HomeMy WebLinkAboutElectric/Gas Municipalization Feasability Study - 1984 A~ALYSIS OF THE FEASII)ILII'Y STUDY OF
POWER SERVICES DELIVERY OPTIO~IS,
I~U~JICIPALIZATION OF E..,LECTRIC SD GAS FACILITIES
PROJECT NO, 835q
REPORT NO. q-19Bq
~RCH 16, 198q
Donald Gruen, Director
Budget Review Office
S~Jffolk County L~islature
Hauppauge, New York
SUFFOLK COUNTY LEGISLATURE
BUDGET REVIEW OFFICE
March 16, 1984
Lou Howard, Presiding Officer and
Members of the Suffolk County [~gislature
Legislature Building .~
Hauppauge, New York 11788
Dear Legislators:
The Budget Review Office has conducted an "Analysis of the Feasibility
Study of Power Services Delivery Options, Municipalization of Electric and
Gas Facilities" prepared by Oaverman and Associates, P.C. Our considered
findings and recommendations thereon are herewith presented.
At the onset, this office recognized that this project was from a
potential economic and social impact perspective, the most important
project ever placed before us. As can be readily discerned from our
acknowledgements, we left no known stone unturned in our search for an
understanding of true costs and most probable results of contemplated
actions.
If one thread was found to fl ow through our entire research and
analysis, it was the absence of hard definitive dollar projections. Many
of the conclusions reached by Daverman were based upon assumptions whose
validity remains uncertain.
Because of the tremendous amount of uncertainty surrounding the
results of municipalization of a utility the size of LILCO, we can only
recommend extreme caution. Our review further indicated that Daverman's
projections of an economic benefit from municipalization would take place
only under the best of circumstances.
We firmly believe that any decision to move forward toward
municipalization should await the disposition of the Shoreham Nuclear Plant
and encompass additional in-depth studies, which hopefully would provide
more substantive answers to questions of valuation, power supply, and the
cost and availability of money.
I would like to thank the Legislature for its confidence and support
evidenced by presenting the Budget Review Office with this assignment. As
always, my staff and I stand ready to provide you with any further
assistance you may wish concerning this matter.
DG:el
E~C.
Very truly yours~
D ector of Budget Review
CON'ITk'TS
Pages
A. S~mary of Findings & Recommendations ............ i
B. INTRODUCTION ..................................... 1
C. DECISION ANALYSIS ................................ 3
D. ECONOMIC FEASIBILITY OF MUNICIPALIZATION ......... 6
1. Cheaper Power ........... ~,, ............... ,..8
2. Exemption From Taxes ...... '~ ................. 14
3. Lower Operating Costs ....................... 17
4. Absence Profit Requirements ................. 19
$. Lower Cost of Capital ....................... 22
6. Lower Debt Service Requiremements ........... 26
7. Nigher Load Density ......................... 30
E. ASSUMPTIONS ..................................... 34
1. Recovery of Acquistion Costs Through
Electric Rates ............................ 39
2. Generation Plants were valued at OCLD ....... 42
3. Consequential Damages were valued at OCLD...44
4. Land and Land Rights were valued at OCLD .... 46
5. Cost Share LILCO's Generating Plant ......... 48
6. Generation Dispatch by one utility .......... 52
7. Allocation of Transmission and Distribution
and Separation of Systems .................. 54
8. Nine Mile Point Two Acquired in 1988 ........ 57
9. LILCO Service Area Costs are Equal .......... 60
10. Outstanding Debt on LILCO's Assets .......... 62
ll. Electric Operations may be selectively
condemned ................................. 64
F. ISSUES .......................................... 66
G. BREAKEVEN ANALYSIS .............................. 80
H. LEGAL ISSUES .................................... 92
I. MESSENA ......................................... 95
J. BUFFALO'S ACTION ................................ 96
APPENDIX
Legal considerations for a municipal electric
utility Legal section (to LILCO specific
for capital program report) wi th flow charts .... A-1
- Response from Public Service Commission ......... B-1
- Questionnaires .................................. C-!
- Acknowledgements ................................ D-1
-i-
The
findings
fi ndi rigs
The
SUF'~IARY OF FINDINGS AND R£COMMENDATIONS
analysts prepared by the Budget Review Office contains numerous
and recommendations, the followlng summary presents those
and recommendatton~ we believe 133 be most meaningful.
Budget Revtew Office ftnds that:
Recovery of condemnation awards in excess of Origlnal
Cost Less Depreciation (OCLD) for L[LCO's"
assets by Suffolk may not be authorized by the PSC to be recovered
through electric rates. [f not authorized for electric
rate recovery, payments in excess of OCLD may have
to be funded by transfers from County operating funds.
The cost of municipalization is most likely understated by the
added cost of acquiring land at values above original cost.
LILCO's cost of debt service on outstanding, noncallable
bonded debt was not considered; thus
the cost of municipalization may be understated. All debt
financed assets should be revalued to take into account
the total weighted cost of callable and noncallable debt
issuances by LILCO. The amount of debt which a Suffolk
municipal utility will have to incur in order to purchase
LILCO's assets could be signlficantly different than
forecast depending upon the type, amount and interest
rates attached to L[LCO's existing debt instruments.
If a municipalization of LILCO's operations would provide
the same operating efficiencies for both systems,
Suffolk's rates would be higher Just to provide service to its
more rural and high tourist areas.
Separating ownership of gas and electric facilities would result
in higher overall operating costs than now exist under
single ownership by LILCO.
The immediate potential economic benefits to a Suffolk
municipal utility from the availability of a cheaper power
supply source may at best marginally impact the cost of
electricity to the average ratepayer in Suffolk County. The
eventual added transmission capacity from the upstate New York
area to the Long Island region may have a broader
long-term financial impact by displacing future
capital construction requirements.
A municipal uttltty's exemption from State and Federal taxes
would be a factor contributing to lower electric rates for Suffolk
County consumers. When measured against the
municipal uttlity's total funding requirements, the
estimated average annual tax savings for all six
scenarios could reduce the uttlity's revenue needs by
4.4 percent. For a residential customer using 750 kilowatt
hours (KWH) per month, there could be a potential annual
savings of about $124.
There is little reason to belteve that any~igniftcant
economies can be attained~restructurtng tILCO's operation
and maintenance functions. The likelihood that LILCO
has conflgurated its operating systems to function at less
than optimal results is very doubtful.
Profits are made to pay dividends to stockholders for
their investment in the assets of the corporation. In
essence, profits paid to stockholders in the form of
dividends represent a cost of capital Just as
much as interest paid on bonded indebtedness represents a cost
of capital.
The rate of return paid on municipal debt instruments is
almost always lower than that on private (coemon stock)
issues, this is not a certainty in a Suffolk buy-out of
LILCO's electric utility facilities.
Suffolk, as a new municipally-owned utility, would not have
any retained earnings with which to fund any condemnation
awards which exceed OCNLD and are not allowed in its rate
base. If the PSC would not allow Suffolk to recover
condemnation awards which exceed OCLND municipalization, it would
not be feasible.
When the level of uncertainty about the valuation of. assets
is coupled with the level of uncertainty about Suffomk's
possible cost of operations and capital, few scenarios
remain economically reasonable.
The Messena award set by the court approached the
Replacement Cost New Less Depreciation (RCNLD)
value. It wauld seem most likely that asset valuation for a
Suffolk takeover will be based on an amount higher than OCLD.
would significantly raise the cost of acquiring LILCO and
lower any potential benefit of municipalization.
This
Based on our analysis of factors most often cited by
other municipal utilities as to why their electric rates
were cheaper than those of neighboring privately owned
utilities, we have concluded that only under the best of
all circumstances would a Suffolk municipal utility provide
lower electric rates than LILCO.
-iii-
The Budget Revie~ Office Recommends that:
* Any decision to muntctpalize should await a resolution of how
the Shoreham Nuclear Power Plant will be paid for.
* Considering the potential cost and uncertainty of
municipalization through condemnation, the County should only
contemplate a negotiated takeover in any municipalization effort.
* A decision to muntctpallze should only be based upon the results
of additional studies to identify assets and determine
the potential cost of:
1. acquiring transmissiJ~ and distribution lines
2. bulk power supply needs
3. acquiring land and easments
4. court awarded consequential damages
5. acquiring generating assets
6. completely severing the two systems
?. an appraisal of all LILCO's assets
8. raising the capital needed for acquisition.
And a legal analysis to determine which revenues of acquisition
are reasonably available to the County.
The cost of the needed additional studies would approximate
$5 million.
* Any municipalization effort should seek to include participation
by Nassau county.
-1-
~NTRODUCT[ON
At the request of the County Legislature, the Budget Review Office has
reviewed the preliminary feasibility analysis prepared by the consulting
firm of Oaverman and Associates, P.C. concerning the municipalization of
electric and gas facilities in Suffolk County.
The purpose of the review was to examine the major assumptions in the
Daverman report which led the consulting firm to conclude that based on
their preliminary analysis there was economic Justification for Suffolk
County to municipalize LILCO's electric facilities. Their conclusion is
predicated on assumptions concern(ng the assets to be acquired, the cost of
~:quisition, damages to be paid, the timing of the acquisition, the method
f financing and the impact on LILCO's remaining customers. It should be
clearly understood that their conclusion was based on a pre-feasibility
analysis and in our opinion is not a sufficiently reliable basis for a
final decision of this magnitude. In some instances, the information
available to the consultant through no fault of his own, was imperfect or
not available as LILCO did not respond to Oaverman's inquiries for
information. The data collected were largely from reports submitted by
LILCO to various public regulatory agencies.
In this analysis, the Budget Review Office has attempted to discuss
what we believe to be potential problems with the major assumptions of the
Oaverman report. The final cost of the municipalization effort to the
ratepayers of Suffolk County could vary greatly from the projections
presented. A major problem in attempting to analyze the situation is that
there are few precedents in law which we can rely upon to make accurate
predictions. Acquisition cost, the ability of the County to condemn only a
portion of an asset, as well as consequential and severance damages that
would result due to condemnation are all issues for which there are no
ready answers. The size of the acquisition contemplated would make the
creation of a Suffolk electric utility the largest single condemnation
proceeding ever taken in the State and perhaps the natron. The recent
condemnation of electric utility assets in Messena, New York is often cited
as a precedent setting illustration of a successful municipalization
effort. There are, however, considerable differences between Messena and
Suffolk, which make comparisons for the most part irrelevant. Messena's
small size, the avail ability of low cost hydropower from the New York Power
Authority and the absence of a need to acquire or build generating
facilities are major differences which change the economics of acquisition
drastically when compared with Suffolk. Most municipal utility systems
have been in existence for some time. Many have low cost energy sources
available to them. It would be inaccurate to presume that municipal
utilities are cheaper merely because they are municipally owned. The
inability to accurately assess the total cost of acquisition and the
absence of legal precedents upon which to base decisions places a great
deal of uncertainty and risk in the municipalization effort.
Unfortunately, the answers to most critical issues would only be provided
by the courts after the County actually condemned LILCO's assets and was
committed to the purchase.
-2-
A ma~or uncertainty whtch wtll tmpact the ftnal acquisition cost of
the municipal utt~tty ts the disposition of the Shoreham nuclear power
plant. Decisions concerning the opentng of the plant and who wt~ bear the
burden of 1ts huge cost have yet to be finalized. The County could be
placed tn the posttton of paytng for 1ts share of the plant whether or not
tt opens. To move ahead wtth the municipalization effort prtor to a
disposition of the $horehm~ tssue compounds the uncertainty concerning the
ulttmate cost of acquisition and to a large extent the success or fatlure
of municipalization. In our optnton such a move ~ould be unwlse.
-3-
Dectston Analysts
The Daverman report viewed favorably a municipalization of electric
facilities in Suffolk County. The report is, however, a prefeastbiltty
analysis and should be considered only a first step in the process of
deciding whether or not to muntctpaltze LILCO's assets. The flow chart
(Figure l) which follows outlines the various decisions that we believe to
be necessary to arrive at a point which would reasonably assure a
successful municipalization effort.
As presented in the flow c~t, if the Legislature wishes to move
ahead with municipalization, we believe it would be appropriate to contact
Nassau County to determine if it would be interested in Joining Suffolk.
(See section on joint municipalization.) If Nassau is interested, the
costs of a bi-County municipal utility should be developed, ll).e .
Legislature might al so examine another factor in lieu of municipalization
such as a refinancing of LILCO's debt with tax exempt bonds. Studies
should also be conducted to determine two things: 1) the ability of the
County to purchase a portion of a generating plant without paying excessive
consequential damages, and 2) the ability to recover the cost of
acquisition through rates'approved by the PSC. Following the chart, if the
PSC will not allow full cost recovery, then the process stops. If the PSC
will not com~it itself to a decision, then the County should examine the
feasibility of obtaining financing under such uncertainty. If the bonds
were not marketable under these conditions, the process again stops.
However, if the bonds become marketable, and if the PSC will allow full
cost recovery, and if the County can condemn a portion of LILCO'S
generating facilities as proposed in the Daverman report, then the County
could proceed with the next series of studies to more accurately determine
the economic feasibility of municipalization. These studies include: l) an
analysis of bulk power supply options to determine viable sources of
wholesale power and future generating plant requirements, 2) an appraisal
of LILCO's physical assets ~o determine the probable cost of acquisition,
3) a legal analysis concerning condemnation, valuation methodologies used
and potential damages to be paid as a consequence of certain actions, 4) an
engineering analysis to determine how the two systems would be severed
along with the approximate cost involved, and 5) Perform another
feasibility analysis to determine the economic benefits of acquisition
based on the data obtained from the above studies. We believe that if any
one of the studies views municipalization negatively, then the process
should stop.
If at this point, the Legislature wishes to proceed after performing
all of the studies mentioned, then it should adopt a resolution placing the
municipalization question on the ballot for a public referend~n. If the
public referendun receives a favorable vote, then the Legislature would
proceed with the condemnation process by preparing a detailed transition
plan ~ich would outline the methodology and a timetable for all activities
necessary to carry out municipalization. A transition team would also be
assembled to coordinate the various activities undertaken in preparation
for operating an electric utility. Persons knowledgeable about utility
management and operations would be hired to set up the mechani~n for
operating and maintaining the system. Separate accounting and billing
functions would also be set up. Contracts for wholesale power purchases
-4-
.ottated with other utilities. An Important factor tn
would a~s~.be n~g ......... =.4..~ ttlttv would be the abtltt¥ to
SuccesSTuI/y estaDIlSnlng a mu-~.v~ U a
closely coordinate all activities with LILCO. LILCO could hamper the
County's efforts by refusing to cooperate or by providing tncemplete data.
Such tacttcs could seriously jeopardize the tntttal start-up of ~h~ new
uttltty. To avoid unnecessary cont'ltct, LILCO should be approacnea early
tn the proceedings tn an attempt to establish a basts for mutual
cooperation and assistance whtch tn the long run would beneftt both
utilities.
-,5-
k
Tel
Tel
-6-
ECONOMIC FEASIBILII~ OF MUNICIPALIZATION
The report presented by Daverman Associates states that municipal
ownership of an electrtc utiltty system is neither a new nor an unusual
concept. The report points out that in New York 5tare there are some 47
electric utility systems in New York State that are owned by the
municipality they serve, and that nationwide, there are over 2,000
municipal systems serving many large cities tncludlng Los .Angeles and
Anaheim, California, Seattle and Tacoma, Washington, Columbus and
Clevemand, Ohio and Jacksonvtlle~lortda. ..
The report further states that a study of the operating and financial
records of municipal utilities showed that their reliability and service
records are comparable with investor owned utilities and that their rates
are, in most cases, lower. A comparison of the electric rates of twenty
publicly-owned utilities to those of investor-owned utilities indicates
that sixteen municipal systems had rates lower than those of contiguous
investor-owned utilities. Oaverman found that on the average, rates
charged by investor-owned utilities were 17.8 percent higher than those
charged by municipal utilities. The following table taken from the report
summarizes these findings:
CO~ARISON OF AVERAGE ELECTRIC RATES
PUBLICLY-OWNED IKrlLITIES VS. CONTIGUOUS INVESTOR-OWN[O UTILITIES
(Costs in Mills/kwh) ~
Investor-Owned~/
Southern California Edison 62.3
Southern California Edison 62.3
Pacific Gas & Electric 51.6
Puget Sound Power & Light 24.0
Puget Sound Power & Light 24.0
Public Service Co. of Colorado 51.2
Public Service Co. of Colorado 51.2
Public Service Co. of Colorado 51.2
St. Josephs Light & Power 58.5
Iowa Electric Light & Power 57.5
Kansas County Power & Light 60.2
Northern States Power 45.5
Columbus and Southern $9.1
Florida Power & Light 53.1
Florida Power & Light 53.1
TECO Energy 57.0
Virginia Electric & Power 61.3
Carolina Power & Light 43.5
Pennsylvania Power & Light 43.4
Niagara Mohawk Power 48.6
Average ~
1980
59.6
50.1
26.5
13.4
15.0
37.2
40.3
36.4
40.3
52.2
47.2
45.5
59.4
67.0
46.7
56.3
63.4
41.1
39.3
27.5
Publicly-Owned
Los Angeles, California
Anaheim, California
Sacramento, California
Seattle, Washington
Tacoma, Washington
Colorado Springs, Colorado
Longmont, Colorado
Ft. Colins, Colorado
Omaha Public Power Nebraska
Cedar Falls, Louisiana
Kansas Coun~ Util., Mo.
Rochester, Minnesota
Columbus, Ohio
jacksonville, Florida
Orlando, Florida
Lakeland, Florida
Greenville, North Carolina
Fayetteville, N. Carolina
Chambersburg, Pennsylvania
Jamestown, New York
1/ One mill equals 1/10th of a cent.
2/ Source: 1981 Annual Reports to shareholders.
3/ Statistics of Publicly Owned Electric Utilities in the United States - 1980
U. S. Department of Energy
-7-
In those cases where the difference tn rates are pronounced, Daverman
believes that much of the variance can be attributed to the public status of the
municipal utility which gave tt preference rights to relatively low cost
hydroelectric power produced at governmentally-owned hydroelectric plants.
The report states that in a general sense, municipalization of an
investor-owned uttlity's facilities by a County can be expected to be
economically advantageous for the following reasons:
1. Lower tnterest rates due to tax-exempt financing which is
available for raistng capital.
2. Freedom from most forms o~axation~ however, most municipal
utilities make payments in lieu of property taxes so that the
tax base of the County is not affected.
3. No dividends which must be paid on common or preferred stock.
4. Increased opportunities for local municipal employment.
5. Ability of a newly formed publicly owned utility to research
and acquire the most economical source of bulk power supply.
Implication
In its report, Daverman concludes that 'attractive possiblittes exist for
the municipalization of the electric utility facilities within Suffolk County"
(Pages ES-l) and that the principal economic advantages of municipal ownership
could result from an avoidance of the costs of Shoreham, a reduction in the cost
of capital, and the elimination of State and Federal taxes. This section will
explore to what extent, if any, these factors and those previously mentioned
wnuld affect the financial viability of a municipal takeover of that portion of
LILCO's electric utility system serving Suffolk County.
Discussion
Sixteen of the twenty publicly-owned utilities listed had lower average
electric rates in lgSO than their privately owned counterparts, while the
remaining utilities with one exception had comparable rates. The Budget Review
Office questioned all of the listed utilities in an attempt to identify the *
reasons for advantageous rates offered by municipally owned utilities. From the
responses we received from seventeen of the twenty utilities we contacted, it
would appear that Daverman's assumptions as to why the municipal utilities' rates
were lower have been substantially confirmed. The following table smmnarlzes the
results of our survey:
-8-
EXPLANATZON OF LOWER ELECTRZC RATES
FOR MUNICPALLY OWNED UTILITIES
YERSUS PRIYATELY OWNED UTILITIES
Reason
No. of Ttmes Ctte~
Cheaper Power Supply Source
8
Exemption from Taxes
7
Lower Operating Costs
No Profit Requirement
6
Lower Cost of Capital
4
Lower Debt Service Requirement
4
Higher Load Density
4
Other Reasons 4
CHEAPER POWER SUPPLY SOURCE
The most frequently cited reasons for municipally owned utilities
having lower electric rates was a cheaper power supply source.
Explanations for this include a better generation mix and access to
perference power provided by a Federal or State sponsored power agency.
According to Oaverman, the generation mix would be the same for a
Suffolk municipal utility as it currently exists for LILCO. Currently, all
of LILCO's generating capacity requires the use of oil or natural gas, with
about 20 percent of its requirements supplemented by purchased power. This
ranks as one of the highest percentages of oil generation in the utility
industry. To the extent a utility like LILCO is dependent on oil or
natural gas for its generation, its cost to produce electricity will of
course be sensitive to price changes in oil and natural gas. As everyone
knows, the price of oil has increased dramatically in the last decade
largely due-to the effects of the 1973 Arab Oil Embargo and the 1978
Iranian revolution (see graph on the following page).
LILCO's present generation mix is highly uneconomical when compared to
other utilities and ~uld remain so for a Suffolk municipal utility as
defined by Oaven~an. Certain member utilities of the New York Power Pool
provide electricity to their customers at a cheaper rate than LILCO in most
cases largely due to a better generation mix. The lg82 variable costs of
production (operation and maintenance costs, including fuel purchases)
based on a weighted average by power source for all New York Power Pool
members were as follows:
INCREASES IN THE PRICE OF FOSSIL FUELS
8~
E
T
P
E 400
R
14
!
L
L
T
U
NO. 8 OiL
------ COAL
· ,o ...... HATURAL 8AB
I I I I
YEAR
Iq~.5 ~:0;t.lAE~ ADDF..~ ~,Y ~Ob~.t'"T REVIEW OFFICE ~qsEb ON .T.~FoRI~RTIOH gOI~L,£D
BY ~ NEW YORK i:~ER, pool..,..
SUFEOI.K COUNTY, NEW YORK
I)I')Wl R SERVICES J)EI.IVI!RY OI"I'IONS
FIGURE 1-3
-10-
Po~r Souse
Varteb]e
Cost
Ntlls
Per KW11
£sttmated Portion
Attributable
To Fuel Costs 1/
Hydro I 0
Nuclear Z2 50%
Coal 22 90%
Oil/Natural Gas ~ 56 : 90%
1/
Information supplied by the. New YoKk Power Pool which is a
consortium of seven private/y-ownea utilities and the New York
Power Authority, whose basic purpose is to coordinate the
development and operation of the members' electric production and
transmission facilities in order to obtain optimum reliability of
service and efficiency of operation from the interconnected
systems of the pool members.
If Oaverman's conclusion is correct that a Suffolk municipal utility
would have to buy a proportionate share of all of LILCO's production
facilities, then a Suffolk municipal utility would be saddled with the same
unfavorable generation mix as LILCO is trying to cope with at the present
time.
Daverman has concluded and we agree that the optimal source of
supplemental purchased power for a Suffolk municipal utility would be the
New York Power Authority. At the present time, LILCO receives about
8.7 percent of the electricity generated by the New York Power Authority's
James A. Fitzpatrick Nuclear Power Plant at a considerable cost savings
(about 3 cents per kilowatt hour at the Fitzpatrick Plant during 1982
compared to LILCO's equivalent cost of production of about ll cents per
kilowatt hour). It was assumed by Daverman that a Suffolk municipal
utility would have access to this cheaper power supply source in proportion
to previous allocations to LILCO. Because of many uncertainties concerning
the availability of hydroelectric power from the New York Power Authority,
Daverman assumed that this potentially inexpensive source of power would
not be available to a Suffolk municipal utility. Issues surrounding the
allocation New York Power Authority hydroelectric power are currently under
examination in contemplation of a change in policy when current
hydroelectric power contracts expire in lg85. The potential for additional
economy purchases from Canada (Hydro-Quebec) is al so uncertain due to the
need to improve transmission facilities to Long Island.
The available capacity of the transmission system linking Suffolk
County to other utilities is one of the limiting factors in determining the
amount of wholesale power a Suffolk municipal utility could expect to buy
to meet its requirements. At the present time, there are major limitations
in the transmission systems directly connected to the LILCO system, and in
the statewide system, both of which limit the power transfers from other
utilities to Suffolk County. As part of a plan to import additional
hydroelectric power from Hydro-Quebec and to allow greater transfer from
existing and planned non-oil-fired surplus generation capacity in upstate
-11-
New York, the New York Power Authority is planning to install major
transmission facilities connecting its Marcy Substation located near Utica
with a new substation in East Ftshktll about 15 miles north of Westchester
County. In addition, the New York Power Authority plans to add another
transmission line from the Sprain Brook Substation in Yonkers to the Shore
Road Substation in Glenwood Landing, Town of North Hempstead, on Long
Island (see map on next page). Without even giving consideration to
LItCO's proposed enhancements to its existing interconnectton with
Consolidated Edison, the Power Authority's proposal would double its
ability to transfer cheaper non-oil fired generated power to the Long
Xsland region from upstate New York and Canada. The Power Authority expects
to have the work on this project c~leted by lgB? and to provide an
estimated annual savings of $1B6 miilion to all electric consumers in New
York State. (This does not include additional costs of about $50 million
for transmission from Sprain Brook to Long Island.)
Our review indicates that even if the necessary improvements are mad~
as presently being proposed by the New York Power Authority, the costs ano
resulting benefits will probably be shared equally by all who receive power
from the Power Authority including both investor owned utilities and
municipal owned utilities. The cost of purchased power varies dramatically
between the upstate and downstate regions of New York State, with the costs
being higher for the later. Mst of the electrical energy generated
upstate and in the adjacent Canadian provinces of Ontario and Quebec is
from hydroelectric, nuclear and coal-fired generating stations, while most
of the energy generated downstate is from oil and gas-fired generating
stations. Even though the ~rcy-South line will be used to send
pre-scheduled energy from Hydro-Quebec and other upstate sources to the
downstate areas where the greatest savings will be produced, the New YQrk
Power Pool will divide up the savings so that each member utility receives
an equal share per customer. It ~on't matter who uses the energy, and it
won't matter which utility turns down its oil-burning facilities.
Our review also indicates that the potential benefits to a Suffolk
municipal utility may be further constrained by system reliability
considerations. Because a utility must maintain sufficient back-up
capability so that the loss of power from any one generating source or
major transmission line (either external or internal to the County's
system) can be recovered from another source, Baverman estimates that a
Suffolk municipal utility would be able only to increase its power
purchases from 20 percent to 25 percent of its total energy requirements
assuming the Shoreham Nuclear Power Plant does not operate. If the
Shoreham plant were brought on-line, Daverman believes the amount of energy
purchases would be reduced to less than 5 percent of the County's
requirements.
It would appear to us that the near future potential economic benefits
to a Suffolk municipal utility from the availability of a cheaper power
supply source may at best marginally impact the cost of electricity to the
average ratepayer in Suffolk County. The added transmission capacity from
the upstate New York area to the tong Island region may, however, have a
much broader financial impact in the long-te~m as it could serve to
displace future capital construction requirements and thereby mitigate
future rate increases through the more economical alternative of power
purchases.
La Grande Complex
Montreal
CANADA
Massena
NEW YORK STATE
765
kV
~Marcy /
~Marcy South J.~= East Fishklll
~ 345 kV ~T- Substation
~~~'-.,-~ ( (Dutchess)
/ *. ~Sprain Brook Substation*
Substati°n~ ~~ore
~~ Substation
~~ '~w .' ~ (Oyster Bay)
-13-
LILCO as an investor-owned utility would probably receive the same
benefits from this transmission improvement as would a Suffolk municipal
utility. The Budget Review Office concurs with the Oaverman finding that
there is no reasonable expectation that formation of a Suffolk municipal
utility will appreciably change either the generation mix or cost of
purchased power.
