Study sees benefits to selling LIPA to investors instead of going fully public

As a state legislative committee works to finalize a plan to transition LIPA to a fully public utility, an investment banking firm working with the Long Island Association has issued a study that examines "dissolving" LIPA and selling its assets to an investor-owned company.

Both a fully public and a privately owned LIPA are different from the utility's current structure as a public-private partnership, with PSEG Long Island operating the utility under contract to LIPA, a state authority that owns the assets. 

The newly released report by investment banking firm, Lazard, postulates that a sale of LIPA "has the potential to generate proceeds of a magnitude that could enable full retirement of existing LIPA debt as well as funding a Long Island Public Benefit Trust to reduce/freeze rates and/or advance local initiatives for decades to come."

The plan would use an anticipated $16.4 billion in sale proceeds to pay off LIPA’s $9.8 billion debt, eliminate LIPA and PSEG management and operation fees, among other expenses, create the $5 billion trust, or even make lump-sum payments to ratepayers.

Lazard says the plan would “improve decision making” while transferring the risks of operating LIPA to a “private entity, ending the transitional role of LIPA as originally envisioned.” Under the new structure, an investor-owned utility would be under the jurisdiction of the state Public Service Commission. 

Skeptics of the plan were quick to note that LIPA had been investor-owned once before — by the Long Island Lighting Co., which also had been under PSC review — and the results had been disastrous, including the assumption of billions of debt for the mothballed Shoreham nuclear power plant, among other problems.

Tom Falcone, LIPA's current chief executive, at a board meeting Wednesday likened the Lazard plan to refinancing a cash-out mortgage with an interest rate three times higher than the original. Lazard, Falcone said, "overstates the benefits and significantly understates the cost of privatization."

Another observer agreed.

"If we go back to the days of LILCO, we're going have all the same issues LILCO had," said Arthur Abbate, a former utility director who started at LILCO in 1975 and stayed with iterations of the company for 37 years. "All you're going to do is change the name and add the profit motive." 

But George Bilicic, vice chairman of Lazard's investment banking group, said the new analysis envisions rate savings "even before we address the extra pool of money" remaining after paying off LIPA's debt. As for a $16.4 billion sale price, Bilicic said he believes "plenty of buyers would pay that," with the new owner helping with the state vision to "drive an energy transition" to green energy. 

The Lazard study says in its first year of operations the new entity could save $949 million by eliminating LIPA's debt, $50 million by cutting PSEG's management fee, another $57 million by eliminating LIPA, and drawing from a pool of "efficiencies" of some $2.9 billion to show total first-year cost savings of some $1.34 billion. It would borrow $5.5 billion to fund operations and upgrades.

"All we're showing is that privatization works, it's an option and that it should be considered," Bilicic said. 

Other observers say the Lazard analysis minimizes the impacts of losing LIPA's current tax-free debt ability and access to federal subsidies for storm restoration and hardening that only public utilities can receive. They also note that Lazard makes suppositions that a potential buyer could well ignore. 

"As Long Islanders have painfully learned from many previous studies, conclusions depend on the initial assumptions," said Assemb. Fred Thiele (D-Sag Harbor), who co-chairs the legislature's LIPA committee, "Depending on assumptions, you can prove that an elephant can hang from a cliff with its tail tied to a daisy." 

But the commission’s goal, Thiele said, "is to provide a realistic approach to an accountable, affordable, transparent energy future. Any solution must provide long-term energy stability, not short-term gimmicks in a hypothetical world. We are going forward to better future, not backward to a failed past.” 

A decade ago, then-Gov. Andrew M. Cuomo also considered selling LIPA to a private investor, with the help of a Lazard study, but the effort ultimately failed. At the time, the LIA under Kevin Law, who was also a former LIPA chief executive, took a formal stand against privatization, adopting a resolution that instead called for PSEG to replace National Grid as LIPA’s primary operator. PSEG took over management of the grid in 2014. 

Current LIA president Matthew Cohen on Wednesday noted the business group was not specifically endorsing any particular model for LIPA, including privatization. "This report is another tool in the toolbox to help guide the legislative commission," he said. "We do not have a horse in this race."

LIA board member Robert Catell, who in the past has urged consideration of privatization, said he joined the state committee's LIPA advisory council with the promise that all options would be examined. "We're talking about the long-term future of Long Island," Catell said.

LIPA itself has found privatizing the utility would be costly for ratepayers. A 2021 LIPA study found privatization would raise customer bills by an average $32 a month, chiefly because public ownership now saves them $447 million a year in financing costs. “Privatization would significantly raise customer costs,” the LIPA study found.

Any efficiencies claimed for a privatized LIPA “will not offset higher financing costs and loss of federal grants,” such as the $1.8 billion LIPA has received in storm restoration and hardening subsidies from the Federal Emergency Management Agency over the past 10 years. Investor-owned utilities aren’t eligible for those grants. LIPA’s study also estimated it would cost $1.45 billion just to retire tax-exempt bonds earlier than their retirement dates.

Falcone on Wednesday noted Lazard's proposed efficiency savings would be felt by the local job market and the economy.

"Synergies are job cuts," Falcone said. The Lazard transaction "takes a locally based business headquartered and governed on Long Island for the best interests of Long Island and the Rockaways, and sells it to the highest bidder." 

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

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