FOR RELEASE:

Hevesi Urges Tough PSC Review of LIPA Rate Increase

LIPA Has Increased Electric Costs 34.6% Since 2001 With No Oversight;
Average L.I. Household Paying $630 More A Year

Citing the need for more oversight of the Long Island Power Authority, State Comptroller Alan G. Hevesi called on the Public Service Commission (PSC) to conduct an aggressive and comprehensive analysis of LIPA’s request to increase rates. Hevesi also stressed the need for rate setting proceedings to be initiated immediately to ensure adequate public participation in the process.

In a report released at a press conference on Long Island today, Hevesi said that:

• LIPA used a loophole in the law to employ fuel surcharges to increase costs seven times since 2001 without PSC review, which is required for any long-term rate increase.
• Surcharges should be limited to recovering costs associated with emergencies or unforeseen conditions, but LIPA’s surcharges repeatedly have included costs that were neither emergencies nor unforeseen.
• Surcharges have added $630 to the average household bill, increasing these bills by 34.6 percent since 2001.
• LIPA does not appear to have fulfilled the intent of its mandate from the Public Authorities Control Board to reduce rates for Long Islanders. In 1999, LIPA’s customers paid 83 percent more than the national average for electricity. In 2004, they paid 96 percent more than the national average, and LIPA has imposed two surcharges since then.
• These added costs will have a negative impact on the local economy that could be as much as $3 billion in 2006 alone.

“For too long, LIPA has had insufficient oversight, and every Long Islander is paying the price,” Hevesi said. “Ratepayers need the PSC to ask very tough questions now that LIPA is finally seeking approval for a real rate increase. Ratepayers need assurances that they are paying no more than they should, that LIPA fulfills its mandate to provide electricity more economically, and that this rate increase is justified.”

Assemblyman Mark Alessi (D-Manor Park), who requested that Comptroller Hevesi’s office review issues surrounding LIPA rate increases, said “The ratepayers of Long Island are fed up with the numerous surcharge increases LIPA has dumped on them over the past several years. I asked the State Comptroller to take a look at LIPA’s past budgeting practices and make recommendations to the PSC as to what they should be taking into consideration when reviewing this base rate increase. The goal here is to make LIPA hold up its end of the bargain when it was created; and that was to provide a more economical supply of energy to Long Islanders.”

The report details the amounts and impacts of surcharges on LIPA ratepayers and recommends that the PSC review the following issues:

• What has the effect of surcharges been on ratepayers and the LI economy?
• Were surcharges lawful and appropriate?
• Is LIPA’s calculation of Fuel and Purchased Power, used to justify surcharges, reasonable?
• Does LIPA need to increase the accuracy of its cost estimates?
• Is the proposed rate increase consistent with LIPA’s mission and planned organizational structure?
• What costs have grown in LIPA’s budgets and what are the opportunities to control costs?
• What has LIPA done to mitigate cost increases and what are the potential long-term effects of these actions?
• Are there comparable utilities that provide lessons for LIPA in managing costs?

“One of the main reasons LIPA was created was to lower the price of electricity for consumers and businesses on Long Island, but in fact the average price of electricity has increased substantially, mainly because of surcharges that total 34.6 percent, which were added without any review by an outside authority,” Hevesi said. “After imposing seven surcharges on ratepayers in the past five years, LIPA’s plan to request approval from the PSC next year is a welcome development. However, given that LIPA increased costs for ratepayers without the approval of any regulatory body, the PSC should immediately initiate a broader review of LIPA than it would for a routine request from a utility.”

In 1998, LIPA cut its base rates substantially, which had a positive impact on the Long Island economy. However, the cumulative effect of the seven surcharges imposed since 2001 have more than offset that positive impact. The Comptroller’s Office found that the current surcharges will cost Long Island’s residential households $600 million in 2006. Using the same methodology as a 2003 economic impact study released by LIPA that assessed the five-year impact of the cut in LIPA’s base rate, the surcharges could have an annual negative impact of up to $3 billion on Long Island’s economy in 2006 alone.

Hevesi also questioned whether the Board of Directors has been involved enough in decision making on ratepayer costs. LIPA is governed by a Board of Directors. A review of Board meeting minutes indicates limited discussion of the imposition of the various surcharges and even less discussion of alternatives.