-14-
EXER~TION FROM TAXES.
The second most frequently ctted reason for a municipal utility having
lower electric rptes was exemption from taxes. As Indicated below in a
table taken from Daverman's report, LILCO is obligated to pay a variety of
Federal, State and local taxes. ~t follows, therefore, that one of the
chief advantages of having a Suffolk municipal utiltty could be its
exemption from taxation.
Taxes Paid by #ew York state Znvestor-Owned Utilities
Governmental Type Of ~
Unit Tax
Federal
State
Income Tax
Payroll
Gross Receipts
Franchise
General Sales*
Method of,
Calculation'
Varies according to tax bracket,
tax credits, and deferrals
Based on Payroll
3.0 Percent of gross receipts
.75 percent of gross earnings
4.0 percent (0 percent for
residential) of sales
County** General Sales *
and Use
City
Gross Income
General Sales
and Use *
Property
Village **
Villag~ Gross
Receipts
School District ** Consumer Tax *
3.0 percent of sales
1.0 percent of Gross Income
up to 3.0 percent of )ale!
Percent of Assesed valuation
1.0 percent of receipts
3.0 perEent.for Districts
assoclatea with a city
with less than 125,000 population
* Pass-through tax
** P?perty taxes are also assessed by the County, village, and school
districts (added by Budget Review Office)
rD osed, that a Suffolk municipal utility should be
Oaverman has p p ........ · ~vae" ~DT/nT oavments) in an amount
prepared to make .payments-ln-~eu-u---~ ...........
xes that ~uld have been paid by LILCO to all local taxing
equal to the ta . he revenue generating.
jurisdictions. ~LOT pa~m?~)_~o~L~,t~i~o~aL~ld not be diminished in
capabilities of the local
any way by the formation of a municipal utility. Thus, no increase in
be necessary and no decreases in local government
loca~ taxes ~wo~[~__ ~4.~ +he imnlementation of a municipal utility in
services need oc~uF .,~- -
Suffolk County.
-15-
All of the 17 municipal utilities who responded to our questionnaire
indicated that they made PILOT payments. The basis for these payments
varied considerably and did not appear to be related to any one criteria
such es the amount of property taxes lost because of public ownership. The
most frequently cited basis for determining PILOT amounts was a percentage
of sales (expressed in either dollar or unit sale amounts), a percentage of
net earnings (with a minimum contribution amount), and a percentage of net
investment in the capital assets of the utility. Almost all of the PILOT
payments were paid into the city or County's general fund, while some
payments were designated to support specific services such as school or
fire functions.
Daverman estimates that the a~tdance of Federal and State tax
payments would account for a significant portion of the cost savings that
would result from the creation of a Suffolk municipal utility. The
relative and absolute dollar contributions that would inure to the benefit
of a Suffolk municipal utility under the various scenarios presented by
Daverman in its ana)ysis are indicated in the table below.
PROJECTED TAX SAVINGS RESULTING
FROM A SUFFOLK MUNICIPAL UTILIT~
AS ESTIKATED BY DAYERIqAN ASSOCIATES
FORT HE FIVE-TEARPERIOD 1985-89
Scenario
# 1 Shoreham opens: Purchase
A Portion
# 2 Shoreham opens: Damages
Are Paid
# 3 Shoreham opens: No
Damages Assessed
Average Average
'Est'd Est'd
Total Tax
Savtn~s~/ Savtn~sl/
$339,121,467 $189,908,021 56%
Ratio of
Tax Savings to
Total Savtngs
gl ,270,414 51,111,432 56%
891,683,004 258,588,071 29%
# 4 Shoreham Amortized:
Damages Paid
# 5 Shoreham Amortized:
No Damages Paid
# 6 Shoreham Excluded From
Rate Base
1/
552,048,930 309,147,400 56%
1,270,663,362 368,492,375 29%
231,049,268 177,907,936 77%
These amounts represent the average savings when an Original
Cost Less Deprection (OCLD) and a Replacement Cost Less
Depreciation (RCNLD) asset valuation is applied under each
of the respective scenarios.
-16-
The Budget Review Office believes that a municipal utiltty's exemption
from taxes could be a definite factor contributing to lower electric rates
for Suffolk County consumers. Although PILOT payments would still be
considered desirable and included as part of the cost of providing
electricity, avoidance of State and Federal taxes would nevertheless
represent a significant savings that would have both immediate and
long-term effects. When measured against the municipal utility's total
funding requirements, the estimated average annual tax savings for all six
scenarios could reduce the utility's revenue needs by approximately
4.4 percent (see table below). For a residential customer using
750 kilowatt hours (KWH) per month, there would be a potential annual
savings of about $62. ~ .'
PR~£CTE1) TAX SAVINGS RESULTX#G
FROM A SUFFOLK MUNICIPAL UTILITY
AS ESTIMATED BY DAVERMAJ~ ASSOCIAT[S
Scenario
Average
Annual
Tax Savtngs~_/
Average Ratio of
Annual Tax Savings
Revenue To Revenue
Requtrements~_/ Requirements
# ! Shoreham opens:
Purchase a portion
$37,981,604
$1,059,959,306 3.6%
# 2 Shoreham opens:
Damages are paid
# 3 Shoreham opens:
No damages assessed
# 4 Shorehem Amortized:
damages paid
# 5 Shoreham Amortized:
no damages paid
10,222,286 1,163,735,726 .9%
51,717,614 949,446,999 5
61,829,480 1,088,058,814 5.7%
73,698,475 944,335,927' 7.8%
# 6 Shoreham Excluded
from rate base
35,581,587 949,505,746 3.7%
AVERAGE
45,171,841 1,025,840,419 4
l/
These amounts represent the average savings when an "OCLD" and a
"RCNLD" asset valuation criteria is applied under each of
the respective scenarios.
Creation of a Suffolk municipal utility will allow avoidance of New
York State and Federal taxes which are currently imposed upon LILCO. The
valuation methodology and scenario used will determine actual savings for
the Suffolk ratepayer.
-17-
Lower Operattn~ Cost~
A~other frequently ctted reason for a municipal uttllty havtng lo,er
electric rates was lower operating costs. Some responses indicated that
because operating costs could be spread over several utility servtces (gas,
water, sewers and electric) savings could be effected through economies of
scale. Other responses Indicated that a competitive edge existed for a
municipal utility because It paid its employees lower salaries than a
neighboring privately owned uttltty. Still other responses indicated that
better management was contributing to lower operating costs.
The Dare,man report concludes~that even though munlctpaltttes
generally pay less in wages than ~estor-owned utilities, the
opportunities for a Suffolk municipal utility to effect economies in this
area are probably relatively small, because a municipal utility ~ould be
part of a larger labor pool of uttltty personnel for metropolitan New York.
In estimating operation and maintenance expenses, Daverman assumed
that no reduction tn labor costs could be achieved by a Suffolk uttltty and
that nonproduction operation and maintenance expenses would be higher in
each of the first three years to compensate for the initial diseconomies
and related start-up costs such as recruitment and training.
Like Daverman Associates, we believe that there is little possibility
that a Suffolk municipal utility could lower its operation and maintenance
costs. We believe that a Suffolk municipal utility would probably incur
higher operating and maintenance costs, although in either event, the
overall impact on electricity rates would probably be negligible.
We believe that certain dtseconomies will exist and remain a factor in
the cost of operating a divided electric utility service. Administative
functions involving budgeting, accounting, purchasing, etc. as well as
other support functions directly involved with the actual delivery of
services will to some extent be duplicated by the separation of one system
into two. Moreover, a Suffolk municipal utility would not have the
opportunity like other municipal utilities to spread its overhead costs
over several utility services. According to Daverman's findings, .
municipalization of LILC0's natural gas utility would not be economically
advantageous for the ratepayer, and thus should remain within LILCO's
province of operations. Water services are currently the responsibility of
the Suffolk County Water Authority and many private utilities.
Responsibility for the delivery of sewer services presently resides with
the Suffolk County Department of Publi~ Works and numerous private sewer
companies. Cost sharing with the Department of Public Works may be
effectively precluded if the County chooses to establish an authority
having a separate legal and organizational status from that of the County.
As Daverman notes, munictpaliztng LILCO's electric utility operations
in Suffolk County would produce a staffing imbalance for LILCO. It seems
unlikely to us that LILCO would terminate its better qualified employees,
which would leave the County to choose from lesser qualified individuals.
If the County is going to remain as capable as or better than LILCO was in
delivering electric services to County residents, it may be forced to pay
higher salaries and/or benefits to induce the more competent individuals
-18-
from LILCO or other companies to come to work for the County. In fact,
LILCO ts presently experiencing this difficulty tn trytng to obtatn
quallfied personnel to operate the Shoreha~ Nuclear Power Plant.
Another factor tn the cost of labor Is the method of hfrtng employees.
We noted that of the 17 respondents to our questionnaire, etght municipal
utilities employ thetr work force through a ctvtl servtce system, whtle
nine municipal utilities do not. For those utilities ustng a ctvtl servtce
system as a basls of employment, labor costs averaged 12.8 percent of thetr
total budgets. Of the nine utilities who do not, seven separately
Identified thelr labor cost whtch~? the average! comprised 14.4 percent
of thetr total budgets. ,-
It ts our conclusion hat there ts 11ttle reason to believe that.any
t 's o eratlon
significant economies can be attatned by restructuring LILCO P
and maintenance functions. The likelihood that LILCO has conftgurated
operating systems to functton at less than opttmal results ts very
doubtful. The New York State Publlc Service Commtssfon presently conducts
a "management revtew" of L]LCO operations every ftve years to determine how
efficiently and economically tt ts being run. When inefficiencies
dtseconomtes are found, LILCO ts advtsed that those factors contributing to
excessive costs wtll not be allowed to be included tn the revenue
requirement calculatlon for purposes of rate setttng.
-19-
~sence of Proftt Requirement
Another reason ctted for a municipal uttltty havtng lower electric
rates Is the absence of a profit requirement. Without proftts, there are
no dividends, and without dividends, there are no cash payments to be made.
Therefore, amounts for dividends need not be included in the municipal
utlltty's revenue requirements. %n turn, this allows a municipal uttltty
to keep electrtc rates lower than they would otherwise have been if profits
were required as in the case of a privately owned uttltty. Although this
rationale would appear to be entirely logical, in fact tt ts not.
Proftts are made to pay dtvtq~ds to stockholders for thetr Investment
in the assets of the corporation. ')e essence, proftts paid to stockholders
in the form of dividends represent a cost of capital Just as much as
interest paid on bonded indebtedness represents a cost of capital. Thus,
when a municipal uttltty requires funds to construct or purchase a capital
asset (generating plant, transmission facilities, etc), it weuld finance
the capital project through debt capital (bonds), where as a prtvate
utlllty like LILC0 could raise funds through a combination of equity
(common and preferred stock issuances) and debt instruments. In either
case, the amount of capital raised would theoretically be the same, only
the cost to secure the capital might be different. The extent of the
difference ts determined by market conditions and the perceptions of the
investment community of the attendant risks. Because there ts a trade-off
between risk and return, any Increased risk associated with the utility
translates dlrectly into a higher rate of return that must be paid to
investors.
Although ~he "profit factor" does not in reality represent a!
additional cost item to be borne by the ratepayer, it is nevertheless the
most expensive basis for acquiring capital. Oaverman has estimated that a
Suffolk municipal utility could sell 30-year revenue bonds at 10.25 percent
to finance the acquisition of LILCO's electric utility facilities. This
compares quite favorably to the New York State Public Service Commission's
last approved rate on LILC0's outstanding common stock issues of
15.5 percent.
The cost of capital acquired from common stock issues is significantly
higher than bond issues because dividend payments are optional where as
interest payments are not. If LILC0 fails to achieve its planned profit
level, it can refuse to pay dividends to its stockholders or it can pay
something substantially less than originally projected. In addition,
dividend payments can be taxable to the stockholders either as ordinary
income or capital gains whereas interest payments on municipal debt
instruments generally are not. Therefore, the yield rates must be set
fairly high in order to make the stock securities marketable.
Although, in theory, the rate of return paid on municipal debt
instruments will almost al ways be lower than that on private (common stock)
issues, this is not a certainty in a Suffolk buy-out of LILCO's electric
utility facilities. There are likely to be other mitigating factors that
could significantly impact the margin of difference between the two sources
of capital. Most notable among these factors will be the potentially large
amount of capital that will have to be raised to facilitate the buy-out and
-20-
the abtltty of the financial market to respond to such a potentially large
demand for funds. This matter Is more fully discussed tn our report
section called "Debt Servtce Requirement."
The profit mottve could also be an Important factor tn a prtvate
utlllty's capital budgeting strategy. A private utility like L]LCO must
continually strive to maintain adequate profit levels to ensure a steady
stream of dividends to its. stockholders. Profit allowances are provided
for in a private utillty's "rate of return" calculation by the New York
State Public Service Commission for purposes of determining the ut~lity's
The rate of return
revenue requirements and thus tts.~)te structure.
allowance is on the one hand base~en the average'cost of capital, and on
the other hand, the amount of invested capital in the uttltty's physical
plant which is alternatively known as the 'rate base."
The rate base is comprised of the following elements: net plant, a
,. ized balances, less accumulated deferred
workin capital allowance, unamort_ __ ent. "Net
taxes ~nd possibly an earnings base a,d capitalization adjus~
plant" represents the original cost of the physical or capital assets of
the utility in service less the accumulated allowance for depreciation.
This cost item comprises about gg percent of the rate base amount and thus
ant factor in determining the rate of return allowance
is a very tm orr ,
which, as previously indicated, is factored into the utility s revenue
requirements.
For a private utility like LILCO, the pressure to maintain or increase
the value of its rate base becomes apparent when looked at in this light.
As the utility's physical assets grow older, their book value for inclusion
in the rate base declines. Unless new assets are acquired or built having
a value equal to or greater than the loss due to depreciation on existing
assets, the utility would receive less in its revenue requirement allowance
assuming no offsetting increase in the rate of return. As a result, there
would be less money available to pay dividends, while the number of stock
issues outstanding wnuld increase due to the need for additional
capitalization on new assets. This could have a double-barrel effect on
dividend payments so that each issue would receive proportionately less
than it would otherwise have received under a rapidly expanding capital
budget program.
The most important capital budgeting decisions utilities make involve
the production function. When and to what extent of generating capacity a
utility chooses to invest in is one of the most crucial and difficult
decisions utilities must make. If the utility overbuilds beyond its
requirements, it can be saddled with a large amount of fixed costs which
will be passed on to the ratepayer unless excluded from the rate base by
the New York State Public Service Commission. Unfortunately, the ratepayer
may not only be required to pay for the excess capacity, but he may also be
asked to pay the utility an additional amount to provide for a return on
invested capital.
The present methodolgy followed by the New York State Public Service
Commission in establishing a basis for setting rates provides a potential
incentive for private utilities to build or acquire capital assets beyond
their need. To prevent utilities such as LILCO from taking advantage of
-21-
this Incentive, the Publlc Service Commission requtres any uttltty seeking
to butld or acqutre m~1or capital assets to obtain prtor commission
approval. A municipal uttltty such as proposed for the Suffolk County
regfonal area would be unaffected by this Incentive and thus could avotd
unnecessary construction projects altogether or, in the alternative, seek
other solutions such as purchasing power (within reliability constraints}
from the New York Power Authority. In short, we believe that the profit
requirements of a private utility such as LXLCO works to the long-term
disadvantage of Suffolk County ratepayers.
-22-
Lo,er Cost of Acqutrtn~ Capttel.
Another reason gtven for a municipal uttltt¥ havtng lower electric
rates was the lower cost of acquiring capttel. Respondents to our
questionnaire Indicated that thts was an important factor tn allo~ng thetr
rates to be lower than that of a nelghbortng privately o~ned uttltty. The
n ex lanatlon for this ts that tnterest patd on municipal bonds ts
appare.~_ _~. --v~ble to the bondholder, whereas tnte~?t a~d dtvtde~
generamm~ ,u~ ~^- ll taxao/e. Daverman nas
rivate utility securities are genera y ......... .~
~d°~h~s factor asa major reason why a Suffolk mun,c,pa! u~l,l~y c~u,u
achieve cheaper electric rates tha~LILCO.
One of the primary ways a utility's rates can be impacted is through a
change in the average cost of capital. The average cost of capital (A/K/A
rate of return) is used for rate making purposes to calculate the amount to
be allowed for the utility's investors. It is Dare,art's belief that the
~^.,+~ ~n,~ ~urchase LI~CO's electric utility tn. Suff~l~ County and pay a
~r~'~frreturn on its newly acquired debt than wna~ LItCO will be
charging its ratep~yers to compensate the utility for its costs of raising
capital.
LItCO's current allowed rate of return is l~.?g percent which is based
upon the average cost of long-term debt, customer deposits, preferred stock
and common equity as follows:
Type ~mount % of Cost Weighted
of Securtt~ ($1000's) Totall Rate (%) Cost (%)
Long-Term Debt $1,694,433 41.32% 10.72% 4.43%
Customer Deposits 10,314 .25% ll% .03%
Preferred Stock 567,820 13.84% 10.~4% 1.42%
Con~on Equity 1,828,66¢. 44.59% 15.50% 6.91.___~_%
Total $4,101,23~ 100.0% 12.79%
In its feasibility analysis, Daverman expects a County authority to be
able to float 30-year revenue bonds at an average rate of 10.25 percent.
This estimate is based upon conditions in the municipal bond market as they
existed in May, 1983, when Moody's Investor Services, a New York City bond
rating firm, had assigned a "single A" rating to the general obligation
debt of Suffolk County. An "A" rated bond is considered to be an
upper-medium graded investment with many favorable investment attributes.
Oaverman believes that establishing a County authortty~ to raise
capital through the issuance of revenue bonds, is the most feasible
alternative to creating a Suffolk municipal utility. Daverman indicates
· ount itself attempted to finance the acquisition of LILCO'S
that if th..~._ Y ..... ,~ z,-- +~ -~roach to be far more difficult due
electric Utlll~y, 11 I~U/U ~).u ~.,~ 'yr
to legal inhibitants and debt contracting limitations. Daverman states
that Article VII of the New York State Constitution would prevent the
County from using revenue bonds. Faced with the alternative of raising
-23-
funds through the issuance of general obligation bonds, the County could
very easily find that its debt contracting margin is not sufficient to
allow full capitalization of the project's cost even under the best of all
valuation methods. As Daverman points out in its report, the County could
petition the State Comptroller for a debt exclusion exemption, although the
exclusion, available under section 123 of the Local Finance Law, is not
automatically granted. Xf the exemption was not approved or was approved
to an insufficient extent, the County would find this alternative
undesirable because it would greatly reduce the County's ability to finance
traditional government services within its legal debt margin.
As Daverman also points out t~ts report, there is an additional
inhibitant to the use of general obligation bonds tE that they are subject
to an anomalous emorttzation schedule under section 21 of the Local Finance
Law which restricts the use of a level debt service. Debt service payments
would be relatively large in the early years and relatively small in the
later years. This negative sloping debt service schedule would work to the
disadvantage of a newly created municipal utility in the early years when
it is incurring other start-up costs. Although revenue bonds would provide
a lower debt service requirement in the transition years, general
obligation bonds result in a lower total payment over the life of the
bonds.
Given the probability that an authority having a separate legal and
organizational status from that of the County would seek to finance the
proposed undertaking through the issuance of revenue bonds, we are inclined
to believe that Daverman's estimate of a 10.25 percent rate to raise the
necessary funding is too conservative for the following reasons:
1. The assumption that a staged financing program could
be implemented to improve the marketability of the debt
is questionable;
2. The assumption that the investment market could readily absorb
the manz~oth emounts of funding that may be required to
facilitate the acquistton is questionable.
3. The assumption that the New York State Public Service commission
will allow the County to include in its rate structure the full
amount of its costs to acquire LILCO's property if the courts
hold that reproduction costs new less depreciation (R~NLD)
is an appropriate basis of compensation is unconfirmeo. -
4. The assumption that a Suffolk municipal utility could acquire
48.2 percent of all of LILCO's electric generating facilities
and thereby avoid being saddled with sole ownership of the
more expensive and unstable nuclear power supply sources is
uncertain.
$. The uncertain outcome of the Shoreham issue and its affect on
marketability of debt instruments.
-24-
The assomption that a staged financing program could be implemented to
improve the marketability of the debt ts questionable. As each new bond
issue is offered for sale, potential bond buyers are likely to feel an
increasing amount of uncertainty and skepttcts= not knowing the full amount
of the project's bonding requirements that in the end could exceed the
earning potential of the assets against which the bonds were issued.
Consequential damages could be exacerbated as the courts may choose to
measure the negattve effects (t.e. burdening diseconmies of scale) on
LILCO's entire system when condemnation first takes place where there ts a
parttal acquisition. These potential disadvantages may outweigh any
possible advantages that could result from a phased-in approach as Oaverman
has suggested. '~ "
The marketability of the project's debtwould certainly be a function
of the project's economics. Oaverman's analysis indicates that a Suffolk
municipal utility would need between $1 and $3.5 billion to finance the
acquisition of LILCO's electric utility system. LILCO's preliminary
estimates place this figure as high as $10 billion. The assumption that
the investment community could readily absorb the mammoth amounts of
funding that could be required to finance the acquisition appears doubtful.
One prominent investment counseling firm has advised us that'~oating a
$1 billion debt issue would not be a problem, where as a $2 billion issue
could present some difficulties. Beyond $3 billion, the bonds would have
to be marketed outside of New York State and thereby loose the relative tax
advantage. At this point, the municipal bonds begin to become competitive
with private issues. Stiffer competition for less dollars will have a
rippling effect upon all municipalities, and in particular those located in
New York State. This would translate into higher borrowing costs for all
concerned as too many hands will be chasing too few dollars.
How the New York State Public Service Commission will rule on what
acquisition costs (OCLD, RCNLD, or other costs basis) a Suffolk municipal
utility can include in its rate structure may effectively preclude the
utility from the bond market. It has been the Public Service Commission's
policy to approve rates using an original cost less depreciation (OCLD)
criteria. In most of the previous instances involving condemnations of
utility property by municipalities in New York State, the acquiring .
n~
municipality has not been subject to the commissio s rate jurisdiction due
to their total reliance upon the New York Power Authority for power.
Without a definitive answer from the Public Service Commission, bond rating
firms may be highly reluctant to even rate any proposed bond issue let
alone provide any favorable rating indication suitable for marketing a bond
issue. Counsel to the Public Service Commission has advised us that it
would be inappropriate for the chairman or any commissioner to express a
position at this time on the issue of whether a Suffolk municipal utility
will be allowed to include in its rate structure the full amount of its
costs to acquire LILCO's property. Because our question involves matters
of policy whose resolution would likely depend upon specific facts, counsel
believes that its ultimate resolution will likely occur during subsequent '
rate proceedings. Until the courts make their decision on the final
settlement price, the disposition of this issue will apparently remain
unanswered. Therefore, any acquisition that requires the issuance of bonds
may be unattainable due to the risks of not knowing whether there will be
-25-
sufficient operating revenues to enable a Suffolk municipal utility to meet
its debt service requirements.
For the reasons stated above, we believe Daverman's estimate of a
10.25 percent financing rate for a Suffolk municipal utility may be too
conservative. We are, unfortunately, unable to compare this rate against
that used by Daverman in estimating LILCO's revenue requirements as
Daverman's estimates were based on PSC models whose details are no longer
available. Oue to the many uncertainties surrounding the Shoreham Nuclear
Power Plant, it is highly unpredictable whether LILCO's last approved rate
of return of 12.79 percent will go up or down. On the one hand, we know
that LILCO's approved rate on common equity of 15.5 percent is unusually
high largely due to the risks atten([~t to the Shoreham Nuclear Power
Plant. Once the Shoreham Nuclear Power Plant controversy is resolved and
funding is no longer required, rates could return to so-called normal
levels which were considerably lower in past years: 1978- 9.83 percent,
1979-10.26 percent, 1980-10.26 percent, 1981-12.21 percent and
1983-12.79 percent. On the other hand, LILCO's precarious financial
position may require a higher overall rate of return even if funding
requirements are totally restricted to the bond market.
-26-
Lo,er Debt Servtce Requtrment
Another explanation gtven for a municipal utility havtng lo,er
electric rates was a lower debt service requirement, Respondents to our
questionnaire cited three reasons for this: (1) the utility's capital
assets have been fully or substantially paid for due to its long standing
existence, (2) po~er purchases have displaced the need to invest heavily in
;~er generating facilities, and (3) ratepayers are asked to finance
capital projects as funds are required during construction, Of the four
municipal utilities who cited these reasons, ~e found all had been in
existence for approximately,70 years, ~"nree of the four utilities purchase
all or almost all of their power 'requirements, whilp one utility purchases .
51 percent of its needs. Taken together, the four utilities expend
approximately 60 percent of their yearly funding requir~ents on purchasing
po~r fr~ other utilities. Zn turn, these pa~ents are used ~ tn part
finance the debt se~ice re~ir~ents of the recipient utilities. Thus, a
s~biotic relationship has been established bergen the two tn order to
take advantage of a cheap power supply source. This situation ~uld be
analogous to the relationship of the New York Po~r Authority ~th the
various private and public utilities throughout the State of New York.
Xf a Suffolk municipal utility ~re fomed, it could not expect its
~atepayers to.provide upfront funding for either the initial acquisition or
.subsequent major capital asset additions as it ~uld be cost prohibitive.
A Suffolk municipal utility would probably have little opportunity to
displace its debt service pa~ents by increasing its po~r purchases for
reasons discussed elsewhere tn this report. Depending on the valuation
basis applied in the final settl~ent, ratepayers may have to reimburse a
Suffolk municipal utility for assets acquired fr~ LILCO even tf those
assets ~re previously paid for by the ratepayers. For these reasons, ~
believe it is unlikely that a Suffolk municipal utility will be able to be
foxed ~th relatively low debt service requtr~ents.
One of the most important c~ponents of a municipal utility's revenue
requir~ent ts the annual debt service pa~ent to the bondholders. For a
Suffolk municipal utility, debt service would be the ~ount of principal
and interest due to the bondholders annually for the initial capital
required to finance the acquisition, potential d~ages, severance, and
other staKt up costs and contingency allowances to establish a municipal
utility. The cost of acquisition, and thus the debt service, will vary
considerably depending on whether Shoreh~ is included in the purchase
price and how LILCO's capital assets are valued, that ts, original cost
less depreciation (OCLD), reproduction cost new less depreciation (RCNLD),
or s~e other agre~ upon or court dete~ined criteria. When Shoreh~ is
excluded and an OCLD valuation methodology is used, Dare.an estimates that
the total acquisition cost ~ the County ~uld be $969,665,000 or the
lo. st ~ssible estimate. Ass~tng again that an ~LO criteria is follo~d
and Shoreh~ is included, Dare.an believes that the County ~uld have to
pay as much as $3,016,gg5,000. If an RCNLO basis ts ~ployed, Dare.art's
estimated cost to the County is $1,4S3,4~,000 if Shoreh~ is excluded, and
$3,4gg,g90~O00 if Shoreh~ is included.
