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HomeMy WebLinkAboutElectric Utility Overview 1985ENGINEERING OVERVIEW ST[~JDY E"ST~'BLP:;HI NG A MUNICIPAL ELECTRIC UTILITY TOWN OF SOUTHOLD, NEW YORK JI,, 1 81!m R. W. BECK AND ASSOCIATES This ;e~or~ h~s ~een 7repared at the request of and fo; the use of the client, and the ccnclusions, observations end ?ecom~ezdatlons contained herein constitute only the o~iniona of R. W. Eock~..nd Associates. To the extent that s%atements~nd b¢oks of record and accounts of the clien%, st~cemcnt~ ef Ind~pen,~ent p~blic accountants ~ud audit- o~ e~r,le~ed b'? [~e client und information prepcred by .. ~,~ w-~ ~c~ u~ed in the ~r~p~ration of this report, ~"'~/ ~C~ ~Md ~~-~iat~s h~z relied upon the z~e ~o be ~.~..r~te, ~n~ f~r ~hich no assurances are intended ~ud no ~e,~r~eu~[ic~B or warranties are made. R. W. Beck and A~ociz~e~ m&k~z no certification and gives no assur- ~cez except a~ e~lici~ly set forth in this report. R. W. BECK AND/ SSOClATES ~*~ .o. I'~I-6474-EA1-AX July 9, 1985 Mr. Francis Murphy, Supervisor Town of Southold Main Road Southold, New York 11971 Dear Mr. Murphy: Subject: Engineering Overview Study Establishing a Municipal Electric Utility in the Town of Southold We are pleased to present our Report setting forth the results of our Engineering Overview Study. This Report was prepared in accordance with our Agreement for Engineering Services submitted in December, 1984 and authorized by the Town om March 28, 1985. The Report identifies the major issues to consider and presents our findings concerning the potential benefits to the ratepayers from establishing an Electric Utility Department in the To~n through the acquisition and operation of certain electric system properties of the Long Island Lighting Company. We would like to acknowledge the assistance of Mr. James Monsell, Superintendent of the Greenport Electric Department, for providing a portion of the data necessary to undertake this assignment. Respectfully submitted, CERTIFICATE OF ENGINEER ENGINEERING OVERVIEW STUDY ESTABLISHING A MUNICIPAL ELECTIL!C UTILITY TOWN OF $OUTHOLD, NEW YORK July, 1985 The technical material and data contained in th~s prepared uuder ~he supervision and direction of the undersigned, as professional engineers are affixed below. report were whose eeals ~ Robert G.-Taylor~//~ Partner and Man~r Wellesley Office R. W. Beck and Associates OUTLINE OF REPORT Engineering Overview Study Establishing a Municipal Electric Utility in the Tow~ of Southold July, 1985 Section No. II III Section and Subsectiom Titles Letter of Transmittal Certificate of Engineer Outline of Report Introduction, Scope, S,,mm~ry, and Findings Introduction Scope of Analysis S,,mm~ry Findings Distribution Facilities Existing Facilities General Plan for a District Municipal System Cost Estimate Exhibit II-1 Town of Southold Service Area Exhibit II-2 Town of Southold Existing System Schematic Diagram Exhibit II-3 Town of Southold Proposed System Schematic Diagram Electric Power Requirements and Projected Costs Reported Energy Sales Estimating Power Requirements Projected Requirememts Cost of Electric Service from the Company New York Power Authority AYailability of NYPA Power Power Supply Costs Transmission and Delivery Charges Cost of Power to the Department Southold Gas Turbine Pase No. I -1 I - 1 I -3 I -4 I -7 II - 1 II - 1 I1 - 2 II - 3 III- 1 III- 1 III- 1 III- 2 III- 5 III- 6 III- 8 III- 9 III-il III-12 III-14 OUTLINE OF REPORT Section No. IV V VI VII Section and Subsection Titles Estimated Value of the Electric System Approaches to Value Comparative Market Approach to Value Capitalized Income Approach to Value The Cost Approach to Value Selected Basis of Valuation Estimated Value of the Electric System in the Town Going Concern Pa~e No. IV- 1 IV- 1 IV- 1 IV- 2 IV- 2 IV- 3 IV- 4 IV- 5 Establishment of Municipal Electic Department V - 1 Organization, Personnel, and Facilities V - 1 Estimating Cost of Establishing Department V - 2 Financing, Engineerins, and Other Consulting Costs V - 3 Total Cost of Establishing Electric System V - 4 Comparison of Revenues and Expenses Under Municipal Ownership and Operation with Continued Company Operation VI - 1 Operating and Maintenance Expenses VI - 1 Purchased Power Cost VI - 1 Capital Additions, System Extensions and Xenewals VI - 2 In-Lieu-of-Tax Payments VI - 2 Debt Service VI - 3 Potential Reduction in Electric Rates VI - 3 Revenues Under Continued Company Operation VI - 3 Projected Revenues and Expenses - 20,615 kW Allocation of NYPA Hydropower Projected Revenues and Expenses - 10,000 kW Allocation of NYPA Hydropower Potential for Integrated Operation with the Greenport Electric Department. Impediments to Full Integration Coordinated Operations Full Integration VII- 1 VII- 1 VII- 2 VII- 3 SECTION I INTRODUCTION~ SCOPE, SUMMARY, AND FINDINGS Introduction This Report sets forth the results of our analyses to determine, on a preliminary basis, the potential for the Town of Southold (Town) to establish a publicly-owned and operated electric utility department (Department) to economically serve electric customers in the Town. The Department would be established by the acquisition of certain electric distribution system properties now owned and operated by the Long Island Lighting Company (LILC0 or Company) which presently provides electric service within the Town. This assignment was undertaken pursuant to the Agreement for Engineering Services between the Town aud R. W. Beck and Associates submitted in December, 1984 and approved by the Town on March 28, 1985. As contemplated in this Report, the Department's service territory would include the area of the Town except that presently served by the Village of Greeuport's Electric Department and Fishers Island served by a private power company through an interconnection with Groton, Connecticut. LILC0 presently serves the Town of Shelter Island and the U.S. Government Research Center on Plum Island from facilities located in Southold. For the purposes of this Report, it is assumed that the Company would continue to serve these areas and pay the Department the costs associated with transmitting LILCO power over the Department's electric system. This "wheeling" arrangement would be basically the same as the arrangement under which LILCO presently transmits power from upstate generating facilities of the New Yo~rk Power Authority, formerly called the Power Authority of the State of New York (herein referred to as "NYPA" or "PASNY"), to the Greenport Electric Department. It is assumed, on a conservative basis, that the charges by the Department for wheeling services for LILCO and for wheeling NYPA power to Greenport would be at cost, and the Department would uot profit from providing these services. The purpose of this analysis was to provide information which, along with elements outside the scope of this study to be considered by the Town, will provide a sound basis to select a proper course of action with respect to the possible establishment of a publicly owned and operated electric Department to serve the T~wn. In preparing the analyses set forth in this Report, we relied on publicly available information obtained from the Federal Energy Regulatory Commission (FERC), the New York State Public Service Co,-,~ssion (PSC), the New York State Division of Equalization and Assessment (SDEA), the New York Power Pool (NYPP) and various municipal electric utilities in the State. In addition, certain information was provided by the Town. Certain legal issues were examined by the Washington, D. C. law firm of Duncan, Weinberg and Miller in a report prepared for a citizens' group in Southampton, New York, and we have utilized those opinions as guidelines in preparing our analyses. Legislation establishing the Department has not yet been developed by the Town and to the extent that responsibilities are eventually divided between the Town and the Department, as a municipal body, in a different manner than implied in this Report, there should be no significant impact on the results of this Report. An assumption basic to this analysis was that the Town would obtain a contract with NYPA to purchase power at wholesale at the same rate NYPA charges other public power systems in New York which purchase power for resale, over municipally owned electric facilities, within their service territories. We have assumed that power would be transmitted to the To~n from NYPA's generating facilities in the same manner that it is wheeled to the three municipal utilities operating on Long Island at the present time. Due to the current controversy as to the availability of hydroelectric power, we have also reviewed the cost of the nuclear power being sold to municipalities by NYPA for resale. For the purpose of this preliminary analysis, feasibility was measured by the amount of long term debt the revenues of the proposed Department could afford to support such that the sum of the annual debt service requirement and all other operating costs would result in a total revenue requirement less than or equal to the projected revenue from the sales of electricity by the Company in the Town. The debt was assumed to be in the form of general obligation bonds. These bonds would be issued to pay all costs of acquiring the existing electric distribution lines at the Town boundaries, extension or reinforcement of existing distribution lines to serve certain customers of both LILC0 and the Department presently served by distribution lines originating outside of their respective services areas, establishing metering points for incoming power wheeled from and for LILCO's system, providing for the establishment of a municipal electric Depar~aent which would operate the acquired properties and all engineering, legal and financing expenses incurred in the acquisition of the properties and in the issuance of the bunds. If the amount of debt supportable by the revenues from projected Department operation of the electric system was greater than the estimated cost of establishing operation of the Department system, then it is anticipated that municipal operation would be feasible. To the extent the Department could reduce, as compared to that charged by the Company, the amount it charged customers for electricity, the projected benefits and feasibility of the Town's establishing Department operations were assumed to increase. Our analysis also assumed that income to the Town from taxes or in-lieu-of taxes on the utility properties would be the same under both continued Company operation or municipal operation and that no property or other tax revenues would be used to pay any of the new utility's acquisition or operating costs. Sco~e of Analysis The scope of the analysis undertaken was as follows: 1. Conducted a field reconnaissance of the Town to determine the general electric distribution circuit configuration and define the points where the Town's electric utility would be separated from the remaining LILCO System. 2. Prepared a preliminary plan for separating the Town and LILCO electric systems identifying the limits of the electric service by the municipal utility. Determined the facilities required, including metering, and estimated the cost of construction of facilities required to physically establish the Town's electric system. 3. Estimated the value which could be expected to be associated with the purchase of the electric distribution properties within the Town. Such value was estimated based upon LILCO's average distribution system rate base accounts included in its FERC reports (original cost less depreciation) and the average reproduction cost new less depreciation value for LILCO distribution properties within the Town as reported to the Town by the SDEA. Other methods of valuation were considered based upon information as found to be available including capitalization of net income and fair market value based on comparable sales. 4. Provided a discussion of the possible mmnagement structure of an electric utility organization as an independent Department of the Town and indicated those utility functions which could be integrated on a cost accountable basis with existing Town facilities. 5. Performed a review of publicly available data obtained from FERC and NYPP and publicly owned utilities within the State to develop estimates of the necessary power requirements, power costs, costs associated with public operation of the electric system in the Town, and continued LILC0 operation. 6. Prepared a summary showing the estimated dollar amounts under various sensitivity cases of payment levels to LLLCO for the properties to establish a utility operation in the Tow~ with the corresponding levels of debt service. These s,~-.