HomeMy WebLinkAboutElectric Systems Community owned-east end towns-1995Final Report
Community-Owned Electric Systems
For
The Five East End Towns
Submitted to
Towns of East Hampton, Riverhead,
Shelter Island, Southampton and Southoid
Entek Research, Inc.
along with
Duncan and Allen
and
RW Beck
March 31, 1995
Executive Summary
The report contains a preliminary study of the establishment of community-based
electric utility systems ("munis''a) prepared for the Towns of East Hampton, Riverhead, Shelter
Island, Southampton and Southold.b It was prepared by Entek Research, Inc. along with its
sub-contractors, the law firm of Duncan & Allen and the engineering finn of RW Beck.
A. Purpose of study
A principle purpose of this initial study is to examine, on a preliminary basis, the legal
feasibility of the Towns' proceeding with the establishment of community-based electric
systems. In addition, certain other "generic" issues affecting the establishment of a muni (i.e.,
those issues that would affect any East End Town) were also examined. Specifically excluded
Rom this first stage stutiy were the Town-specific engineering cost evaluations of the cost of
acquiring LILCO's distribution system; the Towns determined that such cost studies would be
made as a follow-up effort should the Towns proceed toward the establishment of munis. For
this reason, the overall economic feasibility of the establishment of munis was not investigated
as part of this study.
In reviewing the factual and legal analyses set forth in the report, it is important to
bear in mind that the scope of services provided for these analyses requires that they be
preliminary in nature. Each of the issues discussed requires further study and integration into a
specific factual and political context before any definitive plan of action is adopted by the East
End Towns or any of them.
B. Background on the power industry and munis
Major changes are occun'ing in the electric power industry in the United States during
the 1990's. Changes in federal law have opened the wholesale market for power to greater
compelitiora However, to date, the retail market for electricity has not been directly affected by
the changes inTederal law. At this time, there is no federal nor state law that. except under very
rare circumstances, requires an electric utility to "wheel" (transmit) power that a retail
consumer has purchased directly from an alternative supplier. In other words, with very few
exceptions, retail customers do not yet have the right to purchase power from a supplier of
their choice and to have that power delivered to their facilities.
In the absence of such a right to "retail wheeling," many consumers are resorting to
various mechanisms to lower their power costs. 'II~ese mechanisms include self-generation,
seeking access to "economic development" power, "municipalization" (i.e.. establishing a
muni), and cutting deals with utilities after first threatening the utility with of one of these
alternatives. In the worst case (at least as far as the region is concerned), people and businesses
simply leave the region for areas with lower cost power.
Federal law provides munis like all utilitie~mportant opportunities. Specifically,
munis, as wholesale power purchasers, can purchase power from any source and are entitled to
~ In this report we shall refer to any community-based electric utility system by the shortened term "muni"
which is the term commonly used in the electric utility industry. It is derived from the term "municipal electric
utility."
b We will refer to the towns jointly as the "East-End Towns" or, more shnpty, the "Towns."
ENTEK RESEARCH, INC.
have intervening utilities wheel the power from the source to the muni's system at federally
regulated rates. A muni, then, has full access to the wholesale market for power and can shop
around for reasonably ptieed power.
In the past, a local government considering municipalization in New York would be
considering at a complete, or nearly complete, take-over of the utility's distribution system in
the area bounded by its political jurisdiction. As a result of the Energy Policy Act, new
alternatives have become available that may considerably lower the barriers both in terms of
cost and in terms of the time needed to accomplish the legal procedures--to corrununities
desiring to break through the regulatory wail that separates them from the wholesale market for
power.
C. Overview of key findings
The issues studied in this report are complex and a full appreciation of these
complexities and the nuances involved can only be obtained from the main bcxiy of the report
With this in mind, however, some key conclusions stand out and we summarize them below:
1. New York's General Muuicipai law provides the legal basis for the Towns to
establish, own, and operate "munis" (i.e., community-owned eleclric systems)
and the Towns may work either alone or cooperatively to establish, operate and
finance munis. There may be practicai considerations, however, that would
complicate any attempts to finance munis jointly.
2. The General Municipal Law provides flexibility with respect the implementation
of the establishment of a muni and the Towns could proceed incrementally or in
phases in creating such a service.
3. The franchises under which LILCO provides electric service to the Towns and
the Villages within the Towns do not grant an exclusive right to LILCO to
provide electric power service and would not pose an obstacle if the Towns
elected to proceed to establish munis.
4. The Towns may establish munis through severai means including 0) acquiring
LILCO's existing dis~bulion system through negotiation or condemnation or
(ii) creating a competing service through the construction of duplicate
distribution equipment.
5. The Long Island Power Authority Act could potentially be an impediment if the
Towns sought to establish munis through condemnation. There are various
means for mitigating or eliminating this potential problem including proceeding
through an approach that did not involve condemnation.
6. 'Under federal law, munis have the right to seek access to the transmission
system of other utilities that own transmission lines for the purpose of
transmitting power to the muni's system from a distant supplier.
7. The cost of power as delivered to an East End muni from a power supplier
would be approximately 6 e/kWh under the costs of power supply and wheeling
that prevail in 1995. When combined with additional costs of establishing and
operating a muni that were. considered in the study the total would increase to
8.4 e/kWh. Not included in this estimate is the cost of acquiring LILCO's
Community-Owned Electric Svstems for the East End Towns
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distribution system or of constructing new distribution facilities and certain
additional costs. LILCO's current residential rates are about 16 C/kWh. The
total of the cost elements that we have not examined in this study are likely to be
significantly less than the approximately 7.5 ¢ differential between LILCO's
rates and the cost elements we did examine. Hence, it appears highly likely that
municipalization would be econoniically advantageous for the Towns.
D. Legal Feasibility
This section provides a summary of the legal analysis developed in this study, adapted
from Appendix A.
1. GENERAL LEGAL AUTHORITY
General Legal Authority to Establish Munls: Under New York's General
Municipal Law, the Towns have the individual ability to establish municipal electric utilities
within their respective geographic jurisdictions. Article 14-A of the General Municipal Law is
a broad grant of power by the State of New York to each of its municipal corporations to
"construct, lease, purchase, own, acquire, use and/or operate any public utility service within
or without its territorial limits, for the purpose of furnishing to itself or for compensation to its
inhabitants, any service similar to that furnished by any public utility company specified in
article four of the public service law."
Towns may work cooperatively: Them is clear statutory and constitutional authority
for the Towns to work jointly to establish, operate, and to finance munis.
Complications may arise with respect to financing jointly: Joint action financing of
a municipal utility serving more than one of the East End Towns may be complicated by
praclical considerations that could require each Town to undertake liabilities with respect to a
possible default of other Towns. The East End Towns would have to carefully and thoroughly
evaluate the effects of cross-coverage and step-up requirements in determining, as a practical
matter, whether it is worthwhile to proceed with a joint action financing.
2. PROCESS OF MUNICIPAL UTILITY FORMATION
a) Individual Municipal Utility Formation
Five Step Process: The General Municipal Law lays out a five-step procedure for
local legislation for the establishment of a municipal utility: (i) initial resolution of the town
board adopting a plan of utility establishment; (ii) newspaper notice of the resolution; (iii)
submission of the resolution for referendum at a general or special election; (iv) financing
re~01mi0n of the town board for issuance of local obligations to finance the acquisition of plant
and facilities; and (v) referendum on financine resolution, as and if applicable to the mode of
financing adopted. The initial resolution must specify the proposed method of acquiring utility
plant and facilities, the maximum and estimated cost of acquiring plant and facilities, and the
method by which the municipal utility will furnish service.
Phased implementation of municipalization: Considerable flexibility is allowed in
the plan for establishing a mtmi and the Towns may, for example, proceed incrementally to
establish a municipal utility consistently with the limitations on their ability to finance under
Article VIII of the New York Constitution and the Local Finance Law.
EN3EK RESEARCH, INC.
Pa;e I¥ ~recu#ve Summary
PSC Regulation of munis: New York municipal utilities are subject to regulation of
their rates and with respect to the terms and conditions of service by the New York Public
Service Commission. Article 4 of the Public Service Law provides for specific regulation of
municipal utility rates and imposes financial reporting requirements and filing requirements for
contracts and rate schedules. Municipal utilities are generally "self-franchising" within their
own territorial boundaries under New York law; but, if they seek to provide service in another
municipality which has previously granted a franchise to another.utility, they must fa'st obtain
a franchise and certification of the Public Service Commission.
3. ACQUISITION BY EMINENT DOMAIN
Acquisition through eminent domain proceeding: The Towns may acquire utility
facilities through eminent domain (condemaation) proceedings and they may exercise this
power jointly under the General Municipal Law. Joint financing of any such purchase or
condemnation is also generally authorized under the General Municipal Law.
Procedures under Eminent Domain Law: The Eminent Domain Procedure Law
CEDPL") specifies how the eminent domain authority granted by General Municipal Law is to
be exercised. There have been no reported condemnations of electric utility property under the
EDPL. The.basic procedural framework of the EDPL is described below.
Public hearings the Towns are required to hold public hearings to consider
the general purposes and potential effects of the condemnation;
· Offer to negofiatc ',,he Towns would be required to submit a price offer to
LILCO and must attempt to negotiate the acquisition with the condemnee. The
offer must be equal to the highest approved appraisal of the property.
·Court action--wbere negotiations are unsuccessful, the Towns would be able
to seek a court order to acquire the property.
· Determination of compensation--qbe condemnee files a claim for
compensation in the Supreme Court.
Condemnation process may permit immediate take-over: The EDPL process
permits the possibility of immediate use of the property and facilities by the condemnor, prior
to the point final compensation is determined or made.
Rtsks associated with condemnation: The EDPL may pose certain risks in the
acqnisilion of utility assets through condemnation, including:
· Changing of cost over time: There may be potential conflicts between
General Municipal Law Section 360(3), which requires the Town to
establish the maximum and estimated cost of getting into business at the
outset of the utility formation process, and the foreseeably lengthy and
uncertain process of finally fixing compensation (after acquisition) under the
EDPL
· Delay and uncertainty: The EDPL provides for two rounds of judicial
oversight of the condemnation process, which can inject considerable
elements of delay and uncertainty in the utility formation process.
Community-Owned Electric Systems for tho East End Towns
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Commianent of capital: It is possible for the condemnee to elect to treat a
condemnor's offer as partial compensation. In the event that this happens, it
is logical but untested to assume that the condemnor could obtain immediate
occupancy subject to a subsequent final determination of compensation. It
may also be possible, however, that immediate occupancy may not be
available to the condemnor. In such a situation, the condemnor's funds could
be tied up by the condemnee with no operational benefit to the condemnor
over what, again, could be a rather long period for carrying unproductive
debt se~ice.
E. Analysis of specific legal issues
1. WHAT STRATEGIES DO UTILITIES TYPICALLY EMPLOY TO OPPOSE
ACQUISITION EFFORTS BY LOCAL GOVERNMENTS?
There are three main components to the typical investor-owned utility's anti-
municipalization strategy, each of which is directed at eroding the public will to create a
municipal utility:
· Raise the cost: Attempting to make the process of utility establishment too
expensive to complete. The single most common responsive strategy of an
investor-owned utility confronting the establishment of a muni is to claim
"sU'anded investment"--to allege that the new muni has financial responsibility
for high cost generating assets that will not be used when the muni's customers
are no longer purchasing from the IOU.
· Create procedural obstacles: Challenging, at every possible point, the
municipality's compliance with whatever procedural requirements are incumbent
upon it. The name of the game here is both delay for its own sake, and
disruption of the possibility of municipal financing of the establishment of its
utility.
