[BETA] Fortnightly

Traditional utility regulation has been unable to prevent the electric rates of some utilities from rising far above those of neighboring companies. Two factors are responsible for this failure. First, regulators lack the means to keep seemingly reasonable but unnecessary costs from creeping into rates. Second, ratemaking considers a utility's costs in isolation and does not use peer benchmarks to true up rates.

Political pressure helped limit rate increases for nuclear plants during the 1980s. Yet, in the case of the Long Island Lighting Co. (LILCO), with the highest electric rates in the country, political pressure has proved ineffectual.

The 3.5 million people on Long Island who are served by LILCO paid an average electric rate of 15.3 cents per kilowatt-hour (›/Kwh) in 1994 (em 16.8 cents for residential customers and 14.3 cents for commercial and industrial customers. These rates were roughly 50 percent above those in the New Jersey and Connecticut suburbs of New York, and twice the national average. If these rates were cut to the national average, residents would stand to save $1.2 billion annually (em about $700 per residence and $6,000 for each of Long Island's 102,000 businesses.

The most significant factor driving rates is the 1989 settlement that allowed LILCO to recover and earn a return on its $4-billion investment in the Shoreham nuclear plant. Over the 40-year life of the settlement, LILCO will collect $14 billion for Shoreham (em $4 billion in recovery, and $10 billion as a return. LILCO's electric rates have risen 31 percent since 1989.

At the same time, employment has declined by 10 percent (100,000 jobs). Moreover, the replacement of jobs lost from declining defense spending has been compromised by high electric rates.

Neutralizing the Opposition

Discontent is obvious, but has not been mobilized effectively. Consider how the New York Public Service Commission (PSC) publicized its March decision approving LILCO's request to freeze base rates for 1995. All five commissioners came down to New York City from Albany to announce the decision to the financial community. They promised to honor the financial obligations of the Shoreham settlement, emphasizing the importance of LILCO's bond ratings and its "access to reasonably-priced capital."

But in the political equation, the ratepayers did not count. The elements that should have created political pressure in favor of lower rates had been silent or absent: the press, large customers, and coordinated interest groups.

First, the press on Long Island is almost monopolized by Newsday, a loyal supporter of LILCO. Newsday has attacked rate plans proposed by Nassau and Suffolk counties, the two counties LILCO serves. Nassau has petitioned the PSC to allow retail wheeling; Suffolk is asking the Federal Energy Regulatory Commission to permit a county agency to buy wholesale power for residential customers as a "muni-lite." The strained logic of Newsday's attack on these plans suggests that the paper is deeply committed to LILCO's cause at the expense of the community. Wisely or not, Newsday has abrogated the normal role of the press as a catalyst for change.

Second, cuts in defense spending have left Long Island bereft