LIPA’s 2011 Budget

                                                                  By Dr. Matthew Cordaro

A close examination of the proposed LIPA 2011 budget in the context of the authority’s overall financial picture reveals surprises.

Through a confusing manipulation of an increase in delivery charge and a decrease in the power supply charge on LIPA bills, the utility arrives at a small 2.2% rate reduction amounting to a monthly savings of a few dollars for the average customer. Although any rate decrease, however small, sounds good, in this instance it represents a strategic mistake for LIPA and something costing more for the customer over time than no reduction, in essence a backdoor rate increase.

In the case of LIPA, a small reduction that is more of a public relations gesture than anything else, can backfire when a substantial rate increase probably becomes necessary next year because LIPA’s fuel cost projections are low and do not reflect the impact of a weakening dollar and increasing inflation.

LIPA’s track record on projecting fuel costs has not been good. Over the last few years their estimates substantially exceeded the actual costs incurred and resulted in serious over collections.

For the customer, when the planned borrowing of about $200 million by LIPA for the budget year is taken into account, a 2.2% rate reduction does not look like such a great deal. With the money from the rate reduction being replaced by debt, it essentially becomes a loan to customers and their children to be paid back with interest in future years. Wouldn’t it make more sense to use the rate reduction dollars to offset borrowing by a like amount rather than having to pay interest on it for years to come?

One way of perhaps accomplishing this is by incorporating in the budget, up to the amount of the proposed rate reduction, more storm restoration costs, including part of the $32 million spent in preparation for Hurricane Earl. LIPA has been contending that these costs will not be charged to the customer but paid for from internal funds. But the fact remains these internal funds are actually ratepayer dollars since LIPA has no stockholders. Placing more storm costs in the budget would better reflect the reality of who is paying for what and dispel the notion of LIPA being able to absorb any costs. It would also provide a mechanism for minimizing what LIPA needs to borrow.

The LIPA 2011 budget document also contains financial projections for 5 years into the future. In these projections the authority is estimating significant increases in revenues from year to year. This is troubling because, if expenses are not tightly controlled, it introduces the potential for double digit rate increases. To protect against this, LIPA must start now with the proposed 2011 budget to seriously trim expenses.

This requires the reexamination of all costs, including those associated with social engineering to provide significant rebates and incentives for efficiency and renewable to those who can afford to take advantage of them at the expense of those who cannot. Interestingly,  this contrasts with LIPA’s late payment charge proposed in the 2011 budget. There the utility seeks to protect those able to pay their bills on time from subsidizing those who have difficulty doing so. No question there is merit here on all sides, but with LIPA rates being among the highest in the country, hard choices need to be made.

LIPA’s proposed 2011 budget raises strategic questions for the utility and concerns over cost to the consumer. The authority needs to take the time over the public comment period to reevaluate the proposed budget and deal with this.


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