· Propaganda: The extensive use of propaganda 0ncluding misinformation) to
dissuade popular support for municipalization.
2. HOW WOULD UTILITY PROPERTY BE VALUED UNDER A
CONDEMNATION PROCEEDING?
There is no one valuation method that is uniformly accepted by the New York courts
as the way to value utility property. Comparable sales represent the best evidence of the value
of property in any condemnation context, but there are relatively few consensuai sales of
electric utility property to use as reference points. There may be a slight, but discernible,
policy preference for capitalization of eanfings as a valuation approach. If accepted by the
relevant court, capitalization of earnings, in practice, reduces to book value (original cost less
depreciation), plus severance damages.
Utilities almost always try to claim "stranded investment" as severance damages. This
argument has not been categorically rejected by the New York courts; neither has it ever been
accepted.
ENTEK RESEARCH, INC.
3. WHAT CAN BE LEARNED FROM THE TOWN OF MASSENA
MUNICIPALIZATION EFFORT?
The fundamental lesson to be learned from the Town of Massena mtmicipalization is
that a nigh level of enduring public commitment to the formation of a municipal utility is the
single most indispensable ingredient in that process. The process of establishing a muui took
Massena about eight years. During that period, Niagara Mohawk, the IOU from wnich it was
seeking separation, spent approximately as much money opposing the municipaUTation as the
facilities originally at issue were worth. The other principal lesson of the Massena
municipalization is that,given an economically viable alternative source of power supply, the
long-term, nigh-intensity public commianent required to complete the creation of a municipal
mility will ultimately result in substantial benefits to the community that undertakes the
commitment
The passage of EPAct will make the process of obtaining transmission rights a good
deal quicker and more certain than it was in Massena's case. In addition, many of the specific
legal issues that Massena had to comfront were resolved in its favor and therefore likely will
not confront the East End Towns in precisely the same form.
4. WHAT ARE THE IMPLICATIONS OF LIPA ACT REGARDING EFFORTS
BY LONG ISLAND COMMUNITIES TO MUNICIPALIZE?
LILCO would undoubtedly argue that two court decisions---LILCO v. Suffolk and
COEP v. Cuomo~---establish that the enabling legislation for the Long Island Power Authority
pre-empts the authority of municipalities in LILCO's service territory to acquire LILCO's
assets by purchase or condemnation. LILCO would argue that these decisions, read together,
frustrate any possible exercise of municipal eminent domain powers against LILCO's facilities.
On the one hand, the State has "occupied the field" of possible public acquisition of all or any
part of LILCO's facilities--thereby leaving no room for individual municipal action in this
area (L1LCO v. Suffolk). On the other hand, the State, having accomplished its principal
objective under the LIPA Act of stopping Shoreham, it nonetheless continues to occupy the
field to the exclusion of municipal acquisition activities--even though it has no discernible
present intention to do anything further under the LIPA Act (COEP v. Cuomo).
There are at least four possible approaches that could conceivably eliminate or
neutralize the LIPA preemption issue:
· Declaratory judgment: seeking a declaratory judgment, prior to the
initiation of condemnation proceedings, that the LIPA Act does not bar
municipal condemnation of LILCO assets;
· Entering into understanding with LIPA: entering into an arrangement
with LIPA under wnich LIPA would either (i) condemn facilities and
transfer them to the East End Towns, or (ii) authorize the East End Towns
to exercise their own eminent domain authority, or (iii) some combination of
the foregoing;
~ Citizens for an Orderly Enerev Policy v. Cuomo. 78 N.Y.2d 398, 576 N.Y.S.2d 185,582 N,E.2d 568 (t991)
(hereafter "~OEP v. Cuomo") and Lone Island Liehdng Co. v. County of Suffolk, 119 A.D.2d 128, 505 N.Y.S.2d
956 (2d Dept. 1986), aooeal denied N.Y.2d
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Community-Owned Electric Systems for the Eq~( I~nd Towps
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· Seeking legislative clarification: seeking one or more legislative
claflfications of the L1PA Act to eliminate the preemption question; and
· Establishing muni through alternative procedures: establishing a
competing municipal utility without condemning LILCO assets.
5. WHAT ARE THE IMPLICATIONS OF EAST END TOWNS' PRESENT
FRANCHISE ARRANGEMENTS WITH LILCO?
Franchises do not pose obstacle to municipalization: None of the franchises granted
by the Towns or Villages within the Towns with respect to LILCO for electric service poses an
obstacle to the formation of a municipal utility by any one or more of the Towns.
Obtaining consent of Villages: LILCO has franchises from both Towns and from
Villages ~vithin the Towns. This may counsel in favor of getting the villages on board;
otherwise, the extension of service to the villages would (a) require their consent, ~ (b)
require approval of the Public Service Commission.
Franchises are not exclusive: There is no necessa~ exclusivity of utility service areas
under New York law. None of the franchises we reviewed were exclusive, either by their terms
or by operation of law.
Towns may establish competing utility service: A franchise is a property right under
New York law, and is thus generally protected from curtailment or taking without just
compensation. However, no "taking" occurs where a municipality establishes a competing
utility--at least where the municipality lias not granted an exclusive franchise. A critical
implication of this is that the Towns can establish competing utility services without
condemning existing utility property.
6. WHAT ARE THE IMPLICATIONS OF THE 1992 FEDERAL ENERGY
POLICY ACT REGARDING TOWN EFFORTS TO ESTABLISH MUNIS?
Right,to transmission service: Under federal law. munis may request the Federal
Energy Regulatory Commission CFERC") to order a utility to transmit power across its
system in order to permit the muni to purchase power from a supplier that is not located in its
service territory or which is not the surrounding IOU. The federal Energy Policy Act of t992
("EPAct") outlines basic requirements for a FERC order for mandatory transmission service.
It seems likely that, should the Towns establish munis, these munis would be able to satisfy the
criteria such a wheeling order.
No authority to order retail wheeling: Except in very unusual circumstances, EPAct
does not provide the FERC with the authority to order retail wheeling (transmission of power
directly to a retail customer). The circumstances in which FERC can order retail wheeling
directly to an ultimate customer, or through an entity to an ultimate consumer are if the entity
requesting such retail wheeling 0) is a political subdivision of a state and (ii) would use
transmission or distribution facilities that it owns or controls to deliver electric energy to the
consumer.
Alternative approaches to establishing a muni: Given the high cost, both politically
and financially, of acquiring an investor-owned electric utility's facilities serving a
municipality, creation of a municipally-owned utility without undertaking the burden of
acquiring significant transmission or distribution facilities is a desirable option to consider.
ENTEK RESEARCH, INC
Paqe viii Exm~u#ve Summm~
3
Such an option appears to be feasible under the Energy Policy Act of 1992. The possibility of
municipalities creating their own electric utilities and benefiting from the emerging competition
in the wholesale power marLet without having to bear the burden of uneconomical power
delivery costs attendant to condemning or duplicating the existing power delivery services is a
legally untested, but intriguing hypothesis. Local governments seeking to construct duplicate
delivery facilines will have to overcome is the prohibition on retail wheeling and sham
wholesale transactions in Section 212(h) of the Federal Power Act. Given the Commission's
relatively aggressive reading of the Energy Policy Act generally, it is likely that such an entity
may enjoy the benefits of access to the wholesale markets afforded by the Act without having
to endure the cumbersome process of acquiring an entire transmission or distribution system.
7. WHAT WOULD BE THE TAX STATUS OF MUNICIPAL BONDS USED TO
FINANCE CONDEMNATION OF UTILITY FACILITIES?
In 1987, Congress amended Section 141 of the Internal Revenue Code (26 U.S.C.
Section 141) to restrict severely thc ability of municipal utilities to usc tax exempt financing to
acquire the operating assets of investor-owned utilities. As a result, interest on municipal bonds
initially used to finance the condemnation of utility asSets will generally be taxable. In the first
year following the formation of the muni, 10% of the capital investment can be I~nanced using
tax exempt bonds. In the second year, 20% and so on until the tenth year when the full amount
can be financed using tax exempt bends. However, it should also be noted that bonds used to
finance acquisition of utility property may be subject to favorable tax treatment if they qualify
as "exempt private activity bonds."
Table of Contents
I. INTRODUCTION
A. Purpose of Study .................................................................................................. l
B. Questions Addressed .............................................................................................
C. A Caveat ............................................................................................................... 2
D. Organization of the Report .................................................................................... 2
II. BACKGROUND
A. US Electric Industry Undergoing Major Changes .................................................5
B. Municipalization as a Route to Lower Rates ......................................................... 6
III. POWER SUPPLY AND WHEELING
A. Introduction ......................................................................................................... 7
B. Types or'Power Purchase Arrangements ................................................................ 7
C. Cost of'Power Supply ........................................................................................... 8
1. Investor-owned utilities ...................................................................................... 8
2. New York Power Authority ............................................................................... 9
3. Power marketing companies ............................................................................. 10
4. Independent power producers .......................................................................... !0
5. Summary of'power supply prices ...................................................................... 1 !
D Availability and Cost of Wheeling Capacity ......................................................... 12
1. Background on wheeling .................................................................................. 12
2. Availability of transmission capacity ................................................................. 13
3. Wheeling rates ................................................................................................. 14
4. New submarine cable ....................................................................................... ! 5
E. Muni's Cost of Power ......................................................................................... 15
I. Cost or'power supply and wheeling .................................................................. 16
2. Certain costs of setting up a muni ..................................................................... 16
3. Cost of operations ............................................................................................ 16
4. Summary regarding economics of'municipalization ........................................... 17
IV. LEGAL AND ENGINEERING COSTS
A. Full Municipalization ........................................................................................... 19
B. Alternative approaches ........................................................................................ 19
APPENDIX A
PRELIMINARY LEGAL FEASIBILITY ANALYSIS
I. GENERAL LEGAL AUTHORITY
A. Process of Municipal Utility Formation ............................................................. A-3
I. Individual Municipal Utility Formation ........................................................ A-5
2. Joint Action Authorization ........................................................................ A-10
B. Acquisition By Eminent Domain .............................. .' ....................................... A-13
II. EMINENT DOMAIN PROCEDURE LAW
IH. ANALYSIS OF SPECIFIC LEGAL ISSUES
A. Generic Utility Defensive Strategies in Opposing Municipalization Efforts ...... A-19
1. The "~tranded Investment" Argument ....................................................... A-20
2. Other Litigation Challenges ....................................................................... A-23
3. Propaganda ............................................................................................... A-25
B. Valuation Methods Applied to Condemnation of Utility Property Under
New York Law .............................................................................................. A-25
1. There is Some Arguable Support for Capitalization of Earnings as a
Preferred Approach to Valuation of Utility Property in Condenmation ...... A-26
2. Additional Observations on Capitalization of Earnings .............................. A-27
3. Additional Observations on Market Value and Comparable Sales .............. A-29
C. Strategic Overview and Lessons from Towns of MassenafNiagara Mohawk
Municipalization ............................................................................................. A-30
D. Possible Preemption of Municipal Acquisition Authority Under the LIPA Act
and Possible R. esponsive Strategies ................................................................. A-32
1. The LIPA Act ........................................................................................... A-33
2. The Pre-Emption Problem ........................................................................ A-37
3. Possible Approaches ................................................................................. A-41
E. Analysis of East End Towns Present Franchise Arrangements with LILCO ...... A-46
1. Town of Southampton .............................................................................. A-46
2. Town of P,.iverhead .......i ........................................................................... A-46
3. Town of Southoid ..................................................................................... A-46
4. Town of East Hampton ............................................................................. A-46
5. Town of Shelter Island .............................................................................. A-46
F. Implications of Energy Policy Act of 1992 ....................................................... A-48
1. Overview of Section 211 .......................................................................... A-49
2. "Muni Lite". ............................................................................................. A-50
G. Federal Income Taxation Issues Concerning Municipal Bonds Used
to Finance Condemnation of Utility Facilities .................................................. A-58
H. Legal Issues Concerning Formation of Municipal Joint Action Agency ............ A-59
APPENDIX B
PRELIMINARY ENGINEERING COST ANALYSIS:
ACQUISITION OF ELECTRlC PROPERTIES
EXECUTIVE SUM MA RY ...................................................................................... B- !