-27-
Under LILCO owoershtp, the electric uttltty's capttal assets have been
and would conttnue to be patd for by the ratepayers based on thetr ortgtnal
acquisition cost. If a Suffolk municipal utlltty ts created, ratepayers
will at best have to continue to pay for these assets based on their
original cost to LILCO or more likely on some other basis ~ntch could be
substantially higher. Daveman has concluded that even if the County must
compensate LILCO based on an RCNLD criteria, debt service payments will be
lower than the equivalent of ~hat LILCO would charge its ratepayers if the
assets were retained under LILCO ownership. For reasons discussed
elsewhere in this report, we believe that Daverman's estimates of the
potential amount the County may have to pay to acquire LILCO's capital
assets as well as the rate it will.Rave to pay to ra?e the necessary
capital may be significantly under~s'~imated.
Any understatoment of the potonttal acquisition costs or the cost to
acquire capital will, of course, equally impact debt service. This is
perhaps the most critical variable in Daverman's economic feasibility
projections. In seven comparisons, Davennan found that a Suffolk municipal
utility would achieve lower rates in the first year of operation, in three
comparisons lower rates by the second year, and in the_remaining.two
comparisons lower rates by the third year. In all twelve comparisons,
Daverman's findings indicate that a Suffolk municipal utility would achieve
substantially lower rates by the fifth or final year of the study.
The following table indicates ~hat effect a one bfllton dollar
increase in acquisition costs will have on debt service payments at
increasing interest rates:
Interest
Rate
10.25 ~ A/
ADDITIONAL DEBT SERYIC£ PAYHENTS
FOR EACH ONE BILLION DOLLARS IN ADDITIONAL
ACQUISITION COSTS BASED ON YARIOUS INTEREST RAT~S
Nonthly
Debt Se~vtce
.Payments
Total Debt
Servtce P~y~ents
Over S Tears B/
$8,961,010
$537,660,600
9,334,810
560,088,600
11.25~
11.75~
12.25t
9,712,610
10,094,100
10,478,960
582,756,600
605,646,000
628,737,600
12.75%
13.25
10,866,930
11,257,740
Daverman assomed that a Suffolk municipal
able to ~oat revenue bonds at an average
10.25 percent.
652,015,800
675,464,400
utility would be
interest rate of
B/ The five-year time frame coincides with Davenman's
-- transition period covering the years 1985 through 1989.
-28-
If we were to accept Oaverman's projected financing rate of
10.25 percent which in toda's market is understated by .5 to 1.5 percent,
a billion dollar error as ~ what it might cost a Suffolk municipal utility
to acquire LILCO's assets would be significant. Oaverman's projected
savings would either be substantially reduced or turned into a loss
altogether which would probably extend beyond the five-year transition
period. Under the best and worst case scenarios cited by Oaverman, a one
billion increase in acquisition costs would reduce the five-year projected
savings so that when Shoreham is excluded, there is a 54.2 percent and
67.7 percent savings reduction under an OCLO and RCNLO capital asset
valuation criteria, respectively. When Shoreham is included in the
acquisition costs, Oaverman's pro. ted savings are. effectively negated
with a resulting loss in both instances where an OCLO and a RCNLO
methodology is followed (see table below).
DOLLAR INCREASE IN ACQUISITION COSTS ON
THE PROJ£CT~D REVENUE REQUIREI~ENT SAVINGS IN
NOHINAL DOLLARS OVER THE TRANSITION PERXOD FROH 1985 to 1989
Estimated1_!
Acqusttton Pro~ected2/ Add'l o 3/ A~usted
-- !
Cost Five-Year Debt :Ire-Year
Scenario. (In Billions). Savings. Se~tce. Savings (loss).
OCLD:
Shoreham Excluded $.9
Shoreham Included 3.0
$990,280,920
442,318,154
$537,660,600
537,660,600
$452,620,320
(95,342,446)
RCNLD:
Shoreham Excluded 1.5 793,085,088 537,660,600 255,424,488
Shoreham Included 3.5 235,924,781 537,660,600 (301,735,819)
1_/ These amounts represent Daver~an's lowest and highest_ .
estimates under an OCLD and RCNLD asset valuation criteria
when the costs for the Shoreham Nuclear Power Plant are
excluded and included in the financial projections.
2/ These amounts represent Daverman's projected five-year savings
nominal dollars that a Suffolk municipal utility will
-- in .... , ............ e re-uirement than LILCO over
accrue =nrougn a /u~:r .=.~,,u .
the transition period from 1985 to 1989.
3_/ These amounts represent the additional debt service payments
a Suffolk municipal utility would have to pay over the
five-year transition period (lgBS.to lgB9) if Daverman's
estimated acquisition costs are understated by one billion
dollars and the interest rate on the debt financing remains
the same as Daverman has projected (10.25 percent).
-2g-
From the above chart, tt is apparent that the acceptable "margtn of
error" ts sltm, especially when the Shoreham Nuclear Power Plant lS
tncluded tn the estimated acquisition costs. Desptte the fact that a
detemtnatton as to how the Shoreham Nuclear Power Plant will eventually be
patd for rematns uncertain at this ttme, we believe that Daveman's
so-called conservative esttmate of the total acquisition cost to a Suffolk
municipal uttltty ts probably not reasonable. One reason for believing
this is our ftndtng that Daveman valued LILCO's generating plants, land
and rights-of-way, and consequential damage estimates at "original cost"
under 1ts RCNLD scenarios, When vtewed tn con~unctton wtth Daveman's
10.25 percent interest rate estimate of what a Suffolk municipal utility
would have to pay to raise the necc~ary capital to ~acilitate the
acquisition, we believe that Daverma~s debt service estimates would be
greater than anticipated and thus could adversely impact Daverman's
economic feasibility projections to a point where the proposed undertaking
would no longer be considered.financially viable.
-30-
Ntgher Load Denstt~
Some respondents to our questionnaire ctted a htgher load denstty as
an Important contributing factor as to why thetr electric rates were
cheaper than that of a neighboring privately owned utiltty. In essence,
the utilities believe that because their service areas are relatively small
and compact, they can deliver electricity more cheaply, We noted from the
respondents questionnaires that on the average, the municipal utilities'
service areas contained approxtma~§ly 1,272 residents per square mile.
A companion consideration to load density is "load composition."
Generally speaking, systems with a large industrial load have a higher load
factor than systems with a large residential load, Industries are more
likely to maintain a more constant peak load throughout the ~ear than
residential customers, Industrial users al so are generally ;ess affected
by seasonal weather changes Sen compared to residential customers.
LILCO's lgSl load factor, that is the amount of use of LILCO's physical
capacity being used to produce electricity compared to 1ts maxtm=
potential output, was 60.3 percent or 8,1 percentage.points below the
average load factor tn Dave~an's sample, Oaverman attributes LILCO's
relatively low standing to LILCO's high proportion of residential usage of
44,3 percent compared to the sample average of 30.7 percent.
Since a Suffolk municipal utility would assume res~nstbfltty for the
same franchise area presently held by LILCO in Suffolk County~ it is
logical to conclude that the cost to operate both would be relatively
equal. Ne are inclined to believe, however, that Daverman's cost
allocations to a Suffolk municipal utility based on a percentage of sales
criteria is understated. LILCO's franchise area in Suffolk County has a
significantly different density configuration and load composition than
LILCO's service areas in Nassau County and a small portion of Oueens County
(the Far Rockaway Peninsula).
Whereas Nassau County has a population density of 4,600 residents per
square mile, Suffolk County's equivalent !s 1,400. Since Nassau and
Suffolk counties have about the same population (1.3 million), the
difference in density levels is solely attributable to geographical size.
Nassau County covers approximately 289 square miles compared to Suffolk
County's expanse of about 929 square miles. Unlike Nassau County, Suffolk
County is much more elongated with the Eastern End of the Island divided
into two forks. The Northern Fork ends at Orient Point and is
approximately 28 miles in length, while the Southern Fork terminates at
~ntauk Point and is about ~ miles long.
Because Suffolk County is so much larger and more disjointed than
Nassau County, LILCO has had to develop a much more extensive transmission
and distribution system network in Suffolk County. There are about J63
miles of cable in Suffolk County's transmission system compared to
408 miles of cable in Nassau's system. Although specific information with
respect to the amount and configuration of LILCO's distribution facilities
was not available, we suspect that the differences between the two counties
are of even greater proportions than that of the transmission systems. The
cost to service, maintain, and repair these systems is logically greater in
Suffolk than in Nassau.
-31-
Not only weuld "load denstty" be a factor in a Suffolk
munlctpallzatton effort, but also the related factor of 'load composition."
Because tt ts chea er ~o supply electricity ~o commercial and Industrial
users than tt ts t~ deltver electricity to residential customers due to
differences tn usage patterns, a Suffolk municipal uttltty weuld be at a
dtsttnct disadvantage compared to LILC0's romatntng servtce areas (see
Table below).
.COI~AR~SON OF LZLCO ELECTRZC~TY SALES
ZNSZDE AND OUTagE OF SUFFOLK COUNTY
FOR Tlt£~AR 19821/"
;nstde Outstde Total 2/
Suffolk Suffolk ElectriCity
Customer Type 2/ Coun~. County sale~
Residential 2,771,720 2,785,280 5,557,000
Commercial & Industrial 3,094,850 3,429,150 6,5Z4,000
Street Ltghttng 75,120 106,880 182,000
Publtc Authorities 87 ~16Q 154,840 242,000
Total 6,028,850 12,505,000
1/
6,476,150
Electricity sales figures for the Suffolk County region
were obtained from the Oaverman report which were reportedly
based on LILCO's annual reports submitted to the New York
State Public Service Commission. Electricity sales in total
were obtained from LILCO's 1982 annual report to its stockholders.
2/ Electricity sales do not include amounts allocated to
-- other utilities and power pool sales.
From the above chart, it is apparent that the Suffolk County region
does not have the same level of commercial and industrial usage as LILCO's
other service areas (principally Nassau County). Commercial and industrial
electricity sales in Suffolk County in 19B2 comprised 47.4 percent of
LXLCO's total sales of this type. Although residential sales of
i it in Suffolk County was about equal to sales outside of Suffolk
electrc y , usage rate during the summer
County, we believe that Suffolk County s high
months when tourism is high and its transient population grows will further
exacerbate the cost differentials between the Nassau and Suffolk areas.
-32-
Summar~y Cone] us~on$
Based on our analysis of those factors most often ctted by other
munlctpal utilities as to why their electrtc rates are cheaper than those
of neighboring privately owned utillttes, we have concluded that only under
the best of all ctrcomstances would a Suffolk munlctpal uttltty provtde
lower electrtc rates than LILt0. We found that some of the reasons such as
a cheaper power source, lower operating costs and a higher load denstty
given by other munlctpal utilities to explatn why they are able to operate
their utilities less expensively than neighboring private companies wnuld
not be applicable to a Suffolk u:tllty. On the other hand, we note that a
Suffolk municipal uttlity's exemption from the payment of taxes and the
absence of a profit requtrementwnuld most ltkely favorably tmpact
municipalization and that the cost of capttal consideration would least
ltkely favorably tmpact the municipalization effort. There are many
uncertainties attendant to the vartous factors discussed in thts section
which could have a significant bearing upon the viability of the proposed
undertaking. Thts leads us to the conclusfon that any future efforts
towards munlclpaltzatlon should proceed with a great deal of caution and
restraint.
In its analysis, Oaverman collected data from 48 investor-owned
utilities to determine what operational and financial factors influence
electric rates. From this data, Oaverman empirically analyzed the various
factors that influence electric rates in order to dete~mine their relative
importance. Oaverman found that a change in a utility's 'load factor"
would most probably affect its electric rates. This factor was followed in
importance by the cost for taxes, then wages, and finally oil. The amount
of hydropower a utility uses was considered to be the least important
factor of the five (see chart below).
Based on Oaverman Associates ;
Study of 48 sompme znvestor-uwnea uttltte~
Additional Gost
Operational And
Financial Factors
That)lost Significant
Affect
Electrtc Rates1/
Load Factor
Taxes
Wages
Oil
Hydropower
1/
in Hills Per KWH
for Each 1 pe~ent
Zncrease or Decrease
Zfl the Factors
Indicated
.576
.512
.473
.417
.177
According to the Oaverman study, these factors accounted for
82.1 percent of the variation in the price per kilowatt-hour.
-33-
As Daverman has projected, a suffolk ~untctpal utility would be
favorably impacted by its exemption from the payment of taxes, although not
to the full extent of its exemption due to the)nclusion of PILOT payments.
Daverman has concluded that the cost of wages to a Suffolk municipal
utility would be the same as it currently exists for LILCO. Although, we
agreed with Oaverman for the most part, we felt that, if anything, wage
costs could be higher for a Suffolk municipal utility. Daverman has
assumed that LZLCO's existing generating mix would be the same for a
Suffolk municipal utility. We found no difinittve evidence to indicate
that this assumption is not plausible, therefore, a Suffolk municipal
' reliance on oil generated power wo~ld remain unchanged. Daverman
utility ) ........ ~ .......ncertatnties attendant to the
oncluaed ~nat because oT ~e .~3 ~ - ·
has c ....... ,----~- ~r it would ~ot be reasonable at this
allocation of cheap nyaroez=u~F~ ~-~ ,
time to project any additional benefits to a Suffolk municipal utility over
what LILCO currently en~oys. We concurred in this assessment and belleve
that it is probable that a Suffolk municipal utility would not gain an
appreciable advantage over LXLCO in the allocation of cheap hydroelectric
power to the Long Xsland Region.
As stated, most of the major operational and financial factors which
affect the cost of electricity will be appreciably the same for a Suffolk
Municipal Owned Utility (MOU) when compared to LILCO.
-34-
A~MPT~ONS
The Daverman report prepared a detailed cost comparison of L]LCO's
operations versus a Suffolk utility based on the assumption that a
"municipal utility is desired solely fo~ tie ~c~n.omic advantage that lower
rates might provide" (page 174). Certain megls/ators may believe that the
benefit of exercising control and direction of a Suffolk.uttllty's
management decision is more important than any economic advantages derived
from lower rates. Huntctpalization, however, ~ould not be feasible if
Suffolk's rates ~ere to be higher than LILCO's. Discussions with both the
Public Service Comt sston and representatives of the financial co,=unity
have indicated that muntctpaliza~9~ must provide ~n economic advantage to
Suffolk ratepayers in order to allow for both the marketing of bonds and
PSC approval of electric rates at a level ~htch ~ould recover acquisition
COSTS.
In order to provide a complete range of the probable 11mits of the
acquisition costs of LILOO's assets and the cost of muntctpallzation, the
Daven~an report presented six posslble scenarios of asset acquisition ustng
twa different valuation methodologies. Each scenario presents a projection
of the follo~ng factors:
a. The total yearly revenue requirements of LILCO and a
Suffolk utility over a five-year period.
b. The yearly rates per kilowatt hour for LILCO and a Suffolk
utility for five years.
c. The net present value of the total revenue requirements of
LILCO versus a Suffolk utility for a five-year period.
The report further states "In order to counteract as much as possible,
these inherent risk factors (in municipalizing), all assumptions and
methodologies utilized in the development of this report have been chosen
with conservatism in mind." (page 17). Using these "conservative
assumptions employed throughout all aspects of the anlaysis, the strong
economic advantage of the municipal utility is significant." (page 197).
In any report of the magnitude being analyzed, there are literally
hundreds of assumptions which must be made about the municipalization
process. Even with the best information available and the ability to
influence the outcome of projections, the level of accuracy in projecting
utility revenue requirements and sales by utilities remains notoriously
low. The projection of electric rates for LILC0 and a Suffolk utility
based upon unknown results of condemnation awards, uncertain time frames
and escalating capital costs is tremendou~y more complex.
The results of such projections must be viewed as tentative at best.
The assumptions used in any cost analysis largely determines the outcome of
the analyses. The Budget Review Office has assessed the reasonableness and
the 'conservatism" of the assumptions used by Daverman. Of the hundreds of
assumptions made in the report, the Budget Review Office has determined
that el even of the major assomptions used are, in our opinion, not
conservative and perhaps not reasonable.
-35-
They are:
1. Recovery of acqusttton costs through electrtc rates.
2. Generating plants ~ere valued at OCLD.
3. Consequential damages were valued et OCLD.
4. Land rights were valued at OCLD,
5, ~uffolk would cost share generating plants.
6, Generation dispatch will be performed by LZLCO for Suffolk.
7, Allocation of Transmission and Distribution and Separation
of Systems
8. Nine Mile Point Two will be acqut~ed in 1988.
9. LILCO service area coats are equal.
10. No adjustment of cona'~m~ation award w~bid be done to
reflect LILCO's outstanding debt.
Suffolk can selectively condemn electric operations only.
Obviously, the fiscal and operational implications of these last five
assumptions can only be assessed if and when the County moves beyond the
pre-analysis study done by Oaverman.
Ascertaining how the assumptions used by Oaverman affect the outcome
of their cost analysis is difficult.
We have tried to graphically display the myriad of possibilities Nth
Exhibit No. 1 which presents how varying Just a few assumptions in the
decision process of municipalization may yield a new and large set of
financial outcomes. For simplicity and ease of presentation, the decision
tree (Exhibit No. l) depicts how the variation of only five assumptions
affects final outcomes. The decision tree has been constructed so that if
there are three possible outcomes from a decision, the most expensive
outcome is presented by the path that goes up and the least expensive by
the path that goes down.
The (heavy black line) decision tree presents the paths used by
Daverman Associates to reach the two' points in decision level 5, which they
used as a starting point to price their six scenarios. The dotted line at
the top of the decision tree shows the path through the tree followed by
LILCO in estimating the value of its assets. From this presentation it is
apparent that for the five assumptions presented, there are only two
possible paths which could allow a lower starting point for the OCLD
valuation used in Oaverman's six scenarios. Ltke~dse, Daverman's highest
cost scenario (RCNLO) is higher than only 20 other possible paths and is
lower than B8 other paths.
It is therefore our conclusion that the report did not use assumptions
which presented a conservative estimation of cost.
Although, the Budget Review Office has questioned only eleven basic
assm~pttons used by Oaverman, there is a wide difference in the final cost
possible through variation of even a single assumption. The sequential
nature of decision making dramatically impacts the number of options which
must be studied. For instance, if Oaverman had studied all outcomes of
varying five assumptions, 648 cost analysis would have to be presented
instead of the 12 which were. If nine assumptions were varied (as we
-36-
DECISION TREE
MORE EXPENSIVE OPTIONS
LESS EXPENSIVE OPTIONS
CONOEMN ALL ON
A PORTION OF A
PLANT
ASSET VALUATI(~N
CONSEQUENTIAL SEPARATION DISPATCHING
DAMAGES AT BORDER OF POWER
Decision Decision Decision Decision Decision
Level Level Level Level Level5
i10.5 Billion Estimated
Scenario 1
Scenario 2
Scenario
Scenario 4
Scenario 5
Scenario 6
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
DAVERMAN
ASSUMPTIO~4S
.$
3,499,990
3,463,125
1,453,425
3o106,080
1,453,425
1,453,425
3,016,225
2,979,360
979,665
2,682,315
969,665
969,665
-37-
suggest) the number of posstble outcomes increase even more dramatically.
Obviously, not all opttons must be prtced out. Howover. a more
conservative path should be selected in any future studies tn order to
present a fuller range of possible costs.
The Budget Review Office suggests that a more conservative
presentation would be to follow a decision path which:
1) values generation and consequential damages at RCNLD
rather than OCNLD.
2) separates the utilities b~,~phystcal separation and
3) has Suffolk doing their own power dispatching.
Using these higher cost paths rather than the lower cost paths
actually selected would result in a higher starting point for valuing the
highest cost of the six scenarios (RCNLD). This starting point is the
midpoint in the entire cost spectrum of 108 possible outcomes by decision
level five.
If credence is given to LILCO's contention that only entire plants may
be condemned, the cost of condemning entire plants should be also be
explored. Such a study, however, was clearly beyond the scope of the
Oaverman report and would require a power supply study of LILCO's system
prior to developing any cost projections.
Since the assumptions used in the consultants report are critical to
the outcome of their cost analysis, each assumption and its ramifications
is presented in more detail in the following sections. Included in each
section are the reasons why the Budget Review Office believes the
assumptioQ may lead to an overly optomistic presentation of costs through
municipalization.
In addition to the specific assumptions which were made about asset
value, operations, procedures, etc., there are many broad issues which also
affect the outcome and presentation of the Daverman report.
These issues are:
1. Use of two valuation methods (OCLD and RCNLD) only in
asset valuation.
Valuation of going concern
3. Use of only a five-year time horizon for cost analysis.
4. Municipalization will result in lower rates than LILCO.
Joint Nassau/Suffolk municipalization.
6. Cost of Shoreham.
7. Other exogenous variables affecting municipalization.
-38-
$tnce the qualifications of these tssues also affects the outcome and
cost attractiveness of municipalization, the effect and ramification of
each tssue ts also separately presented,
-3g-
DAYEIU4AN'S ASSU~TLON #1,.
Assumption - Recovery of Acquisition Costs Through Electrtc Rate~
The purchase of LILCO's assets by a Suffolk munlctpal uttltty wtll
most probably be patd from the proceeds of bonds. Bond repayment
(principal and Interest) would be made fromrevenues generated from the
sale of electricity by the municipal uttltty. An tmpltctt assumption of
Daverman & Associates was that the PSC would authorize utility.rates at a
level sufficient to cover the cos%.gf operations a? debt services.
Implication
Recovery of condemnation awards in excess of OCNLD for LILCO's assets
by Suffolk may not be authorized to be recovered through electric rates by
the PSC. If not authorized for electric rate recovery, payments in excess
of OCNLD may have to be funded .by transfers from the County to the
municipal utility.
Discussion
Although not specifically mandated in PSC law, the com~Ission has, as
a matter of policy not allowed recovery of payments for assets made above
OCNLD. The rationale for this policy is to prevent coroorations requlated
by the PSC from passing assets back and forth in order ~o increase the
profitability and return on investment (ROI) of the firms. In those cases
where regulated companies have purchased assets from one another at above
OCNLD levels (usually phone systems), the purchasing company has been
required to absorb the difference between the purchase price and the OCNLD
base price from their retained earnings.
Suffolk, as a new municipally-owned utility, would not have any
retained earnings nor would it operate at a profit and, therefore, would
not be able to fund any condemnation awards which exceed OCNLD from
retained earnings. In order to meet court-mandated awards to LILCO,
Suffolk County government might be forced to transfer general fund revenues
to the municipal utility to meet the debt service requirements of those
bonds which exceed the OCNLD amount. Any general fund support would be
derived from locally generated revenue bases such as sales tax or property
tax. The interest payments (without principal payments) on Just the
difference between the Daverman OCNLD scenario and the highest cost RCNLD
scenario could require a 250 percent increase in the general fund tax rate
(10 percent interest rate on the bond).
One possible solution to this problem would be for Suffolk to first
municipalize just LILCO's transmission and distribution system. Without
generating capacity, the electric rates of a municipal utility are not
re ulated b the PSC but rather the Federal Energy RegulatoryCommission
(F~RC). FE~C does not have a prohibition against allowing MOU's electric
rates to increase to meet debt service requirements due to the purchase of
assets at above OCNLD. In the case of the Town of Messena, the higher than
OCNLD condemnation award for Niagara Mohawk transmission and distribution
system is being recovered by electric rates proposed by NYPA (New York
Power Authority) and approved by FERC.
-40-
e of a Suffolk muntctoallzatton of LILCO, the
Unfortunately_ tn the cas 's
armament solutton may not be a feastble solution, f~.ssen~L__
~l~zation tnvolved $,785 ecttve customers or less :nan one-half of
one percent of Niagara 14ohawk's total customer base of over 1,344,000.
Creatton of a Suffolk municipal uttllty would tnvolve approximately
one-half of LILCO's total customer base. Condemnation of the tranemtsston
and distribution system w~thout the associated generation capactty to serve
' ulatton could, tn effect, be considered to render
~,:,~ erie-half of LILCO's generating capactty useless. The County
could therefore condemn only the transmission and distribution system but
pay for the generating plant through an award for consequential damages.
The award for consequential demages~ea~v be made ~ether or not Suffolk
enters tnto a long-rem bulk power purchase from LILCO.
It ts apparent that tf the PSC would not allow Suffolk to recover
condamnatton awards whtch exceed OCLNO, municipalization would not be
feastble as proposed, if the County wtshed to proceed with the
condemnation of LILCO Irrespective of the possibilities of havtng to pay
acquisition costs above OCNLO and not be able to recover those costs
through the electrtc rates there remains two fundtng sources:
1. General fund transfers, and
~. 0tscont~nutng a~l proposed payments in Lteu of Taxes (P~LOTS~.
t ustng both of these fundtng sources would have the effect of radically
ncreastng the County general and selected town and school dlstrtct taxes.
it ts possfble that under a worst case scenarto (a LILCO award of
$$ btllton or more), the general fund property tax rate could tncrease from
the current $3.17 per thousand of full value to $17.34. At the same ttme,
approximately $134 mflllon of additional local property taxes wnuld have to
be ratsed due to the loss of PILOTS.
in an effort to obtatn a ftr~ optnton from the PSC concerning the
County's ability to recover the acquisition costs of LILCO's assets. The
Budget Revtew 05ftce requested a poltcy statement from the chairman of the
Public Servtce Commission. A response was recelved from the counsel to the
PSC which ts Indicative of many of the answers obtatned by the Budqet
Revlew Off~ce concerning all aspects of a municipalization of uttl~ty
assets' of the stze and scope betng contemplatad. The letter states that
~def~ntttve answers cannot be provided, for your questions tnvolve matters
of poltcy whose resolution would 11kely depend upon the spectftc factual
context tn whtch they are ratsed.~ it appears that thts tssue has not
artsen tn prevtous condemnatlons of uttltty property because ~th~ ~qu~tln~
municipalities have not been sub~ect to the coa~a~ss~ons rate ~ur~se~ctlon.
Absent ftrm assurance of full cost recovery tn rates from the PSC, the
County wtll probably not be able to obtatn the financing necessary to
purchase the uttl~ty assets tn the ftrst 1nstance let alone pay for any
subsequent awards whtch may be tssued by the court. The tnabtllty to
attract the necessary financing ~uld of course defeat any muntctpallzatlon
attampt.
The commission letter w~s.also_no~co~T~~ concerning two other
questions, contafned tn the uuoget Eewew u letter dealtng wlth,
l) the creatton of a contingency fund from the rates charged, and g) the
recovery of the cost of the Shoreham plant, tf the County were to acquire a
port~on of the plant and the plant d~d not operate. Each case, espec~a11~
Shoreham, presents a untque set of c~rcomstances which the commission ~s
not ready to deal w~th hypothetically. Any PS¢ decisions on these ~ssues
-41-
would have to be based upon the ctrc~stances of specific cases because of
the far reaching implications attached to such decisions. Unfortunately,
these, like many of the questions raised in our analysis of the Daverman
report, may only be definitively answered if the County chooses to move
ahead and actually condemn utility assets.
-42-
DAV£1UdAN' S ASSUI~TTONS #Z
Assmnptton: Generettn~ Plants Vere Yalued at OGLD
Generating plants would be purchased at their Ortgtnal Cost Less
Depreciation (OCLD). This is the amount included in the Public Service
Commission (PSC) rate base. If purchase cost were to exceed OCLD, it was
assumed that Suffolk would not buy LILCO generetlon capacity, but rather
become a wholesale purchaser of power from LILCO (Daverman page 183).
Bulk power purchases from LILCO are regulated by the Federal Energy
Regulatory Commission (FERC) and ttm~prtce paid includes a return on
investment for the generating plant at OCLD. Any purchase price above OCLD
for the generating plants would, therefore, result in a higher cost for
municipal electricity.
Implications
This assumption by Daverman assumes a low purchase price for LILCO's
assets and thus enhances the attractiveness of munictpaltzing LILCO's
assets in Suffolk. The purchase of assets at costs above OCLD could raise
Suffolk's cost of electricity beyond projected amounts.
