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
- 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
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
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.
Background on Questions Public Service Commission
Should Consider in Reviewing LIPA Request for Rate Increase
Is the proposed rate increase consistent with
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
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
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
- 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.