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Financial News

Fortnightly Magazine - September 1 1995

of large industrial companies that could spearhead a drive for lower rates. Grumman has all but disappeared, and the Island's largest employer is now a grocery chain,

Waldbaum's. There simply are no large customers that can exert pressure for lower rates the way Raytheon has in Massachusetts.

Third, individual proposals to cut rates have lacked the clout of a concerted effort between interest groups. A state agency, the Long Island Power Authority (LIPA), has proposed a $9-billion takeover that values LILCO's common stock at $17.50 per share. LIPA would finance the buyout by selling tax-exempt bonds. Servicing the $9-billion debt, however, would limit the rate cut LIPA could achieve to about 10 percent, which would leave Long Island rates 70 percent above the national average, and second-highest among major utilities. LIPA would simply be paying too much for LILCO's assets. For $9 billion, LIPA would get only $3.5 billion of operating plant, and pay $5 billion for Shoreham intangibles (em that is, "good will." Besides LIPA and the counties, high rates have spawned municipalization studies and attempts by school and water districts to access the wholesale power market.

For its part, LILCO has skillfully held the opposition at bay. The utility has wielded its alliance with Newsday to cast doubt on the viability of competition for Long Island, effectively precluding the opposition from using competition as a unifying theme. Keeping the opposition unorganized, LILCO has been able to isolate and disarm individual initiatives to cut rates.

LILCO's financial policy also makes it difficult for the PSC to reduce rates. The Shoreham settlement placed no restrictions on LILCO's use of funds produced by rate increases. LILCO has used these funds to pay dividends at the expense of its financial strength. LILCO's equity ratio (29 percent) and interest leverage (1.99) remain dangerously low. Meanwhile, its dividend payout ratio has averaged 80 percent for the last four years. This continuing financial weakness has bedeviled the PSC, which has backed away from cutting rates for fear of jeopardizing LILCO's precarious financial position.

While LILCO's financial policy has served investors well thus far, it is not without long-term risks. Management has opposed competition, refused to prepare for it, and kept the company in a vulnerable financial position. Any attempt to reduce rates will likely be disastrous for investors. Moreover, as pressures continue to grow, the likelihood that policymakers will eventually cut rates will also increase. t

Charles M. Studness is a contributing editor of PUBLIC UTILITIES FORTNIGHTLY. Dr. Studness has a PhD in economics from Columbia University, and specializes in economics and financial research on electric utilities.

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