Discussion
Because LILCO will most probably contest a municipalization by Suffolk
County, the purchase price for LILCO's generating system will not be known
at the time condemnation proceedings begin. The courts will determine the
methodolgy and the award amount for the generation, tranamtsston and
distribution systems condemned.
Shea and Gould the attorntes for Niagara Mohawk utility in the Messena
case have stated that the courts valued Niagara Mohawk's assets at RCNLD
value. Mossena's estimate of RCNLD was used. The Town of Mossena
condemned only transmission and distribution systems (T & D) not generating
facilities. Although Oaverman does include scenarios of paying RCNLO for
tILCO's Transmission and distribution related assets, it would appear that
the cost of purchasing generation capacity should also be priced out using
a RCNLD scenario.
If generation systems are priced out using a RCNLD methodology, the
cost for a Suffolk utility to provide power will be significantly higher
than forecast. The purchase price of LILCO's assets using a RCNLD
methodology for generating plant and the transmission distribution system
could be between $1 to $5 billion higher than forecast at OCNLD.
It would appear that by condemning Just LILCO's T & D system, Suffolk
weuld obviate any potential problems of paying above OCNLD for the
generating capacity. Suffolk would then become a wholesale purchaser of
power from LILCO as recommended by Daverman and Associates. Unfortunately,
this may not be a practical solution. Condemnation of LILCO's T & D
without generating capacity could have the effect of rendering useless the
generating capacity of LILCO. Consequential damages for generating
capacity would then be included in the cost of the award for Suffolk's
condemnation of LILCO's T & D.
It is our understanding that even if Suffolk were to enter into a
long-term contract for wholesale purchase of power from LILCO, the
generating plant could still be considered rendered useless by a Suffolk
condemnation of Just LILCO's T & D. Likewise, LXLCO's ability to sell
power to the New York power pool from these generating plants may not be
considered as a mitigating factor to any consequential damages award.
Another factor which must be considered is the allocation of a Suffolk
condemnation award to LILCO's stockholders, bondholders and ratepayers.
There is precedent for the PSC to require that a portion of a regulated
company's capital gain from the sale of an asset be distributed to the
ratepayers. In the case of a Suf~Slk municipalization, a portion of the
award to LILCO could be redistributed to the benefit of Nassau ratepayers.
Municipalization might result in lower rates for Suffolk ratepayers
(if Daverman's projections are correct), than if the municipalization did
not take place. However, after municipalization, LILCO rates in its
remaining service area could be even lower than Suffolk's, due to the
redistribution of a portion of the condemnation award.
-44-
DAY£RZ4AN'S ASSU~TZON #3
Assmptton - Consequential Damages vereValued &tOGLD
Consequential damages ts a court determined monetary award that would
be patd by the County to LILCO for the value of plant and facilities which
would be Judged as no longer requtred by LILCO or considered to be of less
value as a consequence of Suffolk County's condemnation of all, or a part
of LZLCO's electrtc system. The value attached to such damages by Daverman
was computed at ortgtnal cost less depreciation (OCLD) or book value. Zt
was estimated that damages would be patd on distribution facilities and
general plant. The amounts tnclud~Cl In the report for each were $S,S00,000
and $15,0G4,000 respectively. No co'sequential dam'ages were considered to
be incurred for condemning only a portion of LILCO's transmission system
located in Suffolk County. The Shoreham Power Plant created a great deal
of uncertainty as to the potential total dollar award for consequential
damages. In two of the six Shoreham scenarios used in the report,
consequential damages are paid for Shoreham. Scenario No. 2 assmes that
Shoreham opens but the County does not use the Shoreham power and
Scenario No. 4 assumes that Shoreham does not open, but the County is
required to pay damages for its share of the plant costs. The damages
estimated for Shoreham in these scenarios are $1,514,614,000 and
$1,290,746,000 respectively.
Zmpltcattons
1. The report assumes that: In a condemnation proceeding, the
County would be required to pay book value (OCLD) for
LILCO's plant and facilities no longer required or
rendered useless, even though the County may have to
pay replacement cost less depreciation (RCNLD) or some other
value above OCLD for acquiring other LILCO assets.
There would be no consequential damages associated with
acquiring transmission facilities located in the County.
Under certain conditions, the County may be required to
pay damages for its share of Shoreham whether the plant
opens or not.
Discussion
The uncertainty over the Shoreham issue and how the plant's
construction costs will be paid created the necessity of including various
cost scenarios in the Daverman analysis. It has yet to be determined just
how the plant will be paid for. The two consequential damage scenarios in
the report assume that if municipalization occurs, the County's ratopayers
will ultimately be assessed a share of Shoreham's cost whether the plant
opens or not. At this point in time, it is impossible to say Just what the
outcome of Shoreham will be. However, there is no doubt that the Shoreham
question places a great deal of uncertainty and risk in a municipalization
effort. The spectre of Shoreham and its huge cost would place the County
at risk of potentially having to pay an additional large sum to acquire its
share of the plant on top of the cost of acquiring LIL~O's other assets.
-45-
The consequential damage costs tncluded tn the report for Shoreham were
predicated on a ftnal cost of $3.2 btllton. This was a reasonable amount
to assume at the time the report was prepared. However, recent problams
and delays are driving up the the plants costs raising the County's risk
exposure. We believe that further consideration of municipalization
recognize the need to resolve the Shoreham tssue. This would also
eliminate a m~lor variable in any subsequent analysts to be performed.
Based on discussions the Budget Review Office has had with various
attorneys, it would appear that the County could be required to pay some
amount approaching RCNLO for consequential damages rather than OCLO as
projected tn the report. The conde~nor would be required to reimburse the
condemnee for direct damages associated wtth the pPo~erty taken as woll as
damages caused by reducing the economic value of assets not taken. It
appears that the Oaverman report underestimates the value of these damages
use it assumes that no damages would be paid for acquiring only
beck. - -~ ...... +tn~ facilities and the requisite t?nsm~sston _.
facilities. In order to ascertain Just what amount might be payable for
plant and facilities, three concurrent studies should be performed. They
would be: '
1. An engineering analysts identifying the cost of severing
Suffolk from the remaining LILC0 system, identifying how
severance would be carried out.
2. A legal analysis to determine what the probability is that
the County would be required to pay damages for acquiring
only a portion of a generating plant.
3. An appraisal of LILC0's assets to determine the condition
and replacement value of the items to be taken and items
rendered less useful. This would include physical assets
as well as systems and software.
After these studies were done, more reasonable estimates of
consequential damages could be obtained.
-4Go
DAYERF~H'S ASSU~T~ON t4
Land and Land Rt~hts Vere Valued at Ort~lnal Cost
For both valuation methodologies (OCNLD and R¢flLD) land associated
with transmission assets was valued at $1S,121,O00 and distribution assets
at $2,103,000. The value of land associated ~th the acquisition of
general plant and facilities was placed at $32,789. The value of land to
be acquired as part of generation facilities was not reported separately.
Imp1 t c att ohs,
1. That the County ~11 be required to pay onl~v original cost
for land and land rights owned by LILGO tn a condemnation
proceeding and not current market value.
2. The value of acquiring easements and other land rights which
LILCO may have obtalned at 11ttle or no cost to Itself ts
also reported at original cost and ts probably underestimated.
Discussion
Based on discussions, wtth various legal sources there appears to be a
consensus that the County would be required to pay fair market value for
any land condemned. L[LCO would also be reimbursed at current value for
easements acquired by the County, even tf they had been obtained at no cost
to the company. Undoubtedly, there could be a wtde divergence of opinion
concerning what constitutes fair market value for land on which utility
poles and lines may be located. It would appear, however, that the value
would be something more than original cost. If L[LCO contested the
County's offer, a final determination ~ould be made by the courts and be
based tn part on appraisals made for the land to be taken. In condemnation
actions the County usually has two appraisals done on a property. The
County's offer would be made on the highest approved appraisal obtained.
The offer would Include the cost of acquiring easements, but not for
rights-of-way along public roads, since these are already owned by a
municipality. The value and exact nature of the land to be acquired ts
Indeterminate at this tlme, however, tt ts safe to assume that current
value far exceeds original cost.
The alternatlve ar~ent upon whfch the Oaverman assumption rests ts
that the value of LILGO s land would be based on 1ts revenue producing
capability or 1ts economic value. The economic value ts based on the
highest and best use of the land whtch tn thts case ts as uttltty property.
The return allowed on the value of the land ts determined by the PS¢ and tt
ts based on ortgtnal cost. It ts the poltcy of the PSG not to allow a
return on a uttltty asset at anythtng other than 1ts ortgtnal cost..
Therefore, land, because tt ts part of a regulated utt11Ly, has a 11mired
economtc value ~htch ts Independent of market conditions. The problem ts
that there are two different factors potentially controlling value. On the
one hand, the PSC 11mlts the value placed tn the rate base to ortglnal
cost. On the other hand, the courts tn Interpreting condemnation law mag
require the land to be valued at current market cost. Thts only adds
uncertainty to the declston maktng process by casting doubt over any
valuation used to ~udge the potential cost of munlctpaltzatton.
-47-
Land ts always considered to be a non-depreciable asset. That is, 1ts
value remains on the accounting records at its ortginal acquisition cost.
Because of this, the PSC allows the cost of any land acquired to be placed
in the rate base and remain there at original cost indefinitely. The land
is never depreciated and will always earn a return to the company based on
the approved PSC rate. Xf the land in Suffolk has an original cost of
$20 million and the rate of return is 15 percent, then the land will
generate $3 million annually for LILCO into perpetuity.
The foregoing supports our determination that the cost of
municipalization is most likely understated by the added cost of acquiring
land valued at original cost. ,~ '-
-48-
DMERHAN'S ASSU~TIO# #5
Assumption--The County Vould Cost/Share tn LILCO's Base Generattntl Plants
The Oaveman report assumes that the County will obtatn 48.Z percent
of all LILCO's base load steam generating stations. Thts tncludes the
stattons located in Nassau and Queens counties, and the tnterconnections
with Consolidated Edison and Northeast Utilities. The County would also
acquire 66.1 percent of the Holtsville peaklng generating station and
100 percent of the etght other peaktng stattons located in Suffolk County.
The Shoreham Nuclear Po~er Statto~ ~s treated in a variety of ways in the
report, due to uncertainties concef~lng the plants ~peratlon and-cost
tmpact. Stx different Shoreham scenarios ~ere presented tn the report with
the assets in each scenario betng valued at both ortginal cost less
depreciation (OCLD) and replacament cost new less depreciation (RCNLD).
The six different Shoreham scenarios used are 11sted below. Only under
scenarto one does the County purchase and operate a portion of the Shoreham
plant:
1. Shoreham
2. Shoreham
3. Shoreham
4. Shoreham
5. Shoreham
6. Shoreham
Opens - County purchases a portton
Opens - County pays damages
Opens - County pays no damages
amortized - County pays damages
amortized - County pays no damages
cost excluded from rate base
The report assumes that the County would cost/share tn extsttng
generating facilities with one uttllty operating the systems for the mutual
benefit of both. The report further assumes that LILCO would continue to
moniter and operate these plants from its Htcksvtlle operations center for
the mutual beneflt of both utilities. ]n so doing, tt is ass~ed that the
County would acqutre sufficient generating capactty to sattsfy the needs of
customers tn 1ts servtce area. The ramatnder of the generating capactty
would be used by L]LCO to servtce 1ts customers ~n Nassau and Queens
counties.
The distribution percentage of 48.2 percent ts based on a pro rata
share of electricity sales tn Suffolk to the total L~LCO system 1n 1982.
Zmpllcattons
1. The report ass~es that: One uttltty, presanably L~LCO,
will operate all generating systems for both uttllttes.
2. L~LCO will not seek to have the two utilities severed
to the extent possible.
e
The same economies of scale will exist with two
operating utilities as now extst with one.
A distribution based on sales will provide sufficient
generating capacity and growth potential for both utilities.
-4g-
$. ]t is operationally feasible to spltt ownership and control
of generating facilities.
6. Both Suffolk and LILCO will own and be responsible for
plants operating outside their respective service areas.
7. The implication that future electric generation plant
requirements between Suffolk and LILCO will be mutually
agreed to by both utilities.
Discussion .~
It would not be unlikely that LILCO will view munlcipailizatton as a
threat and refuse to cooperate with the County.
LILCO has contended that the County does not have the authority to
~ick and choose which generating facilities it will condemn, because
ILCO's facilities have a prior public purpose in that they service,
residents in Nassau and Queens counties as well as Suffolk. LILCO contends
that it has the right to choose which generating facilities it wishes to
allow the County to condemn. Obviously, LILCO would allow the newest and
most costly plants (including all of Shoreham, Nine Mile Point Two,
Holbrook, and the two newest Northport units) to be condemned. It may be
considered just as unfair for the County to acquire the least expensive and
most efficient plants as it would be unfair to force the County to take the
most costly plants. Oust what the County could take would probably be
subject to extensive litigation and Judicial determination.
If the County did acquire a portion of the qenerating plants, As
presented in the report LILCO could seek to establish two segregateo
utilities. If this were done, the County would have to assume full
responsibility for the operation of its share of the generating facilities
from the moment title vested with it. It is probable that LILCO as an
unwilling participant in any municipalization proceedngs would not promote
a smooth effortless transition of title and plant operation. Further
complicating this approach could be the inability of Suffolk to have its
staff in place at the moment of takeover. Any attempt by the County to
condemn a portion of a plant would present both legal and operational
difficulties. Many of these problems could be mitigated or eliminated,
however, if the entire LILCO generating system were purchased jointly by
Nassau and Suffolk counties.
Splitting ownership of the plants may result in an award for
consequential as well as severance damages to be paid to LILCO. These
damages are awarded as reimbursement to the condemnee for losses incurred
as a consequence of the condemnation process. Such costs would be for
fixed plants rendered useless as well as the cost of severing the LILCO
system into two parts. In its report, Daverman does not allocate
consequential damages for splitting of the generating facilities because
they assume Suffolk County would share the most and least efficient plants
leaving the remaining LILCO customers unharmed. Similarly, severance
damages were not calculated because it was assumed that the plants would
continue to be operated by one utility, probably LILCO.
-SO-
A major vartable affecting the acquisition cost for generation
facilities ts the Shoreham Power Plant. The report presents a nomber of
possible opttons. Costs for Shorehem whtch range from nothtng (assomes
that Suffolk weuld not be responsible for the cost of the plant), to
$1,311,310,000 whtch is Suffolk's share of Shoreham costs tf the plant ts
amortized through rates and ftnally to $1 ,$6g,400,000 tf Shoreham opens and
the County is required to pay for 1ts share of the plant cost. These
estimates assome a total Shoreham cost of $3.Z btllton. *The Shoreham
question was a major vartable tn the Oaveman analysts and ts no less so
now. Recent events delaytng the opentng of the plant may ratse
construction costs to over $4 bt111on. Oectslons relattng to the recovery
of plant construction costs have yebto be made. These decisions will have
a significant impact on electric rat~ for LILCO and would as well for a
Suffolk municipal utility. The part of Shoreham's cost which may
ultimately enter the rate base wil) to some extent depend on prudency
hearings which are to be conducted by the Public Service Commission. These
hearings will attempt to determine the appropriate plant valuation that
should be passed on to ratepayers. Shoreham costs are more than three
times the book value of all of LILCO's other assets. This fact coupled
with the uncertainty concerning the variation between OCLD and RCNLO
valuations for existing in-service assets increases the possibility that a
Su fro1 k municipal uti1 try could not provide lower el ectric rates than would
be available from LILCO. The decision to municipalize prior to resolving
the Shoreham question could put the County in the position of having to pay
a large additional sore of money for a portion of Shoreham, whether it opens
or not.
The major problem with splitting ownership of the LILCO system is that
it separates what was intended to operate as a stngle entity into two
component parts. While this appears to be an equitable distribution it
will probably have the effect of rendering each system somewhat less
reliable and efficient. As a single entity, the entire LILCO system can
draw on the reserve capacity of all generating stations. This ts important
for maintaining system reliability. With sufficient spinning reserve other
generating units automatically meet a system's energy demands. With the
system split in two, each utility may not have sufficent and immediate
reserve generating capability simply because each has fewer generating
units on which to draw. The Northport generating station, for example, is
composed of four separate 330mw generating units. If the system is owned
and operated by one utility and one of these units goes down, there would
be three others which could be used to keep the system in equiltbriom and
meet the energy demand. With split ownership and segregation, each utility
weuld own twe units. If one should go down, the same redundancy would not
exist. Each utility would have only one unit with which to make up the
energy loss to meet demand. This changes the entire generating mix with
two utility ownership of the same equipment. This could be rectified by
establishing agreements for the wheeltng of power between the twn utilities
with each charging for the service. W~ile this arrangement could work
satisfactorily, it highlights inefficiencies which may result from the
split. Each utility would have to carry enough spinning reserve to carry
the other in case of emergency. Failure to do so could compromise the
reliability of both.
-51-
lost +RPER
es incurred while'carrying electricity over large areas
normal 1)n? l~s ..... ,~-*~. s~stem. Suffolk, because of its large area,
primarily in the a~s~r,-u~.-..
ertences greater energy losses than does more densely populated Nassau
energy must be generated
~ Queens counties. Therefore, more electrical other LILCO customers.
to deliver electricity to Suffolk customers than
hi her ercentage of LILCO's generating capacity
Apparently, Suffolk uses a wo~ld i~dicate. While Suffolk has approximately
than actual electric sales
, les. Xts actual energy requirement to
generationC mu .... = ~P~m~.base load s~eam.genera g
purchase .g percent moru u. ~,~ ....
rman. Interpolating the ngnbers used in the
hah recommended by D)ve ther $4.3 million at the
~eport, the additional capacity would co~t ano
valuation.
Additionally, from an operational point of view, one should also
consider the peak load demand in the respective service areas when
.e s lit in generating facilities. It is the peak
calculating the percentag ~. ~. ......~ttv re,uirements for a
demand load that determines ~ne genera~,g uo~ ~
utility. Sales do not indicate what peak demands will be placed on the
system during peak'periods but rather average out demand over the course of
.a year. If electric demand were constant, then utilities could meet energy
requirements with less generating capacity. The Daverman report recognized
that there is a small difference in peak demand between Suffolk and the
remainder of the LILCO system with Suffolk having a higher s~mer peak but
this difference was ignored in preparation of the report (page ll6).
Under the Daverman scenario, it is contemplated that both LILCO and a
Suffolk municipal utility would own generating plants outside their
respective service areas. Currently, most of LILCO'S generating capacity
is in Suffolk County, and eventually as the older units located in Nassau
and Queens Counties are retired, an even greater percentage will be located
in Suffolk. According to LILCO projections, this will occur about the year
~oog. In addition, because of a lack of adequate sites in Nassau county,
all future plant construction is expected to occur in Suffolk County.
While this situation may not present immediate operating difficulties, it
could pose long-term plant siting problems.
-52-
DAW:RIVJi'S ASSU~TXON t6
As?--~--~tlon - Generation Dtspatch ttould be performed by One Uttllt~ for the
~utual ~conomlC ueneTlt Or uocn Utilities
The report assomes that one utiltty, probably LILCO, would continue to
operate the generating facilities much as they are now even though
ownership would be spltt. LILCO operates and monitors all its generating
stations Including peaking stations from 1ts Htcksville control center.
From this facility, stations are operated by remote control and brought
on-line as needed to meet energy d~nd. To the extent possible, the
company operates those stations with the lowest vartable cost to generate
the next unit of electricity. This is a requirement for all members of the
New York State Power Pool. Less efficient and peaking stations are brought
on-line as energy demand increases beyond the capacity of the most
efficient units. In this way, the company is able.to operate the system at
the lo,est variable cost, the fixed cost of the facilities al ready being
included in the rate base.
Impl t cart ohs
1. LILCO will not seek to have the two electric systems
completely severed.
2. The same economies of scale will exist with two utilities
as now exist with one.
3. The County will not have to duplicate LILCO's control center
to operate its generating stations.
4. A LXLCO controlled system wil.1 operate to the equal mutual
benefit of a Suffolk utility
Dtscussto~
A major premlse of the Daverman report is that the County ~ll acquire
its proportionate share of L%LCO's generating facilities and that one
utility will operate the plant for the mutual benefit of both utilities.
The split ownership would not make it any more or less expensive to operate
these plants. The County would merely cost share in the LItCO facilities.
The sytem would continue to operate as it always has. Presumably, a Joint
agreement between the two utilities would be established with the County
reimbursing LILCO for its share of the dispatching costs. From an
operational point of vtew such a mutual agreement would be the best
situation for Suffolk County. The County would not have to provide
separate control facilities and staff to operate its portions of the
plants. It is assomed that LILCO would voluntarily continue to perform
this service for another utility. No additional costs of operating the
plants would be incurred by either utility and the system would continue to
operate as efficiently as before. This would certainly appear to be a best
case scenario for the County's municipalization effort.
-53-
Power dtspatch by one uttltty (L]LCO) Js also predicated upon a less
than complete-separation of the twe utilities transmission and distribution
system, ks presented tn the sectton on uttltty separatton.~he Dav~r~aq.
report selected a method of separating the two utilities wolcn useaDo;n
metertng and phystcal separation. Thts method of uttltty separation
requtres that dispatching and power control be carrted out by one uttltty
since power would flow relatlvely freely between the two systems.
Because the report assumes a best case scenario vtsa vts the
operation of generating factlttt~,and the separation of the utilities, the
County may encounter additional Co'cs or operattng"probloms tfa takeover
were actually to occur. Complete severance of the generating stattons may
be unreasonable and perhaps unworkable. The greater the degree of
dtfffculty, the less desirable and more expensive municipalization can
become,
Finally, tt was assumed that the dtspatch of Suffolk's power by L]LC0
would be done "for the maxtmum mutual benefit of the newly created
(page 70). The "maxtmum mutual benefit declslons" would omploy the same
declslon rules as are currently used to dtspatch power for
Minimization of costs for the entire system Is rattonal ~nen there ts one
system, Division of the system into twe separate utilities would result
different cost decisions for LZLCO and Suffolk. Decisions that
may have minimized power costs for the entire systom, may have primarily
accrued to Nassau but been shared equally by Suffolk, The Budget Revtew
Office does not belleve that It ts reasonable to ass~e that L]LCO would
make dispatching decisions which would result tn a higher cost for
ratepayers, so that Suffolk uttltty ratepayers could enjoy lower rates.
Declstons on economtc dtspatch whlch would benefit both utilities are
generally mutually exclusive and collectively exhaustive. Engineering
studtes recommended by Daverman Associates on the separatfon and
dispatching and bulk power purchase questfon, must therefore be carrted out
before a true value of municipalization can be determined.
Power dlspatchtng by L]LCO means that Suffolk would not have to
'construct a new control center stmtlar to L~LCO's HJcksvtlle center.
Rather, Suffolk would conttnue to use the Htcksvtlle center, thereby,
precluding the need to construct an expensive control center tn Suffolk and
avoldJng a consequential damages award for the center due to
municipalization, Cost sharing charges would be made from LZLC0 to Suffolk
for d~spatchtng and control services.
-54-
DM£RMAN'S AS~I~TION #7
Ass~ption-Allocatton of Transmission And Distribution and Separation of
$~s~ems
Transmission system ltnes and equipment are recommended by Oaveman to
be acquired based on the ratio of miles of transmission lines in Suffolk
County to the total L]LCO system. A transmission system moves electric
energy at high voltages across large distances. According to the Daverman
Report (Table No. 2-2) Suffolk has 69.6 percent of the L]LCO's total
overhead transmission lines and 41.9 percent of the underground
transmission lines. For report p~oses, a composite percentage of 56.96
percent of the total cost of LlLCO's~transmisslon s~stem was used. This
percentage could be due to the large cost differential between u. nde. rground
and overhead facilities although it is not clear how it was arr~vea at.
The report also envisioned two separate systems with tnterconnectton
metering installed to record power flows between the two systems.
The distribution system takes electrical energy received from the
transmission system and distributes it to customers at normal service
voltages. Because specific distribution system information was not
avail able to Daverman during the preparation of their report, dtstrtbution
assets attributable to Suffolk County were calculated based on the ratio of
annual kilowatt hour sales in Suffolk County to the total annual sales of
the LILCO system (page 147). This ratio is the same as the recommended
split in the generation facilities which is 48.2 percent of the total.
At the distribution level, nomerous boundary line crossings exist at
the Nassau/Suffolk border. Customers on both sides are serviced from
sources outside their respective jurisdictions. In order to physically
separate Suffolk from LILCO at the border, the report assomed that a
combination of physical severance and boundary line metering would be used.
The latter would provide e billing mechanism for power flows between the
two systems eliminating the need for complete physical severance at the
border.
Implications
The report assumes that:
1. Separation and metering can be readily accomplished.
2. A separation based upon sales is rational.
3. Allocating acquisition cost faced on a ratio of miles
of transmission lines for Suffolk to the total LILCO
operation would produce a meaningful cost of acquisition.
4. The courts will ignore the age and condition of the portions of
the system being acquired.
5. Complete physical separation would not be required.
Discussion
-55-
The allocation of cost based on a pro-rata share of ltne mtleage ts
applicable only to arrtve at a gross esttmate of cost. The actual cost of
acquiring the transmission and distribution system will depend on the age
and condition of the assets condemned. A detailed analysts of the enttre
transmission system would have to be performed to tdenttfy each asset as
well as the meets and bounds for land related to the system. The County
would also have to acquire the equipment used to maintatn the system as
well as employees capable of performing repairs on power lines.
PresUmably, these employees will come from LILCO, since the diminished
company would no longer have the need to retaln them. A detatled appraisal
of the Suffolk assets would reveal the probable cost of acqutsttfon.
As stated elsewhere, Suffolk ~uld most ltke~ be liable to pay
consequential damages for the acquisition of transmission and distribution
assets to the extent that other LILCO assets would be rendered less useful.
No consequential damages were tncluded for transmission plant acquisition
because a plant would be requtred for both systems, and would either be
cost shared or wheeling charges applted. Severance costs between the two
systems were calculated at $14,g12,000 tn total for the entire system.
Daverman recommends a staged condemnation by the municipal uttltty
system, with acqutsltion of the transmission and dtstrbution systems first
and generation facilities afterwards. While thls would be a sensible
approach so far as the County Is concerned, tt could create additional
litigation. According to attorneys for LILCO, the company would seek
consequential damages for the portion of its generating facilities rendered
less useful by the staged takeover of the transmission and distribution
systems by a municipal utility. If a staged takeover were to occur,
~uffolk would initially purchase its power from LILCO at wholesale prices.
he price would be regulated by the Federal Energy Regulatory commission.
Retail rates would be set by the Public Service Commission, since the
County would be purchasing power from a source other than the power
authority. Even so, LILCO could seek additional consequential damages
because it would no longer need the additional generating capacity to
satisfy its own customers. The point could be argued that the generation
plants would not be rendered useless because Suffolk would be required to
buy power from LILCO. However, this is a potential point to be resolved
through litigation and could have a substantial economic impact on the
County.
Through no fault of its own, Daverman and Associates did not have
adequate information available to determine the value of distribution
assets in Suffolk. Lacking this information, it chose to distribute the
assets based on the percentage of sales in Suffolk to tILCO's total. The
48.2 percent of sales is the same percentage split used in the report for
the taking of LILCO's generating facilities. In using this methodolgy, the
does not tve special consideration to Suffolk's size an~ uniq~
report .... g ~-- ~- --~--~^- to the rest of the LILCO system, since
geograpnlca~ character m. rc,~,v-
Suffolk is not as densely populated, the distribution system must
necessarily be larger to accommodate roughly the same nUmber of customers.