BASIC COST OF ELECTRIC SERVICE ................................................................ B-3
Costing Methods ................................................................................................. B-3
Existing Electric Properties .................................................................................. B-4
SEPARATION AND RECONNECTION UNDER SEPARATE-SYSTEMS .............. B-5
Southampton ....................................................................................................... B-5
East Hampton ...................................................................................................... B-7
P, iverhead ............................................................................................................ B-8
Southhold ............................................................................................................ B-9
Shelter Island ..................................................................................................... B- ! 0
SEPARATION AND RECONNECTION UNDER JOINT-SYSTEM ..................... B-l 1
COMPARISON OF SEPARATION AND RECONNECTION COSTS ................... B-12
ENGINEERING EXPENSES .......................................................................... B- 13
UTILITY OPERATIONS AND START-UP COST ............................................ B- 15
OPERATING AND MAINTENANCE EXPENSES ............................................. B-17
I. Introduction
This report contmns a preliminary study of the establishment of community-based
electric utility systems ("mums''~) prepared for the Towns of East Hampton, Riverhead, Shelter
Island, Southampton and Southold.b The report was prepared by Entek Research, Inc.
("Entek'~) along with its sub-contractors, the law firm of Duncan & Allen and the engineering
firm of RW Beck ("Beck"). Entek was initially awarded a contract by the Town of
Southampton to examine the feasibility of that Town's proceeding to establish a mum.
Subsequent to the selection of Entek by Southampton, the other four East-Ead Towns decided
to join with Southampton to undertake this preliminary study.
A. Purpose of study
A principle purpose of this initial study is to examine, on a prelimina~ basis, the legal
feasibility of the Towns' proceeding with the establishment of community-based electric
systems. In addition, certain other "generic" issues affecting the establishment of a mum were
also examined.
Specifically excluded from this first stage study were the Town-specific engineering
cost evaluations of the cost &acquiring LILCO's distribution system; the Towns detemUned
that such cost studies would be made as a follow-up effort should the Towns proceed toward
the establishment of mums. For this reason, the overall economic feasibility of the
establishment of mums was not investigated as part of this study.
B. Questions addressed
This study addresses the following key questions related to the establishment of munis
by the Towns:,
· What are the legal bases in federal and New York taw for establishing a Town-
owned and operated electric utility system and what are the legal processes
involved in such an undertaking'?
· What legal impediments may stand in the way of a Town that seeks to establish
a mum?
· What are a Town's alternatives with respect to the nature of a muni and the
procedures through which it proceeds to establish one'?
· What are the franchises under which LILCO provides power to the Towns and
what fights does LILCO have under those franchises?
· If any of LILCO's assets are to be acquired for the purpose of establishing a
muni, on what basis is the value of those likely to be determined?
a In this report we shall refer to any community-based electric utility system by the shortened term "munl"
winch is the term commonly used in the electric utility industU. It is derived fi.om the term "mumcipal electric
utility."
~ We will refer to the towns jointly as the "East-End Towns" or, more simply, the "Towns."
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Paae 2 Final Report
· What are the estimated costs of the legal and engineering work required to
establish a muni?
· What power supply options would be available to a Long Island muni and how
much is power likely to cost?
· How would power be wheeled to a new muni and how much is wheeling likely
to cost?
· To what extent would savings result by a joint effort by some or all of the East
End Towns to establish and operate a muni instead of having each town proceed
independently?
C. A caveat
In the context of thc scope defined for this study, the funding allocated, and the
acknowledged "preliminary" nature of this study, we believe it to be thorough. However, it
should be emphasized that the purpose of this study was not to perform an exhaustive
investigation of every nuance of each subject area covered since the resources required for such
an effort would have been much greater. Hence, while we have made reasonable efforts to
review the salient factors necessary to understand the issues listed above, additional study will
be required to further flesh out the details in certain areas. Furthermore, it is important to note
that the law is "organic," in that it is constantly evolving, and imperfect, in that in a given area,
there may be ambiguities or, more rarely, even outfight contradictions. Legal analyses,
therefore, cannot be predictive in the same way as, for example, would be engineering
analyses. For these reasons, the Towns will have to base their decision as to whether to
proceed to the next step in establishing munis, not on the basis of whether or not there is
certainty a~ to how the effort will proceed, but on the basis of reasonable expectations derived
from the historical record of prior attempts to establish mums and a review of the existing law
particularly with regard to the new oppommities that have been created by recent changes to
federal law.
When all i~ said and done, a utility's behavior in confronting a challenge to its
monopoly is not predictable with precision. Thus, while we have outlined the legal basis for
and the sorts of counteractions utilities have undertaken in the past, we can make no claims to
predicting the actions LILCO's may or may not take in the future in response to the Towns'
preceeding to establish mums.
D. Organization of the report
Following this introductory section, Section II provides a background discussion of the
broad changes that have been taking place in the electric utility industry in the United States
and the implications of these changes for those seeking alternatives to continuing to purchase
power their local investor-owned utility.
Section III reviews the potential sources of power supply for an East End mum and the
availability of wheeling capacity to transmit power to the mum and also provides
representative costs of power supply and wheeling for power delivered to the East End.
Appendix A, prepared by Duncan & Allen, provides an analysis of the legal basis in
New York and federal law for local governments to establish mums, to acquire utility property,
and to purchase and wheel power, and it reviews the impediments that a Town would face in
Community. Owned Electric SYstems for the East End Towns Paae :~
efforts it undertook to establish a muni and the altemative methods by which Towns can
proceed to provide electric service.
Appendix B, prepared by RW Beck, provides a preliminary engineering and cost
comparison of the relative benefits of the Towns proceeding jointly towards the establishment
of munis as opposed to proceeding alone.
~oTnmunltv-Owned Electric SYstems for the East Eod Towns Paae $
II. Background
A. US Electric Industry Undergoing Major Changes
Major changes are occuning in the electric power industry in the United States during
the 1990's. Many observers of the industry believe that these changes will result in the dis-
aggregation of the traditional, vertically-integrated generation/transmission/distribution utility.
In this evolution, the industry will likely see generation function separated from the power
delivery (transmission and distribution) functions and deregulated. The power delivery
functions will likely remain subject to some level of regulation of rates and of the terms and
conditions of service at the state and federal levels.
This process of change actually began with the 1978 Public Uffiity Regulatory Policies
Act which required electric utilities to purchase power from privately-owned power generating
fa(rifles that used renewable resources or were based on efficient cogeneration systems.
Private power producers quickly proved themselves capable of generating power at a lower
cost than utilities and were able to keep their plants operating at higher capacity factors. By the
end of the 1980's many state regulatory commissions had indicated thd, r preference for open
solicitations in which such independent power producers could submit bids as the process
through which their utilities would procure power in the future.
In 1992, Congress furthered the process of deregulation at the wholesale level by
passing the Energy Policy Act of 1992 CEPAct") which had two major purposes: (i) it
established the right of private producers to construct, own and operate any type of power
generation facility free of federal or state price regulation~ and provided access to transmission
tines so such "exempt wholesale generators" could "wheel" (transmit) their power to wholesale
consumers; and (ii) it considerably eased the requirements that transmission-dependent utilities
(such as local governments operating electric systems) needed to meet to obtain access to the
transmission Systems of surrounding utilities in order to purchase power on the wholesale
market.
EPAct has begun to transform the wholesale market for electricity. Munis, which in
the past, were forced to purchase from the surrounding investor-owned utility ("IOU') because
they were refused transmission access are now exercising their new rights to obtain wheeling
under EPAct and are entering into power purchase arrangements with non-adjacent milities.
Also, power marketing companies, which neither own nor operate electric generating
equipment, have been formed and are beginning to serve as intermediary brokers, purchasing
power from utilities with surpluses and selling to utilities either needing power or looking for a
lower cost source of power.
At the saree time as these regulatory changes were taking place, the disparity between
the utility rates for power and the price at which power is available on the wholesale market
diverged sharply in certain market areas (including Long Island). This has been especially true
a While PURPA required utilities to purchase form facilities that Inet its resource use and efficiency
qualifications, there is no comparable requirement under EPAct that utilities purchase from exempt wholesale
generators.
ENTEK RESEARCH, INC.
Pa~e 6 ~ln~l
where ulilities had invested in large, nuclear facilities with runaway budgets. In such areas,
many energy consumers are seeking access to lower cost power.
The transition from regulated monopoly to free consumer choice is incomplete,
however. To date, the retail market for electricity has not been directly affected by the changes
in federal law. At this lime, there is no federal nor state law that, except under very rare
circumstances, requires an electric utility to wheel power that a retail consumer has purchased
directly from an alternative supplier. In other words, with very few exceptions, retail customers
do not yet have the fight to purchase power from a supplier of their choice and to have that
power delivered to their facilities.
In the absence of such a tight to "retail wheeling," determined consumers are resorting
to various mechanisms to lower their power costs. These mechanisms include self-generation,
seeking access to "economic development" power, "municipalization" (i.e., establishing a
muM), and cutting deals with utilities after first threatening the utility with of one of these
alternatives. In the worst case (at least as far as the region is concerned), people and businesses
simply leave the region for areas with lower cost power.
B. Municipalization as a Route to Lower Rates
For our purposes, a municipal electric utility is simply a utility owned and operated by
a municipality under the provisions of Section 360 of the General Municipal Law of New
Yorlc In general, munis typically own and operate the distribution grid and the meters that
deliver power to electric power customers. The muni may or may not also own generation and
transmission equipment. If it does not own generation equipment, it would purchase power
from other investor- or consumer-owned utilities, power marketing companies, or independent
power producers.'
Federal law provides munis---tike all ulilities--qmportant opportunities. Specifically,
munis, as wholesale power purchasers, can purchase power from any source and are entitled to
have intervening utilities wheel the power from the source to the muni's system at federally
regulated rates. A m, uni. then, has full access to the wholesale market for power and can shop
around for reasonably priced power.
Nalionally, there are thousands of munis. The largest is the City of Los Angeles'
Department of Water and Power. The smallest is operated by the town Radium, Kansas which
serves only 28 customers. In New York there are nearly fifty munis. In most cases, these munis
were always independent systems. However, in some cases, they were once part of an Investor-
owned system but, at some point, established themselves as separate entities.
In the past. a local government considering municipaUzation in New York would be
considering a complete, or nearly complete, take-over of the utility's distribution system in the
area bounded by its political jurisdiction. As a result of the Energy Policy Act, new alternatives
have become available that may considerably lower the barriers--both in terms of cost and in
terms of the lime needed to accomplish the legal procedures--to communities desiring to break
through the regulatory wall that separates them from the wholesale market for power. These
alternatives are discussed in Appendix A to this report.
a A muni can also generate some of its power and purchase the remainder.
