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Credit rating agencies raise questions about feasibility of privatizing LIPA

From the January 11, 2013 issue of Public Power Daily

Originally published January 11, 2013

By Robert Varela
Editorial Director
The suggested privatization of Long Island Power Authority (LIPA) "could be extremely expensive and may not result in the ratepayer benefits projected," Fitch Ratings said Jan. 8. Standard & Poor’s Ratings Service also said "there is uncertainty as to the economics" of privatizing LIPA.

In a release entitled "LIPA Proposal Could Be Money for Nothing," Fitch said "the primary challenge to privatizing LIPA remains mitigating the higher cost of capital that would likely result from refinancing or defeasing the utility’s more than $6.8 billion of outstanding debt and addressing the authority’s other obligations." 

While privatization might produce some savings in operating costs, the "total cost reductions would be more than offset by higher capital costs of new debt and equity associated with privatization, absent some broader plan to reduce LIPA’s debt burden," Fitch said. The current political environment "seems unlikely to support privatization-driven rate increases," Fitch said, adding that some cost-cutting initiatives, "including reductions in property tax payments (or payments in lieu of taxes), are likely to be politically unpopular."

Under privatization, ratepayers would pay the new owner’s "cost of service, its debt, its return on equity, etc.," and an add-on charge for the securitized bonds, S&P analyst David Dodek told SNL Power Daily in an article entited, "Rating agencies to NY governor on LIPA privitzation: Do the math."

The Moreland Commission, which Gov. Andrew Cuomo created to examine utilities’ storm response and regulation, said LIPA has about $7 billion in debt and assets worth about $3.5 billion, so privatization would produce "stranded debt" of about $3.5 billion. That debt could be securitized, the commission said. "Preliminary analysis suggests that under optimal circumstances, together with the potential synergies achieved by an existing buyer, the securitization method could produce rates that are stable in the short run," the commission said in its interim report. 

Any savings in operating costs that LIPA might be able to realize from privatization "would be overwhelmed" by a $438 million per year increase in financing costs, even apart from an additional $961 million cost to defease its bonds, the Brattle Group concluded in a 2011 report. Even a premium sale price for LIPA’s assets would not "make the privatization option feasible from a rate standpoint," Brattle concluded. The report looked at three structural options for LIPA: privatizing the utility; full municipalization with LIPA taking over operation of its system; and the "servco" model of LIPA outsourcing much of its operations. Overall, Brattle recommended the servco model.


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