New York Gov. Andrew Cuomo announced plans for all of the Long Island Power Authority’s operations to be taken over by PSEG and almost half of its debt to be refinanced.

LIPA charges high electric rates, has a large debt load, and has performed poorly, especially during natural disasters, Cuomo said.

The governor is calling for PSEG to take over most of the responsibility of providing electricity to Long Island, which is currently shared by LIPA and National Grid. LIPA would become a “holding company,” Cuomo said.

Because LIPA is a government body it would continue to be able to issue tax-exempt bonds, Cuomo said. It would remain eligible for Federal Emergency Management Agency reimbursement after major storms, something would be in doubt if the utility were to be completely privatized, Cuomo said.

Cuomo said he would put forward legislation to give PSEG control over LIPA’s operations. The legislation should be passed in the next few weeks, he said.

Part of the legislation would allow the refinancing of nearly half of LIPA’s $6.7 billion in debt at lower interest rates, Cuomo said. This would reduce the burden of debt payments that now account for 10% of electric bills, he said.

LIPA currently is responsible for budgeting, storm-preparedness, infrastructure-improvements, energy-efficiency work, and compensation. All of this will be shifted to PSEG, Cuomo said. National Grid currently maintains LIPA’s transmission and distribution system. PSEG would also take this over.

Cuomo called for a Long Island office of the New York Department of Public Service to be established. The office would oversee the utility’s operations and make recommendations. It would also review rates and storm preparedness. Proposed rate increases would be reviewed in full evidentiary hearings, according to Standard & Poor’s.

New York is seeking a rate freeze from 2013 to 2015, Cuomo said.

For more than 100 years, PSEG has provided electrical service in New Jersey.

“We understand that the governor’s legislative proposal … contemplates creating a special purpose vehicle to refinance LIPA debt through a securitization with the goal of reducing borrowing costs,” wrote S&P analysts David Bodek and Jeffrey Panger in a comment on Cuomo’s proposal.

LIPA’s senior lien general revenue bonds are rated A3 by Moody’s Investors Service, A-minus by S&P and A by Fitch Ratings.

“We view the transition to a higher level of rate oversight, the regulatory lag that is typically associated with hearings, the contemplated rate freeze, and the political hurdles to rate adjustments as collectively having the potential to erode the utility’s financial flexibility,” Bodek said.

At Monday’s meeting, Long Island leaders were generally positive about Cuomo’s proposal.

Nassau County Executive Edward Mangano said he supported the governor’s approach.

“I think we’re definitely moving in the right direction,” said Republican Temporary State Senate President Dean Skelos. Democratic Assembly Speaker Sheldon Silver, a Democrat, said he liked the plan.

Kevin Low, president of the Long Island Association, the island’s main business group, said the plan was a “leap in the right direction.”

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