~= NTEK RESEARCH, INC,
Community-Owned Electric Systems for the East End Towns l=aae 7
III. Power Supply and Wheeling
Introduction
Power for new munis on Long Island is potentially available from a variety of sources:
Traditional investor-owned electric utilities ("IOUs') such as Consolidated
Edison Company, Niagara Mohawk Power Corporation, Northeast Utilities
(New England), or even LILCO
· The New York Power Authority ("NYPA')
Power markedng companies
· Independent power producers ("IPPs")~these may be off-Island IPPs, IPPs
located on the Island but not on the East End, or a new 1PPs on the East End
· From power plants built and operated by the muni itself
B. Types of power purchase arrangements
The wholesale market for power is characterized by a wide variety of arrangements
representing the differing needs and objectives of the purchasers and sellers in entering into
power sales arrangements. Some examples of contractual arrangements are
· Long-tenn full-requirements A supplier is obligated to provide the full
requirements of the muni (usually within certain broad limits) and the mtmi is
obligated to purchase all of its power from that supplier for a specified period of
time (typically five to ten years or longer). The supplier does not generate the
power that is delivered to the muui from a specified power plant but, instead, is
generally obligated to provide the power from any of its sources.
· Base load power---Power intended ~o be used to supply the "base" portion of
the user's load; that is the portion that is there all or most of the time. Pricing is
characterized by l'Jgher capacity charges (fixed monthly charges) but lower
energy charges (variable charges).
· Peaking power-~Power intended to be supplied during the user's peak load
period. Pricing is characterized by higher energy charges but lower capacity
charges. This source can also be used when the user's primary source or' power
is not available.
· Economy power Power transactions made available on a short-term,
"oppormuislic" basis~
a The term "opportunistic" is used here to mean that both the buyer and seller are motivated entirely by short-
term economics considerations~4he seller call make a profit selling from capacity that. for the momem, is not
needed and the buyer can save money by buying from a source that is cheaper than the "finn" sources he would
otherwise rely on. The buyer's need for long or short-term power generating capacity is not a motivating factor
and the seller is not making any conunitment to supply capacity.
Poq¢ 8 Final Re~ort
An electric utility, as a retail distributor of power must find a cost-effective and
reliable mix of power supplies to meet loads that vary by time of day, by day of the week, and
by season of the year. A large supplier of power-~such as an IOU--has available to it a mix
of generating units of various types, enabling it to economically meet variations in load and to
provide back-up when generating facilities are out of service. Generally speaking, it makes
sense for a mum to purchase most if not all of its power requirements from such a suppLier;
otherwise the muni itself must take on the task of finding a suitable mix of generating sources
to economically and reliably match its loads. While it may be suitable for a large mum or a
group of munis working cooperahvely to undertake the responsibility for creating a portfolio of
power generating resources from different suppliers, undertaking lltis responsibility may make
less sense for an individual, smaller muM.
For this reason, many mums enter into full-requirements contracts with a large power
supplier. Traditionally, IOU'$ have played the role of such suppliers. However, as the industry
changes, power marketing companies are stepping into this role as well.
C. Cost of Power Supply
As the discussion in Section B above makes clear, there are "apples" and "oranges" in
the power supply business and it is important to distinguish between them when comparing one
power source with another. The price of economy power is low because the seller only needs to
cover his variable costs of power generation. In contrast, a full requirements supply will reflect
the aggregate capital and variable cost of a mix of base-load, intermediate-cycle, and peak load
generating units as well as the backup power needed to reliably supply power when units are
out of service. Obviously, economy power will be cheaper than a long-term full requirements
supply but the former is only provided on an as-available basis and cannot be relied upon to
serve customers' loads.
Below we provide a representative sampling of power supply prices. While the prices
that are most relevant to a new mum would be those referencing full-requirements contracts,
we have provided examples of firm as well as non-~m (L e., "economy" or "spot") prices
because we believe~they provide a broader picture of the overall state of the power market
today and this can help in understanding where the market is likely to go in the years ahead.
In most cases, these price estimates are based on publicly available contracts (which
we list explicitly) and on our private discussions with power suppliers. In the latter cases,
where requested, we have maintained the confidentiality of the source.
1. INVESTOR-OWNED UTILITIES
a) Role in the market
There are seven IOUs in New York. Due to low load growth during the 1990's and the
large growth in the number of IPP projects brought into service during this period, most have
surplus capacity available for sale. Where they can find buyers, utilities have been selling
under a variety of short- and long-term arrangements.
b) Representative prices
Northeast Utilities Service Company ("NUSCO") is an active seller of power in the
Northeast United States and has expressed interest in selling to wholesale purchasers on Long
Island. Below are two contracts that NUSCO has entered into recently.
ENTER F~ESEARCH, INC.
Community-Owned Electric Systems for the East End Towns Paae 9
· Northeast Utilities sale to Town of Madison: In May of 1994, NUSCO
entered into full-requirements power sales agreement with the Town of Madison
(Maine). This agreement covers sales during the period 1994-2008. The power
sales price in 1995 under this agreement can be calculated to be 4.0
The price rises to 8.5 c/kWh in 2003. Transmission charges through the Central
Maine Power system add 0.5 c/kWh to these rates; however, NUSCO agreed to
pick up these transmission costs during the period 1999-2003 and a portion of
these costs in the period following 2003.
NUSCO sale to Bozrah Light and Power Company~--- In January 1995,
NUSCO entered into an agreement with Bozrah Light and Power. The power
sales price in 1995 under this agreement is 3.5 ¢/k'~qhd.
2. NEW YORK POWER AUTHORITY
a) Role in the market
NYPA was originally created as a public authority to develop the hydropower
resources of the St. Lawrence and Niagara Rivers. Later it was given a role in the development
of auclear power in the state. It now owns and operates approximately 5000 MW of power
generating capacity, consisting primarily of hydroelectric and nuclear power stations.
Most of NYPA's power is sold to muuls, to governmental customers, and to large
industrial customers. NYPA also sells power to the IOUs. Under an arrangement worked out in
1976, when Con Edison was experiencing financial difficulties associated with the construction
of two power plants, NYPA purchased the two plants and also obtained the right to serve
governmental consumers of power in Con Edison's service area.
NYPA currently serves the three existing muuls on Long Island¢ as well as some thirty
to forty Long Island "economic development" customers. It also sells power to LILCO.
b) Representative prices
Sales to existing munis Most of the power sold by NYPA to the existing
munJs is hydroelectric power-so-called 'q?reference Power"---generated by
NYPA in the St. Lawrence or Niagara stations. Because these plants were built
many years ago with cheaper dollars, the cost of power from these plants today
is very low--about 1.0 c/kWh. A new muui satisfying the requirements of the
Niagara Redevelopment Act would be eligible to apply for this low cost power.
However, this supply of power is fully allocated by contract and it is unrealistic
a Information regarding this saie is detailed in the August 1993 contract between NU and Madison and the May
1994 amendment to that con~'act which is filed with the Federal Energy Regulatory Commission.
~ This effective annual price was derived from the actual two-part tariff consisting of a demand charge of
$50/kW-yr in 1995 and rising to $125/kW-yr in 2003 and an energy charge which is 3.4 c/kWh during on-peak
periods and 2.4 c/kWh during off peak periods in 1995 rising to 6.2 c/kWh during on-peak periods and
4.9 c/kWh during off peak periods in 2003. The effective cents per kilowatt-hour prices given in the text in this
and in the succeeding cases in this section are derived assuming a load factor of 50% which is typical for utility
whose loads are not dominated by high load-factor industrial customers.
¢ Information regarding this sale is available in FERC Docket ER95-513 NU
a The actual two-part tariff consists of a demand charge of $25/kW-yr in 1995 and an energy charge which is
2.9 g/kWh.
~ Freeport, Greenport and Rockville Center
ENTEK RESEARCH, INC.
Paae 10 F~nal Reeort
to expect that additional allocations of any sizable mounts will be available in
the near future. Furthermore, should additional allocations become available in
the future, there would likely be competing applicants.
Sales to LILCO NYPA sells power from the Fitzpatrick nuclear power plant
to LILCO under an annually-renewable contract. In 1994, the price at which
that power was sold to LILCO was 5.1 C/kWh (price as delivered to LILCO's
system),a
3. POWER MARKETING COMPANIES
a) Role in the market
Several dozen power marketing companies have received FERC authorization to
function pursuant to the 1992 Energy Policy Act. These entities act as brokers operating on the
wholesale market, purchasing power from utilities and independent power producers and
reselling to utilities and munis.
b) Representative prices
Power Markets Week, a weekly newsletter covering the power marketing business,
reports spot market prices (prices for non-finn power) every week by region of the country.
Prices are obtained from surveys of buyers and scllers~power marketing companies and
utilities--and are quotoa for regional markets throughout the United States.
Due to a surplus of generating capacity in the Northeast United States, power prices
are unusually depressed now. For the Northeastern region, Power Markets Week has reported
spot market prices varying between 1.8-3.0 C/kWh over the past four months with most
transactions taking place near the middle of trds range---that is, at about 2.0-2.3 e/kWh.
Such prices are barely above the marginal cost of generating power from even the
most cost-effective units and they are not close to recovering thc full capital, fuel and O&M
costs of power from a new power plant. Hence, in considering the cost of power supply, it is
important to recognize that the prices currently prevailing on the spot market are not
representative of the long-term cost of power supplies.
4. INDEPENDENT POWER PRODUCERS
a) Role in the market
Some 350 power plants, owned by over one hundred IPPs, currently generate about
6000 MW of power in New York from natural gas-fu'ed combined-cycle systems, hydroelectric
power stations, and from wood and waste-to-energy plants. When all IPP projects currently
under construction are completed, the total level of generation will be close to 7000 MW or
over one fifth of the state's total generating capacity. Some 60-70 of these plants are natural
gas fired cogeneration facilities and represent the bulk of the power generated. The largest
independently-owned plant in the state is the Independence station on Lake Ontario, owned and
~ The actual two-part tariff consists of a capacity charge of $161/kW-yr (which includes wheeling to LILCO's
system) and an energy charge of 1.7 c/kWh. Because NYPA also makes available additional amounts of power
on an as available basis for the energy charge alone, the effective cost to LILCO of the power purchased under
this contract is substantially less than the 5.1 c/kWh stated in the text.
Community. Owned Electric Systems for the East End Towns P;~qe 11
owned and operated by Sithe Energies; at 1000 MW, this plant ranks among the largest power
plants in the state.
Hem on Long Island, there are about 400 MW of independently-owned power plants
ranging in size from a few kilowatts to 135 MW. Most of them are required to sell all of their
power to LILCO under the terms of their power sales agmemeats with the utility, but at least
two of them also sell electricity to the "host" facilities to which they am selling thermal energy.
The largest independently-owned power plant on Long Island is the 135 MW Holtsville
facility, owned and operated by NYPA.
b) Representative prices
The prices at which IPPs sell electricity to utilities in New York vary as there are a
number of different contract formats. One common pricing arrangement---derived from the
"6 e law" in effect from 1981 to 1992~ets prices under a PSC-determined tariff rate at a
minimm level of 6 e/kWh. For most IPPs selling power under such arrangements, prices are
effectively still at the 6 e level since fuel costs~one of the key determinants of the tariff
rate---are at relatively low levels. However, the 6 ¢ minimum price was set during the 1980's
when power generating costs were higher than they are today. At today's gas prices, an IPP
constructing a new natural gas-fired combined cycle unit that is greater than 150-200 MW in
capacity and contracting for fuel supplies is likely to have total costs of about 5 e/kWh or even
lower for the larger, more efficient units.