-arles will provide information to assist the Town in establishing the acquisition of the properties as required by the referendum. e ge I-4 Prepared an estimate of the total annual revenue requirements (level of retail electric rates) estimated as necessary to pay all operating and maintenance costs including purchase of power, and to make the ~nnual debt service payments if the Town were to operate a municipal electric utility on a financially independent basis. Developed pro forms comparisons of the cost of power in the Town under proposed mm~cipal operation and continued LILCO operation. Discussed with the Village of Greenpert the potential expansion of the Village's Electric Department to serve the entire Town or integrated operation with the Town's proposed Department as an alternative to establisktng a completely separate operation by the Town. The results of our analyses, which have been the basis for our findings as hereinafter stated, are presented in the sections which follow this s,,mm~ry section. The existing electric distribution properties now located in the Town have evolved under Company operation as an interconnected electric system as the result of the needs of the electric customers in the total local area without reco~lition of the boundaries of the Town. We have assumed the Town would acquire only those LILCO facilities located within the boundaries of the Town but would remain connected to the Company where power is delivered into the Town. It can be expected that some separation and extension of the distribution 1ices to ser~e customers now supplied from outside of the boundaries of the proposed separated electric systems will be required, therefore, we have allocated funds to be used for this work. A preliminary plan for separation and extension of the system was developed in this analysis. The power now used to supply the Town is trausperted to the Town and its environs over the Company's transmission facilities which are interconnected with NYPA and neighboring electric utilities. Power used in the Town is delivered to the distribution system at 13,800 volts or 13.8 kV through four substations in the Town. Facilities in two of these substations, the Peconic Substation and the $outhold Substation, transform power from transmission voltage (69,000 volts or 69 kV) to the distribution voltage of 13.8 kV for distribution throughout the Town and nearby areas; and the other two substations, Mattituck and Orient Point, transform power from the subtransmission voltage (23,000 volts or 23 kV) to the distribution voltage of 13.8 kV. It is proposed that switching and metering will be installed at the points on the electric system where power flows into or out of the Town. I-5 Under the general concept described herein, we have assumed the Department would be required to install or pay the Company to install metering amd isolation devices on the lines from which the Department would receive its power requirements at transmission level or wheel power for LILC0 to Shelter Island and Plum Island. Also, some extension of existing distribution lines could be required to pick up certain customers now served by distribution lines originating outside their respective utilities' service areas. The current iow level, of projected growth in electrical power usage iu the area indicates the existing facilities should be adequate to provide reliable service for a considerable period of time. We have developed projections of sales of electricity within the Town based on information developed as a result of a review of data from LILC0 reports and from the Tow~. We estimate that the peak power de~d of the electric customers within the Town will be approximately 25,140 kilowatts in 1986 and that the Town will experience minimal growth in sales of electric energy. Based upon our evaluation and projection of the rates the Company charges for electric service, we estimate the revenue the Company will receive from the sale of electricity in the Town will be approximately $12,961,000 in 1986. If the Town were to own and operate these electric properties, the amount of money the Town would have available to make ..nual debt service payments would be the amount of revenue remaining after paying all operating expenses including purchased power. Due to the variation in purchased power costs from N~PA, depending on the amounts of hydroelectric and nuclear power included in the purchase, we have calculated the amount of money available to pay debt service on the basis of the Department's purchasing two different combinations of hydroelectric and nuclear power from NYPA. The amount of funds estimated to be available to pay debt service in 1986 based on these power purchase cost alternatives is as follows: Estimated Funds Available for Debt Service 20,615 kW NYPA Hydro Allocation 10,000 kW N~PA Hydro Alloqation Projected Revenues at Company Rates $12,961 $12,961 Operating Expenses Normal Operation and Maintenance Capital Additions In-Lieu-of Tax Payments Purchased Power Total Operating Expenses 3,854 ~ 3,854 741 741 728 728 3~118 $ 5,045 8,441 310,368 Net Revenues Available to Pay Debt Service ~ ~ 4,520 $ 2,593 I-6 The amount of bonds the above net revenues would support depends on the structure of bond issue including the interest rate and term the bonds would be outstanding. It is also important to consider the limitations the laws of New York place on the way municipal governments must pay off principal. Due to the large variation in the interest rates government entities have had to pay on borrowed funds over the last two year period, and the expectation that these interest rates will continue to vary in the future, we have calculated the amount of supportable bonds issued for a term of 20 years with annual interest rates of 8, 10, and 12 percent. The amounts of bonds the net revenues from Department operation would support are tabulated below: ESTIMATED 1986 DEPARTMENT OPERATION AMOUNT OF SUPPORTABLE BONDS 20,615 kW NYPA Hydro . Allocation 10,000 kW NYPA Hydro Allocation Net Revenues Available to Pay Debt Service 4,520,000 2,593,000 20 Year Bonds Issued At 8% ~30,818,000 $17,680,000 10% $27,120,000 ~15,558,000 12% ~24,214,000 ~13,891,000 We have also made a preliminary estimate of the costs the Towa could be expected to incur in establishing an electric Department. These costs are estimated to be as much as $23,555,000 s,,mmmrlzed as follow: Allowance for Purchase of Electric Properties Allowance for Cost of Going Concern . . Estimated Cost of Severance and Reconnection Working Capital and Initial Coats .... Legal, Engineering, and Financing Expense Allowance for Reserve and Contingencies Estimated Total Investment (Bond Issue) ~17,210,000 250,000 251,000 2,200,000 1,500,000 2~144~000 ~23,555,000 Based upon the amount of bonds the first year net revenues would support varying from ~30,818,000 to ~13,891,000 depending on interest rate and cost of power supply, it appears that acquisition and operation of the electric system would be feasible if the Department could purchase a base amount of 20,616 kilowatts of its power requirement of NmfPA power at hydroelectric rates and it could borrow money at an interest rate of 12% or less. I-7 The level of savings in power costs from Town operation of the electric system is very sensitive, in the first year, to the amount of hydro power the Town obtains. Therefore, if savings to the electric customer in its first year of operation is the primary selection criteria, establishing the Department would not be a recommended option in the case of a 10,000 kilowatt allocation of hydro with the remaining power being purchased from NYPA's Fitzpatrick Nuclear Plant. However, it is important to note that even with this 10,000 kilowatt case, the District would begin to have lower costs than those projected for LLLCO as they phase in the cost of the Shoreham Nuclear Plant as we have assumed in this Report. With this increase in LILCO's cost of power, the break even costs of operation at all interest rates results by the end of the third year. The projected annual savings under this case for the years 1986 through 1990 are shown on Table VI-2 at the back of this Report. Findings Based on this preliminary analysis of the Town' s potential acquisition and operation of the electric utility facilities within the Town, it is our opinion that: 1. Acquisition by the Town of the electric system properties within the Town and the establishment of an electric Department is feasible from an engineering standpoint and could result in a lower cost of electric service to the Town's electric customers, based on the assumption that the Department could obtain hydroelectric power from NYPA. 2. The Town could expect to make an investment of up to ~23,555,000 for the acquisition of existing electric system properties and the establishment of an operating electric Department, which amount includes allowances for unforeseen contingemcies and establishment of a separate and independent electric utility. 3. The amount of savings in power costs the electric customers could expect to receive under Department operation of the electric distribution system is highly dependent on the amount of power that could be purchased at NYPA's hydroelectric rates and the interest rate to be paid on borrowed funds. If, for example, the Department could obtain 20,615 kilowatts of its power at N~fPA's hydroelectric rates and issue bonds at 10% interest, it could reduce the amount paid by the customers in the Village for electric service by amounts ranging from 4.6 to 33.5 percent over the first five years of operation. 4. Au electric Department could make payments in-lieu-of taxes at least equal to the taxes paid by LILCO. I-8 e e An electric Department would accumulate equity in its electric system which is represented by the principal payments on the bonds issued for establishing the Department, plus retained earninss, less the accumulated depreciation on the electric facilities. If the Town proposes to pursue the establishment of an electric Department further, it should initi.lly direct its efforts toward obtaining a share of the hydroelectric power NYPA markets to municip-1]y o~ned utilities, privately owned utilities, and industrials within New York. NYPA is currently planning a reallocation of its hydroelectric power in 1985, and it, therefore, appears the Town should consider filing an application for this power very soon in order to receive the proper cQnsideration from NYPA in its pla--{-g process. The Town should obtain legal advice on the revised New York statutes concerning condemnation of utility property which have yet to be tested in a project of this sort, the form and conduct of any necessary public referenda prior to further action, and other items which may bear upon the outcome of such an undertaking. If the Town proposes to pursue the establishment of au electric Department further, it should seek the advice of an investment banking consultant with respect to the issuance of bonds, possible limits on the amount of money which may be borrowed, interest rates, interim financing, and other items which may bear upon the outcome of such an under~king. Additional engineering design end engineering valuation studies would be necessary to develop detailed cost estimates and plans related to the establishment of a separate electric Department and to support those cost estimates and plans in anticipation of litigation between the Town and Company. SECTION II DISTRIBUTION FACILITIES LILCO owns end operates the electric transmission, substation and distribution facilities which are used to provide electric service in the Town. The electric system which comprises these facilities has evolved over a period of time, being enlarged end extended as necessary to meet the power requirements of the electric customers located in the area inside and near the Town. Therefore, this existing distribution system evolved as a result of the needs of the electric customers in the geographic area without reco~=n{zing Town boundaries or the boundaries of neighboring comm,~ties. In this analysis, it is assumed that a municipal electric utility established by the Town would provide electric service to the residents of the Town ouly, and thus, only those electric system facilities located within the Town which would not interfere with LILCO's electric service outside the Town would be acquired amd operated. Our general plen for acquisition includes the isolation of the electric transmission end distribution system serVing the Town from that of LILC0's end the installation of revenue metering which will measure the power flow into and out of the Town. Existin~ Facilities For the purposes of this report, a field reconnaissence was conducted to determine the general system configuration. Based ou the findings from this reconnaissance, the following system description was developed. The electric system supplying the Town of Southold consists of four substations served by 69 kilovolt and 23 kilovolt lines as illustrated in Exhibit II-1. The ~wo 69 kilovolt substations are Pecouic and Southeld. The two substations served at 23 kilovolt are identified as Mattituck and Orient. The distribution voltage in the Towm is 13.8 kilovolt with the 23 kilovolt serving as a subtransmission voltage and the 69 kilovolt as the trensmission voltage. Also contained within the system is a combustion turbine located at Southold Substation. This generating unit has a nameplate capacity of 14,000 kilowatts and a normal operating capacity of 12,000 kilowatts. Based on FERC reports, T.TLCO operates this ,,~t less than 1% of the year. For a more detailed discussion of the operations of this unit, refer to Section III of this Report. The 69 kilovolt line which serves Pecouic and Southold Substations, emanates from the Riverhead Substation which is located approximately seven miles from the Town line. It crosses the Town boundary ou Sound Avenue and runs along State Route 27 for the majority of its length to the Southold Substatlou. The 23 kilovolt subtrensmission line runs from the Town line all the way across the peninsula to 0rieut Point. A double circuit 23 kilovolt subtransmission line served from Riverhead Substation runs through Tuthills Substation into Mattituck Substation. From Mattituck a single circuit 23 kilovolt subtrensmission line ties into Peconic, Southold and Orient Point Substations. The 23 kilovolt subtransmission line continues through Orient Point Substation to serve Plum Island. Two express 13.8 kilovolt distribution feeders from the Southold Substation provide service to Greenport end Shelter Island. This arrangement is shown in schematic form in Exhibit II-2. II-2 General Plan for a Town Municipal System An electric distribution system serving the Town should be physically and electrically isolated from LILCO at the boundaries of the Town in such a manner that supply to the Town is through designated metering points. Since the existing LILCO distribution and transmission facilities deliver power without regard to these boundaries, the proposed general plan required that the transmission and distribution lines which cross the boundaries be reconfi~ured so that the power supply into and out of the Town is through proper revenue metering which will measure and record power flow. The general plan for the electric system using existing electrical facilities and certain new