The passage in June of a bill by the New York Legislature that could limit the Long Island Power Authority's ability to raise rates triggered rating actions this month by two agencies.
Citing the pending legislation, Fitch Ratings revised its outlook on LIPA last week to negative from stable, which comes on the heels of the same action the week before by Standard & Poor's.
Fitch and Standard & Poor's rate the authority's senior-lien bonds A-minus. Moody's Investors Service assigns its A3 rating.
The bill, which has yet to be sent to Gov. David Paterson, would require that LIPA get approval from the Public Service Commission before it could raise rates by more than 2.5% over a 12-month period.
The PSC is an oversight body that regulates the state's electric, gas, steam, telecommunications, and water utilities.
Under the bill, LIPA would have to go through a full evidentiary hearing - which means going before an administrative judge, submitting oral testimony, and being cross-examined under oath.
Signing the bill into law wouldn't trigger an automatic downgrade, said David Bodek, director at Standard & Poor's.
"What we're really looking to is, what would the Public Service Commission do? Would they act in a way that's supportive?" Bodek said.
When LIPA was authorized to issue debt in 1998, the Public Authorities Control Board, an oversight board that has to approve LIPA bond deals, required PSC approval for rate increases of more than 2.5% in a 12-month period.
But the authority has always interpreted the rule as not applying for increases due to cost increases from higher fuel prices or the cost of purchasing power, said LIPA chief financial officer Elizabeth McCarthy. All of the rate increases since then have been due to those costs and the PACB has never raised the issue.
"If it's enacted it would have the unintended consequence of increasing our customers' cost as opposed to lowering it," McCarthy said. "We would have to have additional staff to undertake these types of rate proceedings ... There's also the potential impact on our credit and our cost of borrowing."
Dan Aschenbach, senior vice president at Moody's, said the legislation is ambiguous as to whether it would apply to only the base rates or to other costs as well.
"It's not clear whether it also would apply to the fuel surcharges," Aschenbach said. Fuel costs have gone up by 98% between 2003 and 2007 and those increases have been passed through to the customer, he said. If "it only affects the 2.5% [base rate] then nothing's really changed ... If it's applying to other LIPA costs, any portion of the rates above the 2.5%, then that would be something that would trigger our concern."
Stephen Liss, counsel to Assemblyman Bob Sweeney, D-Lindenhurst, one of the bill's sponsors, said he did not believe the bill would cause a downgrade.
"Reasonable regulation does not lower bond ratings," Liss said. "The Public Service Commission has been around a long time, they know to do this correctly."
The purpose of the bill was to put the PSC review requirement into the statute, Liss said. "LIPA and the previous administration refused to ever pull the trigger on the PSC review," he said.
Liss said the rating actions were a "self-fulfilling prophecy" because LIPA had "been running around saying this was going to happen, so it's not shocking that the people LIPA pays to rate its bonds are now agreeing with LIPA's assessment." Asked whether he was questioning the integrity of rating agencies, Liss said that he was not.
Standard & Poor's declined to comment and Fitch did not respond to calls for comment.
Paterson has not taken a public position on the bill.
"When the bill gets delivered to the governor's desk, we'll have all interested parties review it, and our counsel's office review, the law and the governor will make his decision then," said Paterson spokesman Morgan Hook.