According to LILCO, Suffolk has approximately 55 to 60 percent of the total
distribution system within its geographical boundaries. If we use the OCLD
and RCNLD values used in the report for the distribution system and apply
the actual percentage obtained from the Oaverman report for transmission
-56-
system (56.96 percent), we find that the value of the distribution system
could be Increased by $39,162,000 under OCLD and $77,419,000 under RCNLD.
It should be noted that percentage cost allocations are made only as very
broad gross cost estimations. The actual costs the County would be
required to pay weuld likely depend on the age and condition of the system
being condemned and not a pro rata share of system factlltles.
Another issue whlch Oaven~an had to address Jn this area was how the
Suffolk HOU would be separated from the rematnlng LILCO system. Three
alternatlve optlons were explored - they were:
1. phystcal separation at boundary points.
2. boundary line metertng>~d separatlon ..
3. transactlonal separation (metering)
The most expensive alternatlve is optlon #1 whfle the least expensive
is option #3. Daveman has pro:Jected $14.9 mill~on as separatlon and
metering costs for optton #2. No cost estimates for options #1 and 3 were
presented.
The best method of separation of the two utilities from LILCO's point
of view 1s option #1, phystcal separation. LILCO cltes safety, engineering
and chargeback reasons. Under toms of the condemnatfon procedure, ~t
would probably be LILCO's dectslon as to what type of separation method
~ould be used between the two utilities.
If LZLCO decides that it wants a cemplete phystcal separation of the
two utility systems (option # 1), Suffolk's costs trill be significantly
higher. These higher costs w~ll artse from three areas:
1. The redestgn and reengtneertng of power transmission
and distribution at the border to provide reliable
servtce for both systems.
2. Construction of a central dispatching and control center
for the Suffolk system.
3. Probable payment of consequential demages to LILCO
for the Hicksvtlle control center.
If the Legislature w~shes to proceed ~dth municipalization, the cost
of exercising option #1, complete phystcal separation of the t~o utilities,
should be determlned prtor to such decision. In addition, the cost of
L~LCO's dispatching power for Suffolk should be further explored. The
ass~ptton that dtspatchlng can be carrted out by L~LCO at no addttlonal
cost other than currently tncurred ts overly optomtsttc.
-57-
DAVERMAN'S ASSUR~TXO# #8
Assmmptton - #1ne gtle Potnt TgO Wtll Be Acqutred in 1988,
The Daverman report assumes that Suffolk will not acqutre 1ts share of
the gtne Mile Potnt Two guclear Plant unttl the plant becomes operational
tn 1988. LILCO's share of the cost of thts plant ts 18 percent. Of thts
18 percent, Suffolk would acquire 48.2 percent of LILCO's tntermst, whtch
would provide Suffolk with an additional 93 mw of power. By calculating
the additional debt service payments required in 1988 (from the report), it
appears that Suffolk's share of the cost of the plant will.be.approximately
$490,$00,000. This amount would'b~ in addition tp.the cost ot acquiring a
48.2 percent share of LILCO's othe6 base load steam generating plants.
Implications
1. The County will be able to postpone paying for 1ts share of
the plant until its opening in 1988 and LILCO will continue
to finance construction work in progress until that time.
2. There is an implicit assumption that Suffolk will not be
required to pay LILCO consequential damages if Suffolk
does condemn a part of the plant during its initial taking
of LILCO facilities or if the plant never opens.
3. The County will be able to obtain the additional
financing required to purchase its portion of the plant at
the time it goes on-line.
4. The bonding authorization set by the County will take into
account the purchase of Suffolk's share of the plant.
DiSCUSSion
The Budget Review Office believes that the Oaverman report ts s~omewhat
inconsistent in its presentation concerning the acquisition of LILCO's base
load steam generating plants and the Nine Mile Point Two facility. A basic
premise of the report is that Suffolk will acquire its fair share of all of
LILCO's generating plants and not merely choose to condemn only the most
efficient least expensive facilities. The report states that 'this would
allow LILCO to continue to produce power at its current average system
cost, thereby, leaving the remaining customers unharmed. Because no extra
costs will be incurred by the remaining customers, no consequential damages
would need to be assessed for existing production plant" (page 162). For
the remaining LILCO customers to remain unharmed, the County would have to
acquire its share of the Nine Mile Point Two facility along with the other
generating facilities. It is unreasonable to assume that Suffolk would not
be required to pay consequential damages to LILCO if it did not take the
plant. The fact that the County intends to acquire the plant in the future
would not necessarily negate the consequential damages issue at the time
the County vests title and forms its own utility. It may not be sufficient
for the County to state that it intends to acquire its share of the plant
at the time it comes on line. LILCO's purpose in buying into this facility
was to provide additional firm power for its service area including
Suffolk. If Suffolk should form its own utility, then LILCO may not need
all the energy it will be receiving from this plant.
-58-
"The Report" appears to ass~e that LILCO ~tll conttnue to ftnance
construction of the factltty on 1ts own for the beneftt of both Suffolk and
ttself. In all probability, Suffolk ~ould have to participate tn the
construction of the plant or pay dm~ages to LILCO. LILCO's abtltty to
ftnance projects through the tssuance of debt or equtty Instruments could
be altered drastically after a Suffolk takeover depending on the
compensation tt recetves for 1ts assets. Muntclpa~tzatton wtll not absolve
Suffolk's r~tepaye~s fr~ the cost of decisions made b~ L]LCO tn
attn tn ~e ~tne ~tle p~o~ect, be tt a good o~ a bad d~tston.
parttctp g ' share of the Htne Mtle Potnt T~
The additional cost of acquiring Suffolk s
uent to municipalization ts.dependent on the
plant several ~ears ~qthe additional capttal re~u~: The
~ ntv's abtltt~ to financial market ~ ratse $490.5 ~11/lOn ~a~ cause ~.~
~ go back tnto the
County to pay htgher than nomal tnterest rates. The success of the
municipalization effort ~uld ulttmatel~ detemtne how m~h additional
capital could be ratsed and at ~at tnterest tares. Provision ~ pu~hase
the plant ~11 have ~ be tncluded tn the bondtng authorization approved
for the municipalization effort. Fatlure ~ provtde sufficient funds could
requtre the Count~ ~ pay for the plant and/or d~ages ft~ General Fund
revenue sources.
k State, tnvestot-o~ed utilities are precluded
~n New Yor . ts. The cost of new
financing construction pto~ec~s on a ~[~ ~[ asset ts placed
facilities are not tncluded tn the ra~ ~
ult ts that utilities must ftnance construction costs
se~lce. The r~s ...... ae~taltze ny debt setvtce pa~qn~s ~rtor
debt ot equtt~ lnstr~ents an~ ~r ....... a _
to plactng the asset tnto se~lce. The cost of capttal tncutre~ outing
construction then bec~es part of the ~tal cost of the asset ~tch fs put
e. The uttltt~ ts allo~d to earn a return on 1ts
tnto the rate bas .... .~ e,,~ ervtce C~mtsston. ~f a
tnves~ents at a rate approvea ~ ~-~ r~.tc S
tltt ~te created tn Suffolk, tt ~uld ftnance capttal
muntclpal ut . ~ .......... ~-- le-tslatton wns passed a~lo~ng
construction in muc~ the same wa~ ~.,~a:.~ ~e~ current revenues. For
construction ~rk Jn progress to be ftna.~
. that ma take years ~ construct and place tn service, the
cap~tal projects .- ~ -.- *~ ntlv tn the final cost of the
ltal can figure stgnt..~a
cost of obtaining c~p ...... ,.~ .... -laths the cost sptral for the
asset. ~s financing aec~anl~ par~a.~
Shoreh~ nuclear plant. The N~ne Mtle Point T~ Plant has been f~nanced b~
LZLCO fr~ funds ~Jch are obtatned prtmar11~ fr~ borto~ngs under
revolving credit agre~ents. Presmably, the count~ ~uld ftnance 1ts
t Jn much the s~e way. ~f the Count~ ~te to acqulre
portion of the plan ..... ~...~.. ~¢a load ste~ plants,
Jts ~rt~on of the pla~t a~g_~.~ ~e.~:"~n~c~ton costs tncurred at
~uld reimburse L~LCO tot ~:s ~flar~ ~-
the ttme tttle ~s vested and Jt ~uld ¢onttnue ~ borrow for additional
construction costs capitalizing tnterest ~a~ents, unttl the plant was
c~pleted and put tnto the rate base. ~s ~uld provide L~LCO wtth a
large mount of cash ~th ~tch tt could reduce 1ts outstanding debt
plactng the c~pan~ Jn a better financial ~sttton than It wns previously.
-59-
It Should be noted that consideration of the ttmtng of the acqufsttton
of the Htne Htle Potnt T~o Plant could be rendered academtc due to the ttme
needed for extensive studles and reports prtor to actually muntctpa~tztng,
not to mentton the litigation that could occur afterward. ~ctual vesttng
of tt~le could be delayed for:years, as tt was tn the ~essena
municipalization case, by whtch ttme the plant weuld most 11kely be
operational. If thts were so, the County would therefore acqutre 1ts
portton of the plant along wtth the other generating plants at the
appropriate cost.
-60-
DAY£RMAN'S ASSU~TZO# #9
Assumption - LZLCO Service Area Costs a~e Equal
A m~lor premise of the Oaverman report ts that the cost of providing
power to the Suffolk service area is the same as providing power to the
remainder of the LILCO service area as a whole. From this premise, the
logical assumption was made that personnel, overhead and other costs should
be distributed on a percentage of sales basis between Suffolk and LZLCO.
.Implications
· The report assumes that allocatTbn of generating capacity based upon
sales is correct. Our findings, however, indicate that allocation of labor
costs, maintenance costs for t and D etc., based upon electric sales
understates the cost of providing services in the Suffolk area. If a
Suffolk MOd is created, actual staffing and costs will probably be higher
than forecast by Daverman.
Discussion
For many years, LILCO has had a unified rate schedule fOr providing
power to all service areas. This unified rate does not, however,
accurately reject the cost of providing services in all of LItCO's various
service areas.
LILCO's unified rates for service are analagous to the Suffolk County
governnent situation. Although several reports have demonstrated that the
cost of governmental services are higher in the more rural areas of the
County, the general fund property tax rate is unified throughout Suffolk
County. The more densely Populated areas of the County are thus in effect
subsidizing the cost of delivering services to the less densely Populated
areas of the County. In the case of LILCO's operations, the cost to
service a customer in the less densely Populated portion of Suffolk County
is obviously higher than in the more densely populated a~ea) of. LILCO')
service area. In addition to higher labor costs, transmlss~on losses in
rural areas are also higher.
To the extent that the cost of operations in Suffolk are higher than
the remainder of LItCO's operations, Suffolk rates are being subsidized.
If a municipalization of LI~CO's operations were possible with the same
theoretical operating efficiencies for both systems, Suffolk's rates would
nevertheless, be higher Just to provide service to the more rural and high
tourist areas.
Daverman indicated that they did not have the data necessary to study
LILCO's load management and for accurately detemining operating costs for
the Suffolk service area (pages 40 and 64). According to our discussions
with LZLCO, much of the data required to do a complete analysis of costs by
service area is not available in a usable format. LI~CO is however
beginning to develop cost data for its Suffolk operations. Unfortunately,
the true cost of Suffolk operations will only be known after several years
of providing services by a Suffolk MOd. The Budget Review Office
recommends that the Daverman data be expanded to the extent possible to
reflect the dlfference tn Suffolk or Nassau operations for labor, overhead,
trans~Isston losses and load factors.
-62-
DM£RYlAN°$ ASSU~TTON #10
Assumption - Outstanding Debt on LILCO's Assets
The Daveman report projected the emount of capttal requtred to
purchase LILCO's assets using t~o different valuation methodologies OCNLD
and RCNLD. (Generating plants ~ere valued at OCNLD under both
methodologies) It was ass~ned that tf Suffolk's share of an asset wore
valued at $1 mtllton the municipal uttltty weuld tssue bonds tn that mount
and the proceeds of the bonds tssued used to pay LZLCO for the asset
condemned.
Zmpltcattons
By ignoring LILCO's cost of debt servtce on outstanding, noncallable
bonded debt. Suffolk's acquisition costs may be understated. All debt
financed assets should be revalued to take into account the total weighted
cost of callable and noncallable debt issuances by L]LCO. The amount or
debt which a Suffolk munictpel utility w111 have to incur in order to
~urchase LILCO's assets could be either higher or lower than fore?st
ependlng upon the type, amount and interest rates attached to existing
debt tnstr~ents.
Discussion
The Daveman report dtd not constder the debt structure of assets tn
arrtvtng at thetr asset valuation estimation. Consideration of the debt
structure of an asset tn the valuation process would probably result tn
either a la~ge decrease or increase tn the ftnal payment which a Suffolk
HOU ~ould have to make to L]LCO.
Thts ts Illustrated by the following simplified and extreme examples:
Example #1 - Suffolk's avard ts undemsttmatod due to
LZLCO's extsttng debt structure.
In this example, an asset had been financed by LILCO using
$100 million of high interest (15 percent) noncallable bonds. Suffolk's
payment of $100 million for the asset would be inadequate if LILCO could
only invest the award at lower (10 percent) prevailing interest rates.
Although this is an extreme situation, LXLC0 would be losing $5 million per
year on the difference between the existing debt service, and the amount it
could receive from investing Suffolk's award. In order for the Suffolk
award to be invested and result in an equal revenue stream to meet the debt
payment requirements of LILC0, a premim payment would be required. In
this example, between 26 to 40 percent premiem would have to be paid to
LXLC0 through a consequential demage award to equal LILC0's higher debt
payment.
-63-
Example #Z - Suffollc's award is overestimated due to LZL¢O's
debt structure.
In thts example, LILCO's wetghted cost of capital for an asset ts
below the prevailing interest rates. Payment of $100 mt111on for an asset
would enable LILCO to invest those funds at 12 percent while only paying
8 percent in tnterest on outstanding funds. In this instance, there would
be no reason for LILCO to exercise the call opttons on outstanding bonds
unless required to do so by statute. Under the assumptions for thts
example, Suffolk would have paid LILCO as much as 50 percent more than the
value of the asset. ,~.
The general rule underlying these examples is that:
It ts tn LILCO's tnterest to tnvest the condemnation awards tf the
proceeds from the Investment exceeds the cost of the capttal used to
construct the asset.
A premium will be required in the condemnation award if LILCO's cost
of capital and the call premiom on debt service exceeds the emounts that
could be received through the investment of Suffolk's condemnation award.
As stated, the examples used represent extreme simplified cases for
Illustrative purposes. In actuality, the financing techniques and methods
used by utilities to finance assets are much more varied than encountered
in municipal operations. PSC rules for asset depreciation, taxes,
marketability of debt instruments, and when costs for an asset may be
included in the rate base, affect the type, amount and repayment schedule
of LILCO's capital structure. Due to these complexities, it is possible
that an asset worth $100 mtllion which is 20 percent depreciated (has a
book value of $80 mtllton) may have appreciably more or less outstanding
debt than the book value of the asset.
-64-
DAYERR~'S ASSUMPTZON #11
Assmptton - [lectrtc Operations Ma~ be Selecttvel~ Condemned.
As part of the municipalization analysts, Daverman and Assoctatesw
P.e. explored the feasibility of acquiring LILCO's natural gas fectlltles
in Suffolk County. Based on their analysis they determined that Suffolk's
acquisition of gas facilities was not economically Justifiable due to the
uncertainty that cost savings would be realized by gas customers. They
determined that LILC0 continue to operate and maintain its natural gas
facilities in Suffolk County with the County only acquiring electrtc
facilities. ~-~.~. ..
~mplications
1. The County can selectively choose to purchase LILC0's
electric facilities without acquiring the natural gas components
of LILCO operation.
2. The County would not be required to pay damages to LILC0
for taking the more profitable electrtc facilities leaving
LILC0 with the less profitable natural gas facilities.
3. Apparently, no additional operating costs were assumed to be
incurred either by the County or LILC0 because of dividing
ownership of electrtc and gas facilities in Suffolk. The
report therefore, appears to assume that similar economies
of scale would exist under stngle or divided ownership.
Discussion
The analysts prepared by Oaverman and Associates, P.e. concerning the
acquisition of natural gas facilities in Suffolk stat~s that there would be
ltttle or no economic advantage to gas customers in the County, if these
facilities were acquired. This is due primarily to the volatility of
natural gas pricing.
Approximately 33 percent or 132,000 of LILCO's gas customers are in
Suffolk County. In lg82, Suffolk County consumed an estimated 40 percent,
or 20 billion cubic of LILCO's entire gas sales. It is estimated by
Qaverman that the capital requirement necessary to purchase gas facilities
~n Suffolk would be $202,3g$,211 under the OCLO valuation methodology and
$543,154,3~6 under the RCNLO valuation methodology. These estimates are
based on certain assumptions concerning the degree of severance required
between the LILCO and Suffolk systems as well as the accuracy and
completeness of the data available to the consultants during the
preparation of the report. Apparently, the cost of acquisition of the gas
system and the resultant cost of gas to customers is not as significant as
the relative cost of bulk gas supply when determining the value of
municipalization. A municipally operated gas facility would be subject to
the same price constraints as LILCO and would not have any advantage in
purchasing gas from suppliers. The same market forces that affect LILCO
would also affect the County. Daverman prepared cost estimates utilizing
prices of three major domestic gas suppliers using OCLD and RCNLO valuation
-65-
methodologies. Of the stx scenarios, only one yielded a lower revenue
requirement for the municipal agency and that was only under the OCLI)
valuation. All other scenarios show the municipality paying a higher price
per MCF than LILCO. This led the consultant to conclude that, "the
apparent economies to be gained due to municipalization of the gas utility
appear to be minor and any assurance that these economies can be maintained
is not possible..." (p. 256). Thi.s is because gas purchases alone comprise
approximately BO percent of the ne~ operations and maintenance Cost
associated with the gas system. This, when coupled with the debt service
associated with acquisition, creates a higher per unit cost for the
municipal agency.
Although there may be questton'~ble economic ~ustificatto for the
County to acquire LZLCO's natural gas faciltttes, it may be unreasonable to
assume that Suffolk would not be obliged to pay damages to LILCO for taking
that portion of its property that generates the greatest income (electric
operations) leaving the company with the less profitable and sometimes~ more
troublesome gas system. The County's research of the legal aspects or
municipalization should include potential damages that might result if the
County only condemned electric facilities leaving LILCO to operate the gas
system.
At the present time, LILCO is able to provide certain economies of
operation because it controls both the electric and gas operations in the
County. If the two systems were placed under separate managerial control,
LILCO would be required to maintain meter readers for its gas system while
Suffolk would have its own staff performing a similar task for the electric
system,' thereby creating an overall increase in operating costs. While it
may be convenient to assume that one company will perform services .for the
other, in reality it may be difficult. Similar dtseconomies ot scale would
result in splitting the billing, accounting and data processing systems.
Suffolk residents using gas would receive two monthly bills instead of one
for utility services. Repair crews would not be affected, however, since
LILCO maintains separate personnel to maintain the two systems. However,
the ability to mobilize personnel and equipment during emer.qencies would be
compromised. In summary, separating ownership of gas amd electric
facilities would result in higher overall operating costs than now exist
under single ownership with LILCO.
-66-
ISSUES
Issue - Tvo Valuation 14ethodolo91es Were Used
The Daver~an report used t~o methodologies to establish a range of
costs Suffolk ~ould tncur tf tt condemned LILCO's assets. The ftrst
methodology used was ortgtnal cost less depreciation (OCLD). Basically,
OCLD tS ~hat ts referred to tn accounting as 'book value' whtch ts the
asset value reflected 1n the company's accountlng records. It represents
the ortgtnal cost of plactng the asset tnto servtce less the accumulated
depreclatJon associated wtth the a~t. Costs obtatned from the accountJng
records ftled wlth the PSC ~ere adjusted ustng the stratght 11ne
depreclatton method and the useful servlce 11fa of the asset tn question.
Thts ts the method used by utilities tn determining the rate base against
whtch the allo~ed rate of return ts applted to yleld a return on 1nvestment
for the uttllty. The total cost of acquiring LZLCO's assets under the OCLD
methodology, Including all contingencies as ~ell as consequential and
severance damages as presented 1n the report ranges from $96g,665,000, tf
no costs for Shoreham are assessed, to$3,016,225,000, 1f Shoreham opens
and ts tncluded 1n the rate base.
The second asset methodology ts referred to as reproduction cost new
less depreciation (RCNLD), thts method estimates the current cost of
replacing LZLCO's assets less a factor for depreciation of that asset.
Depreciation applled was calculated on the stralght 11ne ustng the useful
servlce 11re of the asset. The total cost of acquiring LILCO's assets
under thts methodology, tncludlng all consequentlal and severance damages,
ranges from $1,453,425,000 tf no costs for Shoreham are assessed, to
$3,4gg,ggo,o00 tf Shoreham opens and 1s tncluded tn the rate base
(Table 5-2).
The cost tncluded to purchase Suffolk's 48.2 percent share of Shoreham
was $1,542,000,000 and under RCNLD the cost 1ncluded was $1,569,¢00,000
(page 188). These costs ~ere based on a total estimated cost of the
Shoreham plant of $3.2 b1111on. Thls was the projected plant cost at the
ttme the Daveman report was prepared. However, pro3ected delays In
openlng the plant may push costs to over $4 b1111on.
Two other valuation approaches ~ere reviewed by Daven~an and
Assoclates durtng the preparatlon of the report, but ~ere not used. They
tncluded capttallzed earnlngs ~htch attempts to estlmate a reduction tn
LZLCO's future earntngs tf Suffolk ~ere to takeover 1ts share of the
assets. It was stated that the value estimated ustng thls approach
equalled the OCLD valuation method and so was not used. The falr market
value method was also considered. Thts approach attempts to ascertain ~hat
assets ~ould be ~orth 1n an open competlttve market wttha large n~ber of
~lllng buyers end sellers. This methodolgy could not be pursued, however,
because there ts no open competlttve market for electrtc uttllty assets
~h~ch ~ould establlsh such value.
The t~o valuation approaches used tn the report attempt to esttmate
the reasonable costs Suffolk ~ould tncur, tf Jt purchased or condemned
L~LCO's assets. However, there can be a w~de dlvergence of op~nfon
concerning the value attached to particular assets. Thts 1s especially
-67-
true wtth the RCNLD method. [t ts quite posstble for two groups to
esttmate entirely different amounts for the same asset. If Suffolk were to
value LILCO's assets, tt ts likely that tt would arrive at a lower dollar
value than would LILCO. This ts because asset valuation ts more art than
sctence and because there can be differences of oplnton as to the current
condition of an asset. Asset depreciation could be computed ustng any of
three methods. It could be the total depreciation actually expensed by the
company for each asset, or the pro rata percentage of the asset's estimated
life which has been used or tt could be observed depreciation. This latter
method does not recognize etther~e re~alntng estimated useful life of the
asset or the amount of deprecta~f&n expensed tn th~ company's accounting
records. ~nstead tt attempts to establish a depreciation amount based on
the condition of the asset with an estimate of how long the asset could
rematn tn servtce. The theory ts that assets properly maintained have
longer service 11yes or may not have experienced severe deterioration.
Obviously, applytng thts approach can yield markedly different values
because the calculation becomes a subJectfve question of Judgement arrtved
at after on-stte observations are made. Zn the ~ssena municipalization
case, both the Town of Messena and the Ntagara ~hawk Power Corporation
computed slmtlar replacement cost new for the assets to be taken, but tt
was tn the calculation of depreciation that the two arrived at wldely
divergent asset valuations. 14essena was wf111ng to pay approximately
$1.8 million for the assets tn 1ts service area and Niagara ~hawk
petitioned for approximately $7.5 mtllton. The ftnal award by the Court
was set at $4.7 milllon Including all consequential damages.
The Pessena case, ts Interesting tn that the award set by the court
approached, the RCNLO value. Thts Judgement corresponds to statements made
by Suffolk's attorney tn-charge of condemnations, afftn~1ng the principle
that accounting depreciation ts not generally recognized tn condemnation
cases. Therefore, tt would see~ more ltkely that asset valuation w111 be
based on observed depreclatton tf accepted by the courts. This ~ould have
the effect of negattng the OCLO valuatfon approach entirely.
It also casts doubt over the RCNLD valuatlons computed tn the report.
These estimates could not take observed depreciation into account.
Therefore, an RCNLO valuation made after field observations could be either
greater or lower than that estimated by Oaven~an. To w~at extent tt might
change can only be known after a careful appraisal ts performed of the
assets tn question. At thts time, we can onl~ potnt out that the
valuations used ~n the report ma~ or may not be accurate.
-68-
zssue- Lover Rates tn Suffolk
The Daverman report forecasts that under all scenarios presented,
within five years, a Suffolk municipal uttltty's electric rates would be
lower than LItCO's rates. This is based upon a comparison of the projected
electric rates of tItCO (as a whole) for the periods of 1985 to lgSg with
projected rates for a Suffolk MOu. Total revenue requirements for LILCO's
Suffolk operation have been estimated and compared to a Suffolk uttltty's
revenue requirements (Oaverman page 17g).
A price comparison per kilowatt, hour (KWIt) was made between tItCO
operations and Suffolk' s operattons.~ A price elasttctty of .5 percent was
ass~ed (page lg2) in the projection of rates for both LILCO and a
municipal utility. No price comparison was made between a Suffolk MOU and
a remaining LILCO system after municipalization.
Discussion
Presentation of a price projection per KWH between LILCO's current
operations and a Suffolk MOU does not take into account the possibility
that LILCO's rates may be lowered after municipalization, while Suffolk's
rates may, depending upon the final valuation methodology used, be
significantly higher than those forecast. Application of the principle of
price elasticity to a higher than forecast Suffolk rate would serve to
decrease electric sales thereby further increasing Suffolk's rates (rate
spiral). Mitigation or reduction of LILCO's rates would conversely serve
to increase their electric sales and further lower their rates. Both
situations would affect peak load needs and the configuration of generating
capacity.
As previously discussed, there ts precedent that a portion of LILCO's
condemnation award may be required to be distributed by LIL¢O to its
ratepayers. If this is done, in the form of rate relief, a Suffolk
condemnation of LILCO's assets would result in Suffolk ratepayers
subsidizing electric usage in Nassau and Queens. Even if the PSC requires
the distribution of a portion of the condemnation award to all previous
LILCO ratepayers including Suffolk, Suffolk would still be subsidizing
Nassau customers.
It is probable, that Suffolk will have to pay an mount above OCNLD
and close to RCNLO to acquire the generating plants. For each billion
dollars of additional condemnation award, Suffolk's debt service cost will
increase by $108.3 million (at 10.25 percent interest rate). If this
amount is added to the projected award, electric usage under each scenario
would decrease by various amounts depending upon the percent of increase in
the total revenue required.
Increases in a Suffolk utiltty's electric rates due to higher .
condemnation awards would push the breakeven point of municipalization to a
point further in the future than the five years shown by Oaverman. If a
higher condemnation award is given to LILCO, it becomes possible that
although Suffolk's rates would be lower than they would have been without
municipalization, they may also be higher than LILCO's Nassau's rates will
be after the municipalization, or that Suffolk might never obtain lower
rates.
The emount of the condemnation award directly affects three
interrelated financial factors which determine the economic advantage of
municipalization. These factors are:
1. ~ebt Service
The emount of debt service which must be paid by the Suffolk utility
directly affects revenues which must be received and consequently the rates
that must be charged by Suffolk.,~, ..