facilities constructed by the Town was developed for the purpose of auallrzing the feasibility of establishing an operating municipal electric utility in the Town. This plan represents one means whereby the existing electric facilities within the Town could be separated for operating purposes from the LILCO system. The general plan is technically feasible, however, it may not be the actual plan which would be followed if the Town established its own electric system, because the actual plan would be the result of negotiations between the Town and LILCO. It is possible that such negotlatious could result in a lower or hi~her cost plan than the general plan identified herein. Under the general plan, the Town would acquire all the substations within the Town' s boundaries along with the electric distribution and transmission facilities. Based on this premise, the combustion turbine facility located at Southold Substation has been included in the cost of takeover. If negotiations with LILCO require that this combustion turbine stay in the ownership of LILCO, metering arrangements and their attendant cost would have to be determined for transmission of the combustion turbine generation to LILCO's transmission grid through the Town's facilities. The ownership of the combustion turbine does not appear to be a critical item in the electrical operation of the m--{cipal system. However, the o~nership of this facility by the Town could be very attractive in re~ards to flexibility in power supply planning. Under the general plan, the existing 69 kilovolt transmission and 23 kilovolt subtransmission lines would be reconfigured through metering sets at the Town boundary to provide accurate indication of the power flow into or out of the Town's electric system. Primary source of supply would be from the 69 kilovolt transmission line. The 23 kilovolt subtransmission lines would serve as a backup alternative supply to the Town's electric system. As mentioned earlier, the two 23 kilovolt subtransmission lines serve the Mattituck Substation which originate at the I~iverhead Substation. One of these two lines loops through the Tuthills Substation in order to provide its service. Under the general plan, these two lines would be tied together at the Town line metering installation to provide Tuthills Substation the same reliability of service it presently receives and also provide alternative backup service to the 23 kilovolt subtransmission system at Mattituck II-3 Substation. A set of switches would be configured to provide the capability of tying the ~wo lines together or sectionalizing each of the lines to provide a backup source to the Town's 23 kilovolt subtransmission at the Town line. This configuration is illustrated schematically in Exhibit II-3. The existing 13.8 kilovolt distribution lines are configured such that the establishment of a separate Town owned electric system will not require a great amount of new construction. At the intersection of Laurel Lane and Peconic Bay Boulevard the existing distribution system services the westerly side of the intersection which are presently being served from a distribution line on the east side of the road. Service to the west side of Laurel Lane will require a single phase distribution line extension to be constructed from Peconic Bay Boulevard in order to provide services. The length of this line extension is approximately nine-tenths of a mile. The cost of this line extension is included in the Cost Estimate w~ich can be found at the end of this Section. Cost Estimate The following estimates of probable construction costs are intended for planning and budgetary purposes and are based on 1985 prices with some contingency allowance for price increases and changes during construction. Since an evaluation of the operating performance of the existing distribution system was outside the scope of this study, it was assumed that the distribution system and transmission system were performing adequately, i.e. acceptable voltage levels and conductor loadings. Consequently, no costs have been included for upgrade of equipment or for system improvements. The estimated costs are not based on design specifications and should be reviewed and revised as necessary, when detailed design of the changes are undertaken. The costs of detailed engineering, right-of-way procurement and other incidental costs are included in the overall cost estimate for engineering as have been the estimated cost for the revenue meters for the 69 kilovolt metering point installation. Costs have also been included for the three metering points that are assumed to be required to measure power wheeled through the Town's sFstem for LILCO. The meters will determine the amount of wheeled power for billing purposes. This equipment at these locations is assumed to provide the input to the meters such as potential transformers, current transformers, switches, support structure, and electrical connectors. Revenue metering on the 13.8 kilovolt distribution lines already exists to meter power supplied to the municipal system in Greenport. It is assumed that these meters would be acquired as part of the facilities We tuave estimated that the probable cost of construction will be $250,400 for metering, system separation, line extensions and contingencies and is based upon the quantities and costs shown in the following table: II-4 Se Probable Cost of Construction (1) Description Unit Cost quantity Metertn8 set, 69 kY, located on $59,800 Sound Avenue (2) 1 Lot Metering set, 23 kY, (backup) located between Sound Avenue and SE 27 at Town Line Extended Cost $~,800 $37,300 1 Lot $37,300 1 Lot 1 Lot Metering set, 23 kY, for service $37,300 to Plum Island Metering set, 13~8 kY, for service $17,400 to Shelter Island $18,900/mi .92 mi Distribution line extensions, 13.8 kV $37,300 $17,400 $17,400 6. Line removal and miscellaneous cleanup 7. Pricing Allowance 8. Construction Allowance $33,200 1 Lot $33,200 $30,400 $17~600 TOTAL Use $250,400 $251,000 (l) Does not include, engineering, right-of-way acquisition, legal and other individual costs. Does not include revenue meter, test pluEs, cabinets etc. EXHIBI i _0UTHO~D U@STATt0N 9-23-t3.8 KV - 14~000 KVA 12~500 KVA ORIENT SU_SSTAT~ON t 2.~- 13.8 KV 3800 KVA j SMISSICN ~.ANSMISSION N 23 ~(V TO -- PLUM ISLAND_~ TOWN OF SOUTHOLD SERVICE AREA ~-,. W. BEC;,,( AND ASSOC]AT£-.c 69KV TO -- RIVERHEAD SUBSTATION L TOWN LINE  UTHILLS LANE UBSTATION Li_'~5 - 15.8 KV 6~500 }(VA z OUBLE CIRCUITS 3KV TO LSRIVERHEAD uBSTATION MATTITUCX _'~UBSTAT 10 N --123-15.8 EL- 5~700 KVA 0 .~- ECONIC UB. STATION 9 23-13.8 KV . · - 20~150 KVA %.~,~ .... LEGEND ......... INDICATES 69KV TRAN INDICATES 23KV SUB';' ~ INDICATES SUBSTATIC 115KV 69KV 25 KV 13.SKV ~j-'rowN [~// L~INE I RIVERHEAD SUBSTATION TUTHILLS SUBSTATION I I I I MATT SUBS~ EXHIBIT 'ii-- 69 KV % ~,TTITUCK JE$~ATION PECONIC SUESTATION I I INSTALl- 13.8K~] METERING I iE.8KV TOi SHELTER; SOUTHOLD SUBSTATION INSTALL 23 xv-"L~ Or~IE NT / SU~ST~T!CN~/ 2~KV , r--,~--> T O, i .=~_ u M I ! i~LANE I X R~X]STIN6 _ t~J-~I$.SKV M.= ~ ~RING TOWN OF SOUTHOLD PROPOSED SYSTEM SCHEMATIC DIAGRAM LILCO ' 115 KV... 69KV - 2_.5 KV RIVER .... D SUBSTATION ,,,., TUTHILLS SUESTATION ~TOWN I~/~L.~ 1N E ,__FFNSTALr 23 X /LMETERIN6 INSTALL ~WITCHES I MAT- SUBS EXHIBIT TI-- 2 PECONIC SUBSTAT ION SOUTHOLD SUBSTATION ,TTITUCK BSTATION I1[ 13.SKV TO] SHELTER[ I'SL AND _] ORIENT SUBSTATION 25KV ),TO PLUM ISLANC ~XiSTING ~5.8 KV METERING ~ ~3,8KV TO ~REENPORT TOWN OF SOUTHOLD EXISTING SYSTEM SCHEMATIC DIAGRAM R. W. BECk( AND A55OCiATES SECTION III ELECTRIC POWER REQUIREMENTS AND PROJECTED COSTS The electric power requirements of the Town are basically the electric usage of the electric customers in the Town plus the energy losses that occur in transmitting the electricity from the point of supply to the electric customers. The power distributed throughout the Town is transmitted to the area by LILCO's transmission and subtransmission system which interconnects the distribution properties to the total generation and bulk transmission network of the State and the Northeast area of t~e United States. While the Company produces a large portion of the power it sells to its retail customers at its own generating plants, it also obtains substantial amounts of power through purchases from other utilities, including NYPA. Our preliminary analyses of the proposed Department's power requirements and costs under proposed municipal operation and the projected cost of power in the Town from continued operation of the electric system by the Company have been developed from information taken from the Company's annual reports to the FERC, PSC, and NYPP, which contain historical statistics relating to electric energy usage and the power supply sources available to the Company. Reported Ener~ Sales In its annual report to the FERC, LILCO provides information relating to the sales of electricity by rate classifications. The Company's annual report lists energy sales by customer class and by the revenues derived from those sales. The Company's total sales in those rate classifications of primary interest to this study reported to the FERC for 1983 were as follows: LILCO Ener$7 Use Data~ 1983 Revenue Avg. No. Average MWH Sold ($000) Cust. kWh/Cust. ReMenue/kWh SC-1 General SC-1 Water Heating SC-1 Water Heating & Space Heating SC-2L General 5,089,941 $592,202 751,063 6777 11.63~ 320,612 34,689 41,859 7659 10.82~ 386,931 36,860 26,597 14,548 9.53~ 4,243,835 $450,591 38,906 109,079 10.62~ Estimating Power Requirements The basic components of the de~nd and energy. Energy, measured represents the commodity used over electric requirements of a utility are in kilowatt-hours or megawatt hours, time by the consumer to run lights, III-2 appliances, etc., and is the ,ntt of power metered at the typical residence for billing purposes. Demand, measured in kilowatts or megawatts, represents the generating capacity required at any given moment to supply the energy being used and to overcome any losses of energy on the system between the generator and the consumer. During periods when a large amount of energy is being consumed, the dema-d is high and vise versa. On Long Island, the time of system maximum demand usual]y occurs on a s-tamer afternoon and is referred to as the s,mmer-peak. There is also a winter peak which is the time of maximum demand for that season and which, for LILC0, has historically been lower than the s,,mmer peak. The spring and fall represent off-peak seasons where electric consumption is closer to the overall average for the year. The peak demand of an electric utility is important because it determines how much generating capacity must be reserved for that utility to assure reliable service. The total ~power requirements of the Department w411 consist of the energy sales in the Town, plus consumption of electricity necessary to operate the utility, energy currently supplied by the Company for streetlighting requirements, and the energy losses due to distributing the power from its point of supply to the Department's customers. During 1983, the Company reported system losses and unaccounted for energy of 8.1%. Information available from other municipal utilities indicate distribution losses, internal use, and unaccounted for energy as approximately 5% of total requirements. For the purpose of this analysis, we have assumed lost and unaccounted for energy requirements would be 15% per year. This loss factor is intended to cover both the municipal utility's system losses and losses in the transmission system bringing the power from N'YPA's generating sources to the Town. This factor is higher than that generally anticipated because of the significant distance from NYPA's generating resources and is similar in magnitude to that experienced by the electric utility serving Greenport. In developing a projection of the power requirements and a power supply plan for the Department, it is necessary to estimate the relationship between the average and peak electric requirements of the Department's electric system because the cost of power purchased from NYPA is priced on the basis of this relationskfp. This relationship is referred to as the system load factor. According to its FERC-1 Report, during 1983, the Company had an annual load factor of 54.9% for its total electric system operation. This is a generally higher factor than normally measured for small utilities which serve a primarily residential customer base which is often found to range about 40% to 50%. Due to the fact that the lower the load factor, the higher the cost of purchased power, we have assumed a conservative annual system load factor of 45%, more typical of municipal operation, would be applicable for the proposed Department's electric system. Projected Requirements The future power supply requirements for an electric department serving the Town were projected based upon a review of data from a number of sources. In preparing the projected power supply requiremen~s~ an attempt has III-3 been made to make reasonably conservative assumptions which will result in the estimates tending to be high to avoid understating the cost to operate the utility. There is data available on the historic energy consumption by customer class in Southold in the Company's FE~C-1 reports through 19i80 after which it was no longer a reporting requirement. This. data forms the base from which population projection data and other information was used to estimate future power supply requirements. Projections of the power supply requirements of the residential customers in the Towm was based upon consideration of the number of customers and the average consumption of electricity per customer. The Company reported it served, in the Town, an average of 8,854 residential customers per month in 1980. Based upon discussions with the Town, they estimate a growth of 1,600 new housing units over the 10-year period of 1980 to 1990. They also report that the growth in residential construction of about 250 houses per year since 1980 but expect this growth to flatten