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News Digest

Fortnightly Magazine - May 15 1998

rate reduction bonds over the next few years, according to a new report from Prudential Securities Inc., entitled The State of Utility Securitization: Stranded Costs and Other Financing. Prudential expects issues of RRBs to reach $10 billion to $15 billion this year, although it cautions that this figure is extremely volatile given political, legal and regulatory hurdles.

WATER UTILITY CREDIT QUALITY. In a new report, Moody's Investors Service finds the credit quality of some U.S. water utilities may suffer as they face the high costs of safe drinking water requirements and pursue diversification efforts. The report, The Water Utility Industry: Risks Rise for Last US Regulated Monopoly, states that the cost of complying with environmental mandates will prove troublesome for smaller investor-owned, municipal and private water utilities. The report adds that diversification could prove risky for larger investor-owned utilities that seek to supplement earnings through acquisitions. Stronger competition in that area from other larger investor-owned and municipal utilities as well as from newly deregulated electric utilities, could drive up bids for acquisition targets. Overall, the report states, "financial risks associated with the regulated, investor-owned water sector are not as significant as in the electric utility sector, which itself has undergone a wave of diversification, mergers, and acquisitions, and now faces deregulation."

SULFUR-DIOXIDE EMISSIONS. The U.S. General Accounting Office released its report, Air Pollution (em Estimated Benefits and Costs of the Navajo Generating Station's Emissions Limit, which questions the benefits of reducing SO2 emissions at the 2,250-MW Navajo Generating Station.

In 1991 the Environmental Protection Agency had required the Navajo plant to reduce emissions by 90 percent, costing plant operators $100 million, claiming that plant emissions impaired visibility in Grand Canyon National Park, in violation of the Clean Air Act. The EPA initially had estimated a 14 percent winter season visibility improvement in the Grand Canyon vicinity due to reducing SO2 emissions by 90 percent, but lowered that estimate to 7-percent improvement to reflect new study results.

Public Power

LILCO TAKEOVER. The Internal Revenue Service has issued a favorable ruling for Long Island Power Authority to move forward with its partial takeover of Long Island Lighting Co. According to New York Gov. George Pataki (R), the deal will cut electric rates on Long Island by almost 20 percent. But consumer groups say the ruling, which gives LILCO investors a $2-billion capital gains tax exemption if the takeover occurs, is a "bailout" of the utility's failed nuclear investment at ratepayer expense.

LILCO would sell LIPA its $4.8 billion of Shoreham plant assets, its 18 percent interest in the Nine Mile Point 2 nuclear plant and part of its purchased power contracts. LILCO would transfer its transmission and distribution assets to LIPA, retaining its gas-fired and non-nuclear electric generating assets. LIPA would pay LILCO $2.5 billion in cash; LILCO would sign a 15-year electric supply contract with LIPA to operate LIPA's transmission and distribution system. LIPA would assume $3.6 billion of LILCO's $5 billion outstanding debt and preferred stock. LILCO would finance the transaction by issuing $7.3 billion of municipal bonds. The IRS ruled that