Fitch Ratings to Governor Cuomo: Privatizing LIPA won’t work
The worst performing public service in the aftermath of Superstorm Sandy was the Long Island Power Authority. There are a lot of different estimates floating around, including 2.1 million of LIPA’s electricity customers were without power; some for up to 3 weeks. It was a public health disaster of epic proportions as households had to face late October and early November weather with no way to heat their homes or turn on the lights. The latest LIPA fiasco followed years of criticism of the organization.
New York State governor Andrew Cuomo ordered a swift investigation into the slow response of LIPA after Sandy. His Moreland Commission delivered its interim report on Monday.
According to Reuters (emphasis mine):
The commission recommended a complete overhaul of LIPA and the system by which power is delivered on Long Island…It recommended that a private utility buy LIPA.
But before there was time to dig out the financials for LIPA, Dennis Pidherny, Managing Director of Fitch Ratings, was out with a note saying privatization was not economically feasible:
Fitch believes the suggested privatization of Long Island Power Authority (LIPA) could be extremely expensive and may not result in the ratepayer benefits projected. Yesterday, the Moreland Commission recommended privatizing the utility and increasing state oversight and fines that all state utilities would pay if they are found to perform poorly.
The giant albatross hanging around LIPA’s neck is the debt it incurred when it assumed responsibility in 1985 for the never commissioned Shoreham Nuclear Power Plant. Fitch is focused on that debt:
In our view, 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. LIPA’s high debt burden and nominally high electric rates remain a key credit concern. Debt to funds available for debt service was 19.0x for fiscal 2011, compared to Fitch’s rating category median of 8.1x.
Not only is LIPA saddled with a massive amount of debt, more than two times what comparable utilities carry, but if LIPA were privatized it could no longer issue non-taxable municipal debt. LIPA would then be faced with substantially higher borrowing costs. If LIPA were privatized, it would likely have to pay more in property taxes in addition to having to generate profits for equity holders. From Fitch again:
Although some reduction in operating costs may be attainable under privatization, other initiatives, including reductions in property tax payments (or payments in lieu of taxes) are likely to be politically unpopular. Fitch therefore believes that 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. 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.
It’s hard to argue whether privatization is the right path for LIPA without a lot more financial data in the public realm. The Moreland Commission made a few other recommendations for better state oversight that are spot on. Although it’s only a start to managing LIPA, I give Governor Cuomo credit for initiating the process. LIPA is a mess that has festered for decades. If it could be converted from an independent agency to a public utility and gradually bring down rates for its Long Island customers over the next several decades, everybody would win.