out between now and 1990. Using the 1,600 units as the' total over the 10 year period, the indicated post-1985 growth rate is 70 houses per year. No apartment complex or other multi-family housing construction is expected according to the Tow=. By estimating the residential customers in this fashion, the projection is conservative by front loading the number of customers rather than assuming a single average customer growth from the base year. Total power supply requirements are higher in the critical early years of the Department's operation using this method. Discussions with the To~: indicate that a growing proportion of the residential population of the Town is represented by the age groups generally identified as late middle age and senior citizens whose use of electric energy tends to be price sensitive. This is expected to result in less per customer usage of power in the Town than om LILC0's systemwide average. These conditions generally resemble those experienced by the residential customers served by the Greenport Electric Department. Average annual use on the Greenport system was approximately 5,100 kilowatt-hours per customer for 1983-1984, which is less than the 6,777 kilowatt-hours per SC-1 General residential customer reported by LILC0 in its 1983 FERC-1 report. Therefore, for the purposes of this Report, we are projecting average energy use by residential customers in the Town at 5,100 kilowatt-hours per customer for each year of the projection period. Based upon the factors discussed above, the projected number of residential customers in the Town and sales of electricity to those customers in the Town is as shown in the following table: Residential Electric Sales Energy Sales Year Number of Customers (000 kWh) 1986 10,200 52,020 1987 10,250 52,275 1988 10,300 52,530 1989 10,400 53,040 1990 10,450 53,295 111-4 The commercial customer class in Southold does not show the same high rate of expansion as found on the LILC0 system as a whole which is experiencing an influx of high-tech and service industries. Information from the Town indicated that the Town's location will tend to discourage industrial and office development. The data available in Company reports indicates commercial customer growth in the range of 5-10 customers per year and that, historically, the Town's commercial customers have accounted for approximately one-half of one percent of the Company's commercial and industrial (C&I) sales. Using these factors and the Company's proJectians of C&I sales from its New York Power Pool Report for 1983, we have projected the commercial sales in the Town as follows: Commercial Electric Sales Energy Sales Year Number of Customers (000 1986 1,020 32,700 1987 1,025 32,850 1988 1,035 33,150 1989 1,040 34,000 1990 1,050 34,500 These projected figures appear sufficiently conservative for the purposes of this Report considering that they represent a high (15-20%) growth in per customer energy consumption over the Company's 1980 data for the projection period. Based upon the data provided by the Town and in Company reports, it appears that municipal use of electricity is included in the data for C&I customers, except for street lighting. Using the information available, we have allowed 800,000 kilowatt-hours per year for municipal street and highway lighting. The total sales of electricity must be adjusted for transmission and distribution losses as previously discussed. Using the 15% loss factor we have assumed for the purposes of this Report, the total projected energy requirements and peak system dems~d based upon a 45% system load factor for a municipal electric utility serving the Town are shown in the following table: PROJECTED POWER REQUIREMENTS SOUTHOLD ELECTRIC UTILITY DEPARTMENT 1986 1987 1988 1989 1990 Demand (kW) 25,140 25,310 25,563 26,020 26,333 Energy (000 kWh) 99,101 99,774 100,771 102,572 103,805 111-5 Cost of Electric Service from the Com~am¥ There is significant uncertainty concerning the cost customers will have to pay for electric service from the Company in the future. The primary source of this uncertainty relates to the controversy surrounding the Shoreham Nuclear Power Station. At the present time, construction has been completed on the plant at a cost in excess of $4.2 billion and fuel has been loaded. Litigation regarding the emergency plan-lng for the plant has delayed the Company from undertaking low power testing and is delaying the eventual commercial operation of the plant. It is not the purpose nor the intent of this Report to take a position on the issues related to the Shoreham plant. However, the eventual outcome of the Shoreham debate will affect future cost of electric service from LLLCO. Additionally, the Company has informed the municipal utilities on Long Island that ,,,less the Shore_ham Plant comes on line there will be a shortage of transmission capacity, restricting LILCO's ability to transmit their allocation of NYPA power into the area. We have assumed that any transmission related problems will be resolved by the time that the Town begins municipal operation. For the purposes of this Report, we have chosen to base the projected cost of LILCO service on amounts developed by the PSC in Case No. 28Z52. The costs are as set forth under the P$C's Rate Amelioration Plan which assumes that Shoreham comes on line and is phased into the LILCO rate base over a five-year period to avoid the rate shock or sudden rise in electric rates which would occur if the entire investment in Shoreham was allowed in rate base in a single step. Additionally, we discussed the current statns of the rate plan with the PSC and have dete~ined that it wo~td be appropriate to reduce the costs projected by the P$C by 1~ per kilowatt-hour to account for slightly lower oil prices than included in the P$C's projection in Case No. 28252. The quantity of energy reflects the projected sales of energy within the Town and does not include the 15% losses which are included in the Department's projected requirements because the cost of such losses would be included in the cost of energy sold by the Company. The projected cost of LILCO service to the customers in the Town ranges from approximately $12,961,000 in 1986 to $18,486,000 in 1990 as developed in the following table: III-6 Projected Cost of Continued LILCO Service Year Average Revenue PSC Rate Adjusted Projected Amelioration Per Discussion Southold Plan (1) WIth PSC (2) Energy Sales (~/kWb) (~/kWh) (k~m 000) 1986 16.04 15.04 86,175 1987 17.86 16.86 86,760 1988 20.30 19.30 87,627 1989 20.85 19.85 89,193 1990 (3) 21.48 20.48 90,265 LILCO Revenue From Southold $12,960,720 $13,760,136 $16,912,011 ~17,704,811 ~18,486,272 (1) - Supplemental Exhibit of R/chard L. Ansaldo, NYPSC Case No. 28252. (2) - Per discussion with Richard L. Ansaldo PSC on 2/22/84 a l~/kWh downward adjustment deemed appropriate based on current oil prices. (3) - Based upon 3% 1989 increase projected by PSC. New York Power Authority The NYPA is the most economical and, therefore, is both the most sought after end the primary source of power used by existing publicly-owned electric utilities within the State. NmfPA is a public corporation and political subdivision of the State which builds and operates electric generating and transmission facilities for purposes specified by the Legislature and the Governor. N%'PA was originally created purs-mnt to the Power Authority Act of 1931 (Act) to finance and construct hydroelectric power projects in the international rapid sections of the St. Lawrence River near Massena, New York, the hydroelectric project on the Niagara l~iver, and certain related transmission lines. In 1968, the Act was amended to authorize NYPA to build nuclear and pumped storage generating plants in order to assure optimum use of the St. Lawrence end Niagara Projects, to attract and retain high load factor industry, to supply the needs of NYPA's existing municipal and rural electric cooperative customers, end to assist in maintaining an adequate, dependable power supply in the State. This permitted construction of the James A. Fitzpatri=k Nuclear Plant and the Blenheim-Gilboa Pumped Storage Facility. The Act was further amended in 1972 and in 1974 to authorize N~A to construct and/or acquire the necessary generation to dependably supply electricity to the Metropolitan Transit Authority, the New York City Transit Authority, the Port Authority of the State of New York and New Jersey, the City of New York, the State, the Federal Government, other public III-7 corporations, and electric companies in the metropolitan area of New York City. This allowed NYPA to acquire the Indian Point No. 3 Nuclear Plant and the Astoria No. 6 oil-fired plant from Consolidated Edison Company. At the present time, NYPA is involved in projects to add additional generating capacity to the Niagara Project, construct small hydro units, and participate in waste-to-energy facilities in order to increase its electric generating capability. NYPA has also entered into an agreement to purchase 800,000 kilowatts from Canada during the s,,-,,er months and is currently constructing transmission facilities to enhance the delivery of electricity from its upstate facilities and Canadian purchase to the Company and other investor-owned utilities in the southeast region of New York state. NYPA's major power generating resources and their capability are shown in the following table: NYPA POWER RESOURCES Generatin~ Plants Installed Capability (kW) 1953 Project: Niagara Project Moses Plant Lewiston Pumped Storage Plant St. Lawrence Project 1970 Project: Blenheim-Gllboa Project Fitzpatrick Nuclear Plant 1974 Project: Indian Point No. 3 Astoria No. 6 TOTAL 1,950,000 240,000 912,000 1,000,000 883,000 1,013,000 833,000 For full requirements customers, NYPA assumes the responsibility of planning for additional power supply resources and coordinating the operation of existing resources. NYPA is also responsible for arranging for the transmission of power from its generating resources to its municipal utility customers. This has relieved the municipalities that are all requirements wholesale power purchasers from NYPA of any power supply operating or planning activities. The cost of power from NYPA currently varies depending on the units NYPA identifies as used to supply the power. The cost has historically been based upon the costs of the conventional hydroelectric projects and is the basis for the wholesale rate under which N~PA supplies hydroelectric power to the existing municipally-owned utilities in the State. Currently, NYPA also includes power from the Fitzpatrick Nuclear Plant and its associated costs in the power supplied to a number of the manicipals. A second set of costs is III-8 based upon the Southeast New York (SENY) generatiug plants (i.e., Indian Point No. 3 and Astoria No. 6). These SENY plants supply power prettily to public authorities located in New York City and Westchester County. The power costs under each of these divisions are further subdivided into rates for each different customer class serviced from the particular group of power supply resources in the division. NYPA supplies most of the power requirements of its existing publicly-owned utility customers from its conwentional hydroelectric generating facilities, the St. Lawrence and Niagara Projects. N~PA's sales to publicly-owned utilities from the Niagara Project are made subject to the preference provision of the Federal Niagara Redevelopment Act which rends as follows: "(1) In order to assure that at least 50 per centum of the project power shall be available for sale and distribution primarily 'for the benefit of the people as consumers, particularly domestic and rural consumers, to whom such power shall be made available at the lowest rates rensonably possible and in such manner as to encourage the widest possible use, the licensee in disposing of 50 per centum of the project power shall give preference and priority to public bodies and non-profit cooperatives within economic transxission distance. In any case in which project power subject to the preference provisions of this paragraph is sold to utility companies organized and administered for profit, the licensee shall make flexible arrangements and contracts providing for the withdrawal upon reasonable notice and fair terms of enough power to meet the reasonably foreseeable needs of the preference customers." NYPA sales to its existing state municipal and cooperative utility customers has totaled 547,000 kilowatts. This allocation has been identified as 461,000 kilowatts from the Niagara Project and 86,000 kilowatts from t_he St. Lawrence Project. The remaining output from the St. Lawrence and Niagara Projects, ss well as the output from NYPA's other power generating facilities, is sold to investor-owned utilities in the State, NYPA's industrial customers, and out-of-state preference customers as repuired by the Federal Niagara Redevelopment Act. Such sales include firm power, firm penking power, peaking power, and secondary energy sales. Availability of NYPA Power The availability of additional hydroelectric power to both existing and newly formed municipally owned utilities has become a major item of contention between N~PA and the municipals both inside and outside the state. NYPA has, since the early 1970's, a record of advising municipals interested in investi/atin~ the possibility of form/n~ a new electric system III-9 that there was no NYPA hydroelectric power available for them. the mid-1970's, NYPA did begin to supply power to municipals previously served and in 1981 began supplying the newly formed Massena, New York. However, in it had not municipal in Currently, NYPA has advised each municipal it services of maximum hydroelectric power it can receive and when the municipal power requirements exceed the amount, they are assumed by NYPA to be purchasing nuclear power which is sold at a higher cost. This nuclear power is priced on the basis of NYPA's Fitzpatrick Nuclear Plant. The Municipal Electric Utility Association of the State of New York (MEUA) brought suit against NYPA to increase the hydroelectric allocation and has won an increase in the amount of hydropower allocated to in-state preference customers from 547,000 kilowatts to 697,530 kilowatts as of June 30, 1985. In addition, a ruling by FERC in March, 1985 has found that to be a preference customer, the utility must be publicly owned and operate its own distribution system. This ruling effectively denies preference power to'the so-called ~,ntcipal Distribution Agencies (MDA) formed with NYPA's encouragement to receive an allocation of power to be distributed by the Investor Owned Utility serving the electric customers within the political boundaries of the MDA. The complex mature of the public power supply situation makes it difficult, at best, to estimate how much of NYPA's various sources of power would be finally obtained for the Town's electric utility. We believe the MEUA's position that hydroelectric power should be allocated to municipally owned utilities which operate their own electric distribution system is being presented on a sound basis amd the historical decisions in this regard support the recent FERC ruling. However, it has to be recognized that there is a limited amount of hydroelectric power so that while we believe there is a good potential for obtaining on allocation of hydroelectric power for newly formed public electric utilities, it cannot be expected that ali municipals who may, at some future date, apply for hydroelectric power, will obtain it. Power Supply Costs The low cost of NYPA hydroelectric power makes it the most desirable power for any proposed new consumer owned system in New York. However, the current controversy over its availability suggests the Town needs to investigate this potential source further before it assumes it is available. Im order to provide a reasonable indication of the potential range of power supply costs under m~n~cipal operation, we have developed two separate cost analyses (cases) demonstrating the cost effect of two power supply combinations from NYPA. The first case assumes a combination of power sources consisting of 82% hydroelectric capacity and 18% nuclear capacity from NYPA's Fitzpatrick Nuclear Plant which is the current overall average mix of power received by publicly owned electric systems in New York State according to NYPA's April, 1985 allocations. In this case, the amount of hydropower becomes fixed with the initial allocation and all additional power beyond the initial year is assumed to be nuclear power. The second case assumes 10,000 III-lO kilowatts of hydropower at 45% system load factor with all additional power being supplied from the Fitzpatrick Nuclear Plant. This case is based upon the Town's initial notification to NYPA in a letter dated March 28, 1985 that it is considering the formation of a municipal electric system. The cost of hydroelectric capacity from the Niagara and St. La~ence Projects has been held constant since those facilities began generating power. The cost of energy has been reduced from 2.67 to 2.05 =~lls per kilowatt-hour based upon a determination made in connection with a review conducted at the tine the bonds issued to construct the projects were pai~ off. Because there is no fuel cost associated with hydroelectric generation, these energy sources have been insulated from those price rises that have affected the cost of energy from fossil fueled generating facilities. The cost of capacity and energy from these two hydro sources is as follows: NYPA Hydroelectric Power Costs Capacity Energy ~1.00 per kW per month $0.00205 per kWh For the purposes of this analysis, we have held the cost of hydroelectric power constant for 1986-1990. In comparison to the costs associated with hydroelectric power, the cost of power from the Fitzpatrick Nuclear Plant has risen significantly since it went into operation in 1975. In February, 1982, the following rates took effect for power from the Fitzpatrick Nuclear Plant: February, 1982 NYPA - Fitzpatrick Nuclear Plant Power Costs Capacity Energy $13.40 per kW per month $ 0.00965 per kWh This is an increase from the previous rate of $11.00 per kilowatt per month and 8 mills per kilowatt-hour and almost a doubling of the rate of $6.50 per kilowatt per month and 5 mills per kilowatt-hour in effect in 1977. The increase in capacity cost was a result of expenses NYPA incurred for plant modifications which are mow completed. For the purposes of this a~-~ysis, we have projected the cost of energy from the Fitzpatrick Nuclear Plant to increase at the rate of 7~/year to reflect our projections of the long-term trend in the cost of nuclear fuel. Based upon this method, the cost of nuclear power for the proposed municipal for the 1986-1990 study period is as follows: Cost of NYPA Fitzpatrick Nuclear Plant Power 1986-1990 Capacity Energy Year (S/kW-mo) (S/kWh) 1986 13.40 .01033 1987 13.40 .01105 1988 13.40 .01182 1989 13.40 .01265 1990 13.40 .01353 III-11 Transmission and Delivery Char~es There will. be additional costs associated with the transmission and delivery of the power from NYPA's generating facilities to the Town. In New York State, each utility which allows power to be transmitted across its system is allowed to charge for this service, known as wheeling. For the purposes of this analysis, we have reviewed the various costs charged by LILC0 for the transmission and delivery of power. The current wheeling charges paid by the Greenport Long Island municipal utility for high voltage transmission by intervening utilities and transmission and distribution voltage delivery by LILCO are as follows: NYPA Niagara Mohawk Con Edison LILCO (transmission) LILC0 (delivery) S0.18/kW-mo $1.38/kW-mo S1.41/kW-mo $2.69/kW-mo S .90/kW-mo Based upon this review, we estimated the District would be charged a total of $5.66 per kilowatt per month for wheeling services in 1985 because it would receive power at transmission level voltage. It has been estimated that this wheeling charge will increase at the rate of approximately 5% per year as shown in the following table: Transmission and Delivery Charges 1986-1990 (S/kW-mo) 1986 1987 1988 1989 1990 $5.94 $6.24 ~6.55 $6.88 $7.22 III-I/ Cost of Power to the Department As a result of our analyses of the individual items affecting the power supply costs, we have prepared a projection of the overall cost of power supply to the Department. Due to the fact that the Town does not have a power contract with NYPA, we have developed two power supply cases to provide information on the range of costs which the Department could expect to pay to meet its power supply requirements from the resources NYPA uses to supply its all requirements municipal electric utility customers. The first case assumes the full requirements of the District are met with a mix of 82% hydroelectric end 18% nuclear resources. This mix is based upon the average NYPA hydro and muclear allocations to municipals iu New York as of April, 1985. This would amount to a 20,615 kilowatt hydro allocation which is held constant over the 1986-1990 period. All additional capacity required to supply the Department's power requirements is assumed to come from NYPA's Fitzpatrick Nuclear Plant. This is the lowest reasonable cost case based upon the current NYPA municipal power allocations and clearly demonstrates that hydropower is the most desirable resource. As shown on Table III-1 at the end of this Section, this mix of power is projected for the District to range in cost, for the 1986-1990 period, from appromimately ~3,115,000 to ~3,919,000. It should be uoted that the demand and energy costs for this case represent less than half the total cost of power per year with the majority of the costs of power supply related to the trausmissiou and delivery of costs. The second case assumes the Department is limited to a 10,000 kilowatt hydropower allocation and energy is supplied at 45% load factor with the remainder of the Department's power supply requirements coming from the Fitzpatrick Nuclear Plant. This case is developed to demonstrate the impact of obtaining a substantially lower amount of hydropower with the reduction in hydropower being replaced with nuclear power from the Fitzpatrick Nuclear Plant. The total costs of power under this case range from approximately $5,045,000 to $5,979,000 from 1986 to 1990. The estimated cost components and total power supply costs projected for the Department are set forth on the following table: III-13 COST OF NYPA POWER SOUTHOLD MUNICIPAL ELECTRIC UTILITY $ooo Peak De,nd (kW) Energy Requirement (MWh) Case 1 - 20,615 kW (18%) Hydro Allocation Hydro Capacity Charge Hydro Energy Charge Nuclear Capacity Charge Nuclear Energy Charge Wheeling Charge TOTAL Case 2 - 10,000 kW Hydro Allocation Hydro Capacity Charge Hydro Energy Charge Nuclear Capacity Charge Nuclear Energy Charge Wheeling Charge TOTAL 1986 1987 25,140 25,310 25,563 99,101 99,774 100,771 1988 1989 1990 26,020 26,333 102,572 103,805 $ 120 $ 120 $ 120 $ 120 $ 120 81 81 81 81 81 2,435 2,462 2,503 2,576 2,626 617 667 725 799 871 1.792 1.895 2.009 2.148 2.281 { 247 { 247 { 247 $ 247 { 247 167 167 167 167 167 727 755 796 869 919 185 205 231 270 305 1.792 1.895 2.009 2.148 2.281 III-14 Southold Combustion Turbine LILC0 has a generating unit identified as the combustion turbine type located in the Southold Substation in the general vicinity of Chapel Lane. According to the Compauy's FERC-1 report, the unit was placed in service in 1964 amd has a nameplate rating of 14,000 kilowatts. The FERC reports show that from 1980-1983 the unit has been connected to the system an average of 44 hours per year and generated an average of 100 per MWh/year. This data is indicative of a unit that is primarily run only for a few hours at the time when the LILC0 system is at or near its yearly peak or in the event of an unscheduled shutdown of a major generating unit. The unit can be started up on-site or by remote control from LILC0's operation center in Hicksv~lle. Combustion turbine type units are normally installed with the intention of only operating them a few hours each year due to their high operating costs and~ therefore, high costs per kilowatt-hour for generation. For the purposes of this Report, we have assumed that the Town will acquire but not operate the unit. Given the age of the unit, its depreciated cost will not significantly impact the overall cost of the acquisition and the unit may be useful in the future for peaking or reserve purposes depending on the future costs associated with power supply from NYPA non-hydro sources. At present, the unit capacity is not sufficient to meet the projected peak demand of the Town and, therefore, we would not anticipate tha~ it would be cost effective for the Department to staff for the unit's operation and maintenance during its initial period of service as an all requirements customer of N~fPA. In Section IV of this Report, we have included an allowance to purchase the unit. This gives the Town the option to mothball the unit until it can play an economic part in the Department's power supply plans, sell the unit or compensate LILCO for it if the Company claims that the ,,ntt is needed on the system for spinning reserve or system stability purposes. SECTION IV ESTIMATED VALUE OF THE ELECTILIC SYSTEM The estimated full value of the electric system facilities to be acquired was made to determine the price the Town might have to pay LILCO for properties. Full value is the amount of money that a well-informed buyer is Justified in paying and a well-informed seller is Justified in accepting, assuming that the parties thereto are acting without undue compulsion and that the property is offered at the marketplace for a reasonable length of time. For the purposes of this Report, the estimate of value is made with the intention of arriving at an approximation of the highest formal appraisal value in the event that the Town obtained the properties through coudemnation proceedings. In determining full value, properties must also be appraised on the basis of highest and best use. We believe all Parties would agree that the highest and best use for the properties under consideration is their continued use as an electric Utility system. Approaches to Value The three classic approaches to value are generally described as the Comparative Market Approach, the Capitalized Income Approach, and the Cost Approach, which includes both the Original Cost Less Depreciation and Reproduction Cost New Less Depreciation methods. Not all of the three approaches to value are applicable in the valuation of some types of property. The three appoaches are discussed in the paragraphs which follow. Comparative Market Approach to Value The application of the Comparative Market Approach to value is a consideration of other recent transactions involving similar types of property in the vicinity. Over the years, there have been sales of State of New York. In general, the terms "recent," "similar types of property" are quite argumentative. utility property in the "in the vicinity," and In 1979 in Town of Massena, New York vs. Niagara Moha~k Power Corporation (Index 59244), a three-Judge commission was required to determine full value or fair value. The decision in that case stated: "On the whole record, we conclude that the fair value of the physical plant taken is $4,214,000. This is very close to our calculation of reconstruction cost new less depreciation of that property." IV-2 The original cost less depreciation or net book cost of the Massena property which was the subject of this condemnation proceeding was $1,826,695, therefore, the fair value was determined to be 2.31 times net book cost. Due to other considerations, Massena negotiated with Niagara Mohawk to purchase an expanded amount of properties and became an operating electric utility on May 8, 1981. Considering only this recent transaction, it appears that the Comparative Market Approach to value directs an appraiser to produce an opinion of value based upon Reconstruction (or Reproduction) Cost New Less Depreciation