A benchmark of the cost of power generation on Long Island is NYPA's contract for
the sale of power from the Holtsville plant. The pricing in this contract is a complex set of
formulas which, essentially, set base prices and escalators (where appropriate) for each
component of the owner's costs of generating electricity. Today, the total effective price is
approximately 5 c/kWh. While, due to its tax-exempt status, NYPA has certain financing
advantages not available to a typical IPP, this is counterbalanced by the fact that NYPA's gas
purchase contract was executed some four to five years ago and may not be representative of
the favorable pricing that has prevailed in the gas industry since then.
One t~pstate IPP has quoted us a price of approximately 4.5 e/kWh (available in
1995). Approximately half of this price represents capital amortization and operating and
maintenance costs. The other half represents fuel supply and transportation costs. Under a
long-term contract, the portion of this price representing fuel costs can be expected to track
increases in fuel costs. While this price is somewhat on the low side, it may not be
unrepresentative of the cost structure of a large, efficient combined-cycle unit with good
transmission access to competitively-priced gas supplies.
5. SUMMARY OF POWER SUPPLY PRICES
In the short mn, economy power can be obtained on the spot market in the region at
prices as low as 2 e/kWh. However, while they indicate the state of today's market for non-
firm power, these prices are not directly relevant in evaluating the economics of power supply
for a mum.
A more relevant guide as to the tong term cost of base-load power supply is the price
from new gas-fired combined cycle facilities. As indicated above, in 1995 this price is
approximately 4.5-5.5 e/kWh, depending on where the power plant is built, the financial
structure of the owner, the size and efficiency of the facility, fuel supply and transportation
costs, and the load factor of the purchaser. About 40% of this price would be associated with
ENTEK RESEARCH, INC.
Paoe t2 [:inal Renort
capital amortization which would remain flat; 10% associated with O&M costs which would
increase with inflation; and 50% associated with fuel costs which would escalate with the
delivered price of fuel. It is important to understand that base-load power such as this would
only be appropriate for a portion ora muni's needs; it would need to be supplemented with
other purchases to supply intermediate and peaking power as well as backup for outages.
A full-requirements contract would normally be expected to be somewhat higher than
the cost of base-load power since it incorporates a mix of power generating sources of different
types with an adequate allowance for the extra capacity needed to provide a reliable supply.
This type of arrangement is all-inclusive and would address all ora muni's power needs; it
could be entered into as the sole source ora muni's power supply.
The NUSCO sale to Madison mentioned above in Section C-1 is an important
indicator of today's market for full-requirements power in the Northeast. The 1995 price in
this contract is 4.0 t/kWh. This price is lower than the full price of power t~om a new power
plant and demonstrates the favorable market for purchasers of power that exists in the mid
1990's due to the surplus power situation in which the Northeast finds itself today.'
As the following section will makes clear, the location of the power supply is also a
critical factor in determining the overall cost of power as delivered to a muni since wheeling
can add substantially to the delivered cost of power.
D. Availability and cost of wheeling capacity
1. BACKGROUND ON WHEELING
"Wheeling" in electric utility jargon refers to the transmission of eleetricity across a
utility's system for a f~e. Usually, wheeling charges are applied by a utility when it is neither
the source nor the purchaser of the power; rather, wheeling charges are applied by a third-
party utility whose sole function is to transmit the power across its system. Wheeling charges
may be paid either by the purchaser or the seller of power. The Federal Energy Regulatory
Commission has ulthnate jurisdiction over wheeling rates but the FERC typically defers to
state public utility commissions where such commissions employ FERC-approved methods for
calculating wheeling rates.
The level of any wheeling charges that would apply to purchases of power by munis
established by the Towns depends on the number of utility systems through which the power
must be wheeled and the wheeling charges of each of those systems. Some examples illustrate
how this concept would apply to power wheeled to the East End:
· Purchases from an IPP on Long Island--If the IPP were located such that its
power could be delivered directly to the muni's transmission/distribution
system, no wheeling would be required. If transmission through LILCO-owned
transmission lines were required, then LILCO wheeling charges would apply.
· Purchase from IPP or Power Marketing Company from Upstate
Source Power would be wheeled through LILCO's system, across a
submarine cable, through Con Edison, and, depending on the location of the
source, through another utility system as well.
Note that the price schedule in this contract has the effective rate rising at about 10% per year to a level of 8.5
c/kWh in 2003, reflecting the expectation that power surpluses will gradually be reduced over that period.
Con;t~unRv-Owned Electric Systems for the East End Towns Paoe 13
· Purchases from NYPA's Fitzpatrick plant-~Power would be wheeled through
LELCO's system, across a submarine cable, through the Con Edison system,
and along NYPA's upstate transmission lines. Wheeling charges would be paid
to all three utilities as well as for the submarine cable.
· Purchases from New England~Assuming the power was supplied by
Northeast Utilities, which has a direct intertie with Con Edison, the power
would be wheeled through the Con Edison and LILCO systems and wheeling
charges would be paid to each of these utilities as well as for the submarine
cable.
2. AVAILABILITY OF TRANSMISSION CAPACITY
The limiting factor in bringing additional power from upstate sources to Long Island is
the capacity of the submarine cables that link Long Island to Westchester and to CoaneeticuL
The table below shows the intertie capacity on submarine cables between Long Island and
Westchester and between Long Island and Connecticut. There is a total of 1485 MW of
capacity on these three interties. However, of this, some 272 MW of this capacity is allocated
to Con Edison. Also, on-land transmission connections to Norwalk, Connecticut are inadequate
to provide reliable service. Taking these two portions out of the total leaves 927 MW of firm
interlie capacity available for transmission to the LILCO system/
Transmission Intertie Capacity to Lonq Island
Cable Capacity
[MW]
Y-50 (Shore Road, LI--Dunwoody, Westchester) 599
Y-49 (Garden City--to Sprainbrook, Westchester) 600
Northport to Norwalk. CT 286
Sub-Total 1485
Less Con Edison entitlement -272
Net LILCO entitlement 1213
Net MLCO w/o Northport to Norwalk 927
The current tn'm-power utilization of the transmission capacity as used to deliver
power to or through the l .H .CO system is shown in the table below, NYPA employs 175 MW
of this capacity to deliver to the munis, to the Nassau and Suffolk County Municipal
Distribution Agencies, and to economic development customers on Long Island. LILCO uses
305 MW to transmit power from its share of the Nine Mile 2 nuclear power plant and from its
Gilboa and Fitzpatrick purchases from NYPA. The total usage thus amounts to 480 MW.
In addition, LILCO also uses capacity on the these lines on a non-firm basis to bring
in "economy" power; i.e., power for which there is no firm purchase commitment but which is
purchased on an opportunistic basis when it is cheaper than power that would otherwise be
generated by LILCO. However, this non-firm usage is lower in priority than f'nan usage and
new firm use customers would take priority over the use of the line to transmit economy power.
a In LILCO's planning studies, the utility txeats the Northport to Norwalk line as capable of carrying [00 MW of
capacity. Hence, the analysis here is probably conservative in that it assumes that there is no firm capacity
available from this line.
ENTEK RESEARCH, INC.
Pa~e 14 Final Report
Current Utilization of Transmission Interties
Purpose Capacity
NYPA--saIes to three existing munis
NYPA--sales to MDA's and eco. dev. customers
LILCO-Nine Mile 2 18(;
LILCO--Giloba 4E
LILCO-pumhase of Fitzpatrick power from NYPA 7~
Total 48(
In summary, there is approximately 450 MW of firm capacity available on the existing
transmission interties. The level of available l'mn capacity could potentially Increase if I .ri .CO
ceased purchases of Fitzpatr 14k power . .e.g., due to a decrease in its loads if additional
customers (such as the East End Towns) leave its system or if transmission upgrades were
made in the Norwalk region, permitting the firm utilization of the Northport to Norwalk line.
The available capacity would decrease if other entities on Long Island sought to use it to
purchase firm power from off-Island sources.
3. WHEELING RATES
Wheeling charges are regulated by the FERC. Traditionally, transmission rates have
been calculated based on the costs utilities incur in providing transmission service. These costs
are dominated by the capital amortization of the original and any succeeding investments.
Operating costs for transmission lines are relatively low.
Aa important principle of regulation is that customers obtaining the same service
should pay the same charge. Hence, in general, a new muni wheeling power to its system
would pay LILCO and other utilities, as applicable, the same rates as apply to existing muuls.
Charges that currently apply to power delivered to the existing munis are as follows:
· LILCO on-land system-~$2.10/kW-mo for delivery at primary voltage.'
· Charges for submarine Intertiesb Y-50 (older cable): $0.61/kW-mo. For the
newer Y49 intertie, the charge is significantly higher: $4.42/kW-mo.
· Con Edison--$1.12 S/kW-mo for power transmitted to the Westchester end of
the Y49 intertie.
· NYPA-~NYPA's wheeling charges for transmission from its upstate facilities
(located on Lake Oswego) to the Con Edison system range from $1.60-
2.19/kW-mo
a There is a $0.87/kW-mo surcharge for delivery to the secondary distribution system which is the voltage level
at which LILCO delivered to Greenport. Freeport and Rockville Center receive power at the primary level and
this surcharge does not apply to them.
b LILCO and the three Long Island munis are engaged in a dispute as to the charges that should apply for
transmission on the submm'ine cables. As the text makes clear, the rates on the older Y-50 interlie are much
lower than the rates on the newer Y49 intertie. Until 1993, the municipalities paid the lower Y-50 rote.
However, LILCO has sought to treat the power for the munis as being transmitted on the newer line and to have
the munis pay the higher rate. This dispute is as yet unresolved.
Communi~-Owned Electric Systems for the East End Towns
Applying these rates to particular situations and convening to a cents per kilowatt-
hour measure of the cost~ results in the following illustrative examples,b
· Purchases from IPP on Long Island---Wheeling charges would be zero or
0.6 c/kWh depending on whether or not there was a need for transmission
through LILCO's system
· Purchase from IPP or Power Marketing Company from Upstate
Source 2.0-3.2 e/kwh
· Purchases from NYPA's Fitzpatrick plant 2.0-3.2 e/kwh
· Purchases from Northeast Utilifies---l. 1-2.1 e/kWh
4. NEW SUBMARINE CABLE
As has been mentioned, three submarine transmission interties¢ connect Long Island
with Westchester and Connecticut. The most recent intertie~the Cross Sound Cable
project--was completed in 1991 at a total cost of $325 million. This intertie provides 600 ~
of transmission capacity. The charge for finn capacity on this line is $4.42/kW-month which,
on a cents per kilowatt-hour basis, is equivalent to 0.6 e/kwh if power is taken at 100% load
factor or 1.2 e/kWh if power is taken at the 50% load factor of a typical utility.
There are several possible routes for a new submarine intertie: One is between
Shoreham and Millstone since there are excellent on-land transmission connections at each end.
Because of the length of the submarine cable, the cables would have to carry DC current and
AC-DC inverters would be necessary at each end. LILCO has prepared some rough ,estimates
showing that a 900 MW intertie would cost over $600 million. On a cents per kilowatt-hour
basis, these costs would translate to about 2 C/kWh or more. However, it should be
emphasized that, as far as we are aware, virtually no engineering work has been done
regarding such a project and any cost estimates are rough at best.
Eo Muni's cost of power
The scope of this study does not include the development of an estimate of the rates
that would be charged by a muni. However, the information that has been prepared-~,he costs
of power supply and wheeling, and various costs to set up and operating a muni--does provide
most of the data needed to estimate such rates.
