(A version of this article appeared January 31, 2013, on page A17 in the U.S. edition of The Wall Street Journal)
NY POLITICS
Plan to Privatize LIPA Is Forming
By LAURA NAHMIAS and REBECCA SMITH
New York Gov. Andrew Cuomo is considering privatizing the state-owned Long Island Power Authority by issuing bonds to pay off more than half its debts and selling its distribution and transmission system, separately, to the highest bidder, officials said.
Privatizing LIPA has long been dismissed as an option for the troubled utility because its huge debt load scares off potential buyers, but Mr. Cuomo has said he is determined to change LIPA once and for all, betting that its widely criticized performance during superstorm Sandy will clear the way.
The plan under discussion would roughly halve LIPA's $7 billion debt and remove an obstacle to selling it to another utility company. It also would potentially produce a lower interest rate on that debt. Customers of the new utility would repay those bonds over many years, as a separate fee on their bills. A new entity would likely be responsible for issuing the bonds and overseeing repayment.
It isn't certain the plan would reduce LIPA customers' bills, among the highest in the nation.
Privatization faces significant political opposition on Long Island, and administration officials said they are considering other options, including turning LIPA into a municipal utility.
"LIPA Board trustees requested additional details regarding [privatization] which were provided," said Matt Wing, a spokesman for Mr. Cuomo. "However, the administration does not want this to be a top-down process and we will be discussing a range of options with local elected officials and community and business leaders."
The plan to separate LIPA's attractive assets from its debt appears to be gaining steam. Last week, in a private meeting of LIPA trustees who sit on its finance and audit committee, representatives of the governor's office outlined how privatization might work, with details supplied by Lazard Freres & Co., LLC, a utilities financial adviser.
Under the plan, details of which still are being worked out, the state would sell LIPA's utility system for about $3.5 billion, and then most of LIPA's debt would be securitized through a revenue-backed bond issuance. Bonding authority would require passage of a law.
LIPA's 1.1 million customers likely would be offered a rate freeze for three to five years, during which the new owner would try to improve service, said a person with knowledge of the financial details. It doesn't look like customers would see lower bills right away, though that might be possible after a few years, people with knowledge of the discussions said.
Currently, LIPA's customers pay down its debt as part of their rate per kilowatt hour. Under the plan being discussed, the debt would be separated from that rate and assessed separately on the bill. Lower interest rates that could be obtained after the debt is refinanced could make it possible to reduce carrying costs for the debt.
Issuing bonds to stabilize utility debt—a process called securitization—has been used elsewhere, most notably by California when it sold bonds to manage billions of dollars in debt created by the energy crisis a decade ago.
LIPA has been plagued by financial problems since it was created as a holding company in 1985, by then-Gov. Mario Cuomo, to manage the assets of the former Long Island Lighting Co. and to absorb the $6 billion debt created by the Shoreham nuclear power plant. The authority employs only about 100 people and contracts the management of its system to other companies, currently National Grid.
Privatization was endorsed by a commission empaneled by Mr. Cuomo to examine the utility's response to Sandy, and Mr. Cuomo has since embraced the idea, promising Long Islanders would see their utility rates frozen for several years.
There are some sticking points. The most fundamental is finding a utility willing to acquire LIPA. Among the names that have surfaced are Northeast Utilities, NU -0.63% Public Service Enterprise Group, PEG +0.97% National Grid and Consolidated Edison Inc. ED +0.18%
A spokeswoman for Northeast Utilities, in Massachusetts, said the company doesn't discuss potential transactions. A person with knowledge of discussions said the utility had been approached but wasn't interested, in part because LIPA is seen as poorly maintained and Northeast Utilities is preoccupied with integrating another utility it recently acquired.
PSEG, which is scheduled to take over management of LIPA in 2014, said it is committed to delivering a "high level of service, reliability and value" and added it is committed to working with state officials on finding the best method of achieving that aim.
Passing the enabling law may be hard. State Sen. Philip Boyle, a Long Island Republican, said local officials won't be convinced easily. "I can't fathom the way they're going to make privatization work," he said.
Some LIPA trustees favor the privatization plan, but others are wary, according to people who attended the recent meeting. Many lawmakers and business owners have already spoken out against privatizing the utility because they fear rate hikes.
"I'm the first to agree that, looking ahead, we don't want to hold onto an old structure of LIPA, but I'm far from convinced that privatization is the right way to go," said LIPA trustee Neal Lewis. He worried privatization would lead to loss of public control and bring "a real risk of significant rate increases in the future."
However, rate increases by a private utility would be subject to regulation by the state. Currently, LIPA can raise rates without approval.
Write to Rebecca Smith at rebecca.smith@wsj.com