of the property. Capitalized Income Approach to Value The value of commercial property, such as apartment buildings, is generally determined by capitalizing the estimated prospective net income. In New York and more than 35 other states, public utilities such as LILC0 are regulated by a state agency which periodically prescribes a maximum rate of return a utility may earn on its original cost rate base. If, therefore, a utility earns exactly the prescribed rate of return on its rate base and that return is capitalized by a suitable capitalization rate (the rate of return percentage), the result is rate base. The courts have held that rate base and full value are not the same. The Cost Approach to Value The cost approach to value is a consideration of the current cost of replacing or reproducing a property with suitable deductions for depreciation. This is frequently accomplished by pricing a bill of materials or by estimating the cost per square foot of various types of construction. In utility properties, an inventory can be made and the items priced at current cost. This method is cumbersome and very expensive when the properties are extensive as is the case with LILCO. An alternative to the priced inventory is to determine the Reproduction Cost New by trending surviving original cost dollars by means of a suitable index. Surviving original cost dollars by plant classification or account are available from the records of the public utility which is required to keep its books in that manner by the New York Public Service Commission. The SDEA further requires that these records identify the taxing district in which the property is located and distinguish between that which is located on public rights of way (Special Franchise Property) and on private property. As noted above in the discussion of the Comparative Market Approach, one very recent sale of utility property resulted from a decision of the court that the fair value was very near the "reconstruction cost new less depreciation." IV-3 Perhaps more important is the frequently stated opinion that "specialty" property must be valued ou the basis of Reproduction Cost New Less Depreciation. Electric, gas, and steam heat utility properties qualify as "specialty" property by the criteria set forth in Matter of Count~ of Suffolk (Van Bour~ondien), 47 N.Y.2d 507, 392 N.E.2d 1236, 419 N.Y.S.2d 52 (1979): "(a) The improvement must be unique and must be specially built for the specific purpose for which it is designed; (b) There must be a s~ecial use for which the improvement must be so specially used; (c) There must be no market for the type of property *** and no sales of property for such use; and (d) The improvement must be an appropriate improvement at the time of the taking amd its use must be economically feasible.and reasonabl~ expected to be replaced ***. In Matter of G~eat Atlantic & Pacific Tea Co. v. Kiernan (42 N.Y.2d 236, 240), in the context of a tax certiorari proceeding, we added a further refinement to the element of uniqueness: 'a specialty may perhaps be best defined as a structure which is uniquely adapted to the business conducted upon it or use made of it and cannot be converted to other uses without the expenditure of substantial sums of money' (47 N.Y.2d at 51/; emphasis on original)." It is noted that on August 23, 1984 in Tenneco Inc. - Tennessee Gas pip,l~n, Division v. Town of Cazenovia~ New York, et al, an additional phrase was added in describing a specialty as follows: "It could not be converted without substantial expenditures and it is an appropriate improvement, which if destroyed, would be reasonably expected to be replaced or reproduced." There can be no doubt that electric service is desirable and essential in the Town. Overhead electric facilities are us-~lly less desirable than uaderground facilities, although the former are certs~nly less expensive to install and much easier to service and replace. These factors would be considered in the event of a total replacement and could be expected to result in a system substantially like the present electric system. Selected Basis of Valuation Based upon the acceptance of Reproduction Cost New Less Depreciation as the basis of determining fair value in utility property exchanges and condemnation cases and considering utility property as a "specialty" property, the Cost Approach Method of value utilizing trended surviving original cost dollars is selected for use in this study for the purposes of arriving at an estimate of the value of the properties in the Town which would likely approximate the value resulting from the highest value of a formal approved appraisal. IV-4 Estimated Value of the Electric S~stem in the Town In order to estimate the value of the existing electric system in the Town without benefit of a formal appraisal, we have relied upon information developed by the 8DEA for the electric system in the unincorporated areas of the Town supplied at the request of the To~n. The reports provided by SDEA included the following information: 1) Original Cost (OC) of properties installed prior to 1951 2) OC of properties installed on public ways subsequent to 1951 3) OC of properties installed on private ways subsequent to 1951 4) Reproduction Cost New (RCN) of properties installed on public ways subsequent to 1951 5) Reproduction Cost New Less Depreciation (RCNLD) of properties installed on public ways subsequent to 1951 The data supplied by SDEA was used as the basis to arrive at an estimated value of the properties as of January 1, 1985 in the manner outlined iu the following paragraphs. Based upon the field reconnaissance, it was determined that virtually all of the electric system presently serving the Town was constructed subsequent to 1951; and therefore, it was assumed that all properties in the Town are covered by the subsequent cost categories. In addition, it was assumed that any development of properties on private ways occurred in parallel with development on public ways, thus, permitting the application of the ratio of RCN/OC of properties on public ways to the 0C of properties on private ways to develop the estimated RCN of properties ou private ways. Finally, it was assumed that the percentage condition (the reduction in value because of depreciation) computed by SDEA for properties on public ways was also applicable to the properties on private ways. The values supplied by SDEA are based upon the original cost of properties installed to year's end 1983 and indexed to a RCN using the Handy Whitman Index of Public Utility Construction Costs at a value for an average date expressed as "giving two weights to 1978 and one weight to 1980." Utilizing this same index, the combined public and private way property value was brought forward to a valuation date of January 1, 1985. Because the field reconnaissance indicated, no significant new construction of electric facilities ongoing at present in the Town, this value was used as the basis for estimating the value of the electric system in the Town. Certain of the electric system properties on private ways in the Town do not have account designations which correspond to properties on the public ways which RCN and depreciation have been computed by SDEA. The estimated value for those properties, primarily substations and the combustion turbine, IV-5 was computed by indexing the 0C data provided by SDEA from the years of installation to 1/1/85 and depreciating at the straight line rates set forth in LILCO's FERC-1 Report. In addition, we have included an amount for meters which are not included in the SDEA reports to the value of the distribution properties. The estimated RCN and RCNLD for the electric system properties in the Town by principal class of equipment is broken out as follows: Estimated Value at 1/1/85 RCM (~000) RCI~D (~000) Generation ~ 4,006 ~ 726 Transmission 3,723 3,014 Distribution 21,669 13,223 Street Lights and Signals 474 247 ' Y,21o There is some question about the eventual disposition of the combustion turbine as discussed in Section III. However, by including the estimated value of this unit in the amount allocated to purchase the facilities, the intention of approximating the highest value resulting from a formal appraisal has been served. For the purposes of this report, we will utilize a value of $17,210,000 as the estimated value of the electric properties presently serving the Town. As a rough test of whether this estimate of value falls within a reasonable range, we refer back to the discussion of the Massena case, noting that the ratio of net book cost to RCNLD was determined to be 2.31. In its 1983 FERC-1 Report, the Company reported a net book value of its distribution plant for the year end 1983 (or January 1, 1984) of ~488,612,289 and 881,224 distribution level customers (residential and small commercial/industrial) for a net book value per customer of ~554. Applying the 2.31 ratio yields an RCNLD of $1,280/customer, which is within range of the 31,202 ($13,223,000 divided by 11,000) calculated based upon the SDEA figures for distribution properties and our estimate of approximately 11,000 customers. Goin5 Concern In addition to the actual distribution properties, the District will require certain maps, operating manuals, and billing data currently maintained by the Company. This material designated as Going Concern may require certain efforts by the Company to separate it from the Company's total data base. For the purposes of this study, we will allow $250,000 for the acquisition of Going Concern from LILCO. SECTION V ESTABLISHMENT OF MUNICIPAL ~T.F~CTILIC DEPARTMENT Our analyses of the costs of establishing and operating a municipal electric system to serve the Town is based upon the assumption the Town would establish a Department which is fiscally independent of all Town operations. In estimating the basic type of organization proposed for the Department and the personnel, equipment and space requirements, we have utilized information om existing municipal system operations as available from other sources. Orsanization~ Personnel and Facilities Information provided by the Town indicates that in establishing the proposed Department, it would be a requirement that all costs related to the acquisition of facilities and operation of the Department be borne by utility customers and reflected in utility rates. The Town does not, at present, operate any services on this basis; and therefore, the option of functionally integrating services such as meter reading or billing, as is done by some municipal utilities serving combined electric, water, and gas customers, is not a consideration for the proposed Department. The To~n does, at present, maintain streetlights and this function would become part of the Department's services. Many municipal governments have ordinances whereby the municipal electric utility is supervised by an Electric Utility Board or Light Commission. The Board may be elected or appointed and formulates policy for the electric utility. The members of the Board are usually not ~ull time employees of the utility and are compensated only for expenses incurred to attend meetings. Policy decisions by the Board are generally based upon the recommendation developed by the day-to-day operating manager of the utility, the input from the citizens served by the utility and consultants as deemed required by the Board and the utility manager. Given the mature of the operation of the Department as a financial obligation of the Town, if general obligation financing by the Town is used to establish the Department, we would recommend that a five member Board be created. While a smaller mumber of Board members might be adequate to run the Department once the operation matures, the initial formation process might be better served with a wider range of experience and opinions available from the Board. As mentioned in the previous paragraph, the day-to-day operations of the Department would be the responsibility of a manager or superintendent. The primary qualifications for the superintendent would be experience with electric distribution systems in an engineering and operating capacity with some exposure to management and accounting. The remainder of the Department's operating staff would generally consist of three line crews, meter readers, meter and operating equipment repair personnel, and an office staff. It is anticipated that the line crews could be supplemented by a contract crew or V-2 crews from other municipal electric utilities on Long Island in the event of any major system work or to repair localized storm d-m-ge. Office space would be required for the administrative and record keeping functions of the Department. Information from the Town indicates that existing Town office facilities would not be adequate to provide space for the Department's operation on a cost reimbursement basis. Therefore, it is assumed that for the initial operation of the Department, office space would be rented. In addition to office space, facilities for equipment ~-J material storage will be required. The Tow~ has indicated that space for the Department's line trucks and material storage could be made available on a cost reimbursement basis at the Town's Public Works Department depot. Estimatin~ Cost of Establishing Department As a part of this analysis, we investigated available ~n*ormation on the investment in supplies and materials, and in general and common plant, for existing municipal electric utilities operating similar electric distribution properties. In 1983, the average reported inventory of material and supplies maintained by the municipal electric utilities reviewed amounted to $36 per customer. The municipal electric utility serving Freeport, New York maintains an inventory estimated at approximately $37 per customer for non-generation related materials and supplies. For a system with approximately 11,000 customers, this would amount to an investment, based upon the $36 per customer average, of $396,000. For the purpose of this preliminary Report, we have assumed