~. Rates
Increases in revenue requirements result in higher rates (assuming no
growth in electric sales). Rate increases which exceed the projected
Inflation rate (6 percent) have the effect of further increasing rates by
reducing sales (price elasticity). When this economic principle of price
elasticity is taken to an extreme point, the utility develops a rate
spiral.
3. Breakeven Point
As the condemnation award increases the breakeven point where the net
total revenue requirements of LILCO equal Suffolk's, moves further out in
time. The breakeven point of electric rates moves even further out in time
due to price elasticity.
These issues are more completely discussed in a section entitled
Breakeven Analysis. The Budget Review Office believes that if the
Leglslature wishes to proceed with municipalization, the consultants
computer model should be used to project:
a. LILCO's rates without muni~ip~iz)~ion.
b. Suffolk's rates with municipalization.
c. LI~CO's rates after municipalization.
These three rates should be forecast using higher condemnation awards
in order to accurately assess breakeven points for each scenario.
-70-
Issue - Valuation of a Gotn~ Coo·em_
f u oinq concern" assets such as operating
Determining the value o g ..... '--s etc. will he
forms and records, billing procedures, computer s~u,, ,
extremely difficult in a condemnation of this size. The courts' decisions
will play a major role in the final determination because they not only
assign a value to particular assets, they can choose which assets do in
fact have a value. This means that neither the County nor tltCO will be
able to finalize the valuation issue until well into the condemnation
process.
~mpltcatto~n ...... J~ntn a very brdad ~ange-._)~esi~t
Gotn concern vatues may_~=r$ w, ,oe~ntine LILCO's pOSl$~on;, ,-
the uppergend of the range (probably rep ...... of
accepted by the Court, will substantially add to the total cost
condemnation, while assets at the lower end (the county's.~)t~ion)
have small actual values, but carry significant consequential oamages ~na~
will also add large costs to the condemnation. This unknoWn final value
presents an additional risk to the County.
Discussto~n
enerally anything of value other than land,
Going concern assets, are g .__~ oe~arately. Oaverman has initially
ich are va~ueu a ~
olant and equtpment~ wh .... ~# .~ ~c ~ercent of costs other than
~ecemmended that a ~contlngency Tu.u v..~ v for going concern assets.
acquisition of real property be available to pay
This amount ranges from $10g.6 million to $$41 million to cover
tbed. ~owever, the court, in
tures under the ~arious scenarios descr o acco t either party's
t~ec~,-- ^, -he o--os, rig claim, does ~ot ~av~.t ...... ~- --se the going
valuation or list of asse:s, rot · F ,
r valuation purposes were: property records,
concern assets allowed fo ords systems, procedures, forms
customer information records, operating rec ,
then, the value
and maps. and the cost of acquiring rights-of-way. Evep . $3,105,732) was
med (Town-$160,O00; Niagara Mohawk (NIMO)
e~ch part~_cla~ ..... ~-ed indenendently by the court at $410,000.
d~sregaroe~ ann ue~e~-,,- r
1aimed by NIMO were throWn out as having no
Obviously, some.of ~he_~t~_~_,,,~ case. 'Franchises," yalue~ ~.~ ,^
lu~.~,- _ ....... z...a [O De ~mp~] V~,'''-tS ~ -
company at $576,~/z, we~· [u~, ..~.. 'Trained personnel" was Oho:net
obtain and theretore hmo no rea~ -~,-~,
item which was given no value by the court. The number of employees
involved in the Massena case was so small, that no value could legitimately
he nembers of employees tnvolved in the LILCO case, however,
be assigned. T the emount to a very large
should not be disregarded ~o easily beca~se.~.~fore have a significant
proportion of LILCO's total emptoyees an~, ~-~ , large
value. Thus, an ite~ with no value in one case may in fact have a
impact in another.
Another tssue tnvolves taktng a portton of a going concern's assets
and trytng to detemtne 1ts value. Taktng half an operating system may
render the remaining system useless or too expensive to operate ~tth Just
the remaining cemponents. Also, the court found tn Hassena that 'tt ts
~mproper to use a percentage (of the value of 1rems taken) as a method of
valufng going concern assets.' Parttal condemnation, then, could ~ead to
htgh costs for consequential d~ages and additional htgh costs to the
County to redestgn the system tn an attempt to make tt useful after
condemnation ts complete. In etther case, ftnal gotng concern value ~1~
be hard to deten~ne before the fact.
-72-
Issue -The Cost of Shoreham
Assessing the cost/benefits to be dertved from a municipalization of
LILC0's electric operations in Suffolk was made very difficult due to the
uncertainty surrounding Shoreham. In order to reduce the uncertainty
regarding Shorehm and increase the reliability of their forecasts, the
consultant's report developed six scenarios to deal with the Shoreham
Nuclear Power Plant.
Subsequent to the issue of.the OQverman report, the professional staff
to the Publtc Service comtsslon ha% issued an audt~ of LILCO's management
of the Shoreham project. That report~proposes that'LILCO, and not the
ratepayers, be responsible for approximately $1.55 btllion of Shoreham's
cost. Under the proposed PSC's staff plan, the LILCO ratepayer would be
responsible for no more than $2.5 btllton of Shoreham's ftnal cost.
Although the PSC staff report is advisory to the seven Publtc Service
Conelssloners, it does provide insight into what will probably be a final
determination of the Shoreham situation by the PSC.
If the PSC staff recon~nendatton is that the LILCO ratapayers should be
responsible for $2.5 billion of the planta costs is taken at face value,
those scenarios proposed by Daverman which hold Suffolk harmless for costs
associated with the nuclear plants are unlikely. The table below
smmnarizes all scenarios proposed by Oaverman.
Shoreh~m
Scenarto Open
! Yes
2 Yes
3 Yes
¢ cl osed
5 cl osed
6 closed
Suffolk Responsible
for a Shoreham Award.
Yes tn rate base
Yes through damages
No damages assessed
Yes damages assessed
No damages assessed
No damages assessed
Scenarios 1,2 and 4 which include a payment by Suffolk for the
Shorehem plant are the most likely. Of those scenarios, the Budget Review
Office believes that scenario 2 should be discarded since it is
unreasonable and unduly penalizes a municipal utility. The only situation
under which scenario 2 conditions (buy a portion of the plant but_receive
no electricity from it) would exist is if Shorehem experienced a long-term
catastrophic accident after operations began (like Three Mile Island).
Scenarios 1 and 4 are therefore the most likely Shoreham outcomes in a
municipalization process. The question then becomes, if the PSC staff
recon~nendations are accepted, how wtll that affect the economic feasibility
of municipalization? Obviously, the most accurate and consistent
projection would be derived from using the consultant's computerized model
to project revenue requirements for the two utilities . Without using the
model, it is only posstble to infer whether or not the economics of
municipalization would be negatively or positively impacted, but not the
degree to which it would be affected.
-73-
If the PSC staff recommendations are ~ccepted a~
economtc advantages projected by Oaver~an tot scenarios ~/ana q, wl~ be
reduced. T~ts Is due to the fact that the PSC ts only setttng a lower
value upon Shoreham for rate setttngs purposes. The total cost of the
plant will not change, based upon the PSC findings, Just the amounts that
can be recovered through electric rates. By excluding a portion of
Sboreham's cost from the rate base, LILCO's electric rates wtll be
"artificially lowered." In effect, the true cost of generating electricity
w111 be subsidized by the uttltty from 1ts retatned earnings. This ts an
tlon not available to a municipal utility. Proceeding with
~ntctpaltzation prior to resolution of the Shoreham issue makes
impossible to assess with any acL~u~acy the potential impact of
muntclpalizatton on electric rates tn Suffolk County.
-74-
Issue - The Oaverman analysts uses a five-year ttme hortzon spanntng th.e
oears i~u~ ~nrougn i~o~. ihe ~oun~ ~ould~a$$,~e o~ner~h! an~ u
The Daveman report analyzed and presented revenue requtraments for
both the municipal uttltty and LILCO over a pertod of ftve years beginning
Janua~J 1, lgB$ at whtch ttme tt was assumed the County ~ould begtn
operating a municipal uttltty. The time hortzon used was sufficient to
Illustrate that a municipal uttltty could operate at a lo,er cost per
ktlowatt than LILCO under a11 stx scenarlos, tf the many assumptions
contalned tn the report materialized.. It was outstd.e the scope of the
consultants report to examtne cost'-~arpacts beyond the five-year ttme
hortzon for etther Suffolk or LILCO.
Implication
1. Because of the relatively short ttme hortzon of the report,
tt was unnecessary to consider potential fundtng for
expensive capttal additions such as construction of
or replacment generating stattons for etther a Suffolk
County operated uttltty or
~. The relatively short ttme frame does not allow for an
assessment of the long range financial and planntng tmpact
of municipalization of Suffolk's electrtc uttllty systam.
It ts generally recognized that the typtcal planntng hortzon
for electric utilities ts ten to twenty years.
3. Municipalization ts assumed to be accomplished expeditiously
for report purposes. In actuality, however, acqutsttlon
could take several years. Transition costs ~ould necessarily
be htgher tfa protracted condamnatton proceeding were to occur.
Discussion
Performlng a 'long-ter~ cost analysts may have been outstde the scope
of the Daveman report, however, tt should be recognized that
municipalization of electrtc facilities Is a longotem enterprlse.
Therefore, tn our optnton, the five-year ttme hortzon does not allow for
the Inclusion of sufficient tnformatfon to assess the full potential lm~Rct
of municipalization. Because the ttme frame ts short, the need to prov~ae
for the construction of new generating plants to tnsure sufficient system
capacity, ts not addressed. The need to butld new generating capacity w~11
most 11kely depend on t~e outcome of the Shoreham lssue. Obviously, having
the plant on-line weuld Indefinitely postpone the need to acqutre
additional capacity. Further decisions concerning the ttme to place a
plant tn servtce, the type of generation, capacity, locatton and financing
presumably could be made ~otntly by the two utilities, tf they were to
share generating facilities. However, thts does not have to be the case.
Both utilities could go thetr separate ways. Irrespective of the exact
nature of a spl~t should tt occur, a study of future bulk power
requtraments and the need to butld and ftnance new generating capactt~
should be performed prtor to such spltt. It must be recognized that the
ttme horizon for the construction of new capactty ts at least ten years.
-75-
Thts requtres utilities to forecast growth and energy requirements over
ten, t~enty and even thirty-year ttme horizons.
It should be noted that the ttme hortzons used tn the Daverman report
do not reflect the actual ttmtng that the municipalization effort wtll
requtre. The planning and condemnation ~rocesses could take several years
w~th the timtng of the acquisition being affected by probable 11ttgatlon on
the part of LILCO. The data and results presented by analyzing
municipalization over the years 1985 through 1989 should therefore only be
considered as representative of ~Osstble results of that process.
-76-
Zssue - The Possibility of a Nassau/Suffolk Municipalization of L2LCO's
taCll1~les da$ NO~ ~oflsld~,~d~
The pre-feasibility analysts performed by Daverman and Associates.
P.C. concerning municipalization of electrtc uttllty facilities tn Suffolk
did not present consideration of a Jotnt Nassau/Suffolk municipalization of
LXLCO's facilities. The study only requtred analyses of a power servtce
deltvery optton for Suffolk. However, tt becomes apparent durtng our
revtew that a bt.County municipalization effort could eliminate much, tf
not all, consequential and severance damages ~tch woul~ be pazable t~...
LXLCO as a consequence of municipalization- Zt would a/so tend to optimize
operating economies by acquiring a~lngle or9anlza~4onal unit, thereby use
of L]LCO's extsttng organizational structure, professional staff,
accounting and data processing systems as well as matntaln optimum power
generation mtx.
Discussion
To the extent that the numerous assumottons.¢ont~tned tn the.Daverman
report hold true it would appear to be ecohomlcalty auvantageous ~o
muntcipalize electric facilities in Suffolk County. To do so would entail
splitting ownership and control of LILCO's generating, transmission and
distribution facilities in Suffolk from the remainder of the LILCO system.
Such a partial taking of L%LCO's assets by Suffolk could require that the
County pay costly consequential and severance d~ag9s to LILCO. It Could
also create, in our opinion, dtseconomtes or scale Dy creattng two
utilities to provide the same servtce currently now being provided by one.
Duplication of certain administrative and operational functions is bound to
result from the split which could translate into higher combined operating
costs than under the present system. The Daverman report however is only a
prefeastbiltty analysis of the municipalization of electric facilities in
Suffolk. Additional analysis must be performed in order to confirm or deny
with some certainty the conclusions reached in the report. However, if it
makes economic sense for Suffolk to munictpalize electric facilities then
it would seem (prima facie) that the potential economic benefits could be
enhanced if Nassau County Joined in the municipalization effort.
Consequential and severance damages could be avoided.b~ l~QviQg the L~CO
system intact. The transition under a bi-County municipalization wout~
also presumably be ;moother and less costly. Some arrangement would have
to be made to municipalize or sell that portion of the LILCO system
extending into Queens County. In addition, it might be advantageous to
acquire tItCO's natural gas system as well (see section on natural gas).
In any case, municipalization would seem to make more sense if done as a
bi-County project rather than Suffolk acting unilaterally.
-77-
~ssue - Exogenous Factors Affecttn~ Municipalization
Daverman has concluded that "attractive possibilities exist for the
municipalization of the electrtc uttltty facilities ~thtn Suffolk County."
In comtng to thts conclusion, they had to make n~erous ass~ptions tn the
development of thetr presentation. The results of thetr study should be
vtewod cautiously as raptdly changtng circumstances could significantly
affect the valtdtty o~ Daveman's conclusions. ~tters have been changtng
so qutckly, for Instance, that a recent request to the Publtc Servtce
Commission for tnfomatton resulted tn a response Indicating that two of
three models use~ by Dare,man have been purged from their files and that "a
more current anamysts would show~gniftcantly different results.' Our
review indicates that there are certain exogenous factors to Dave~man's
financial projections that are presently in a state of flux or at least
tndetemtnate at this time. Those factors which could have a significant
bearing on the feasibility of municipalization follow;
Allocation of Shorehem's Cost
As a result of a two-year $1.6 million audit, the staff of the State's
Public Service Commission found that the Shorehem Nuclear Power Plant could
have opened in August, lg82, if the project had been properly managed. The
commission's staff has concluded that because LILCO g~ssly mt~anaged
the construction of the plant from. its inception, LILCO should abso~ at
least $1.$ billion of the plant's $3.8 billion projected cost. The
c~lsston's report also concludes that if the price atanl goes any higher
than $3.8 billion, it should be LILCO's stockholders not its customers
who have to pay the additional costs. If the seven-member Public Service
Commission approves its staff recommendations, LILCO's ratepayers would
only be required to pay $2.3 billion for Shorehem irrespective of how much
the plant ultimately costs. Since Dare,man estimated that the completion
of Shorehem would cost $3.2 billion, adoption of the Public Service
Commtston staff's reconmendattons would mean a potential ratepayer savings
of $900,000,000 under several of Dare,man's scenarios. This would result
in about a $72 per year savings for the average residential electric
consumer. The potential savings to Suffolk County ratepayers could
translate into a sizeable loss for a Suffolk municipal utility and thereby
render Oaveman's economic feasibility projections unteo~ble..~n.effect,
municipalization of LILCO's electric utility system cou~ result in a
Suffolk municipal utility sharing the costs of LILCO's mismanagement.
Nine-Mile Potnt Two Batl-Out
LILCO's problems with the Nine Mile Point Two Nuclear Power Plant are
very similar to those it faces with the Shoreham Nuclear Power Plant. The
Nuclear Regulatory ~ommission recently issued a highly critical audit of
the u state Nine Mile Point Two plant ftndin~ 'major deficiencies" in
x-fa iPn of welds, and 'significant problems" in the plant's quality
Y g 'S
control program. At the current cost estimate of $¢.2 billion, LILCO
share would be $?S6 million, although a new higher cost estimate for the
project is expected. LILCO recently failed to make a $1.1 million payment
it owed on the plant which is part of $180 million LILCO would owe this
year. The Governor has proposed that LILCO be relieved of its lB percent
share in Nine Mile Point Two. In order to give the four remaining
-78-
utilities tnstant cash to ptck up LILCO°s share, the Governor ts calltng
for the New York Power Authority to contractually obltgate t tself to
purchase power from the plant. The Oaverman analyses assmnes that Nine
Htle Point Two will be completed by 1988, that LILCO will retain 18 percent
ownership in the facility, and that a Suffolk municipal uttltty would own a
48.2 percent proportionate share. Based on these assumptions, it would
appear that Oaverman has provided for a total project cost of $5.6 bt111on
of t
be oblt ated to pay about $1 btllton to be shared
~tch LILCO would .g. . ost a roxtmattng
. with a SuffOlK municipal utility at a c PP _
proportion__a_tely ..... ~ a~-~ts itself from sharing in the co. sts
$4g4,0OO,OUu: _~T ~XI..~.~U u..~a . would favorably ~mpact
Nine Mtle Point Two Nu~l.ear_Po.w.e_r_Pla. n..t~._t.t
~;~s for both LILCO an~ a ~uttolK ~T~y. .'
Marcy-South Transmission Improvements.
The New York Power Authority has proposed the construction of a
ransmtsston 1the between the Town of Marcy, near Utica,
345 ktlovolt (KV) t nt . The authority also
and the Town of East Ftshktll in Outchess Cou ~
proposes to add another transmission 1the from the Sprain Brook Substation
Road Substation in Oyster Bay on Long Island. The
in Yonkers to th.e .Sh. ore _ are needed T:O alleviate
power Authority believes that these improvements
bottlenecks in the existing transmission network so that the state's
e their dependence on expensive oil-fired electricity by
uti. 1 t t.ies, ca.n _r_e~d~u?. -~wer from Quebec and more economt.cal elm. ct.ri
using nyaroe/ec~r~ ~ _ ., .~ ...... *-~ ~oneftts tm nro~ecteo
generated within the StaT~. .~T ~,!~ ~^~.~.~''.' ".. ~_ rec~tve -ower from
O0 000) is snareo equa~iy oy a~ woo
savings of $18G,0 , ........ ~a ~,~ ha marainall¥ effected. If a
the Power Authority, ~ztuu wu,,~ ~...~ ........ would receive a
proposal put forth by the Governor is implemented, LILCO
disproportionate share of the savings over the crucial years when it needs
help. .In return, LILCO would forego savings in later years when it is over
the crisis point. Dare,man's findings indicate that even with a
Marcy-South transmi ssi on network, LILCO' s system tel tabtl i ty constraints
may inhibit any significant additional transfers from occurring. Oaven~an
estimates that a Suffolk municipal utility would only be able to increase
m 20 ercent to 25 percent of its total energy
its power purchases, fr~_ ~hPnreham uclear power Plant does not operate.
requirements assuming ~ne ......... N
If the Shoreham plant is brought on-line, Dare,man believes the amount of
non-fin~ energy purchases would be reduced to less than $ percent of the
County's requirements. Xf the decision is made to reallocate cheap
hydroelectric power to the Long Island region, residential ratepayers may
nevertheless receive little if any benefits from the change as the power
Authority may choose to assign a greater portion of its cheap power to
specific companies such as the Grun~an Corporation or to industrial ft~ms
in general. Because of all these uncertainties, Oaverman did not include
the possible effect of obtaining cheaper power.
Capital Asset Valuations for Rate Setttn~
How the New York State Public Service commission will rule on the
osts (OCLO, RCNLO, or other cost basis) a
question of.~at, ac~q.u~t??.t°.n..c~.~.,~ in its rate structure may effectively
Suffolk municipal ut~m~ ~o. ·
preclude the utility from the bond market. Without a definitive answer
from the Public Service Con~tssion, rating firms may be highly reluctant to
rate any proposed bond issue. Counsel to the Public Service Commission has
7g
advised us that tt would be Inappropriate for the chatrman or any
commlsst, oner to express a posttton at thts ttme on the tssue of whether a
Suffolk municipal uttltty will be allowed to tnclude the full cost to
acqutre LILCO's property tn 1ts rate structure. Because our questton
tnvolves matters of poltcy whose resolution would 11kely depend upon the
specific factual context in which the questton were ratsed, the
commission's counsel believes that 1ts ultimate resolution will 11kely
occur durtng subsequent rate proceedings. It would appear then that unttl
the courts make their dectston on the ftnal settlement prtce, the
disposition of thts tssue will remain unanswered. Therefore, any actton
that necessitates the tssuance of bonds to make an tntttal tender
(down-payment equivalent) to LIL~J)~may be unattainable as potential
Investors may deem not knowing whether there will be sufficient operating
revenues to enable a Suffolk municipal utiltty to meet 1ts ~eb~ servtce
requirements too great a risk. Oaverman assumed tn 1ts analysis that the
Publtc Service Commtsslon would gtve a favorable ruling and thereby allow
the full cost of acquisition to be tncluded tn a Suffolk munfctpal
uttllty's rate structure.
Tax-Exempt Ftnanctn9 for Shoreham
,~.~a ~+a*a~ Kenator Alfonse O'Amato is presently working 9n.a plan
- - Y'''~C~'~-~-~ c~oreham Nuclear Power Plant by obtaining an
tO help LXLbU re)~.o.u~ ~.~ ~,, tlt from selltn
exemption from Federal law that prohibits the ut ty g
tax-exempt Industrial development bonds. If the plan works, it could save
LILC0 at least $100 millton in debt service payments annually. To
implement the plan, approvals must be obtained from the Internal Revenue
Service, the State Legislature, and the United States Congress. At the
present time, Federal statutes prevent LILCO from taking advantage of this
potential opportunity because the law prohibits any utility serving more
than two counties from selling tax-exempt bonds. Senator o'Amato's
proposal weuld amend the original legislation to indicate that the law was
not intended to preclude a company such as LILCO from making use of
tax-exempt financing where the company matnly serves two counties. Without
a favorable ruling from the Internal Revenue Service, LILCO would be faced
with the alternative of having to sell its franchise area in Queens. Even
if the necessary approvals are received, LILCO is concerned that a tax bill
currently under consideration by Congress could scrap the whole refinancing
plan because of a provision in the tax bill that would put a cap on the
amount of industrial development bonds each state will be allowed to issue.
According to a spokesman for LILCO, the company would issue at least
$2 billion which would use up more than three-fourths of the money that
could be applied statewide. Oaverman's financial projections for LILCO do
not include the financial savings that could result from a tax-exempt
refinancing plan. Therefore, implementation of such a plan would put
Oaverman's economic feasibility projections for municipalization in a less
favorable light.
-80-
The Daverman report ts based upon numerous assumptions. Ass~p~tons
~ch ma~ o~ ma~ no~ ~ld up. I~ ts ~ss~ble ~ assess ~he econ~tc
~conf~dence level~ of the pro~ecte~ ~esulta of these ass~pt~ons. Chart tl
presents thts "confidence level" as ~11 as the effect of htghe~ tntarests
costs u~n the econmtc viability of municipalization for each scenario.
Specifically, the exhtbtt shows the percent of additional bonded d~t,
for ht her condonation awards and st111 not
~tch ma~ be tssued to a~ g LCO's. ~e
cause a Suffolk uttllty~s revenue requtt~ents to exceed L]
analysts used n~nal dollars and vatted both the cost of capftal (Interest
rate~ for Suffolk and the n~ber off, ears tt ~uld take for the ~tal
revenue requtrments of Suffolk ~ e~al the total ~venue requtr~ents of
CO. The breakeven potnt, represents that ~Int tn ttme ~en revenue
L]L trments for a Suffolk uttltty ~uld equalrevenue requtred for L~LCO
requ
over the s~e n~ber of ~ears.
Referring ~ Chart ~1, tf the Suffolk Legislature used a crtterta of a
two-~eat bteakeven potnt (Suffolk's expenses to equal L~LC~'s total
ex enses tn t~ yeats) then a Suffolk uttltt~ could tssue ~ oercent more
de~t than Oaveman pro~ectad ~uld be needed to cond~n L~LCb's assets tn
scenario No. 1 with a 10.2S percent cost of capttal· Ustng the same
crtterta of a two-year breakeven potnt, only ~ percent more debt could be
tssued at an 11 percent tnterest rate. gtth i percent cost of capttal,
the Suffolk uttltty could only meet the b~eakeven crttarta, tf the cost of
municipalization was $ percent lower than that projected by Oaverman.
Frum an Inspection of the data tn the chart, tt ts obvtous that:
1. The longer the ttme hortzon allowed to achieve a breakeven
of Suffolk's revenue requirements tn comparison to
the higher the confidence level that municipalization will be
econumtcally feasible.
2. The higher the municipal uttlttys' cost of capital the lower
the confidence level attached w~th municipalization under
each scenario. The senslttvtty of each scenario to Increases
tn tnterest rates ts dtrectly related to the amount of
projected tndebtness necessary to acqutre L]L¢O's assets.
Those scenarios with the htghest acquisition costs are the
most sensitive to tnterest rate changes.
%t ts Important to recognize that the data tn Chart go. 1 was
developed on the assumption that Oaveman's projections were accurate In
twe areas. They were: 1) L~LCO's revenue requtruments to meet operating
costs, and 21Suffolk's operating costs (variable costs).
As previously detailed, the Budget Revtew Office does not belteve that
the operating costs of Suffolk were accurate~ presented by Oaverman.
as we believe, the cost of providing servtce tn Suffolk ts Inherently more
expensive due to transmtsston losses, 1 arger geographlca] area, lower
population density, higher peak load and lower load factors, then a htgh
rice level should be requtred before any further step be
economic con~t~e .......... ~-~+ hi-her antlcipated operatlng
taken on municipalization, 3us~ ~u u..=~
COSTS.
-81-
C~ART 1
TIMES PURCHASE PRICE - EQUAL REVENUE STR£A)~S
Year 1 Year 2 Year 3 Year 4 Year 5
0CNLD 1
10.25% (6%) 7% " 16% 24%
11% (12%) .2% 9% 16%
12% (15%) (5%) 4% 10%
OCNLD 2
10.25% (18%) (5%) 4% 11%
11% (23%) (11%) (3%) 4%
12% (26% (15%) (7%) (1%)
OCNLD 3
10.25% 100% 133% 160% 181%
11% 88% 120 145% 164%
12% 77% 106% 129% 147%
OCNLD 4
10.25% 25% 30% 34% 41%
11% 17% 23% 26% 32%
12% ll% 16% 20% 25%
OCNLD 5
10.25% 215% 229% 241% 258%
ll% 196% 210% 221% 236%
12% 177% 189% 200% 213%
OCNLD 6
10.25% 10% 25% 37% 54%
11% 4% 16% 29% 44%
12% (1%) 12% 22% 35%
27%
19%
13%
14%
7%
1%
190%
172%
153%
46%
37%
29%
268%
245%
221%
63%
53%
46%
-82-
Year 1
Year 2
Year 3
Year 4
Year 5
RCNLD !
