LIPA report says privatizing utility ultimately would led to higher rates

LIPA customers could see rate savings for four years if the utility were sold to a private entity, but those reductions would turn to significantly higher bills starting in 2031, a new analysis by the authority indicates.

LIPA has repeatedly said the concept of privatization would ultimately hurt ratepayers by depriving it of savings through loss of its tax-exempt status and access to federal emergency funds.

But the latest report from LIPA responds directly to an analysis by financial firm Lazard released earlier this year that indicated customers would see big benefits from a potential $16 billion buyout of LIPA, including payoff of its $10 billion debt and other cost-saving measures.

The Long Island Association has helped publicize the privatization initiative, even as it says it hasn’t taken a formal stance on LIPA’s options. This week, the LIA briefed members on the Lazard analysis, its president, Matthew Cohen, confirmed. A Lazard spokeswoman didn't immediately respond to a request for comment.

LIPA’s warning against privatization and its questions about the Lazard analysis are clear in a fact sheet released this month. It comes as a state legislative committee looking into LIPA’s future as a fully public entity was unable to finish its work and pass legislation to expedite the shift in this year’s session. The issue is expected to be taken up in January.

LIPA’s analysis found the prospect of a rate freeze in the privatization mode by Lazard would cost customers around $1 a month in 2026, then result in lower monthly bills, from $2.81 in 2027 to $9.11 in 2030, before bills begin to climb markedly.

The Lazard model proposes creating a public benefits trust from proceeds of the sale to fund the bill reductions. But once that trust runs out in 2030, LIPA projected, bills will jump by $30 in 2031, $45.02 in 2032 and $47.17 in 2033, before climbing at that scale “indefinitely.”

“Privatization would increase the cost burden on customers,” LIPA said in its report.

Conversely, LIPA has previously said, shifting to the fully public power model, by eliminating the annual management fee of around $78 million paid to PSEG each year, “reduces customer bills.”

LIPA in its report said the Lazard analysis “omits key details and context, creating an inaccurate assessment of how a sale to private investors would affect customers, their bills and electric service to the region.” LIPA noted there’s nothing to indicate a private utility would perform better than a fully public LIPA, and a privately owned utility would mean loss of local control by customers.

LIPA likened a private sale of LIPA assets to someone who decides to sell a home on which they have a 2.6% mortgage, then leasing it back and paying the new owner an 8.7% rate of return. “The future stream of higher payments to the new investor makes the transaction a loss,” LIPA’s report says.

LIPA explained that its own analysis is so different from Lazard’s because Lazard’s didn’t account for factors such as the newly private entity’s loss of sales and property tax exemptions and federal grants, while “improperly accounting for LIPA’s cost of tax-exempt debt.”

A report commissioned by the state legislature studying conversion of LIPA to a fully public entity also had issues with Lazard’s analysis, saying potential synergy cost savings were “significantly overstated,” while future borrowing costs estimate was “simply incorrect.”

“Every independent analysis, including our own, and common sense, says that ratepayers will be left holding the bag if we turn our grid over to a for-profit utility that can’t finance its debt through tax-exempt bonds, isn’t exempt from corporate sales, income and most property taxes, isn’t eligible for billions of dollars in federal disaster assistance, and is guaranteed a hefty annual profit over-and-above the cost of operating the system,” said Rory Lancman, executive director of the state legislative commission.

Asked to comment on LIPA’s report, Cohen, the LIA president, said, “We are not going to get in a back and forth with LIPA in the media on an issue so critical to Long Island’s future.”

He said the LIA’s position “remains the same — every option needs to be fairly and thoroughly examined with an independent financial analysis and the LIA will support the model that is proven to be in the best interests of ratepayers, whichever model that may be.”

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

Mark Harrington, a Newsday reporter since 1999, covers energy, wineries, Indian affairs and fisheries.