the Department would initially require and thereafter maintain a $400,000 inventory of materials and supplies for operating the electric distribution system. In addition to a basic inventory of equipment, the Department would require an investment in general plant consisting of office and storage space as well as equipment necessary for operation and maintenance of an electric utility. We have made a review of the investment in general plant for a number of municipal electric utilities in New York State. The review indicated an average investment per customer in general pl,~t of ~81 per customer, which for a system with the number of customers in the Town, approximately 11,000 would amount to a total investment in general plant of $891,000. By way of direct comparison the municipal electric utility in Freeport, New York serving approximately 13,000 customers reports a total of approximately $683,000 or $50 per customer in general plant including over $300,000 in transportation equipment. However, given the fact that this is a new business, it appears appropriate to allow approximately $800,000 in estimating the investment in general plant for the Department. V-3 We have mot, in this analysis, made an estimate of how this initial investment of $800,000 for general plaut would be allocated. A more detailed evaluation of available space and facilities for general plant would need to be made if the Town proceeds to establish an electric utility but for the purposes of this preliminary evaluation, we believe this is a conservative amount to assume the Department would meed for general plant. In addition to the above items, some allowance needs to be made for the funds required to pay operating amd maintemance expenses during the period between acquisition and the time revenues are received from the sale of electricity. We have identified these funds as necessary working capital. For the purpose of this Report, we have assumed funds equal to approximately 90 days of operation and maintenance expense, or ~1,000,000 would be required to cover the initial working capital requirement. While these funds may not be obtained as part of the general obligation bond financing, they can be borrowed; therefore, we have included this amount in the total amount to be financed. Based upon our preliminary evaluation of the electric distribution properties im the Tow~ and propoeed public operation of these properties, we believe an allowance of $2,200,000 to eetablish the equipment, material, inventory, service, and storage areas and working capital is reasonable. For the purpose of this Report, we have included this amount to provide the funds needed to acquire space and begin the operation of the Department. Financin~ En~ineerim~ and Other Consultin~ Costs The planning, study, and related work required to proceed with the acquisition of the electric distribution properties in the Town amd establishing the program of modifying the electric system that will assure customer service continuity while establishing a separate municipal electric utility requires time and expense. The cost that will be incurred during the process of establishing the Department will depend to a large extent on the vigor with which the Compamy opposes the program of acquisition and the time difference between the dates the Town begins operation of the electric properties and achieves staffing of the Department's operating organization. Based upon past experience, there is little doubt that the Company will seek to litigate every step of the program to the maximum extent possible, therefore, it is necessary to be extremely conservative in estimating an allowance for such costs, especially in the area of potential legal fees. For the purpose of this Report, we have also assumed the Town would use consulting services for the mauagememt and contractor services for the operation of the Departmen~ for the initial weeks of its operation. This cost is included in the $1,500,000 set forth for financing, legal, engineering and other comsultimg costs during the period of acquisition and establishment of the Department. To the extent that these funds are mot all used in the acquisition and startup phases of municipal operatiom, the remaimder can be used to reduce the annual debt service on the bonds issued. V-4 The need and cost of consulting expenses is often questioned. The hiring of consulting firms by businesses is normal when specialized services are required and that is why a large number of consulting firms exist. Reports filed by the Company with the FERC indicate that the Company spent approximately $8,000,000 for consulting services, mot counting those charges related to the Shoreham Nuclear Power Plant, during the last year such information was required by FERC as a separate schedule. We have no reason to assume that such expenses have decreased over time. This, of course, is in addition to ~he m,~y other items of work that were performed by t/xe Company's own engineering and legal staffs. Total Cost of Establishin~ Electric S/stem The total cost of establishing the electric system which is equal to the estimated size of the bond issue required to purchase the electric facilities in the Town, to separate the system and construct the required additional facilit£es, to set up and initiate mun/cipal operation of the electric system and to obtain financing is estimated to be $23,555,000. This amount includes the costs to acquire the properties, Going Concern and to separate the municipal electric system from the LILCO system as developed in previous sections of this Report. The items included in this estimated bond issue are as follows: Size of Bond Issue To Establish a Municipal Electric Utility Allowance for Purchase of the Company's Facilities Allowance for Cost of Records, Plans and Going Concern Estimated Cost of Severance and Reconnection of the Electric System Equipment, Material, Working Capital and Initial Costs Cost of Financing, Legal and Engineering Reserve and Contingencies at Approximately 10% TOTAL BOND ISSUE $17,210,000 250,000 251,000 2,200,000 1,500,000 2~144,0_0__0 $23,555,000 SECTION VI COMPARISON OF REVENUES AND EXPENSES UNDER MUNICIPAL OWNERSHIP AND OPEP. ATION WITH CONTINUED COMPANY OPERATION To identify the possible feasibility of public operation of the electric distribution system in the Town, we have analyzed the amount of bonds and the net revenues the electric system could support. To the extent the projected revenues under continued Company operation are in excess of the total costs under Town operation with such amount including debt service on the bonds that are estimated as necessary to acquire the properties and establish an operating electric Department plus the amount needed to provide purchased power and operate the system, it would appear reasonable to proceed with further investigation of the program. The total revenues the Department receives from the sale of energy to its customers must be adequate to pay operating and maintenance expenses, in-lieu-of-tax payments, funds necessary for system extensions and renewals, the cost of purchased power and the debt service on the bonds issued to pay for the acquisition of the electric properties and set up the operation of the Department. Operatin~ and Maintenance Expenses In estimating the operating and maintenance expenses for the Department, statistics on the operating and maintenance expenses of the other publicly owned electric utilities on Long Island were examined. The customer weighted average for operating and maintenance expenses for an electric distribution system was reported by the Long Island Municipals in 1983 to be approximately ~196 per customer, exclusive of power generation and purchased power costs. This amount also includes costs associated with customer accounting, sales expense, and administrative and general expenses. We have projected this cost to increase from a base of ~200 per customer at a rate of 7% per year from 1984 to allow for increases in the cost of materials and wages and included an adjustment for the projected increases in the number of customers. In the initial years of Department operation, there is the possibility of additional costs of operation due to the "learning curve" effect which refers to the fact that any operation may experience some unanticipated and non-recurring impediments during the start-up phase. To allow for this, we have increased the projected 0&M expenses by a factor of 1.5 in the first year of operation and 1.25 for the second. Purchased Power Cost The sources of power supply available to the municipal electric utility is discussed in Section III. As discussed in that section, we have estimated the cost of power supply on two bases: (1) a power supply mix of NA~PA hydro and nuclear energy based upon 20,615 kilowatts of hydroelectric capacity reflecting the current average mix of resources allocated to the VI-2 existing municipal utilities in New York; and (2) a power supply mix with the amount of hydroelectric capacity limited to 10,000 kilowatts which is consistent with the Town's initial notification of interest to NY~A, and the remainder from the Fitzpatrick Nuclear Plant. The calculations of power costs were based on the charges as detailed in Section III and assuming an average load factor of 45%, the ratio of maximum and average system requirements. Capital Additions, System Extensions and Renewals In addition to operating and maintenance expenses, there is a need to annually have funds available to replace, upgrade and extend electric.service lines and general plant and equipment. For the purpose of estimating this cost, we have reviewed the amounts incurred by the municipals on Long Island over the period from 1981 to 1983. These amounts averaged ~42 per customer for net capital additions. This figure is based on a review of the increase in the utilities' total net assets which contain amounts for general plant. In the Department's ease, the general plant would be covered in the costs to establish the Department and should not require replacement initially. The average for all New York municipal electric utilities in 1983 was ~58/customer. Based upon this review, we have assumed a conservative cost of $60 per customer for system extensions and renewals in 1984 escalated at 5% per year for inflation plus the effect of customer growth, in estimating the Department's operating costs. In-Lieu-of-Tax PaTments Municipal electric systems who receive power from NYPA do so under contractual arrangements. One of the provisions of these contracts concerns the payment to the local government of ln-lleu-of taxes. The amount of In-lieu-of-~Y payment is calculated by applying the prevailing property tax rate to the depreciated original cost of the municipal's tangible property which is used in the transmission and distribution of electric energy. In this analysis, we estimated the in-lieu-of-tax payments to be equal to the amount that the Company paid in 1984. Information available from the Town shows that the Company made tax payments of approximately $697,500 on properties in the Town with an assessed valuation of ~2,170,314 which represents an overall tax rate of 32% to cover school, fire, and Town assessments. Therefore, we have assumed an in-lieu-of-tax payment on the basis of current Company payments equal to ~700,000 for 1985 increasing at 4% annually during the period of analysis would be paid by the Department. It should be noted that this assessed value is significantly lower than the $9,029,853 special franchise assessment valuation prepared by the SDEA for properties located on the public ways in the Town outside the Village. VI-3 Debt Service Several factors are involved in estimating the annual amount the Town would need to have available to repay the funds borrowed to acquire and establish a Department to operate the electric utility properties. The annual debt service payments required to pay off this borrowed amount is not only dependent on the amount of funds borrowed but also on the term of repayment and the ann,,-1 interest rate. For the purpose of this study, we have assumed that the establishment of the Department would be financed by issuing General Obligation Bonds with a provision that the Bond Holders must look first to the facilities financed thereby and the revenues therefrom as security for the Bonds before considering the tax base of the Town. This is often referred to as the "double-barrel" type of bond. This has been the general practice of the municipalities in New York in the past and offers the lowest cost method of financing for a governmental agency. The actual method of financing should be determined after more detailed evaluations by legal and financial consultants are made. Interest cost on bonds has varied widely over the past few years and financing plans will need to be finalized before the interest rate that would be paid on the bond issue can be predicted. For the purpose of this analysis, we have calculated the annual debt service on the basis of 20 year bonds in the principal amoumt of $23,555,000 with annual interest rates of 8%, 10%, and 12%. The formula for issuing bonds in New York results in the highest debt service occurring iu the first year of repayment. Assuming the first year of repayment is 1986, the estimated debt service on $23,555,000 in 1986 for the various interest rates is as follows: 8% - $3,454,733; 10% - ~3,925,833; and 12% - ~4,396,933. Potential Reduction in Electric Rates In order to provide an indication of the potential range of reduction in the average electric bills of the residents in the Town under public operation of the electric system, we have calculated the range of reductions in total revenue requirements under Department operatlou as compared to the revenues projected under continued Company operation. Revenues Under Continued Company Operation In this analysis, we have projected the revenues the Company would receive from electric sales within the Town from 1986 to 1990. This projection was based on the projected power supply requirements of the Town utilizing the price per kilowatt-hour for the average customer proJiected for the Company by the NYPSC in Case No. 28252 and, based upon discussion with the PSC, a downward adjustment of 1~ per kilowatt-hour to reflect continuing "soft" oil prices. 