New York Governor Andrew Cuomo’s proposal to privatize the Long Island Power Authority would require the immediate redemption of the utility’s $6.9 billion in short-term notes and long-term bonds, some analysts are saying.
On Monday a body appointed by New York Gov. Andrew Cuomo, the Moreland Commission, released its initial recommendations for changes to the authority and regulation of the state’s public and private power utilities. It recommended that a qualified utility purchase LIPA’s assets and serve as the manager of Long Island’s electrical utility.
On Wednesday afternoon Cuomo endorsed privatizing LIPA. “It is time to abolish LIPA,” Cuomo said in his annual State of the State speech. An empowered Public Service Commission should regulate a new private Long Island power utility, he said. Rates should be frozen for several years, he said.
New York’s legislature would have to approve any privatization.
If a private utility were to take it over, LIPA’s bond indentures would require the immediate redemption of its debt, said Standard & Poor’s credit analyst David Bodek. Fitch Ratings managing director Dennis Pidherny confirmed that a private takeover of LIPA would require the immediate redemption of the debt. LIPA would have to redeem its tax-exempt debt, presumably by the new entity’s sale of taxable debt, they said.
In addition to the notes and bonds as of Dec. 30, 2011, LIPA also owed $3 billion in capital leases.
Taxable debt would have higher interest rates and thus be more costly for LIPA, Pidherny said. LIPA would also have the challenge of trying to sell $6.9 billion all at once.
S&P rates most of the authority’s general revenue at A-minus with a negative outlook, though some of the debt is insured and has a higher rating. Fitch gives LIPA’s general revenue bonds an A rating with a negative outlook. Moody’s gives the senior-lien revenue bonds an A3 rating, the subordinate-lien revenue bonds a Baa1 rating, and the third-lien New York State Research and Development Authority bonds a Baa 2 rating. On Dec. 10 Moody’s put all of them on review for a downgrade.
LIPA’s customers have complained about the utility’s slowness in restoring power after several recent hurricanes. The utility charges those customers some of the highest electricity rates in the nation.
On Tuesday Pidherny and Bodek were both skeptical of what was then just the commission’s suggestion that LIPA be privatized. Privatization would lead to higher capital costs through the higher interest rates of taxable bonds, Pidherny said. Fitch’s analysts do not see enough reductions in operating costs with privatization to offset the higher capital costs, he said.
“While it serves mainly residential customers in some of the wealthiest counties in the country, the current political environment seems unlikely to support privatization-driven rate increases,” Pidherny wrote in a press release.
Pidherny and Nicole Gelinas, senior fellow at the Manhattan Institute, both said that LIPA is hobbled by a large debt incurred when it took over the Long Island electrical provision from a private utility in 1998. The private utility had started the construction of a nuclear power plant that was ultimately cancelled, leaving it with billions of dollars in debt. LIPA inherited the debt.
Gelinas said LIPA also was hobbled by debt from a property tax dispute from about 20 years ago.
For political reasons New York State government is loath to encourage further increases of LIPA’s customer rates, Pidherny said. Yet due to the substantial damage from Hurricane Sandy, there is financial pressure on LIPA that may be diverted to the bondholders, he said.
State and local politicians would like to have a private utility take the blame for Long Island’s electrical woes, Pidherny said Tuesday. If the private utility did anything that upset the public, the state Public Service Commission could penalize it financially, he said.
On Tuesday Moody’s vice president Laura Schumacher wrote: “The report is preliminary, additional recommendations are to follow in the coming months, and there are numerous legal, structural and operational questions and challenges that at this point have only begun to be contemplated; we note that a privatization of a public power enterprise of this magnitude has not been seen in the United States.”
“To the extent LIPA were to become a privately owned entity, it would lose its ability to issue tax-exempt debt as well as its legally entitled reimbursement for storms from the Federal Energy Management Agency, along with its ability to independently set rates,” Schumacher wrote. “These are significant advantages that factor into the current LIPA credit profile. As a private entity, LIPA’s rates would also need to be sufficient to provide a reasonable return on the private equity invested. In our opinion, the cost of these factors is likely to be greater than any potential ‘synergies’ or economies of scale that could be achieved by combining with another utility.”
“If it was possible for LIPA to instantaneously become a privately owned investor owned utility, which would be regulated by the N.Y. Public Service Commission, while leaving its existing debt load in place, the credit implications for the bondholders would undoubtedly be negative; however, we do not believe this is possible or intended,” Schumacher continued.
“The report implies that a privatization would occur via a sale of LIPA’s assets for an amount that would be sufficient to repay a portion of its debt outstanding; the report further assumes that the remaining debt would be securitized and repaid via a separate charge, which would continue to be paid by Long Island ratepayers. As such, the credit impact on the existing bond holders would be neutral to positive; however it is still very early in the process and there is a tremendous amount of uncertainty regarding the legal and financial details of any potential restructuring.”
Unlike the rating agency analysts, Gelinas thought the privatization to be a good idea. A private utility would have better operational management. It would have private sector managers who would be accountable and the shift from tax-exempt to taxable debt is a concern, she said. However, the state should consider giving tax-exemption to private monopolies like Consolidated Edison Inc. which provides electricity to New York City and Westchester County and to a private successor to LIPA. These entities are providing a public service, she said.
In August 2011 the Brattle Group released a report saying that privatization would be a bad idea for LIPA, Pidherny said.
Currently, the governor appoints half of LIPA’s board of directors and the legislature appoints the other half.
The Moreland Commission also made other recommendations relevant to LIPA as well as the rest of the state’s electrical utilities. The commission recommended the hiring of more trained staff at the Department of Public Service after years of reductions and the unification of the department’s management with that of the New York State Research and Development Authority.
Pidherny endorsed the recommendations along with other suggestions that would only affect the state’s private utilities.