From the information in this report, we can develop the following components that
would make up the rates ora new muni:d
a For this conversion, we have assumed a 50% load factor for the purchasing mtmi
b Wheeling charges are shown as ranges because of uncertainties due to the dispute between LILCO and the
three LI mtmis as to how wheeling rates will be computed tbr the submarine interties and beoanse charges for
wheeling upstate depend on which transrmssion liues wilI actually be needed tbr a particular purchase. The low
end of the range assumed the lower cost for upstate transmission, where applicable, and, tbr wheeling across the
submarine cable, that there would be a 50/50 blending of the cost of the Y-50 and Y-49 thterties. The higher end
of the range assumed the higher cost for upstate transmission and that the charge for the submarine interties
would be the full cost of the more expensive Y-49 intertie.
~ Each submarine intcrtie actually consists of several individual cables.
a All of the costs provided are in 1994 dollars.
ENTEK RESEARCH, INC.
P;~qq 16 Final Reoort
COST OF POWER SUPPLY AND WHEELINGa
Power supply is likely to cost 4.0-5.5 c/kWh for full-requirements supply. Power may
be obtained near the lower end of this range in the near future. As the current surpluses of
generating capacity in the Northeast are reduced, the cost of full requirement power is likely to
rise.b
The cost of wheeling can range from 0-3.0 c/kWh, depending on the location of the
supplier. If power is obtained from off-Island power suppliers, wheeling charges ot'2-3 c/kWh
are likely to be incurred. Over time, it is reasonable to expect that power supplies are likely to
be available from Island-based sources, assuming new IPP projects are built on the Island
and--assuming the industry is restructured as many expeet-~as LILCO's generating resources
are transferred to competitive suppliers.
As an example of thc combined cost of power delivered to an East End muni, we can
take the 1995 price under the NUSCO sale of full-requirements power to the Town of Madison
as described in Section C-I of this part of the report. Assuming the power is delivered by
NUSCO to the Con Edison border at the prices quoted in the NUSCO/Madisen contract, the
total power supply and wheeling cost would be 6.1 f/kWh in 1995.
It is interesting to note that this estimate for the cost of power delivered to mania on
the East End is also very close to the figure that would be obtained if the power supply were
assumed to be new generating sources located on the Island (Lc., if the nfix of ganeration were
based largely on new gas-fired combined-cycle and simple-cycle units). In this case, wheeling
would be required only through LILCO's system.
2. CERTAIN COSTS OF SETTING UP A MUNI
In Appendix B, Beck has prepared estimates of various costs associated with setting
up a muni and certain of the costs associated with acquiring physical assets are described and
estimated. These include engineering, disconnection and reconnection, start-up, and working
capital costs. In addition, the cost of acquiring the 69 KV transmission line that loops around
the East End was also estimated. Not included in these costs is the cost of acquiring the
distribution system.
Assuming the five towns proceed together towards the establishment of munis, the
total amount of these cost elements is estimated to be $29 million without the 69 KV line and
$58 million with the transmission line. To estimate how much these costs contribute to the
rates that would have to be charged by an East End munl, we have converted these capital
costs into a cents per kilowatt-hour rate using the following assumptions: 30 year debt financed
at an 8% interest rate and the total East End load as given in Appendix B. The net effect of
these cost elements on rates is estimated to be 0.3 f/kWh without the 69 KV line and
0.6 f/kWh with the 69 KV line.
3. COST OF OPERATIONS
In Appendix B, Beck has prepared an esttmates of the annual cost of operations and
maintenance for East End muins. Beck estimates that these costs would be $15,250,000 per
a Price estimates given in this section are based on currant 1995 price structures. As such, they do not reflect
changes that may occur in the costs that suppliers must pay to generate power, in particular, fuel prices
variations could have s substantia| effect on these prices.
b Note according to current PSC and utility projections, it may be ten years before the surpluses are el/mmated.
ENTEK ~ESEARCH, INC.
Communit~Owned Electric Systems for the East End Towns Page 17
year (1995 dollars) assuming the Towns worked cooperatively. This is equivalent to
1.7 ~/kWh. If the Towns proceeded alone, the costs would be very slightly higher.
4. SUMMARY REGARDING ECONOMICS OF MUNICIPALIZATION
Adding together the est'unatexl cost of power supply and wheeling, the partial costs of
setting up a muni as outlined in the previous sections, and the costs of operations, the sum total
is approximately 8.4 c/kWh. Besides these cost elements, the total costs a mm would have to
recover would also include in lieu of tax payments, reserve for depreciation, and debt service
on the remaining acquisition costs. Of these, the latter are the most significant as the remaining
costs of acquisition would include the costs of the distribution system (including service drops
and meters) as well as any other costs that may be imposed through the condemnation process,
if the process of acquisition is through condemnation.
LILCO's current rotes are just under 16 C/kWh.a The difference between LILCO's
current rotes and the 8.4 c/kWh that we have esfunated for the specified cost elements
examined in this study is about 7.5 c/kWh. Based on our experience with utility systems asset
valuations, this differential is significantly greater than the likely costs of the remaining cost
elements. Hence, while we have not performed a complete economic evaluation of the
establishment of a mtmi, it appears highly likely that such an evaluation would conclude that
mumcipalization would be economically advantageous to the Towns.
This value does not include the gross receipts tax.
ENTEK RESEARCH, INC.
Gommuni~,-C,~,,~~ Electric Systems for the East End Towns peqe 19
IV. Legal and Engineering Costs
The legal and engineering costs for the establishment of a muni vary depending on the
process the Towns choose for proceeding (full, conventional municipalization involving
condemnation of assets as compared to setting up a competing service), the degree and type of
opposition on LILCO's part, and whether the Towns elect to work together or to proceed
individually.
A. Full municipalization
For full municipalization, the legal costs for a single town are estimated to be between
$1-2.4 million for a single Town proceeding alone. There are major scale econormes in the
legal effort if the Towns proceeded to work together; if the five Towns proceeded together,, the
legal effort is estimated to increase by only about 10% for the entire effort.
Engineering costs for full municipalization for a single Town proceeding alone are
estimated to be $1.15 million. As with the legal effort, major scale economies would apply if
the five Towns proceeded together; in this case the total effort is estimated to cost $1.35
million.
The total of the engineering and legal expenses is thus estimated to be about $4 million
if all of the Towns proceeded together with the fifll, conventional municipalization approach.
B. Alternative approaches
If one of the alternative approaches discussed in Appendix A were adopted
instead~one of the so-called "muM-lite" approacber~costs would be substantially lower.
Legal costs for such an effort would range from $50-200,000, depending primarily on the level
of opposition by LILCO and the need to become involved in court appeals. Again due to scale
economies, there would be little change in this estimate whether a single Town proceeded alone
or all Towns proceeded together.
Until one of the alternative approaches was better detined in terms of its physical
scope, it is not possible to develop an engineering cost estimate.
ENTEK RESEARCH, INC
Table of Contents
APPENDIX A
PRELIMINARY LEGAL FEASIBILITY ANALYSIS
I. GENERAL LEGAL AUTHORITY ...................................................................... A-2
A. Process of Municipal Utility Formation ................................................................... A-3
1. Individual Municipal Utility Formation .............................................................. A-5
2. Joint Action Authorization .............................................................................. A-10
B. Acquisition By Eminent Domain ............................................................................ A-13
II. EMINENT DOMAIN PROCEDURE LAW ........................................................... A-14
III. ANALYSIS OF SPECIFIC LEGAL ISSUES ......................................................... A-18
A. Generic Utility Defensive Strategies in Opposing Municipalization Efforts ............A-19
1. The "Stranded Investment" Argument ............................................................. A-20
2. Other Litigation Challenges ............................................................................. A-23
3. Propaganda ..................................................................................................... A-25
B. Valuation Methods Applied to Condemnation of Utility Property Under
New York Law .................................................................................................... A-25
1. There is Some Arguable Support for Capitalization of Earnings as a
Preferred Approach to Valuation of Utility Property in Condemnation ............ A-26
2. Additional Observations on Capitsli×ation of Earnings .................................... A-27
3. Additional Observations on Market Value and Comparable Sales .................... A-29
C. Strategic Overview and Lessons from Towns of MassenafNiagara Mohawk
Municipalization ................................................................................................... A-30
D. Possible Preemption of Municipal Acquisition Authority Under the LIPA Act
and Possible Responsive Strategies ....................................................................... A-32
1. The LIPA Act ................................................................................................. A-33
2. The Pre-Emption Problem ............................................................................. A-37
3. Possible Approaches ....................................................................................... A-41
E. Analysis of East End Towns Present Franchise Arrangements with LILCO ............ A-46
1. Town of Southampton .................................................................................... A-46
2. Town of Riverhead ......................................................................................... A-46
3. Town of Southold ........................................................................................... A-46
4. Town of East Hampton ................................................................................... A-46
5. Town of Shelter Island .................................................................................... A-46
F. Implications of Energy Policy Act of 1992 ............................................................. A-48
1. Overview of Section 211 ................................................................................ A-49
2. "Muni Lite". ................................................................................................... A-50
G. Federal Income Taxation Issues Concerning Municipal Bonds Used
to Finance Condemnation of Utility Facilities ........................................................ A-58
H. Legal Issues Concerning Formation of Municipal Joint Action Agency .................. A-59
APPENDIX A
Preliminary Legal Feasibility Analysis of
Establishment of One or More Municipal.
Electric Utilities by the Towns of East
Hampton, Riverhead, Shelter Island,
Southampton and Southold, New York
BY:
Donald R. Allen, Esq.
John P. Williams, Esq.
John P. Coyle, Esq.
DUNCAN & ALLEN
1575 Eye Street, N.W.
Washington, D.C. 20005
Telephone: (202) 289-8400
This is a preliminary analysis of the legal
feasibility of the establishment of one or more municipal
electric utilities by the Towns of East Hampton, Riverhead,
Shelter Island, Southampton and Southold, New York ("East End
Towns"). In general, the East End Towns have the ability
individually to establish municipal electric utilities within
their respective geographic jurisdictions under the powers
granted by New York General Municipal Law Article 14-A,
Sections 360 through 366. The East End Towns are also
empowered, by General Municipal Law Article 5-G, Section 119-
o, to exercise jointly the municipal utility authority
conferred on them by General Municipal Law Article 14-A.
General Municipal Law Section 360(2) grants to
municipalities in the State of New York the power to
"construct, lease, purchase, own, acquire, use and/or operate
any public utility service within or without its territorial
limits, for the purpose of furnishing to itself or for
compensation to its inhabitants, any service similar to that
furnished by any public utility company ." As discussed
in Part III.D of this Appendix, one significant question
involved in any decision by the East End Towns concerning how
to exercise their municipal utility powers under Article 14-A
of the General Municipal Law -- by either construction,
purchase or acquisition -- is whether and to what extent the
Long Island Power Authority's enabling legislation (Public
Authorities Law, Section 1020 through 1020-hh (the "LIPA
Act")) places any limitations on the exercise of those
municipal powers with respect to the facilities of the Long
Island Lighting Company ("LILCO").
Part I of this Appendix discusses the general legal
authority of the East End Towns under General Municipal Law
- 2 -
Article 14-A and the laws of New York generally, either
individually or collectively to (a) form a municipal electric
utility, and (b) condemn LILCO's assets. Part II reviews the
general framework of the process of condemnation under New
York Eminent Domain Procedure Law. Part III analyses the
following specific legal issues:
Generic Utility Defensive Strategies
In Opposing Condemnation Proceedings;
Valuation Methods Applied to
Condemnation of Utility Property
Under New York Law;
Ce
Strategic Overview and Lessons from
Town of Massena/Niagara Mohawk
Municipalization;
De
Possible Preemption of Municipal
Authority Under the LIPA Act and
Responsive Strategies;
Analysis of East End Towns Present
Franchise Arrangements with LILCO;
Fe
Implications of Energy Policy Act of
1992
Federal Income Taxation Issues
Concerning Municipal Utility Bonds
Legal Issues Concerning Formation of
Municipal Joint Action Agency.
