A Cuomo commission proposes privatizing LIPA, with all that entails

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A commission charged by Governor Andrew Cuomo with overhauling New York's utility system today recommended he privatize the Long Island Power Authority, the state-run utility that performed poorly following Hurricane Sandy.

"LIPA was flawed from inception," said Cuomo today, after the Moreland Commission he convened presented its recommendations. "There's nothing you can do with the existing structure."

The Moreland Commission argued, in a PowerPoint presentation, that privatization, while a complicated, onerous process, would result in a more efficient delivery of electricity in Long Island and the Rockaways, LIPA's current service area.

If a private company were to operate LIPA's assets, it would also be subject to oversight by the Public Service Commission, which monitors the state's privately run utilities but not LIPA, which is a state authority, like the M.T.A. and the Thruway Authority.

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All of which might very well result in a more functional utility.

But a privatization of LIPA might well mean a rate increase, too.

"The costs of privatization ... are significant and none of these things are going to come about without a probable increase in rates," said Michael Fragin, who served on the LIPA board of trustees' finance committee through 2011.

Fragin, it should be noted, agrees with Cuomo's Moreland Commission that privatization is the best option, but he also thinks it's important to note that privatization won't solve LIPA's significant financial problems.

That's because LIPA has $7 billion of debt on its books right now. Since that debt is, right now, municipal debt, the interest rates attached to it are relatively low.

Were LIPA to go private, interest rates would go up. Those higher interest rates would, presumably, be passed on to ratepayers.

Today, a reporter asked the commission about what LIPA's privatization might might mean for its tremendous debt load, much of it a legacy from the construction of the Shoreham nuclear power plant by LIPA's predecessor company.

Ben Lawsky, Cuomo's superintendant of financial services and the commission's co-chair, responded.

"The Shoreham debt is about $7 billion," said Lawsky. "The value of the assets at LIPA are about, a little under $4 billion, I think. So you have about $3 billion, let's say, in stranded debt. And there are ways to securitize that debt, potentially refinance it, and over a period of time, deal with it. And that can be done."

One way to deal with it would be for the state to assume LIPA's debt, but it's hard to imagine upstate legislators rejoicing at the prospect of paying off debt accrued in Long Island.

"I didn’t see the word 'bailout' in the Moreland Commission report," said Fragin.

And there's yet one more thing to consider: property taxes.

Unlike some other state agencies, the authority pays property taxes and payments in lieu of taxes on its contractor National Grid's power plants.

LIPA is "basically funding Long Island’s overspending," the Manhattan Institute's Nicole Gelinas told me in November.

Were a private company to acquire LIPA's assets, it's safe to assume the company would be eager to challenge its property tax assessments and reduce its tax load, something the authority has been skittish about doing on its own.

"Once they started challenging them, and they did it successfully, then you’d have to start seeing an economic impact in many localities in Long Island, and that could certanily be significant," said Fragin.

Today, the Moreland Commission also recommended overhauling the Public Service Commission to make it a more effective regulator.

"We're basically recommending putting the PSC on steroids," said Lawsky.

Absent from the commission's analysis was any recognition that the state could have undertaken these reforms two years ago, when Cuomo first took office, running on a platform that included just this sort of utility reform.

Cuomo has been reluctant to assert his authority at either LIPA or the PSC through the appointments he, as governor, is entitled to make.

Hurricane Sandy, by altering the political calculus, changed all that.

"There's something called political will," said Cuomo today. "Why haven't a lot of things happened? Why haven’t we passed gun control in this state and in this nation? ... Sometimes you need an event that galvanizes public opinion to actually move the process."