LIPA's excess power supply cost ratepayers $641M over 9 years, PSEG report finds

LIPA's overly cautious approach to securing new power sources during the past nine years has resulted in a sizable surplus of capacity on Long Island that cost ratepayers hundreds of millions of dollars and discouraged market competition, a report by PSEG Long Island found.

Between 2005 and 2013, the study found, the Long Island Power Authority had an average of 528 megawatts of excess power annually above state capacity requirements -- the equivalent of nearly two new power plants. Some years, the report said, the excess approached 1,000 megawatts. A megawatt powers around 800 homes.

While the cost of the surplus varied by year, PSEG, which manages the electric grid for LIPA, said the average cost of the 528-megawatt excess was around $71 million a year, or around $641 million over the nine years.

PSEG found that where other utilities in the state plan for the possibility of a one-day outage every 10 years because of the lack of power resources, the LIPA approach was designed to have enough power to prevent all but a one-day outage every 1,000 years, PSEG found. The overly cautious approach, PSEG said, results in a "measurable impact on rates."

In addition, the study found, building the proposed 752-megawatt Caithness II power plant in Yaphank would result in an excess of 400 megawatts by the time it was completed in 2018. The excess comes at a high price: $88 million, which would mean a 2.2 percent rate increase in 2018 to cover the costs.

PSEG prepared the review at LIPA's request, in advance of PSEG's taking over the power markets function in January.

$2.5B in 'lease obligations'

PSEG is advising LIPA to move away from its conservative approach immediately. "We feel it's a strong recommendation," said PSEG Long Island president David Daly, adding he believes LIPA has an adequate supply of power through 2020 to perhaps 2022 without new plants.

As Newsday reported, PSEG has said the Caithness II plant is "not needed." PSEG recommended that LIPA explore a range of options to meet short-term power needs while it develops a new plan over the next 18 months. LIPA has called the PSEG findings "reasonable," and said it would not sign a contract with Caithness II this year.

LIPA last week said its approach to power planning was aimed at reducing the risk of outages and planning for a greater level of uncertainty than other utilities. LIPA declined to comment further.

But the PSEG report, currently being reviewed by LIPA and the state Department of Public Service, noted that all other New York utilities plan based on a less conservative system using state requirements, which PSEG is recommending LIPA adopt.

"LIPA is the only utility in New York State that explicitly uses a more conservative planning criteria than that mandated by the NYISO," the report said, referring to the New York Independent System Operator, which sets utility capacity requirements.

The PSEG report allows that LIPA's overly aggressive approach was rooted in the "geographic isolation" of the Long Island grid and a lack of on-Island generation, but it said those issues are "no longer applicable."

The report also details the heavy toll on ratepayers of accumulating numerous new power contracts over the years. LIPA has $2.5 billion in "lease obligations" tied to the power contracts -- essentially guaranteed payments owed to plant and cable developers over the next 20 years.

"There is essentially no Long Island merchant [power-plant] development activity in the generating sector and, effectively, no competitive wholesale power market," PSEG found, because LIPA grants lucrative long-term contracts for power. The lack of competition is "largely driven by capacity oversupply and [LIPA's] full reliance on" contracted power purchase agreements.

Questions about analysis

LIPA's long list of locked-in capacity contracts with small and large plant developers "impedes viability of LIPA retail choice programs by removing liquidity from the Long Island capacity market and ESCOs' ability to make money," the report found.

ESCOs, which are small, independent companies that seek to offer customers more competitive rates, issued a formal complaint about LIPA's programs in a state audit two years ago.

The PSEG report notes that ratepayers wind up footing the bill for lucrative power contracts that ratepayers in other markets rarely face. "LIPA ratepayers assume risks traditionally borne by merchant [power-generation] suppliers in [a] deregulated power supply market," the report says, because LIPA is securing contracts rather than buying energy on power markets.

The report also said National Grid plants on Long Island, while used less, are well maintained, have been upgraded for environmental requirements and remain "strong" performers, fully capable of supporting LIPA's power requirements. LIPA last year renewed its contract with National Grid, a 20-year, $5 billion pact.

John Cameron, chairman of the Long Island Regional Planning Council, a bi-county planning organization that found Caithness II a "project of regional significance," said he had questions about the analysis.

"I want to know whether they're planning for future growth on Long Island," he said. "We need to upgrade the old plants, and we need reliable, efficient power."

Nevertheless, he said, if PSEG has "done a good job of detailing that, I'm comfortable."

Cameron said he considered it prudent to have "another set of eyes" reviewing the local power market, and said he welcomed any analysis that sought to mitigate high rates. "We're focused on rate control, too," he said.