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LILCO: The Ultimate Failure of Regulation

Fortnightly Magazine - March 1 1996

have financed a 17-percent rate reduction.

The PSC completely ignored its obligation to minimize the settlement's impact on rates.

The LIPA Proposals

Cuomo's takeover plan would have provided investors with a windfall from a takeover, a point not lost on LILCO's management. LIPA would have bought LILCO's $4.3 billion of worthless Shoreham intangibles at book value. Investors would have been bailed out, and Long island residents would have been left holding the bag.

LILCO, of course, could not openly promote a takeover. Publicly it had to appear a cooperative bystander, but behind the scenes LILCO began to do whatever it could to induce major players to support a takeover. It has been very successful.

In June 1995, LIPA came forward with a second takeover proposal (em a somewhat more palatable version of the original proposal. This proposal marked a last-ditch effort by a lame-duck board of public power advocates. The state legislature had restructured LIPA, and in August a new 15-member board was to take over, with 9 members appointed by Governor Pataki, and 6 by the leaders of the State Senate and Assembly.

Pataki also opposed this takeover, and it appeared the proposal would pass quietly into oblivion. In July, however, LILCO won a key tax judgment that renewed the turmoil. Suffolk County and the Town of Brookhaven, where the Shoreham plant was located, had collected property taxes from LILCO on Shoreham while it was being built. Since the plant never operated commercially, the court found that these taxes had to be refunded to LILCO with interest. The judgment was for $78 million and covered 1976 to 1984. A pending case for later years threatens to bring the total refund to about $400 million.

LILCO was only the conduit for these taxes; the judgment represents a debt that some parts of Long Island owe to others. The obvious way to satisfy this debt is to reverse the original collection process by placing a tax on electricity sold in the areas that benefited from the original Shoreham taxes, and crediting the proceeds to the bills of all ratepayers. LILCO cleverly kept the politicians from focusing on the obvious solution.

LILCO now had the political weapon it needed to create sympathy for a takeover. LILCO played the villain by pressing for immediate payment of the judgment, which was seen as an attack on the town and county. The politicians were anxious to counterattack, and LIPA said it would not collect the refund if it took over LILCO. LIPA's promise of forgiveness was strongly endorsed by Brookhaven and Suffolk, and the wilting takeover bid took on new life.Candidates of both parties vied to take the strongest position in favor of the takeover.

Pataki's Intervention

While campaigning for Republican hopefuls on Long Island in early September, Pataki declared that any solution to "high electric rates on Long Island must include the end of LILCO." He went on

to say there would have to be "double-digit rate reductions for Long Islanders. . . . Right away." The Governor had unnecessarily taken direct responsibility for Long Island's