report also claims that LIPA "vigorously opposed" the PSC Staff's recommendation to lower LILCO's electric rates, because "it was understood that if LILCO's rates were cut by 5%, LIPA's new electric rate schedule would not appear as favorable when juxtaposed against LILCO's." This statement is wrong. In fact, LIPA submitted testimony to the PSC in which LIPA stated that it believed LILCO's rates should be reduced by 6.8%.
LIPA's goal is to achieve sustainable double digit rate reductions. By issuing tax-exempt bonds and avoiding federal income taxes, LIPA will create sustainable double digit rate payer savings that neither the PSC nor the Legislature could duplicate.
Competition under LIPA The Report makes repeated claims that the LIPA plan will preclude or stifle electric competition on Long Island. To the contrary, the LIPA plan fosters competition, and does so at least as quickly as under the status quo. Most importantly, the LIPA plan will provide rate payer savings from competition in addition to the immediate average rate reduction of 17 percent. Competition will occur in several ways under the LIPA plan:
The HIA Report should really be entitled Rate Cuts - Never since its recommendations are preposterous and have no chance of being enacted. LIPA's goal is to create sustainable double digit electric rate reductions now; by issuing tax-exempt bonds and avoiding federal income taxes, LIPA can achieve its goal within one year. Pursuing legislation to require a $2.5 billion write-off by LILCO is futile. Delaying implementation of the LIPA plan for ten years or more would cost Long Island rate payers approximately $5 billion of foregone savings, with no assurance that any alternative effort would be successful. Further, the current opportunity to avoid the capital gains tax of approximately $2 billion will have been irrevocably lost as would the likelihood of ever implementing any transaction of this type.