In reviewing the factual and legal analyses set
forth in this Appendix, it is important to bear in mind that
the scope of services provided for these analyses requires
that they be preliminary in nature. No specific legal advice
as to any particular course of action is recommended in this
Appendix, and each of the issues discussed herein requires
considerable further study before any definitive plan of
action is adopted by the East End Towns or any of them.
Io GENERAL LEGAL AUTHORITY
In 1934, the New York Legislature enacted Article
14-A of the General Municipal Law, apparently as enabling
legislation for a municipalization effort then contemplated by
the City of New York. See Tierney v. Cohen, 268 N.Y. 464, 198
N.E. 225 (1935); New York Edison Co. v. City of New York, 268
N.Y. 669, 198 N.E. 550 (1935). Article 14-A of the General
Municipal Law (Sections 360 through 366) is a broad grant of
power by the State of New York to each of its municipal
corporations~/ to "construct, lease, purchase, own, acquire,
use and/or operate any public utility service[~/] within or
without its territorial limits, for the purpose of furnishing
to itself or for compensation to its inhabitants, any service
similar to that furnished by any public utility company
specified in article four of the public service law." General
Municipal Law Section 360(2). Article 14-A of the General
Municipal Law is within the scope of permissible delegations
of power to municipalities by the Legislature under Article IX
of the New York Constitution. Villaqe of East Rochester v.
Rochester Gas & Electric Co., 262 App. Div. 556, 31 N.Y.S.2d
754 (1941), aff'd, 289 N.Y. 391, 46 N.E.2d 334 (1943); O'Fl~rnn
v. Villaqe of East Rochester, 292 N.Y. 156, 54 N.E.2d 343
(1944), cert. denied sub nom. Despatch Shops, Inc. v. Village
of East Rochester, 323 U.S. 713 (1944).
Article 14-A also provides a fairly precise
description of the procedural steps that a New York
municipality is to follow in establishing municipal utility
operations. These steps, and both the specific and general
authorization of joint action by New York municipalities in
the formation and operation of municipal electric utilities,
are outlined in the next section of this Appendix.
A. Process of Municipal Utility Formation
One of the key features of Article 14-A is its
requirement that two central elements of establishing
il
General Municipal Law Section 360(1) defines "municipal
corporations as meaning "a county, city, town or village."
"Public utility service" is defined by General Municipal Law
Section 360(1) as meaning "any service authorized to be
furnished by any public utility company pursuant to article
four of the public service law and shall include works,
structures, poles, lines, wires, conduits, mains, systems,
waterpower and any and all other real and personal property
used or necessary for, connected with or appertaining to the
furnishing of such service."
- 4 -
municipal utility operations be established in advance by
local law (General Municipal Law Section 360(3)):
(1) the proposed method of constructing,
leasing, purchasing or acquiring the plant
and facilities necessary for utility
service, together with both the maximum
and estimated costs of those activities;
and
(2) the method of furnishing'utility
service.
As discussed in detail below, this requirement
limits to some extent the ability of a New York municipality
to make major changes in its plan of utility establishment
quickly in response to developments in the implementation of
that plan,3/ while at the same time requiring full public
disclosure, debate and approval for both the initial
formulation of the plan and any subsequent major adjustments
to it. In addition, neither case law nor statutory provision
explains (or limits) what the phrase "method of furnishing
service" means -- i.e., whether the phrase requires that local
law establish the source of power supply, the structure of the
utility or the entire plan for acquiring facilities and power
supply and delivering electricity to the utility's consumers.
The most reasonable, abstract interpretation of the
requirement that local law establish the ,'method of furnishing
service" would appear to be that a Town (or group of Towns)
needs to establish, with such detail as is reasonably possible
in advance, the basic conceptual plan for acquiring power
supply and facilities and delivering electricity to consumers.
For these reasons, among others, the procedural requirements
of Article 14-A for adoption of a plan of utility
establishment also counsel in favor of completing a detailed
and exhaustive feasibility analysis of the process of
establishing a municipal utility prior to adopting
implementing legislation, because of the rather lengthy
process involved in making major changes to the plan in
response to unforeseen developments.
3/
As discussed in more detail below, the plan may be amended
after its adoption, but the process of amendment is subject
to the same notice and referendum requirements as the
original plan.
- 5 -
We first summarize the process of municipal utility
formation under General Municipal Law Article 14-A for an
individual Town. We then review the process for the joint
exercise of municipal utility powers under (1) the specific
delegation for joint powers under General Municipal Law
Section 361(2), (2) the general delegation for joint powers
under General Municipal Law Section 119-o, and (3) the
constitutional provisions for joint powers under Article VIII,
Section i and Article IX, Section 1(c) of the New York
Constitution.
1. Individual MuniciDal Utility Formation
In broad outline, General Municipal Law Sections 360
and 362 lay out a five-step procedure for local legislation
for the establishment of a municipal utility. The process
involves two distinct phases: the establishment phase and the
financing phase. The acquisition of utility property by
eminent domain -- as opposed to acquisition through
construction or negotiated purchase -- adds several steps to
the process, which are discussed separately in Part 2 of this
section. The five basic steps in the legislative procedure
are:
a. Resolution of the town board adopting
a plan of utility establishment,
which must specify (General Municipal
Law Section 360(2)):
The proposed method of
acquiring utility plant and
facilities;
ii.
The maximum and estimated
cost of acquiring plant and
facilities; and
111 ·
The method by which the
municipal utility will
furnish service.
be
A minimum six consecutive weeks'
newspaper publication of (i) a notice
of submission of the resolution for
mandatory referendum and (ii) the
text of the resolution itself
(General Municipal Law Section
360(5));
- 6 -
Submission of the resolution for the
plan of utility establishment for
referendum at a general or special
election (General Municipal Law
Section 360(5));
Financing resolution of the town
board for issuance of local
obligations to finance the
acquisition of plant and facilities
(General Municipal Law Section 362;
Local Finance Law Sections 30.00
through 33.000); and
Referendum on financing resolution,
as and if applicable to the mode of
financing adopted (Local Finance Law
Section 35.00).
The specifics of the steps in the establishment
phase of the process are discussed below, along with certain
specific background on the legal principles applicable to
these steps. At this point in the East End Towns' examination
of the process of utility formation, a detailed discussion of
the financing phase would be premature.
a. Statutory Drovisions
General Municipal Law Section 360(3) requires in
relevant part that, where a New York Town proposes to
establish a municipal utility exercising the powers vested
under General Municipal Law Section 360(2):
The proposed method of constructing,
leasing, purchasing [or] acquiring the
plant and facilities for such service,
together with both the maximum and
estimated costs thereof, and the method of
furnishing such service shall be fixed
· by a resolution of the town board in
the case of a town.
General Municipal Law Section 360(4) specifically
confers "authority to adopt such a resolution . . ~ upon the
town board of the town" seeking to establish a municipal
utility. Under General Municipal Law Section 360(5), the
action of the town board in adopting a resolution to establish
a municipal utility is then subject to ratification or
- 7 -
rejection in a mandatory referendum preceded by six weeks of
publication of the relevant resolution in one or more
newspapers of general circulation. General Municipal Law
Section 360(5) specifically provides, in relevant part, that:
Any such action by the town board of a
town shall be submitted for the approval
of the electors of the town at the next
general election to be held not less than
ninety days after the adoption of such
resolution; or at a special election
called in the same manner as provided in
the town law for submission of a
proposition at a special town meeting or a
special town election. Such submission
shall be in the manner provided by, and in
accordance with[,] the provisions of the
town law for the submission of any other
question by referendum on petition, except
that the referendum on the proposition
provided for in this section shall be
mandatory. Every such . resolution of
the town board and the notice of the
submission thereof, shall be published in
one or more newspapers published within
the town to be designated by
the ~e~islative body of the municipal
corporation affected, once in each week
for six consecutive weeks immediately
preceding such election
Once established, a New York municipal utility is
generally subject to regulation with respect to the rates,
terms and conditions of its service by the New York Public
Service Commission under the provisions of Article 4 of the
Public Service Law "so far as the same are applicable."
General Municipal Law Section 364(1). It is important to
observe here that the regulatory regime established by Article
4 of the Public Service Law does not, by its terms, regulate
municipal utilities in the same manner as investor-owned
utilities. Some of the more important provisions applicable
to municipal utilities are noted below.
Under Article 4 of the Public Service Law, the New
York Public Service Commission generally has jurisdiction over
the rates charged by municipal utilities. Public Service Law
Section 66(5). However, municipal utility rates are generally
subject to Public Service Commission review only upon a
- 8
complaint in writing signed by 25 or more consumers residing
in the municipal utility's service territory. General
Municipal Law Section 364(2) (b); Public Service Law Section
71. Municipal utilities are subject to Public Service
Commission reporting requirements as to such matters as their
amount of bonded indebtedness, employee salaries, expenditures
for facilities and operation and maintenance and other
operational matters (Public Service Law Section 66(7)), and
are required to file their contracts and rate schedules with
the Public Service Commission (Public Service Law Section
66(12)). Municipal utilities are generally not required to
obtain a certificate of authority from the Public Service
Commission under Section 68 of the Public Service Law (General
Municipal Law Section 364(2)), and are therefore generally
"self-franchising" within their own territorial boundaries
under New York law.g/ However, as discussed under Part
III.E below, a municipal utility that seeks to extend its
service within the territorial boundaries of another
municipality which has previously granted a franchise to
another utility (a situation that might exist with respect to
the Villages of Southampton, Sag Harbor and Dering Harbor)
must first obtain a franchise and certification of the Public
Service Commission pursuant to Section 68 of the Public
Service Law. General Municipal Law Section 361(1).
b. Leqal considerations
There are very few court decisions interpreting and
applying the statutory requirements of General Municipal Law
Section 360~ Two sets of court decisions, the Town of Massena
cases in the mid-1970s and the earlier Villaae of East
Rochester cases from the mid-1940s, offer some important
guidance on two basic legal issues arising under Section 360
and related statutes.
The first principle established by the case law is
that, given the limitations on the borrowing power of New York
municipalities under Article VIII of the New York Constitution
and the provisions of the Local Finance Law implementing
The one exception to this principle is that, where a
municipality owning a municipal utility seeks to sell
surplus power to a municipality that is presently served by
a public utility, "such extension shall not be effected
without the approval of the public service commission"
presumably under Section 68 of the Public Service Law.
General Municipal Law Section 361(1).
- 9 -
Article VIII of the Constitution, municipalities may proceed
incrementally to establish a municipal utility consistently
with the limitations on their ability to finance. O'Flynn v.
Villaqe of East Rochester, 292 N.Y. 156, 164-165, 54 N.E.2d
343, 347 (1944), cert. denied Dub nom. DesDatch Shods, Inc. v.
Villaqe of East Rochester, 323 U.S. 713 (1944). This
principle is of significant benefit to municipalities seeking
to establish a utility, both under phased condemnation
proceedings as contemplated by Section 401(C) of New York's
Eminent Domain Procedure Law, and where a municipality
determines to construct its own utility facilities rather than
to acquire the facilities of an existing utility through
condemnation.
