State holding public hearings on PSEG's $200M electricity demand reduction plan

Will Long Island customers get the most for their money with PSEG Long Island's proposed $200 million program for electricity demand reduction?

Hearings on the plan held by the state Department of Public Service began Tuesday in Hauppauge and will continue through next week.

Around a third of the program's ultimate cost -- $122 million -- will go to pay back PSEG for loaning LIPA the $200 million for conservation and renewable energy measures over 10 years.

The PSEG plan seeks to cut 185 megawatts of demand from the system over the next decade, around half the output of a large power plant.

One market watcher, who said he would prefer that PSEG's plan be considerably more expansive and further lower electric demand, said ratepayers could get a much lower rate -- and potentially much greater electric savings -- by financing the plan using LIPA's tax-exempt rates of around 4 percent.

Peter Gollon, energy chairman of the Sierra Club's Long Island chapter, estimated that if LIPA borrowed the $200 million itself instead of PSEG, ratepayers would save around $100 million in interest over the 10 years, paying just $22 million in interest by 2026.

Better, he said, if LIPA borrowed the full amount PSEG is expected to recoup, or $322 million, even more could be put into demand-reduction measures -- $76 million, he said. And the interest paid would still be less than under a PSEG-financed model -- only around $45 million, he estimated.

PSEG has said use of its own lending capital was proposed as a way of helping LIPA avoid further debt.

Further, PSEG spokesman Jeff Weir noted the program is designed to mitigate any rate impact by making certain that the energy savings ultimately offset program costs.

Julia Bovey, director for the Department of Public Service's Long Island office, said the agency will be reviewing PSEG's lending plan and weighing it against the prospect of LIPA taking on more debt.

At the hearing, longtime LIPA critic Peter Quinn raised questions about LIPA's increasing debt, including programs such as Utility 2.0, which could increase future financial obligations.

"Some ratepayers have big concerns about paying down debt, and others want a modern, clean, efficient electric system," Bovey said. The challenge is "how to balance it out."

Either way, she said: "It's crucial that the ratepayer impact is fully understood" before the plan gets final approval. The department will present its review and a formal recommendation to the LIPA board in coming months, she said.

PSEG's Weir said the company believes other elements of the program will help assure its cost effectiveness. He said the company "absolutely" expects that competitive bidding for subcontracts tied to Utility 2.0 will be part of the process.

LIPA's direct contracts are subject to state comptroller review but, under Gov. Andrew M. Cuomo's LIPA Reform Act, PSEG contracts are not. It's unclear whether PSEG is required to seek competitive bidding under the act. A spokeswoman for Comptroller Thomas DiNapoli didn't immediately have a comment.

Lockheed Martin, PSEG's partner in the broader LIPA system management contract, is expected to do some of the Utility 2.0 work, Weir said. Where Lockheed isn't used, "We clearly will do competitive bidding. . . . My understanding is almost everything is going to be up for competitive bids."

As written, the Utility 2.0 plan does not have a mechanism for the utility to recoup revenue that is lost because of energy savings. Because PSEG expects to reduce demand for up to 185 megawatts of power, LIPA's total revenues would decline by a commensurate amount.

Regulators have a mechanism, called revenue decoupling, that allows utilities to recoup system costs even as demand declines -- a measure intended to provide an incentive for demand reduction even in the face of revenue decline.

"There is no revenue decoupling" in 2.0, said Weir, "but it may be considered as part of the rate case" that PSEG will submit to LIPA and regulators in February.

Bovey said the Department of Public Service will closely review any revenue decoupling proposals tied to the Utility 2.0 plan when it conducts the PSEG rate review.