LILCO: The Ultimate Failure of Regulation

Fortnightly Magazine - March 1 1996
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Nowhere are the failings of traditional utility regulation more evident than on Long Island. The New York Public Service Commission (PSC) has raised rates for the Long Island Lighting Co. (LILCO) 31 percent since 1989. Rates are now over twice the national average (em the highest in the continental United States. Meanwhile, Long Island's economy has been ravaged by defense cutbacks that have erased 100,000 jobs (em a 10-percent drop in employment. The high electric rates have kept new industry from moving in, and a grocery chain is now Long Island's largest employer.

The normal order has been turned upside down. While pressures for competition are sweeping the industry, New York State has floated three proposals for a public takeover of LILCO in the last 15 months. Instead of facing the ominous prospect of absorbing huge stranded costs, LILCO's investors hope to be bailed out by the state. While utilities fight public power, LILCO is quietly trying to sell itself by orchestrating a public takeover. And Gov. George Pataki, a Republican, is advocating government intervention instead of championing competition.

The Shoreham Settlement

Long Island's current electric rate problem is an outgrowth of the closing of the Shoreham nuclear plant in the late 1980s, which left LILCO in dire financial straits. At the end of 1988, LILCO had $4 billion invested in the plant and an equity ratio of 33 percent. Its cash flow from operations was only $235 million, and it needed $575 million in capital to finance debt maturities and capital spending in 1989. Without major rate relief, LILCO faced bankruptcy.

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