10.25%
ll%
12%
RCNLD 2
10.25%
ll%
12%
RCNLD 3
10.25%
ll%
RCNLD 4
10.25%
ll%
12%
RCNLO 5
10.25%
ll%
12%
RCNLD 6
10.25%
ll%
(16%)
(2~%)
(24%)
(32%)
(34%)
41%
33%
25%
10%
3%
(2%)
lll%
98%
86%
(19%)
(24%)
(26%)
(5%)
(11~)
(15%)
(18%)
(23%)
(26%)
63%
64%
46%
14%
7%
2%
121%
108%
95%
(9%)
(14%)
(18%)
(3%)
(8%)
(11%)
(16%)
(19%)
81%
71%
61%
18%
11%
5%
129%
115%
102%
(1%)
(7%)
(11%)
9%
3%
(2%)
(5%)
(11%)
(15%)
96%
84%
72%
23%
16%
9%
140%
125%
111%
10%
3%
(2%)
13%
6%
.18%
(2%1
(8%1
(13%)
101%
89%
77%
26%
18%
12%
146%
131%
116%
17%
9%
3%
-83-
The Daveman report states "tt ts not posstble to use the valuation
figures developed herein with a degree of confidence for proceeding with
any Implementation activities deemed appropriate by Suffolk County"
(ES-16). When the level of uncertainty concerning asset valuation is
coupled with the level of uncertainty about a Suffolk uttlity's cost of
operations, a high ~c~nf~en~? level" ~ shoul~_be_a_prer~qu~stt~.~?
proceeding with municipalization. ~asea upon tne uuoget Kevlew UTr~ce
analysis of the assumptions used to develop the Baverman cost analysis, it
would not be unreasonable to require a Z5 percent confidence level before
even thinking of proceeding with municipalization.
As previously discussed, if the PSC staff's ~tndtngs are any
indication of how Shoreham's costs may be absorbed, then Daverman's
scenario #1 and 4 are more likely to occur since they include a ~artial
absorption of Shoreham's costs by the ratep~y~rs: T? ~a~ in_Char~.#1
(confidence levels) is graphically presenteo ~n ~rapns m-mz. ~rom ~nese
graphs, the effects of varying legislative decision criteria about
confidence levels, interest rates and breakeven points is readily
perceived.
The confidence level (percent of additional capital expenditure
possible) is the vertical axis and the number of years from date of
condemnation is presented on the horizontal axis. The three lines on each
graph represent "confidence" at various interest rates. The breakeven point
for a scenario is established by extending a horizontal line from a
selected confidence level to an interest curve. Dropping a vertical line
from that point shows the number of years before Suffolk's revenue
requirements equals LILCO's. All time beyond the breakeven point (area to
the right of the breakeven point) represent where cost savings accrue to
the Suffolk ratepayer due to municipalization.
Scenario 1 as depicted in graph #2 is an example with the following
'decision criteria:
a. a RCNLD asset valuation
b. a five-year revenue breakeven point
c. an ll percent cost of capital
d. a 25 percent confidence level requirement.
Viewing the graph, we find that there is no combination of interest
rates and breakeven points that will yield a 25 percent confidence rate.
The highest confidence level is achieved with a 10.~5 percent interest rate
using a five-year breakeven point. The confidence level at that point is
13 percent.
Confidence level is defined as the percentage of additional debt
with may be issued by Suffolk due to higher condemnation
awards,.start-up costs etc. and still not have Suffolk's revenue
requirements exceed ~I~CO's.
C
0
N
F
!
D
E
N
C
E
R
A
T
E
OCNLD
3o!
20
10
(loi
(2o)
(3o)
Graph ! - Scenario 1,
Shoreham Opens, Cost in Rate Base
1 2 3
yEARS
-84-
4 5
10.25%
11.0%
12.0%
~raph 2 - Scenario ~
ihoreham Opens, Cost in Rate Base
C RCNLD 30
0
N 20 10.25%
I
D ~.,~%
R
A (30) 1 2 3
T yEARS
E
C
0
N
F
I
D
E
N
C
£
R
A
T
E
OCNLD
40
30
20
10
(lO)
(2o)
(3o)
-85-
Graph 3 - Scenario 2
Shoreham Opens, Damages Paid
10.25%
11.0%
12.0%
C
0
N
F
I
D
E
N
C
E
R
A
T
E
RCNLD
0
(40)
4O
3O
2O
10
(lo)
(30)
(40)
I 2 YEARS3 4 5
Graph 4 - Scenario 2
Shoreham Opens, Damages Paid
'10.25%
11.0%
-12.0%
I 2 3 4 5
YEARS
C
0
N
F
I
D
E
N
C
E
R
A
T
E
OCNLD
C
0
N
F
I
D
E
N
C
E
R
A
T
E
190
170
RCNLD
150
130
110
go
70
100
go
80
70
6O
50
40
30
-86-
Graph $ - Scenario ~
Shoreham Opens, No Damages Paid
1 2
YEARS
Graph 6 - Scenario 3
Shoreham Opens, No Damages Paid
I 2 3
YEARS
4
4
25%
11.0%
12%
10.25%
11%
12%
5
C
0
N
F
I
D
E
N
C
E
OCNLD
45
40
35
30
25
2O
15
10
0 _
C RCNLD 25
0
N 20
F
I 15
D
E 10
N
C 5
E
O-
R
T
-87-
· Graph 7- Scenario ~ _10.25%
Shoreham Closed, Damages ~
~ ~'11%
~12%
Graph 8 - Scenario 4
Shoreham Closed~ Damages Paid
10.25%
12%
i ~ 3 4 5
YEARS
-88-
Graph g - Scenario S.
Shoreham Closed, No Damages Paid
C
0
N
F
I
O
E
N
C
E
R
A
T
E
C
0
F
I
D
E
OCNLD
N
C
E
R
A
T
E
270
250
230
210
190
11%
12%
RCNLD 150
140
130
120
110
100
9O
8O
10.25%
1 2 3 4 5
yEARS
Graph 10 - Scenario 5
Shoreham Closed, No Damages Paid
10.25%
11%
12%
1 2 3 4 5
YEARS,
C
0
N
F
!
O
E
N
C
E
R
A
T
E
OCNLD
6O
5O
4O
3O
2O
10
(lO)
-89-
Graph 11 - Scenario 6
Shoreham Closed, No Damages Paid
I 2 3 4 b
YEARS
10.25%
11%
12%
Graph 12 - Scenario 6
Shoreham Closed, No Damages Pai~,
C
0
N
F
I
D
E
N
C
E
R
A
T
E
RCNLD
0
3O
2O
10
r
(10)
(2o)
(30)
10.25%
11%
12%
I 2 3 4 b
YEARS
-go-
Graph #1 presents the dectston crtterta for scenarto #1 as changedbeto
on, That graph shows a 25 percent confidence level may
an OCLD.v~lu~tt __ .=.~ . ~n ~ nercent cost of capttal.
achteved in Tour-years .,~. ~ .... $ r
As stated tn the beginning of thts sectton, the Daveman report
presented the projected expenditures of LILCO and Suffolk tn both nomtnal
and net present value dollars. The Budget Revtew Offtce analysts tn
Chart #1 only uses nominal dollars.
present value analysts Js a fta~ncta~ too~ used to measure the
benefits of future cash flows obtaJne~ fro~ an investment Jn current
do~lars. Future cash t~ows are discounted ustng a dtscount rate
the anticipated interest rate ove~ the pe~tod of time selected. Fo~
ex~p~e, Jn orde~ ~ earn $1 mtllJon at the end of ftve yea~s, ass~Jng a
~0 percent interest rate yea~ fo~ the pe~tod, an tnttlal tnves~ent of
$6~0,9~ ~u~d be requtre~ ]f ~ could tnvest funds at a rate of
u~d on1 be necess~y to tnvest $593,451
1~ percent P~ yea~ lt.~ ~*-~-?the dtscount ~ate, the.~e~r do11~
must be tnveste~ ~oda~ to reach an trivetS...~..1yen a set o~ anticipated
the s~e ex~ple and solve for the tnter==~ ----
future cash ~ows.
The Daveman report uses ne~ present value ~ c~pa~e the present
utrments for t~e Suffolk municipal
f t~e future revenue ?q _ 5-3 through 5-~4 tn
~u~O, tn each of ~he twe, ve scenarios used (Tables
the Daveman repor~. In all but one of the scenarios, the muntctpa~
u~tltt~'s discounted cost for t~e ftve-~ea~ pertod ex.tried
~ha~ of L~LCO. In eec, case, the s~e dtscoun~ rate of ~0.~5 percent lS
ass~ed. Each of the ~bles presents a ~ear-b~-~ear revenue ~equl~ment
and the pe~ untt cost of elect~tc generation fo~ both utilities. The total
revenue requlr~en~s for each are dtscoun~d pres~abl~ to show the current
value of ~hese future dollars.
Thts presentation ts misleading for several reasons. ;trst of a11,
there ts on~ an expenditure stre~ whtch wtll be patd fr~ future
operating revenues. The Coun~ wtl1 no~ ~atse funds ~da~ and tnvest those
funds to pa~ fo~ future operating costs. The chotces fo~ the Count~ are
muntctpa~tze or not muntctpa~tze. ~ere a~e no o~her tnves~ent opttons
ca 1tel on whtch tt needs ~ recetve a
because the count~ ~o~s not h~v~___~.4.;~ ~ be deb~ not equtt~ capltal.
re~urn. A~I captta~ ~or asse~
A net presen~ value analysts ts onl~ appropriate
not the beneftts ~ the Suffolk ratepa~er due to c~ea~ton of a municipal
uttltt~ exceeds the beneftts to be ~ecetved f~m the tnvesment of capltal
c~eatton of a municipal u~tltt~ ts not betng
fo~ ~e.o~her put.se. ~e ...... ~--*- ~n earks, h~ghwa~s,
~aluated tn the context of al~e~natlve ;nve~u,,;--- -
enters etc. ~e more appropriate analysts
brtdges, waterers, healt~ c. - ' ........~-.~-
f~m ~he County's potn~ ot v one
nmtna~ dollars because thts ts the actual ~ount of
each of those ~ea~s. ~hat those s~s are ~rth toda~ at ~he assmed
-91-
dtscount rate of 10.25 percent may be a potnt of comparison, but tt should
not be taken as another Indicator that municipalization ts cheaper. The
problem with using this tool is that the current value can be raised or
lowered by merely fluctuating the discount rate. The discount factor used
is the projected interest rate on the County's borrowings (10.25 percent).
If this rate wore increased, the net present value of the future cash flows
would be reduced.
The higher the interest rate, the lowor the cost in net present
dollars, but the higher a~ount of nominal dollars required. The value of
the net present value analysis is only good on a relative basis. Its use
in the report only allows us to c~mP~are the value.o~ the future cash flows
in more easily understood current dollars.
-92-
Legal Tssues
The municipalization of LILCO's electric utility in Suffolk County
will undoubtedly require condemnation. The procedure is long and complex
and once entered into would commit the County or any authority or agency
created, to final costs set by the courts. Sued costs would range from
'book value on the low side to going concern' value on the upside
(displaced economic value). A court award would have to be paid even if
determined to make the acquisition disadvantagious.
In ~ddition to the uncertai~$esults of court adjudicated condemnation
awards there exist several major iSSues, the resolbtton of which could make
the difference as to whether or not municipalization should or should not
take place.
One major issue is that of prior public use. McKinney's Statutes
contain various references applicable to the problem. Section 312 states
in part "...a statute authorizing the condemnation of lands is strictly
construed in favor of the landowner, and every requisite of the statute
having asemblance of benefit to the owner must be complied with.' Section
three recognizes that the power of eminent domain has been delegated to
public utilities and section 293 allows that".., when the authority does
not expressly permit the taking of lands already devoted to a public use,
such lands cannot generally be taken.' The utility itself has indicated
that it must protect the interests of its remaining customers and therefore
has a right to choose the plant and equipment necessary to fulfilling this
mandate. By prohibiting any takeover whatsoever of these specifically
identified holdings, the utility is claiming that the prior public use of
the plant and equipment overrides Suffolk's attempt to condemn them again
for public benefit.
While these arguments are legitimate, the same sections of McKinney's
provide a possible offset. Section 312 includes the provision: "However,
condemnation statutes are not to be construed so literally or strictly as
to defeat the evident purpose of the Legislature." Section 293 reiterates
this statement and further adds 'the power to take lands al ready dedicated
to a public purpose must be conferred by express terms or necessary
implication..." Therefore, it appears that a defense of prior public use
can be overcome by a very carefully written resolution to be presented to
the people in referendum. However, only a Judge will be able to ultimately
decide this issue.
A second area of concern is that of partial condemnation. The study
by Daverman Associates indicates that approximately 60 percent of LILCO's
plant and equipment is located within Suffolk County, but only 48.2 percent
of its sales take place there. Under the requirement that
.'...(condemnation) will extend no further than is expressly stated or is
necessary to accomplish the general scope and purpose of the g~ant..." we
would anticipate that all of LILCO's property cannot be condemned.
Furthermore, any attempt to take the utility's total holdings may be viewed
simply as an attempt to avoid payment of consequential damages.
-g3-
On the other hand, a perfect spltt of capacity versus use is htghly
unlike1 , especially concerning power production facilities. A great deal
~; ~?w41 be reouired to obtain a legitimate split that will probably
require one side to purchase 1ts remaining need from the excess capacity
maintained by the other. Who weuld supply and who would purchase is hard
to determine, but LILCO has indicated that its right to protect equipment
for its Nassau customers puts it in the forefront in determining who gets
what. Again, a court will probably have to decide exactly what the split
will be and how it can be achieved.
third m or issue ts that of border severance. Simply stated, the
..~A~m ,, ,hataJhao~ens to those~acilittes ,long.~he.]ine of.~on~nation.
[ [E6 o {d- otenti lly require the County to physica,,y cut the ~,es
between Suffolk and Nassau and pay an amount adequate to reestablish end of
the system facilities along the Nassau border. This could result in major
expenditures for equipment on both sides of the line that under the current
system are unnecessary. The County does have authorization to extend
condemnation outside its boundaries, if necessary, but the system will
still have to end somewhere. Under certain circumstances, one utility may
be ordered to wheel power to another (much like LILCO now does for
Greenport), so there is a possibility of metering all power sent across the
County line as a solution. Whatever the outcome, determination of
severance damages will play a major role in the final settlement and
should, therefore, be minimized'as much as possibly by County actions.
A fourth concern is slightly more academic, but necessary to consider.
If a decision is made to proceed with condemnation, many hours of legal
work will commence. Even with unlimited in-house capabilities (which of
course does not exist) many specialists will have to be put on retainer so
as to be available throughout the process. These specialists will not only
include utility consultants and legal counsel, but also will ultimately
include engineers, management and financial analysts, bond counsel, and
regulatory specialists among others. All of this will be expensive, with a
current estimate for legal counsel at three to four million dollars. Other
preliminary expenditures will drive this cost significantly higher. A
decision to municipalize would al so cause LILCO to spend similar amounts of
money on legal fees to protect its interests in the proceedings. The
nature of this expense ~ould be such that until the condemnation was
complete, Suffolk County ratepayers would subsidize LILCO's legal costs and
additionally pay all of the County's costs as taxpayers.
-94-
11eh es could also occur outside of the county courts.
Lega~ cha g · - ~--,-*-- ~n+ to the Court of Appeals, an
/e an early ue~,),v- -~ -
Massena, tot ex.amp , ..... ~___ ,~. ro era1 District Court ana a
- st hearing was orougn~ g~lur= ~.~ .~d
antt.t~u L _. ...... e-*H-ted ~th the Federal Energy Regulatory
Conmtssion. There is no reason to belteve that stmtlar events ~ould not
happen in a L[LCO case. The cost of these suits by themselves are not
necessarily overbearing, but tn cembtnatton they can tie up the process for
years, especially if ~he litigants are "held harmless" (protected from rate
Increases strictly as a result of municipalization).
Furthermore, in addttion to t~ condemnation la~ suit, ~Jth all
opportunities for dectston revte~s ~ appeals, the~e are a n~ber of
potential areas fo~ further litigation. Nassau County has already
.......... · ~e Countu's posltton on Shoreh~. Also,
mentioned a possible su;; aue ~u ~. a t r~aintn
should it be ~rcelved that condonation adversely affec s g LILCO
~ could see another suit ~ergtng rrm our
ratepayers tn N~ssau,
neighboring cou ry. Taxpayers tn Suffolk could organize a legal challenge
to a decision to condmn, especially since a large part of the upfront
expenditures might c~e fr~ tax revenues rather than bond proceeds. ~d,
even tf such a suit ts thro~ out of court, tt would have required an
expenditure of time, effort and money.
A final area of concern deals primarily ~th coordination bergen the
County and various regulatory agencies such as the Public ~tce
C~isston (PSC), the New York po~r Authority (NYPA) and the Federal
Ener~ R~ulato~ Co~ission (FERC). ~is coordination will occur
naturally once the municipal utility ts established and operating because
certain instances require involv~ent by one or more of the listed
agencies. Hoover, close coordination at all stages of the condonation is
reco~ended so as ~ avoid unnecessary delays once o~ershtp ts achieved.
-gS-
In a recent case 'the to~n of Hassena against Niagara Hohowk po~er
Corporation,' the to~n condemned the transmission and dt
facilities o~ned by NIHO so as to fo~m a mu~c~pa~ utility. Afte~ seven
yea~s and nea~y t~ m~on do~a~s ~n ~e~a~ fees, the to~ achieved
a~ exact c~pa~son of cases ~s ~mposs~b~e, s~m~ ~ssues
~u~po~e: ~ ......... ~ ~as a ma~o~ tssue tn Hassena, ~et th~
oo exist, uoruer = everance G~ages,
tt at d ~t b denying ~or consequential a~...= -ach other, part~al
~s[[adethat ~e t~ par=~es cooperate and ac~,.,,~
condonation ~as another ~ssue, bu(-tn effect .as d~regarded by the court
due to the ~all size of the condoned port, on ~n relation to the overall
syst~. Time and legal costs were both unanticipated to the extent that
they occurred tn ~ssena, but~can ass~e comparatively slmtla~
g~eate~ amounts tn any Suffolk case because t't ~s the mere fact of argutng
a case tn court that uses ttme and money, not necessarily the stze or type
of the condonation. That 1s, even though Suffo~k's total costs could
exceed a b~ton do~a~s, ~ ~uld not necessarily have legal costs
p~oporttonate ~ the ~ount spent tn ~ssena (t~ m~l~lon tn lega~ fees
versus a ftnal a~a~d by the court of $4.8 mtll~on~.
~n any event, the Important th~ng to ~be~ tn ~ssena ts that the
to~ made a deciston and ~as able to tmpl~ent tr. Should Suffolk County
make a stm~lar decision, the s~e methodology extsts by ~h~ch tt too can be
tmpl~ented. Such a dectston cannot be made l~ghtly, ho~ve~, for as
pointed out. Once condonation proceedings a~e started and tttle passes,
an undete~tned pa~ent as set forth by.the.
Suffolk ~11 be c~tt~ ~.. ~ ~ ~ald even ~f tt caused the acquisition
Cou~t. That ~ount ~u~u nev~ ~u ~ ~
to be d~sadvantageous. Even stopping the process early can st~l result ~n
substantial costs to County taxpayers.
-96-
BUFF'A~.O
Ourtn9 the course of the municipalization study by oaveman
Associates, it was pointed out that many municipalities currently o~n and
operate an electric uttlttyo Forty-seven such systems exist in the State
of New York. All of them are quite small ~hen compared ~lth a potential
size of Suffolk County. There ts some tnterest tn larger areas,
system the ........ ,--,-- ~ a study on the feastbtltty.?fL
however, as evlaen~e? Dy cump,~,v-_~_ ~ev~f ~u alo. ~htle ~na~
establishing a mun~clpal utility for ~n= ~.-; .... ff
SyStem ~OUld not be as large (or a~.costly) as a Suffolk County takeover, a
brief discussion of the Buffalo st~d~-may be helpful:.
Buffalo is the second largest city in the state, with a population of
nearly 358,000. it has a land area of 41.8 square miles and an assessed
n of taxable real property of more than one btllton dollars. The
valuatlo ........... =--*~1~ ~175 million and it employs about
city's operating ouoge~ ~s appru^,.,=~; ~ -
3,700 persons.
th~ Ctt of Buffalo
0aveman Associates, P.C. si ned an agreement wtth Y
on july 31, 1981, to perfom a feasibility study on municipalization of the
electric and gas facilities owned by gtagara ~ohawk Power Corporation.
This study was completed in 14ay, 1983 and, much like the study done for
Suffolk County, found "potentially attractive possibilities for
municipalization." Three acquisition scenarios were presented, ranglng tn
costs from $189 mtllton to $423.6 mtllton. Idany of the assumptions and
conclusions used in the Buffalo study are similar to those presented tn the
Suffolk County report. Some ~ the me]or ~en~ are the size of the
project, proximity to alterna=lve power SUpp. u==, =.~ the fact that no
generating facilities wnuld be condemned. Each of these points places
Buffalo's Potential cost well below that of Suffolk County and in our
opinion makes munlctpaltzation more attractive for Buffalo as compared to
Suffolk.
A muntctpallzatton resolution had been Introduced in the Buffalo City
Counctl twice. Once in 1982 and again in 1983 after completion of the
th times the resolution was narrowly defeated by the
Oaven~an study. ~o The Issue apparently was more philosophical than
13-member Council
partisan (all 13 Councilmen are of the same political party) and there
seems to be a 11mtted interest on the part of the general publtc.
The resolution Is expected to be presented for Counctl approval a
third time tn the near future so as to present it for a public referendum
on the November, 1984 ballot. According to one Councilmen (an opponent),
there is a general concern that acquisition is not supported by the study
conclusions under the highest cost scenario. ~lth no realistic expectation
for acquiring the facilities at anything less than highest cost, this
concern has heavily tnt'luenced past votes and sttll prevails. Also,
relatively inexpensive, especially
extsttng power.tn the Buffalo area is so because of the City's
~hen com area ~o areas downstate. ?h~,t~.. h.~.~nu*r oosstbtltttes as
locattonPnear the gtagara Rtver wt~h =,, .~= ,,~---- .... ~
well as the future potential for obtaining Canadian hydropower or powe~
from the ~ew York Power Authority. Thus, even in the best case scenario,
actual customer savings are mtntmel. A third point that wtll affect a
potential vote in Buffalo is tha~ the leadtng proponent of municipalization
on the Ctty Counctl was defeated in his btd for reelection last ~ovembe~.
A-!
APPENDIX
LEGAL CO#SIDERATIOHS FOR A
-I~UNZCXPAL ELECTRIC UTXLII~
e of this section is to provide a general discussion of
~he. pur~o? ..... hould be examined before forming a municipal.L
certain legal issues ~na~ ~
electric utility corporaton for Suffolk County. Used in conjunction
the initial report to the County by Daverman and Associates, P.C., it
should provide the reader with a basic understanding of the various
processes involved in an undertaktngeOf this type. Initially, the section
outlines the legislation thatwould ,nable the County to own and operate a
utility service. By following th~rescribed legal'methodology, Suffolk
would be authorized to enter into negotiations with Long Island ~i.9httn9
Company (LILCO) for the purchase of everything necessary to provloe
electricity to consumers. Should such a discussion prove successful, the
County could become the owner/operator of a Suffolk utility in a relatively
short time span. Should negotiations fail, and all indications are that
they will, the County could acquire electric distribution capability
through condemnation, a complex and lengthy procedure.
The likelihood of LILCO willingly selling almost one-half of its
ts at a mutually acceptable price to Suffolk is remote.
electric sys~em, asse ........ ~w~ the taking of private property through
New York State laW, nowever, o,,~ o
the eminent domain process.
Our presentation does not attempt to be the protocol to form a
municipal utility and does not supplant specialized legal counsel and/or
utility consultants, both of which will be needed before further steps are
taken by Suffolk County.
LEGAL PROCESS
Authorization
New York General Municipal Law, ~360 et seq. authorizes any municipal
corporation to "construct, lease, purchase, own, acquire, use and/or
operate any public utility service within or without its territorial
limits." Assuming Suffolk County decides to proceed with a
municipalization program, the County Legislature must pass a resolution
he ro osed method of acquisition, the method of furnishing
desiqnating ~ ~ _~ ..... - ---ts of development of the utility.. B~ la~,,,
services, ano :ne pruFua~u v"-
the "costs of development" must tnclude "the maximum and estimateO costs
, . rultn s which indicate that a
of the project. There have been. however. 's
single figure will suffice. Thus, a resolution indicating the County
intent to purchase some portion of LILC0's plant and facilities at a cost
not to exceed a given number of dollars would apparently meet the
requirements of 5360.
After passage of this resolution, the issue must be ratified b~ the
County electorate. This can occur either in the next general elect~on held
more than ninety days from passage by the Legislature or at a special
electton held in the same manner as those called by the Governor. In any
event, the resolution must be published in one or more newspapers once a
week for six consecutive weeks immediately preceding the election.
A-2
Assumtng passage by the citizenry, the County would now be authorized
to begtn negotiations with LILCO. However, there are some posstble
concerns regarding thts ftrst step tn the process. Anyone detemtned to
fight creatlon of a municipal uttltty can attempt to 11ttgate the tssue at
any time following passage of the resolution by the Legislature and prior
to the publtc referendum. Such litigation may require hearings and
testimony not only in the courts, but before the Publlc Sevtce Comatsston
(PSC), New York Power Authority (NYPAI or the Federal EnergY Regulatory
Commission (FERC) as well. Addttt~gal delays may occur in the event that
special State legislation would be ~equtred to overcome any impediments to
municipalization ~tch are unique to this case, e.g: clarification of the
status of other municipal authorities within Suffolk county (I.e.
Greenport). Another concern is the possible need for an envtroreental
impact review. Even though Suffolk would be purchasing primarily existing
facilities rather than building brand new ones (at least at this point in
the process) an environmental impact statement may still be required.
Coordination with County and State depar1~ents of Envtroreental
Conservation is essential because if a statement ts needed, tt must be
obtained prior to passage of the enabling resolution. In fact, even if a
determination is made that a statement ts not required, that dectston
should probably occur prior to passage of the original resolution. .~le
none of these concerns would ultimately prevent the County trom obtaining
authorization to form a municipal utiltty, each could add a great deal of
time to the overall process.
The ftnal step in the authorization process would be the County's
urchase all of the necessary plant, equipment and transmission
attempt to ~ILCO (See Chart A). The price would be subject to negotiation
1tries from
and could entatl many offers and counter offers. ~n the event of a
standoff, third party arbitration is a possibility, and could be obtained
from a variety of sources mutually agreeable to the parties. It appears
likely, however, that LILCO would not be willing to sell its Suffolk County
facilities at any price. The only other means of acquiring the utility
service then, would be through condemnation proceedings.
A-3
Condemnation
Chapter 73 of the New York consolidated laws establishes the [mtnent
Domain Procedure Law (EDPL). Zts purpose is to provide assurance that Just
compensation is paid to any person whose property rtghts are acquired for
public use. ~hile thts ts a fairly simple goal to understand and support,
it is extremely difficult to achieve.
The process begins with a public hearing tn which project need and
?vironmental.and residential impp~ts are determined and/or received.
Project need incorporates the p~b~tc use, beneftL'or purpose to be served
by the proposed project. In the specific case being studied, a possible
public purpose could be less expensive electricity rates, which could lead
to increased residential and industrial expansion, thereby benefitting the
population as a whole. The environmental and residential impact statements
required are general statements of the effects of the proposed project.
Both of these statements appear to be less important when discussing
~urchase of existing facilities than. a situation tn whtch the County
ntended to condemn other forms of property, but they are required
nonetheless. The decisions reached as a result of the environmental impact
review conducted prior to passage of the legislative resolution would
probably be sufficient for purposes of the EDPL.
In order to ensure as much publtc participation as possible,
appropriate notice of the public hearing ts required. This means that the
hearing must be advertised in five successive issues of a local paper at
least ten but not more than thirty days before the scheduled date. Public
awareness is further enhanced by the requirement that within 90 days of
completion of the hearing, a synopsis of all findings and determinations
made as a result of the hearings must be published in two successive issues
of the paper. In addition, a copy of the findings must be made available,
upon request and without cost, to anyone who so desires.