0n this basis, we estimate the total revenues to the Company from electric sales in the Town will range approximately from ~12,961,000 in 1986 to ~18,486,000 in 1990 as developed in Section III. VI-4 Due to the large variation in revenue requirements depending on source of power and interest rates paid on bonds, we have calculated the potential savings in power costs to ~he electric customers in the Town under various conditions. These savings and the percent reductions are shown on the tables at the end of this section. VI-5 PROJECTED REVENUES AND EXPENSES SOUTHOLD MUNICIPAL ELECT1LIC UTILITY 20,615 KW ALLOCATION OF NYPA HYDROPOWER (~000) NUMBER OF CUSTOMERS 1986 1987 1988 1989 1990 11,220 11,275 11,335 11,440 11,500 POWER REQUI~J~MENTS Demand (kW) Energy (000 kWh) 25,140 25,310 25,563 26,020 26,333 99,101 99,774 100,771 102,572 103,805 PROJECTED CO~k~f R_~WENUE REVENUE REQUIREMENT FOR MUNICIPAL OPERATION 412,961 413,760 816,912 817,705 $18,486 Operation and Maintenance Capital Additions Payment In-Lieu of Taxes Subtotal Purchased Power Total Before Debt Service $ 3,854 $ 3,453 $ 2,970 4 3,215 $ 3,450 741 778 827 881 920 728 757 787 819 852 45,323 8' 4,988 4 4,584 4 4~915 8' 5,222 3,118 3,269 3,450 3~701 3,919 8-8,441 48,257 $ 8,034 88,616 89,141 BONDS ISSUED AT 8% Debt Service Total Revenue Requirement Potential Savings Percent Savings 4 3,455 4 3,288 4 3,124 $ 21964 4 2,807 411,896 411,545 $11,158 411,580 85,948 $ 1,065 82,215 45,754 46,125 86,538 8.2% 16.1% 34.0% 34.6% 35.4% BONDS ISSUED AT 10% Debt Service Total Revenue Requirement Potential Savings Percent Savings $ 3,926 43,727 43,533 83__3~343343 $ 3,157 412,367 $11,984 $11,567 411,959 $12,298 4 594 8 1,776 $ 5,345 4 5,746 4 6,188 4.6% 12.9% 31.6% 32.5% 33.5% BONDS ISSUED AT 12% Debt Service Total Revenue Requirement Potential Savings Percent Savings $ 4,397 4 4,167 4 3,942 $ 3~723 4 3,508 412,838 $12,424 $11,976 412,339 $12,649 $ t23 4 1,336 4 4,936 4 5,366 8 5,837 0.9% 9.7% 29.2% 30.3% 31.6% VI-6 PROJECTED REVENUES AND EXPENSES SOUTNOLD MUNICIPAL W3.F~CTRIC UTILITY 10,000 KW ALLOCATION OF NYPA HYDROPOWER ( 5000 ) NUMBER OF CUSTOMERS 1986 1987 1988 1989 1990 11,220 11,275 11,335 11,440 11,500 POWER REQUIREMENTS Demand (kW) Energy (000 kWh) 25,140 25,310 25,563 26,020 26,333 99,101 99,774 100,771 102,572 103,805 PROJECTED COMPANY R~VEAR3E REVENUE REQUIREMENT FOR MUNICIPAL OPERATION 512,961 513,760 $16,912 $17,705 518,486 Operation and Maintenance Capital Additions Payment In-Lieu of Taxes Subtotal Purchased Power Total Before Debt Service 5 3,854 5 3,453 $ 2,970 5 3,215 5 3,450 741 778 827 881 920 728 757 787 819 852 $ 5,323 5 4,988 $' 4,584 5 4,915 5 5,222 5,045 5,225 5,438 5~724 5~97~ $10,368 510,213 510-~,~-~ $10,639 511,201 BONDS ISSUED AT 8% Debt Service Total Revenue Requirement Potential Savings Percent Saviugs $ 3,455 5 3,288 $ 3,124 $ 2,964 $ 2,807 $13,823 513,501 513,146 513,603 514,008 5 (862) 5 259 5 3,766 5 4,102 $ 4,478 (6.7%) 1.9% 22.3% 23.2% 24.2% BONDS ISSUED AT 10% Debt Service Total Revenue Requirement Potential Savings Percent Savings $ 3,926 5 3,727 $ 3,533 5 3~343 5 3,157 $14,294 $13,940 513,555 513,982 514,358 $(1,333) 5 (180) 5 3,357 5 3,723 5 4,128 (10.3%) (1.3%) 19.8% 21.0% 22.3% BONDS ISSUED AT 12% Debt Service Total Revenue Requirement Potential Savings Percent Savings $14,765 $14,380 513---~ 514,362 $14,709 $(1,804) 5 (620) ~ 2,948 $ 3,343 5 3,777 (13.9%) (4.5%) 17.4% 18.9% 20.4% SECTION VII POTENTIAL FOR INTEGRATED OPERATION WITH THE GREENPORT ELECTRIC DEPARTMENT The Village of Greenport (Village) operates a combined electric, sewer and water utility which provides electric service to the Village and to certain electric customers in the Town outside the Village boundaries. It has been suggested that some form of integrated operation, either by expansion of the Greenport Electric Department (GED) or inclusion of the GED in the proposed Town electric utility, would be beneficial if the Town formed an electric Department. Based upon our preliminary a~lysis, it appears that most potential benefits would flow to the Town simply on the basis of the relative size of the two municipalities involved, and the Village would, therefore, be unlikely to choose to give up the separate status of the GED. However, there are areas of mutual benefit which both the Town and the Village could obtain and should investigate further should the Town go forward with a program to establish a municipal electric utility. Impediments to Full Integration Before discussing areas where cooperation between separate Town and Village electric systems could be beneficial, some explanation of the reasons that full integration is not assumed is required. The primary reason is that we expect the electric rates charged by the GED will, in the immediat~e future, be lower than the rates for the proposed Town system. GED has been in existence since 1899 and owns and operates an electric system which has been constructed over time at a cost related to the time that the facililties were installed. Therefore, the GED system's rates reflect the depreciated~ original cost of the system and should be less than the rates of the proposed Town system which would be acquired from LILCO on a different cost basis with funds borrowed at present interest rates. GED's rates also reflect certain economies of a combined electric and water operation which might be reduced if the electric utility operation were i~tegrated with a Town Department. A second reason is local control of a valuable service. We understand one of the primary reasons the Town is considering establishing a Department is to be free from the impact of decisions of the LILCO Board which mskes decisions affecting the Town without input from Southold. It is not unreasonable that the Village would want to keep its utility respunsible exclusively to its residents. There are also the questions of the Village Department's already having an allocation of NYPA hydropower, which might be decreased percentagewise if integrated with the larger proposed Town utility which, as of yet, has Bo allocation. Finally, there is the operational consideration of Greenport's load factor. Because of its industrial load at off-peak hours due to the night-time operation of ice-making and fishmeal processing facilities, GED is able to operate at a load factor in excess of 55% thus utilizing a greater VII-Z proportion of the energy available from each kilowatt of capacity it purchases. This load factor would decrease if Greenport's load factor were combined with the Town load which is estimated to have a load factor of 45%. These perceived disadvantages could eventually be eliminated once the Town has actually established an operating electric Department amd demonstrated reliable and economic service. However, at this pr,l~minary stage, it is not a reasonable assumption that the Village of Greenport would give up its independent utility in favor of immediate, fully-integrated operation with the proposed Town Department. Coordinated Operations Because the proposed Town utility would interface with the GED directly as an intervening transmission system, some level of coordinated operation would be required. This could be limited to simply the coordination required to continue operations as presently ia effect between LILCO and GED. This coordination basically takes the form of operating the ~wo systems independently with the responsibility of avoiding operations which would degrade the performs-ce of the neighboring system. This situation sometimes requires GED to operate in full separation from LILCO depending solely on its ability to generate its full requirements. There is the potential for increased coordination, however, since both the proposed Southold Department and GED could realize mutual benefit from operation of GED's diesels and the combustion turbine in Southold for peak shaving if Southold acquired this generating unit from LILC0. Wheeling costs contribute significantly to the total cost of power from NYPA generating resources. These wheeling charges, when added to the cost of Br~A nuclear generated power, could make operation of the local generating facilities economical if they can be operated for a short period of time during the peak power season and, as a result, allow the Town's Department and GED to avoid receiving a larger capacity allocation from NY~A nuclear resources for the entire subsequent allocation period. At the present time, sufficient information regarding hourly power requirements in $outhold is not available to develop estimates of costs and benefits that could occur under a coordinated peak shaving operation. However, given the mix of generating facilities petentt~lly available to the GED and the Town's proposed Department, shown in the following table, it appears that the situation presents attractive possibilities should Southold proceed with a program of acquisition. Unit Type Katin~ (kW) Southold Greenport #4 Greenport ~5 Greenport ~6 Combustion Turbine 14,000 Dual Fuel Diesel 1,250 Dual Fuel Diesel 1,875 Dual Fuel Diesel 3,840 VII-3 All of these generating units are normally considered to be of the type best suited for peak period operation and the range of available capacity gives an opportunity to match various levels of peaking power requirements without over-generating. For example, if the Towa needed a limited amount of peak shaving which it could not efficiently serve with the combustion turbine, it could request GED to run a diesel unit to meet the peak need and the parties would take this power into account when computing wheeling and power supply charges. By the same token, when the peak shaving needs of both the Town and GED could be most economically served by running the combustion turbine instead of GED running its diesels separately, this mode of operation could be initiated with appropriate accounting adjustments in the monthly power bill. Transactions such as briefly outlined above take place between separate utility systems as a common industry practice. While this initially could be accomplished by coordination between the two operating departments, if it became a comm°n practice with proven savings in purchased power costs to both utilities, eventually there might be additional benefit to a fully-integrated operation of all units under a single dispatch controller. Another e~mmple of potential coordinated operation would be mutual aid for line construction or restoration of service under emergency conditions. This is common practice among municipal electric utili~ties, and the utility requesting aid compensates the responding utility much as if it had hired a contractor. Given the proximity of the two utilities, this concept could be expanded to the coordinated scheduling of line extension or normal replacement to permit the utilities to avoid the use of contractors and produce a higher level of manpower utilization. Again, the implementation of this type of coordination would require operating experience on the part of the Town Department to determine the normal level of line work and what types of distribution system work would put it in a situation of requiring an extra crew for a limited amount of time. with this information in hand, some type of formal agreement might be worked out for the exchange of line crews which would benefit both utilities. Greenport currently operates its combined utility departments along somewhat similar lines, assigning personnel for work as electric, water, and sewer projects, as appropriate by Job function and work level requirement. Full Intesration If the various types of coordinated operations outlined above and perhaps others, such as Joint material purchases to take advantage of quantity discounts, are tried and successfully accomplished, the Towm and village might consider fully integrated operations. By f. l ly integrated operations, we are referring to a single electric department with one operating staff. The utility board responsible for management policy would have to be structured in such a way as to assure protection of the interests of both m,,.~cipalities, perhaps by mandating a certain number of members had to be from the Village. By establishing separate accounts for service directly related to each municipality amd allocating certain adm~nlstrative and general functions on an VII-4 equitable basis, the municipalities could maintain a separate identity for ratemaking purposes if required, but still take advantage of these economies of scale proven through experience during the various stages of coordinated operanions. As an example of the type of economics which might be eventually achieved through integrated operations would be the potential reduction in line crews. Greanport will shortly have two line crews on its system, and we estimate three crews will be required by a Town Department for a total of five in the two utilities. Informal discussions with GED indicate that a total of four crews would probably suffice for the entire area under normal conditions if operations were combined. While these are only preliminary estimates, this provides an e-~mple of how integrated operations could benefit both utilities. Other such areas of mutual benefit from integrated operations could include bulk purchases, a single computer system serving both electric systems for billing and administration, reduced office and yard space and other mutually inclusive functions. Such a program of fully integrated operation has the obvious potential to reduce future costs. However, an evaluation of the cost benefit of integrated operation will require data based upon the operating experience of the proposed Town system. Should the Town successfully proceed with a program of establishing a municipal electric utility, further investigation of this issue would be Justified.