Updated November 30 7:34 AM
LIPA’s 2012 Proposed Budget understates its financial needs by suggesting only a 1.5% rate increase, possibly to regain some favor with beleaguered ratepayers. It is able to accomplish this through manipulation of cash from overcharges and borrowed funds, a practice that unfortunately increases costs for the consumer in the future. With this type of financial management, LIPA customers will never see the day when rates, apart from fuel costs, are stabilized.
One item underestimated in the 2012 budget is fuel cost, with LIPA projecting a decrease of 2.8% from the amount in the approved 2011 budget. This disregards the fact that DOE and others have estimated natural gas prices will increase by 5% with a mild winter and by double digits with colder weather. In any case LIPA is protected by its ability to automatically increase rates on a quarterly basis if fuel costs exceed budgeted levels. This absence of risk on the part of the utility may explain why it can minimize the 2012 fuel cost estimate and use it to help produce a lower overall rate increase.
The 2012 budget also increases funds for the efficiency and renewables program by 26%. This brings the total for this program to over $116 million a year. In the midst of a recession damaged economy and having among the highest utility rates in the nation, can Long Islanders really afford this. Although investment in the future is important, there are priorities to be considered, such as putting food on the table. It is no secret that LIPA’s late payments and uncollectables are at an all time high, suggesting some belt tightening is necessary. Maybe cutbacks on the efficiency and renewables projects that are not cost effective would be a good place to start.
Another increase in the proposed 2012 budget is $24 million for the National Grid management contract covering inflation and higher sales. The big question, however, is this anywhere near enough to what will be required when LIPA’s liability to fund Grid’s under funded pension costs are included. Clearly, from merger documents for the companies which ultimately produced LIPA and National Grid, LIPA has significant responsibility for National Grid worker pension costs. The current under funding for these costs is in the neighborhood of $525 million. No matter what concessions LIPA may gain in negotiations with National Grid, it is obvious that what is in the proposed 2012 budget is not enough and some adjustment needs to be made.
There is a modest increase for storm restoration in the 2012 budget of $6 million, however, LIPA states it is not charging in rates the $44 million in excess storm costs over prospective FEMA reimbursements for Hurricane Irene. Apparently the $44 million bill is being paid, or has been paid, out of cash which probably includes funds from borrowing. Of course this still represents customer money one way or the other, even if it does not show up in an announced rate increase. Actually, it may make more sense to charge customers for this now in rates rather than putting it off so ratepayers would not end up paying for it with interest over time.
The FEMA reimbursement also raises questions in the context of the 2012 budget. Under the grants portion of the budget the FEMA reimbursement is listed but no reference to the amount appears. Was it booked in 2011 even though it was not received or actually determined? Why does it appear as a line item in 2012? Does LIPA know when it will be received and is it sure of the amount? The answer to these questions could have a serious impact on the 2012 budget and on LIPA’s cash position.
As part of the 2012 budget presentation, LIPA discusses amortizing the cost of transitioning to its new SERVCO structure over the 10 year term of the contract. This raises the question, wouldn’t it be more appropriate to write off those costs over the actual 2 year transition period. In any event, LIPA is including $17 million of those costs in the 2012 budget. Although not in rates, this expenditure represents yet another strain on cash and more money that the customer will have to come up with over time.
Also related to the SERVCO restructuring, the 2012 budget includes funds for 6 additional LIPA personnel. This appears to be a minor issue, unless it is recognized that to perform all the functions LIPA says it will in overseeing the contractor, it will require many more than 6 additional people. This could involve hiring new personnel and replacing some existing employees with others having more appropriate experience.
During the budget presentation to LIPA’s board, the COO stated that during the Brattle Group’s study of the new structure, little attention was given to how LIPA would be organized to supervise the SERVCO contractor. The immediate question then is how could have the conclusion be reached that the SERVCO option had less transitional risk than the full municipal structure. In reality, the SERVCO option requires an overlapping and much more complicated management structure than for the municipal model. The consequences, if not apparent in the 2012 budget, will become evident in future budgets.
Another topic of concern with the 2012 budget are the charges associated with the Shoreham Settlement Agreement. Apparently those charges appear to have increased with this budget. This needs to be clarified in view of the Suffolk County court action on this and a recent evaluation by the County Controller. The issue relates to the fact that arbitrage on LIPA debt assumed as part of the settlement should have been used to reduce the amount charged to Suffolk County ratepayers.
LIPA’s capital budgets for 2012 and 2013 were included as part of the proposed 2012 LIPA budget presentation. The capital budget for 2012 was increased 2.2% over the approved budget for 2011. This appears to be quite ambitious when the actual expenditures for 2011 will underrun the approved budget by $13 million. If the budgeted amounts are not being spent, then how do you justify increasing them? Compounding this, the capital budget for 2013 is projected to increase by 16% over the 2012 budget.
Adding up the pluses and minuses of all these observations, the 2012 proposed LIPA budget appears to be insufficient to support the utility’s financial needs. While it may be desirable from a public relations perspective to propose a budget with a minimal rate increase, in the long run it may do more to undermine the financial stability of the utility and increase costs to ratepayers. All of LIPA’s costs are underwritten by the customer and it has no stockholders. As such, all LIPA money, either borrowed, collected through rates or held in cash, is customer money. Taking this into consideration in developing budgets is important because sometimes increasing rates to customers can be more in their interest over time than deferring costs or borrowing.