At this point in the process, the entire matter may be brought before
the Appelate Division of the Supreme Court for Judicial review. Not quite
a formal appeal, the review process enables any person(s) aggrieved by the
findings and determinations to present their disagreement with the manner
in which the condemnation has proceeded to date. Based on four specific
areas of concernd the court can either confirm or deny the condemnors
findings. This scope of review" includes, conformity with the Federal
and State constitutions; conformity wi th statutory authority; compliance
with eminent domain procedures; and whether or.not a public use will be
served by the acquisition. [n effect, the rewew allows all concerned
parties to clear up any remaining or continuing concerns about condemnation
early enough in the process to avoid unnecessary expenditures of time and
money later. That ts, a ruling confirming the findings may reduce later
legal challenges, while one denying the findings may end the process
entirely.
Ninety days after publication of the findings, or once the review (if
one has been conducted) is completed, the County will have to make a formal
offer for the LILCO property. In order to adequately prepare the offer,
the County appraisers may, upon written demand, inspect any books, records
or other property that may be necessary. Some measure of protection is
afforded the condemnee (LILCO) by allowing for a "petition for relief" to
the court if it is felt that the demand is unreasonable. However, if LILCO
A-4
doesn't provtde the tnfomatton when requested, the county doesn't have to
make tta offer until the data is ultimately received and analyzed. T~e
actual offer, then, represents what the county belteves to be ~ust
compensation for the property and must be for the amount of the highest
approved appraisal. Also, where practicable, the offer must tnclude an
ttomtzatton of total direct, severance and/or consequential damages, Who
detemtnes which situations are practicable ts unclear, but thts may allow
the County to avoid spending large amounts of time and effort fine tuning
its offer tt tt ts impractical to do so. Finally, the offer apparently can
approval, if for some reason final approval
be made contingent on bonding ~/ ..
has not yet been obtained.
Upon receipt of the County's offer, LXLCO ~ould have three options:
s a ent tn full; accept it as a parttal payment towards an
accept it ? ~ ~.j J , ...... *. or re~ect the offer outright. Re~ectton is
amount to oe oec~aeQ ,. ~---~..~ -.4~4+~ f-tls or fetuses to nottfy the
after ntnety days, ~ ~.e u~,..-~ --
automatic
County that the offer is accepted. ]f acco ed as an advance payment,
L]LCO would have three years tn which to ft a claim for the amount
felt was still due. ]f payment is accepted but the attorney general
'unable to certify all persons legally entitled to a portion of it, the
money must be put into an interest bearing account of the court. When
payable amounts are determined by the supreme court, they will be paid from
this account. ]f no such dispute arises, then the advance pa~ent goes to
the utility until the ftnal amount is decided. On the outside chance that
the ftnal award is lower than the advance payment, the County would be
reimbursed the excess amount plus interest earned on it. We would expect,
however, the reverse situation to occur, i.e. the final award will be
la.jet than the advance, thereby, requiring the County to pay L]LCO
nterest that could have been earned from date of
additional funds plus t . ~ .~_.~= +~ amount offered be ~oo low
nal a en~. 3n~u,u v,,e
acquisition to da~e o~ f~ -=-~he County can adjust it without having to
due to error or mlSCalCU/a~,
reinstate the entire condemnation p~ocess.
Acceptance of a partial payment signals an agreement to transfer
tttle, and from that point unttl the property is vacated and possession is
surrendered to the County, L[LCO will have to pay ~ent at a fatr and
reasonable value established by the County (or the court if L]LCO feels the
amount of payment, the method of pa~ent and
is unreasonable). ~he _ ~..+ e~ e ent between the
amount all $ttll su~ .... a~reem
=e~ ~n rim oa ents (rent} are. until court ordered
~t~ wit~ ~sstble court intervention, right up
acquisition (See Chart
~_-~atton - &cqutsttton,
Assumtng no voluntary agreements can be reached between the County and
be In a new action agatnst the uttltty In order
L]LCO, the condemnor must ~
to acquire the ~roperty. ~r~;~-~fice'containtng a genera~ uescr~p~,o,
acquisition in the County
of the property. Notice must al so be served on the owners and posted in
three conspicuous places near the roperty to be taken. Then, a petition
must be filed with the court. ThePpetitton must include a statement of
ubltc hearing requirements and a copy of the
com ltance with the p ac ulsition maps; 'a
P s- a co y of the pro osed q . .
dete~iQ~tion.a~ f~,C. a s~atement of t~e intended.p~b!'c use, and a
A-5
vesting of title. LILCO has the right to attend the court hearing and
respond to each allegation presented in the petition that it chooses to
defend. Once the court determines that all procedural matters have been
followed, it will order the acquisition map filed and title will vest in
the County (See Chart C).
The above process must begin within three years of publication of the
findings and determinations made at the public hearing. Xf condemnation is
to occur in stages, the first stage must begin within three years and all
others must begin within ten year~, otherwise, t~e.entire conoemnatton
process must begin anew because the'project will have been considered
abandoned. Also, if the County should want to abandon the property within
ten years of acquisition, LILCO would have a right of first refusal to
repurchase the property. ..~
Legal Valuation
As stated earlier, the purpose of the Eminent Domain Procedure Law is
to assure that a property owner receives Just compensation for that which
is taken from him. This, then, becomes the final major issue to be decided
by the courts: what is just compensation? and how is it determined?
Simply put, "just compensation" is the fair value of real property
taken, but taking existing public uttlity property is no simple matter:
Thus, according to one court, "Just compensation is largely a matter or
judgement and circumstance." With this as a guideline, its no wonder
condemnation issues are usually settled in court. Every effort is made,
however, to arrive at a fair price using a very detailed methodology.
Within 30 days of vesting title, the County must publish a notice of
acquisition in ten successive issues of the official newspaper. Again, the
notice must contain certain acquisition information (dates, general
description, etc.) and also must direct the utility to file a written claim
a specified date with the condemnor and the County Clerk. If the
humility makes a claim for compensation for any interest other than the fee
(land), it must present: the schedule of items so claimed to the condemnor,
along with the name and address of the utility; reasonable identification
of its interest in the property; a general statement of the nature and type
of damages claimed; and the name and address of the company's attornies.
At the end of the thirty-day period, the County must file a statement
of readiness. The court then will establish rules of procedures for the
claim regarding the time for filing and exchange of wrltten appraisals;
ftltng of supplemental reports and filing of any reports from expected
expert witnesses that will attend the trial. A pretrial conference may be
catled between the parties and the court would again establish any
pertinent rules. Finally, the court must view the property to be taken
unless both parties waive this requirement. Based on all of this
information generated, atrtal ts held and the court determines the
compensation due. This amount includes lav~'ul interest from date of
acquisition to date of payment, exempting any advance payments that have
been in an interest bearing account (See Chart O).
A-6
The eminent domatn procedure law closes with some miscellaneous
provisions that may be applicable tn a case of thts sort. Under certatn
circumstances, the County mtght have to reimburse LILCO up to $10,000 for
fees and expenses relatad to expert witnesses. Certain incidental expenses
are also payable, including recording fees, transfer taxes or similar
expenses in connection with the acquisition or transfer of property; any
penalties incurred for prepayment of mortgages; and the pro rata portion of
any property, sewer or water taxes that might have been paid between date
of vesting title and date of final Judgement. More importantly, if the
County abandons the project at any t4ee or the court determines that the
property or any portion of it was not'iegally authorized to be acquired,
the County will have to reimburse LILCO for any and all expenses actually
incurred due to the acquisition procedure.
Appeal s
Throughout the condemnation process there are points at which court
decisions are made. As a side issue, each of these Junctures can trigger
the appeals process. Appeals are subject to procedures established in the
Civil Practice Law and Rules (CPLR) S 5501 et seq. Basically, onl~ the
a.. rieved arty may appeal a Judgement or.order, and even then, only
gq- ~ ...... -~ .... ecific scone of review are appealable. In that
~t~d~m~o~ ~:~'~o~d have bee~ heard in the Supreme Court of the
district including Suffolk County, all appeals would go to the Appellate
Division. Appeals to this division are generally rather broad because
almost any question of law and/or fact can be brought before it. Appeals
from ~ decision made here go before the Court of Appeals where only a
questqon of law may be challenged, unless the Appellate Division has
revised or modified a Judgement using new facts. However, even given this
narrow scope of review, we can safely assume that any court action
surrounding a condemnation of L%LCO's Suffolk County property will
ultimately be decided by the Court of Appeals.
The process in general is straightforward. A final Judgement (or
order) of the Supreme Court may be appealed to the Appellate Division.
decision is either affirmed, modified or reversed through another
Here, )~gement. Modification or reversal could result in a grant of a new
final
trial or hearing. Once issued, this second final Judgement may be eligible
for appeal to the Court of Appeals where it may then be affirmed, modified
or reversed. In all likelihood, this decision would be the last made,
unless the case somehow ended up in the Federal court system or was
remanded, which could start the process all over again (See Chart E).
While it is impossible to predict exactly where or what Judgements
will be appealed, some good possibilities follow. First, an issue could be
raised following passage of either the legislative resolution or the public
referendum due to the precise terminology, specific content and sequential
procedure required. Another potential area is after publication of
findings and determinations, when the procedure is subject to Judicial
w. The etition for relief from the demand for prevesting appraisal
revte . -P ......... , -~d snectfically in the EDPL, as well.
rmatlon lSa poln~ UT a~ca, ,,,~-~ ~
tnf°fter the "final" judgements mentioned earlier following ~cq~istti?~.~no
~:t:rmination of just compensation. Once agatn, though, it is ,mposs,o,e
to predetermine which side will want to appeal what Judgements at any point
in the overall process. However, there will be appeals and it is the
appeals process that will probably account for most of the time spent on
A-7
this undertaking.
Once the legal process has run 1ts course and the County actually owns
the uttllty service, it must be operated tn the most effective manner
possible. General Municipal Law Section 360, requtres that the method of
operation, rates, rental and charges for servtce and a collection procedure
all be establlshed by the legislative body of the municipal corporation.
Thus, the County Legislature must matntafn an active participation in the
uttllty. This does not preclude the establishment of a spectal authority
or agency to operate the ut111ty~.~ ..
A-8
CHART A
CHART B
CHART C
CHART O
CHART E
R.OW CHARTS
deptcts the acquisition by purchase of the L%LCO assets
necessary for municipalization.
deptcts the condemnation process.
deptcts the acqutsltton phase of condemnation.,
deptcts the valuat!e~Pbase of condec, nation.
deptcts the appeals process, whtch may occur at
vartous potnts (X) throughout condemnatlon.
A-g
* A
Municipal legislative body
must adopt legislation to
establish electric utility.
Resolution must be published
in one or more news~a'pe~
published in the county once
each week ~r six consecutive
weeks prior to election.
Election Day
approve
I(X)
Municipality should attempt
to purchase system.
LILCO AGREES, NEGOTIATES PRICE
RAISE FUNDS
(BONDING)
PURCHASE SYSTEM
disapprove
)' LILCO DISAGREES .-
STOP
> GO TO B
*If an environmsntal impact statement is required, it
should be completed before the legislative body adopts
resolution, local law or ordinance authorizing action.
A-lO
Municipality must publish
notice of purpose, time and
location of public hearing
in official daily newspaper
and newspaper of general
circulation.
Public Ue~ring
Municipality ~ust outline
purpose, location of project
and other pertinent informa-
tion. ~
Municipality must make
determinations and findings
concerning proposed project
and publish a synopsis
thereof in at least two
successive issues of both
any official newspaper and
general circulation newspaper.
Property to be acquired
must be appraised. County
has right to inspect
property. ~
RAISE FUNDS
Municipality must make
written offer to acquire
property. ~
LILCO ACCEPTS -
FULL PAYMENT
PURCHASE SYSTEM
Any person aggrieved by the
determination and findings
may seek judicial review
thereof by an appellate
"'division of the Supreme
Court with jurisdiction
over the property being
condemned.
(x)
'~LILCO REJECTS ~GO TO C
~)~PARTIAL PAYMEtlT~GO TO D
LITIGATES PRICE
(x)
A-11
C
Municipality must commence
acquisition proceedings.
Failure to do so is
considered abandonment
of condemnation.
lityk ....... 'l
Municipa ust obtain I
order from Supreme-Jlpurt ,. I
for permission to acquire I
property and to file map I
by present verified petition
to Supreme Court in the I
judicial district where
property is located,
~ (X)
Municipality must file in
the office of the clerk of
the county where the property
is located a notice of the
pendency of the proceeding,
including a general descrip-
tion of the property.
Municipality~ust serve
notice of the proceeding
on the condemnee.
The condemnee may interpose
a verified answer, possibly
resulting in a trial on the
merits. I (X)
Court shall direct filing of
order granting petition. The
municipality shall file and
enter order and acquisition
map in the office of the
county clerk. Title then
vests in the municipality.
I
(X)
GO TO D
I
At any time during
acquisition proceeding,
court may order
temporary possession.
A-12
D
The municipality must give
its legal advisor a copy of
the acquisition map, and the
legal advisor must certify
the names of the condemnees.
The municipality must~use a
notice of acquisition to be
published in at least ten
successive issues of official
newspaper or newspaper of
general circulation in the
municipality and mail such
notice to each condemnee of
record.
Condemnee shall file written
claim of damages with clerk
of court with jurisdiction.
'L (X)
Municipality must serve and
file a note of issue
pursuant to Civil Practice
Law and Rules.
Judge must de~cide award.
Raise additional funds
(if necessary).
Purchase System
A-13-
E
FINAL JUDGEHENT BY SUPRD1E COURT, SUFFOLK COUNTY DIVlSI(~l
AGGRIEVED PARTY APPEAl.
OUESTION OF LAW A~ID/OR FACT
L. o RETURN TO LO~ER COURT
APPELLATE DIVISION
DECISION AFFIP~ED, ~DIFIED, REVERSED
FINAL JUOUEPIENT ISSUED
AGGRIEVED PARTY APPEALS OUESTION OF LAW
COURT OF APPEALS
DECISION AFFIRMED, ~ODIFIED, REVERSED
FINAL JUDGLMENT ISSUED
RESUNE CONDEMNATiOrl
AESUME
D~DE~IATION
RETURN TO LOWER COURT I
Supreme Court.
B-1
SUFFOLK COUNTY LEGISLATURE
BUDGET REVIEW OFFICE
Decem. ber 23, 1983
Mr. Paul Gioia, Chairman
New York State Public Service Commission
3 Empire Plaza
Albany, New York 12223
Dear Mr. Gioia:
On December g, representatives from my staff met with Mr. Richard Ansaldo,
Chief of the Utility Finance Section of the Department of Public Service.
The purpose of the meeting was to discuss matters relating to a report
prepared by Daverman Associates of Syracuse, New York on the feasibility of
Suffolk County purchasing Long Island Lighting Company's (a privately-owned
utility) gas and electric assets to establish a municipal utility in
Suffolk County.
My staff found Mr. Ansaldo was most helpful ~nd informative and resolved
most of our questions on utility finances. There were, however, several
questions we raised that Mr. Ansaldo thought would more appropriately be
addressed by writing directly to you. In order to accurately assess the
recommendations contained in the Daverman report, we would most appreciate
your response to the following questions.
Question
STATEMENT
Mr. Ansaldo advised us that a Suffolk County municipal utility would come
under the jurisdiction of the New York State Public Service Commission for
purposes of rate setting. Mr. Ansaldo also stated that for purposes of
rate setting, the capital assets Suffolk County would acquire from LILCO
would be valued at their 'original cost less depreciation" or OCLD. The
amount Suffolk County would pay for these assets may, however, be
considerably higher depending upon how the courts ultimately resolve the
matter of compensation under a public utility's condemnation authority. If
the courts held that Suffolk had to pay 'replacement cost new less
depreciation' or RCNLD, Mr. Ansaldo indicated that the County might be
precluded from including the higher amount in its rate structure. If this
were the case, the County's utility agency would fail to recover a
sufficient amount of money from its ratepayers to cover the debt service
requirements.
-B-2
Mr. Paul Gtota, Chat~man
New York State Publtc Service Co~isston
December 23, 1983
Question:
What would the Public Service Commission's likely policy be regarding the
treatment of acquisition costs for. capital assets based on OCLO versus
RCNLD? ~--
Question
Statement
In reviewing the matter of operating loss contingencies with Mr. Ansaldo,
it would appear that there is a decided advantage to an investor-owned
utility (1Od) in setting rate levels than there is for a municipally-owned
utility (MOd). As we understand the rate setting formula, IOU's are
allowed to include an amount for "profit" to cover its equity funding
requirements which are returned to the company's stockholders in the form
of dividends. Xf the company fails to realize a profit, then it has the
option of deferring dividend payments to its stockholders. In the case of
a MOd such as that which ts being proposed for Suffolk County, there is no
option but to incur a loss. Xn essence, the County would have no cushion
to fall back upon in the event revenue projections are not realized and/or
operating costs (including debt service payments) exceed budgeted
allowances.
Question:
What would the Public Service Commission's probable position be on allowing
the County to provide for a contingency fund in its rate structure so that
there would be adequate resources available to the County in the event of
an unfavorable operating year where expenditures exceeded revenues.
Question 3
Statement
According to the Oaverman report, the County would buy a portion (about
48.2 percent) of LILCO's generating facilities as opposed to the
alternative of buying power on an as needed basis. Part of LILCO's
generating capacity does, of course, prospectively include the Shoreham
Nuclear Power Plant. The County has argued before the Nuclear Regulatory
Co~tsston that the Shoreham Nuclear Power Plant should not be allowed to
open because the immediate area to the plant cannot be safely evacuated.
As a corollary to this argument, the County has also held that should the
plant not open, the so-called 'usefulness" rule would preclude the recovery
of the plant's costs from LILCO's ratepayers and that LILCO's stockholders
should be held responsible for the plant's cost.
B-3
Mr. Paul Gioia, Chairman
New York State Public Service Commission
December Z3, ~gB3
Question:
If the County were to purchase a portion of the Shoreham Nuclear Power
Plant as recommended in the Oav&rman report, an6 if the Shoreham plant was
not to open for either voluntary ~r involuntary reasons, what options, if
any, would the County have to recover its share of the plant's cost?
above questions would be.appreciated. If you
Your written response to the .... ,J ~ -iven through a discussion
believe that a more meaningful response cuu~u ~ ~
of the various issues raised by our questions, please advise us, and we
will make arrangements to meet with you and/or your staff at your
convenience.
Stn y,
Director, Budget Review Office
TC:OG:rm
cc: R. Ansaldo, Chief of Utility Finance Section
)~ew York State Public Service Commission
Agency Building 3
Albany, New York ~2223
B-4
ALBANY
January 11, 1984
Donald Gruen, C.P.A-
Director, Budget Review office
Suffolk County.Legislature
Legislature Bu=lding
Hauppauge, New York 11787
Dear Mr. Gruen: .
' a has asked me to.reply to your letter of
Chalrm_a~__~l~:_;~, three questl°gs regard~ the likely
er 23, l~uJ r~ ~ ~ f various aspecu~ of a
Decemb omm~ssion o
rate treatment b~_~,~on by suffolk county of the Long Island
hypothetical conu~u~*
Lighting Company.
BecaUse the questions raise.issues which conceivably [t would be inagP
might come before the Commission~
issioner to express a position on
~v ehe chairman or ~ny Co_mm -~==~n- defin=tive answer~
uue -~-7--____;~d for your qu~Sn~ * _~ _~n the sDeCxIlC
cannot De p=uv~.~=__ would lxkely.=epenu_~___ a ~eneral
policy whose resO .... ~-,, are raxsed. Howe¥=~,
~actual context xn w x _=T lioable consideratxons
discussion o= some o= ~n=
You inquire what the co~ission'S likely policy woul~
the cost of acquisition.
..... ,v~in= the treatment.Of ..... ~., were required to pay
mc ~?~T~[[i~' ~ou inquire xf tne.=~u"~uld the commission
Specm~u.. = _~_, less depreciatxon{ -
r P - - e matter of policy.
allow such costs a~ ~-- established rates
using original cost less u=w~=~ .... paying more than original
Thus, the prudence of a municipality
cost less depreciation for acquired plant would likely be an
issue in the municipality's subsequent rate proceedings.
. isen in most of %he instances
....... this xssue has not a~ ......... rtv by municipalities,
involving cog=~mn=t:iT~lities have not peen
for the acquiring
commission's rate jurisdiction.
Mr. Gruen
-2- January 11, 1984
Your second question is whether the commission would
'allow a contingency fund to the County to provide for an
unfavorable operating year where expenditures exceed revenues.
Section 72 permits the Commission in fixing rates to give due
regard not ohly to a return on capital but also "to the
necessity of making reservations out of .income for surplus
and contingencies." Whether the Commission would authorize
such a contingency fund is unknown.
Your third question is, if the County were to purchase
a portion of the Shoreham plant and thereafter the plant did
not operate, what options would the County have to recover its
share of the plant's cost. In the past, the Commission
generally has permitted prudently incurred abandonment costs
to be passed along to utility ratepayers. However, the Com-
mission has never been faced with an abandonment of a completed
and nonoperating plant nor has it passed along costs of the
magnitude that would result from a Shoreham abandonment. Thus,
there is no real precedent in this area.
Very truly yours,
Davxd E. Blabey
Counsel /
APPENDIX
C-1
Investor Owned Questionnaire
UTILITY QU£STIONNAXR£
SUFFOLK COUNTY LEGISLATURE
Page 1 of 4
This questionnaire is an integral part of a study being conducted by the
Budget Review Office of the Suffolk COunty Legislature, Hauppauge, New York
117~ on Long Island. Your response to the 'questions' presented below is
requested and appreciated. The information you furnish will be used only
on a collective basis with that of other respondents and will not be
released on an individual company basis. If you prefer to telephone your
answers to the questions, please call Frederick Pollert or James,Spero at
(516) 360-4100. Thank you.
Official Name and Address of Your Company
Your Name and Title as the Person Completing this Questionnaire
Your Telephone Number as "Contact Person"
I. UTILXTY TYPE AND SXZE
1. What type of fuel does 'use to generate electricity?
2. On a County basis, what geographic area is covered by ?
C-2
Page 2 of 4
3. What is the total residential population served by ?
4. What percentage of total power consumption is for residential
purposes?
5. How many employees does have?
6. What is your utiltty's generating capacity (in megawatts)?
7. What percentage of your uttltty's power, if any, is purchased and
from whom?
11. RATES
[. Daverman Associates of Syracuse cited as having higher rates
than the adjoining , municipally owned utilities. To what factors may
this be attributed? What is the relative importance of each factor?
C-3
Factor
Page 3 of 4
Relattve Importance
of the following items of expense?
Item
Labor
Equipment (Capital)
Supplies
Fuel
Debt Service
Contracted Services
Power Purchases
Taxes (local real property)
Approximately what percentage of your total budget is spent on each
Percentage
C-4
Page 4 of 4
3. For your different types of generating facilities, what is the
amount of fixed or variable costs expressed in mills per kilowatt hours?
ADD[TXONAL COI~£NTS:
C;5 MuniC~ail~ Operated Questionnaire
APPENDIX,
Page ! of B
UTXLITY QUESTIONNAIRE
SUFI~OLK COUNTY LEGISLATURE
This questionnaire is an integral part of a study being conducted by the
Budget Review Office of the SuffGl.k County Legis)ature, Hauppauge, New York
11788, on Long Xsland. Your respo'hse to the 'questions' presented below is
requested and appreciated. The information you furnish will be used only
on a collective basis with that of other respondents and will not be
released on an individual company basis. Xf you prefer to ~elephone your
answers to the questions, please call Frederick Pollert or James Spero at
(516) 360-4100. Thank you.
Official Name and Address of Your Company
Your Name and Title as the Person Completing this Questionnaire
Your Telephone Number as "Contact Person"
FORI~TXON OF UTILI1~( COMPANY
1. In what year was formed?
2. Was the company formed as the original supplier of power in the
area, or was it formed as a result of the municipalization of an existing
investor utility?
C-6
Page 2 of 8
3. Zf the company was fomed by muntctpaltztng an tnvestor-ovmed
utility, what procedure was used? That is, outright negotiated purchase,
condemnation, etc?
4.. Please describe the procedure, the costs and the timeframe involved
in the municipalization process.
UTZLITY TYPE AND SIZE
type of fuel does use to generate electricity?
C-7
Page 3 of 8
2. On a County basis, what geographic area is covered by ?
3. What is the total restJ~cial population 'served by ?
4. What percentage of total power, consumption is for residential
purposes?
How many employees does have?
6. What is the utility's generating capacity (in megawatts)?
7. What percentage of the utility's power, if any, is purchased and
from whom?
C-8
Page 4 of 8
RATES
III. 1. Daverman Associates of Syracuse cited as having lower rates
than the adjoining an investor-owned utility. To what factors may
this be attributed? In your opinion, what is the relative t~portance of
each factor? ~
~ Relative %~portance
Factor
2. Approximately what percentage of your total budget is spent on
each of the following items of expense?
Percentage
Labor
EquipL~ent (Capital)
Suppl i es
Fuel
Debt Service
Contracted Services
Power Purchases
c-g
Page $ of 8
3. For your different types of generating facilities, what is the
amount of fixed or variable costs expressed in mills per kilowatt hour? ·
4. Does
jurisdictions?
provide payments in lieu of taxes to local
5. What (s the amount of these pa~nnents?
6. What form do these pa~nnents take?
7. If had to pay property taxes, what do you estimate the total
annual real property tax bill would bet
C-lO
Page 6 of 8
IV. ORGANIZATIONAL AND OPERATIONAL STRUCTURE
1. Does your utility have the separate legal status of an authority
or is it considered part of a municipal government operation?
2. How is structured organizationally? (This quegtion may be
answered by attaching a copy of the appropriate organization chart, if
available.)
3. Who appoints directors to the your utility's governing board?
C-ll
Page 7 of 8
4. Does any municipality review the budget or capital expenditure
plans =f your utility?
5. What is t. ne basis for hiring employees?
6. Do employees have civil service status?
C-12
page 8 of 13
?. Who recruits and hires employees7
ADDITIONAL CO~4ENTS:
D-1
ACKNO~tEDGEMENTS
The Budget Revtew Office wishes to gratefully acknowledge the help and
information provtded by the following groups, corporations and individuals.
Without their assistance, this report could not have been competed.
1. Daven~an & Associates, P.C,
2. Long Island Llghttng Company,
3. Public Servtce Commlsston
4. New York State Power
5. New York Power Authority
6. Shea Gould
7. Vartous Financial Advtsors
8. Various Legal Sources
9. Buffalo City Counctl
10. Robert H. HcShane, Real Estate Appratsor
11. Federal Energy Regulatory Commission
12. Village of Rockvtlle Center
13. Investor and munlctpally o~ned utilities who
responded to our questtonnalre
Carolina Power and Light Company
Col~bus and Southern Ohio Electric Company
Iowa Electric Light and Power
Kansas County Utility
Niagara-Mohawk Power Corporation
Northern States Power Company
Public Service Company of Colorado
St. Josephs Light and Power Company
Tampa Electric Company
Anaheim Public Utilities
Cedar Falls-Iowa
Chambersburg Municipal Electric
Colorado Springs Department of
Public Utilities
Col~nbus, Oivision of Electricity
Fayetteville Public Works, North Carolina
Greenville Utilities Commission
Jacksonville Electric Authority, Florida
Kansas City Public Utilities
Lakeland Department of Electric and
Water Utilities
Los Angeles Department of Power
Omaha Public Power, Nebraska
Rochester Public Utility, Minnesota
Seattle City Light
Tacoma Public Utilities-Light Division