[BETA] Fortnightly

Citing the ongoing Competitive Opportunities Proceeding as well as recent public statements by New York Public Service Commission (PSC) chairman John O'Mara, Fitch Investors' Service predicts that New York will aggressively approach electric industry restructuring.

Fitch believes electric utility bondholders could be adversely affected by PSC policies that order less than full stranded-cost compensation, establish penalties to force disaggregation, or provide bailouts that transform weak companies into strong competitors. The aggressive stance of the governor and PSC, however, increases the probability of a shortfall in full stranded-cost recovery.

But Niagara Mohawk Power Corp. (NiMo) and, to a lesser extent, Long Island Lighting Co. (LILCO) may benefit from the New York State administration's drive to impose a political solution. NiMo may find its negotiations with independent power producers (IPPs) improved by O'Mara's recent statement that the PSC may seek to mitigate the harmful effects of uneconomic IPP contracts on the utility. Also, a proposed state bill (S.7826) allowing utilities to secure intangible regulatory assets could give NiMo and the PSC a tool to recover some or all of the contract reformation costs (see story on p. 44).

LILCO, too, could benefit from such a bill, which would provide an alternate financial recovery mechanism if the proposed Long Island Power Authority buyout is blocked by political or Internal Revenue Service obstacles. However, the PSC's April decision to review LILCO, and the likelihood of a greater rate decrease than LILCO's proposed 1.3-percent cut, would trim LILCO's cash flow and pressure the company to find a long-term solution limiting harm to bondholders and shareholders.

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