Toward the end of his State of the State extravaganza Wednesday, Gov. Cuomo alighted for one minute on the Long Island Power Authority: “The time has come to abolish LIPA, period,” he said of the state-run power authority. And he promised: “We want to do it in a way that protects the ratepayers and freezes the rate for a period of years.”
It’s going to be pretty hard to make those numbers add up.
LIPA exists because of similar promises. In 1995, Gov. George Pataki pointed to LIPA’s private-sector predecessor, the Long Island Lighting Co., as the culprit behind high power rates and poor performance.
“My position is clear,” Pataki said. “Any LIPA solution to the high electric rates on Long Island must include the end of the Long Island Lighting Co. You’ve got to have double-digit rate reductions.”
LIPA’s takeover of LILCO three years later fulfilled an earlier pledge — made by Gov. Mario Cuomo. In 1986, that Gov. Cuomo’s “blue ribbon” commission said a takeover would save ratepayers 9 percent.
Why? Lilco had taken on massive debt to build the Shoreham nuclear plant — which never opened, thanks to locals’ opposition. The idea was that a state entity could handle this burden, because it wouldn’t have to pay taxes on income or on debt, or make money for shareholders.
It hasn’t worked out.
The current Cuomo’s push comes in the wake of LIPA’s Sandy bungling. As a state commission convened by the governor concluded Tuesday, LIPA fell far short of making good on its 2006 promise to spend $25 million a year to harden its grid for a storm.
Why? Partly because of all that debt — now $7 billion. A company that spends $331 million a year in interest charges doesn’t have much left for such investments.
Re-privatizating LIPA, and letting a company like Con Ed take over, leaves a slew of problems.
First, a private company couldn’t wave away LIPA’s debt. As Cuomo’s commission noted, LIPA’s debt load is twice what its assets are worth. This “stranded” debt — $3.5 billion — “would have to be repaid over time by LIPA ratepayers” even after privatization.
And a private firm would have to pay more interest on this debt, because its bondholders would have to pay taxes.
These costs would kick in immediately. LIPA, under contractual agreements, would have to pay off its existing bonds upon its sale. Yet just a 6 percent increase in debt costs would have thrown LIPA into the red in 2011 — and privatizing would boost the new company’s debt expenses more than that.
Second, a private company would have to pay federal and state income taxes. That would give shareholders reason to question the generous payments to Long Island governments that LIPA now makes in lieu of property taxes — $301 million a year.
Third, the new non-LIPA would still have to build a better grid — especially since Cuomo wants to hike penalties for failing to do so.
Building substations and burying lines costs money. And investors would charge a “risk premium” to guard against those higher fines if the work’s not done before the next storm.
Fourth, there’s fuel, which power companies need to make power. Because gas prices are unpredictable, private power companies like Con Ed pass fuel costs directly onto consumers without having to secure state approval every time prices rise or fall.
LIPA doesn’t pass along such costs automatically. Pataki, for one, let it borrow $250 million to avoid passing high costs to voters — er, customers.
A private company wouldn’t want to take on fuel-price risk the way LIPA does. Unless Cuomo can predict fuel prices, he can’t guarantee a rate freeze.
Well, there’s one way to try — alchemy. Pataki, for example, did cut power rates, through borrowing and by sneaking “fuel surcharges” onto bills.
(Of course, despite that, LIPA’s power rates are still the second highest in the country . . . behind Con Ed.)
Is the trick bag empty? Cuomo’s commission noted that a change to state law “could enable” LIPA debt “to become AAA-rated, resulting in lower interest costs.”
But how would LIPA’s successor improve its rating by five grades? One way would be to pledge even more revenues to repaying debt. But that means less cash for storm-proofing.
The other way would be to sneak in some state pledge — say, a guarantee to back the reissued debt up with state income-tax revenues.
For now, Long Islanders are — almost — back where they started four governors ago.
Nicole Gelinas is a senior fellow at the Manhattan Institute.