Other facts from the report:

• In May 1998, Nassau County/Rockaway ratepayers saw their rates reduced by 20.9 percent and Suffolk County residents saw their rates reduced by 19.1 percent. Since then, although LIPA’s base rate has not changed, LIPA has used fuel surcharges to increase costs for households by 34.6 percent or more than one-third of the average residential customer’s bill.
• A study by the Boyd Company of Princeton, New Jersey exploring the economic impacts associated with opening a plastics factory on Long Island found that Long Island would have the 11th highest operating costs among 125 sites nationwide and identified energy costs as a major contributor to the higher costs of operations.
• In 2003, although LIPA’s supply costs declined, it still imposed a 3 percent surcharge on ratepayers. It attributed this increase to the need to recover costs from 2002, a new policy of collecting anticipated fuel cost overruns in the current year rather than in future years, and a new target of accumulating $20 million net income.
• When figuring out the amount of its surcharges, LIPA includes costs that are not part of the industry standard and which the PSC would not allow other utilities to include in a surcharge. For example, paying customers to stop using electricity during peak hours and the administrative cost of trying to lock in future fuel costs, both of which are normal operating expenses. Since 1999, LIPA has added 16 such charges, adding a cumulative total of $311 million to LIPA’s budgeted costs for fuel and purchased power.
• Between 2000 and 2003, LIPA’s administrative costs increased 26.3 percent, much faster than the cost of purchasing electricity, up 18.4 percent.
• Between 1999 and 2006, LIPA increased the amount budgeted for fuel and purchased power by 231.6 percent. For fiscal year 2006, LIPA’s proposed budget for fuel and purchased power reflects an increase of 18.5 percent over 2005 and more than triple the amount budgeted in 1999.
• According to LIPA, the average household electricity use on Long Island has increased by 15 percent over the last six years, making the residents and businesses of Long Island the nation’s fourth highest average users of electricity.

Hevesi’s office has released audits of LIPA in the past showing excessive payments to some officials, unclear budget practices, and political polling. Last year, LIPA improved its budget practices in response to an audit that found it did not present a full and accurate picture to the public.

Click here for a copy of the report.

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Background on Questions Public Service Commission Should Consider in Reviewing LIPA Request for Rate Increase

Is the proposed rate increase consistent with LIPA’s mission and planned organizational structure?

• LIPA was created to supply electricity to Long Island in a reliable, efficient and economical manner, and was charged with decommissioning the Shoreham Nuclear Power Plant and lowering prices. The plant was successfully decommissioned in 1994 and LIPA has taken significant steps to increase capacity and strengthen reliability. Whether LIPA’s actions have been efficient and economical is a matter for further analysis.

What has been the effect of surcharges on ratepayers and the LI economy?

• In its first year of operation, LIPA’s customers paid electric prices that were 83 percent higher than the national average. In 2004, LIPA’s prices were 96 percent higher than the national average – and, LIPA has imposed 2 surcharges since then. An analysis of this impact using the same methodology LIPA used to determine the benefits of its initial rate cut shows that the $630 additional cost per average household imposed by the surcharges will have a negative economic impact of as much as $3 billion in 2006.

Were surcharges lawful and appropriate?

• A 1997 PACB resolution prohibited LIPA from increasing rates by more than 2.5 percent during a 12-month period without approval by the PSC following a full evidentiary hearing, and called for an overall 14 percent decrease in rates as compared to LILCO’s base rates.

Is LIPA’s calculation of Fuel and Purchased Power, used to justify surcharges, reasonable?

• Although the resolution did allow for the average rate to be adjusted to reflect emergency conditions including unforeseen increases in fuel prices, the PSC must determine if LIPA used these provisions as intended.
• In addition, LIPA includes costs in its fuel and purchase power budget that are not part of the industry standard and are inconsistent with what the PSC would allow other utilities to include in a surcharge.

Does LIPA need to increase the accuracy of its cost estimates?

• Estimates, by their nature, are often wrong, and this is most often the case in estimates about energy prices because of the myriad of factors influencing costs. Although an energy risk advisor predicted in April 2005 that energy prices will remain high, LIPA’s 2006 proposed operating budget predicts that its fuel and purchased power costs will decrease by 2010.
• Rate proceedings should include an examination of LIPA’s methods for estimating fuel costs to date and the industry experts at the Department of Public Service should advise LIPA on ways to improve its estimates.

What costs have grown in LIPA’s budgets and what are the opportunities to control costs?

• LIPA has three categories for its costs: operations and maintenance (O&M), debt service and payments in lieu of taxes (PILOTS).
• Information supplied by LIPA to the U.S. Department of Energy indicates that from 2000 to 2003, LIPA’s O&M costs increased by 19 percent, while its interest and PILOT payments both declined slightly. Industry experts at the Department of Public Service must carefully examine these trends to determine if they are reasonable, and to identify steps that might be taken to address anomalies.

What has LIPA done to mitigate cost increases and what are the potential long term effects of these actions?

• While LIPA has taken steps to restructure its debt and lower related costs, its debt portfolio now includes a level of variable rate exposure that may create financial risks in the future.

Are there comparable utilities that provide lessons for LIPA in managing costs?

• LIPA is a unique entity, but other utilities – both public and private – have faced the same fuel price fluctuations as LIPA has and potentially comparable electric utilities provided electricity at a lower cost than LIPA from 1999 to 2004.
• Two comparable utilities have seen prices decrease during the same period LIPA’s prices have increased. On the other hand, Con Ed has seen its costs increase in a pattern similar to LIPA’s.
• Industry experts should determine whether actions taken by other utilities to address fuel price fluctuations could be applied to assist LIPA in controlling costs.

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