The second important principle in the case law is
that the plan for establishing a municipal utility is allowed
considerable flexibility in its implementation. As the New
York Court of Appeals recognized in Town of Massena v. Niaqara
Mohawk Power CorD., 45 N.Y.2d 488, 489-490, 410 N.Y.S.2d 276,
280-281 (1978):
In any instance when a municipal
corporation endeavors to enter the public
utility field, necessarily a time gap
occurs between the drafting of the initial
outline and actual completion of the
project. During this interval, usually
not of short duration, several
contingencies may suggest or even
necessitate a change of direction: e.g.,
spiraling costs may render the undertaking
economically unfeasible; technical
developments may make the plans obsolete;
and demographic shifts may require a
revamping of the system. In view of these
and other pragmatic considerations,
flexibility in implementation of a section
360 project is obviously necessary. To
adopt a narrow interpretation, therefore,
might well destroy for practical purposes
the very statutory scheme which the
Legislature has seen fit to enact.
Furthermore, since a project once
implemented may be altered freely without
referendum submission (see 2
Opns. St. Comp., 1946, p. 582; 2
Opns. St. Comp., 1946, p. 556; Illinois
Power Co. v. City of Jacksonville, 18
10 -
Ill.2d 618, 165 N.E.2d 300), it would be
absurd to insist on such strict adherence
to the approved method.
Given the limited number of electric
municipalizations that have occurred in New York, the limits
of this principle of flexibility recognized by the Court of
Appeals in Town of Massena are both unclear and largely
untested. The specific facts of the case involved abandonment
of part of a plan of utility establishment providing for
construction of a transmission line and substation, in favor
of a plan to contract for transmission service. Thus, while
there is clearly some flexibility permitted in implementation
of the plan, it is not clear that such flexibility would
extend, for example, from changing the entire method of
acquisition under the plan from construction to condemnation
or vice versa.
Finally, it is worth noting that the key provisions
of the utility establishment resolution used by the Town of
Massena appear in the Appellate Division decision in the Town
of Massena case cited above. Town of Massena v. Niaaara
Mohawk Power Corporation, 60 A.D.2d 139, 400 N.Y.S.2d 862,
864-865 n.1 (3d Dept. 1977). This example provides a useful
starting point for the drafting of an appropriate utility
establishment resolution by any one or more of the East End
Towns.
2. Joint Action Authorization
As indicated above, there is abundant constitutional
and statutory authorization for the joint exercise of the
municipal utility power conferred by General Municipal Law
Article 14-A by two or more municipalities. First, Article
IX, Section l(c) of the New York Constitution -- part of the
New York Bill of Rights for Local Government added to the
Constitution in 1964 -- provides in relevant part that:
Effective local self-government and
intergovernmental cooperation are purposes
of the people of the state. In
furtherance thereof, local governments
shall have the following rights,
privileges and immunities in addition to
those granted by other provisions of this
constitution:
- 11
(c) Local governments shall have the
power to agree, as authorized by act of
the legislature, with . one or more
other governments within or without the
state, to provide cooperatively, jointly
or by contract any facility, service,
activity or undertaking which each
participating local government has the
power to provide separately. Each such
local government shall have the power to
apportion its share of the cost thereof
upon such portion of its area as may be
authorized by act of the legislature.
Second, Article VIII, Section 1 of the New York
Constitution provides specific authority for joint action in
financing by municipalities. Article VIII, Section 1 provides
in relevant part that:
IA]ny two or more [counties, cities,
towns, villages or school districts] may
join together pursuant to law in providing
any municipal facility, service, activity
or undertaking which each of such [town]
has the power to provide separately. Each
such unit may be authorized by the
legislature to contract joint or several
indebtedness, pledge its or their faith
and credit for the payment of such
indebtedness for such joint undertaking
and levy real estate or other authorized
taxes or impose charges therefor subject
to the provisions of this constitution
otherwise restricting the' power of such
units to contract indebtedness or to levy
taxes upon real estate. The legislature
shall have power to provide by law for the
manner and the proportion in which
indebtedness arising out of such joint
undertakings shall be incurred by such
units and shall have power to provide a
method by which such indebtedness shall be
determined, allocated and apportioned
among such units and such indebtedness
treated for purposes of exclusion from
applicable constitutional limitations,
provided that in no event shall more than
the total amount of indebtedness incurred
- 12 -
for such joint undertaking be included in
ascertaining the power of all such
participating units to incur indebtedness.
Third, the general grant of authority for joint
action and joint financing under Article VIII, Section 1, is
specifically implemented by Article 5-G of the General
Municipal Law (General Municipal Law Sections l19-m through
119-oo). In particular, General Municipal Law Section 119-o
sets forth broad particular authority for the development and
implementation of agreements among municipalities for the
joint financing and operation of any municipal "service,"
including electric utility operations.
Fourth, General Municipal Law Section 361(2)
specifically provides for agreements among "two or more
municipal corporations, authorized as provided in [General
Municipal Law Article 14-A] to exercise the powers specified
in [General Municipal Law Section 360] for the joint
ownership, leasing, construction, acquisition, use or
operation of a public utility service, within the combined
territorial limits of such contracting parties. The method of
operation of and the rates, rentals and charges for such
service and the procedures for their collection shall be fixed
by such agreements."
There is no case law testing whether the general
procedural requirements for utility establishment or financing
by individual municipalities similarly apply to the joint
exercise or. those powers by two or more municipalities. The
constitutional provisions, by their terms, appear to
contemplate that the procedural requirements applicable to
municipalities acting individually are likewise applicable to
municipalities acting jointly. Thus, it would appear that any
agreements for the joint exercise of municipal utility powers
are subject to the same referendum approval process as
contemplated by General Municipal Law Section 360(3), (4) and
(5). Joint financing activities are also apparently subject
to the same procedural requirements that the Local Finance Law
would impose on any municipal participant acting individually.
Notwithstanding the existence of reasonably clear
statutory and constitutional authority for joint action
financing, joint action financing of a municipal utility
serving more than one of the East End Towns may be complicated
by practical considerations. This is because, under Article
VIII of the New York Constitution and the Local Finance Law,
municipal financing is generally required to be done on the
- 13 -
basis of a municipality's "faith and credit" -- i.e., general
obligation financing, supported by a conditional tax, levied
in connection with the relevant bond resolution, to make up
any deficiency in debt service requirements that is not
covered by the proceeds of utility operation. In the context
of joint action financing, it is likely that lenders and
bondholders would require cross-default and "step up"
provisions that would obligate all non-defaulting joint action
financing participants to make good on any default on
financing obligations by one of the financing participants.
Although these kinds of cross-coverage and step-up
arrangements are permissible under Article VIII, Section 1 of
the New York Constitution and General Municipal Law Section
119-o, they would inject a considerable level of complexity
into a joint action utility financing because their effect on
and relationship to the debt limitations applicable to
participating Towns under Article VIII of the New York
Constitution and the Local Finance Law is unclear as a legal
matter. Thus, to the extent that the East End Towns may find
it desirable in the future to contemplate the joint action
financing of a municipal utility, the effects of cross-
coverage and step-up requirements would have to be carefully
and thoroughly evaluated in determining, as a practical
matter, whether it is worthwhile to proceed with a joint
action financing.
B. Acquisition BV Eminent Domain
General Municipal Law Section 360(6) provides that a
municipal corporation may, for the purpose of establishing
municipal utility service:
acquire the public utility service
of any public utility company operating
pursuant to article four of the public
service law or any other public utility
service within or without its territorial
limits, by purchase, or by condemnation in
the manner provided by law for
condemnation by such municipal corporation
of private property for public use.
This power to acquire utility facilities by purchase
or by condemnation is one of the powers that may be exercised
jointly by municipalities under General Municipal Law Section
361(2). Joint financing of any such purchase or condemnation
is generally authorized under General Municipal Law Section
119-o(2) (e).
14 -
It is important to bear in mind for purposes of this
discussion that General Municipal Law Article 14-A permits,
but does not require, a municipality seeking to establish a
municipal utility to acquire facilities by condemnation.
Thus, there is no general obligation on the part of such a
municipality to condemn or to purchase facilities of a public
utility corporation. Village of East Rochester v. Rochester
Gas & Electric CorD., 289 N.Y. 391, 399-400, 46 N~E.2d 334,
339 (1943).
There is no specific statutory process for
condemnation of utility facilities set forth in Article 14-A
of the General Municipal Law. Compare, e.g., Public Authority
Law Section l199-eee(5) (specific condemnation principles
applicable to the exercise of eminent domain power by the
Saratoga County Water Authority against facilities of another
water utility). Accordingly, the "manner provided by law for
condemnation" for purposes of General Municipal Law Section
360(6) is set forth in New York's Eminent Domain Procedure Law
("EDPL"). The basic procedural framework of the EDPL is
described below.
II. EMINENT DOMAIN PROCEDURE LAW
New York's EDPL was adopted in 1977 in order to
impose a general, uniform process on the condemnation of
private property for public use within the State of New York.
The basic process of condemnation under the EDPL proceeds in
four distinct steps:
Public hearings, on specified public notice,
resulting in the issuance of a "determination
and findings" by the condemning authority
specifying (a) the public use, benefit or
purpose to be served by the proposed public
project; (b) the approximate location of the
project and the reasons for site selection; (c)
the general effect of the project on the
environment and residents of the locality; and
(d) other relevant factors. The determination
and findings are subject to judicial review in
the Appellate Division on petition filed within
30 days of issuance (EDPL Article 2);
Offer and ne=otiation, including prevesting
discovery as to the value of the property to be
taken. As part of this process, the condemnor
is required to obtain one or more appraisals of
- 15 -
3 o
the property sought to be taken and to make a
written offer for 100 percent of its highest
approved appraisal to the party whose property
is to be taken. The condemnee may reject or
accept the offer, or may elect to accept the
amount offered as an advance payment or deposit
on full compensation and reserve the right to
claim additional compensation (EDPL Article 3).
Ac isition, where negotiations are
unsuccessful in producing an agreement on
price, is effected by court order. Proceedings
must be initiated within three years of
issuance of the determination and findings
required under EDPL Article 2, or within three
years of the entry of a final order or judgment
on judicial review, whichever is later (the
"final determination date") (EDPL Section
401(A)). Where the property at issue is to be
acquired in stages, the determination and
findings need only be made at the initial stage
of acquisition. The first stage of the
acquisition must be commenced within three
years of the final determination date, and the
last stage must be commenced within ten years
of the final determination date (EDPL Section
401(C)). Vesting is accomplished by the filing
of an order, on verified petition, by the
Supreme Court for the county in which the
property is located, determining compliance
with the provisions of EDPL Articles 2 and 3,
and an acquisition map, showing the property to
be acquired. The Court may or may not order
immediate occupancy of the property by the
condemnor. Where the condemnee is permitted to
occupy the property after vesting in the
condemnor, the condemnee is liable to the
condemnor for use and occupancy (EDPL Section
402). The condem~or may "abandon" the property
acquired within ten years after acquisition,
and must offer the condemnee a right of first
refusal to repurchase the property (EDPL
Section 406).
Determination of comDensation. Within three years
after vesting, the condemnee must file a claim for
compensation in the Supreme Court. Compensation is
thereafter determined by the Supreme Court, which
- 16 -
determination is thereafter subject to judicial
review in the ordinary course. (EDPL, Article 5).
Although the EDPL by its terms governs the
condemnation of real property, EDPL Section 708 provides that
"Whenever any condemnor is authorized to acquire for a public
use property other than real property, the acquisition of such
property shall be in the manner and procedure prescribed for
the acquisition of real property under [the EDPL]." Given the
specific authorization for condemnation of the "service" of a
public utility corporation under General Municipal Law Section
360(6), it is clear that the process described in the EDPL
will govern whether the utility facilities at issue are
considered real property, personal property, fixtures or sui
qeneris "utility property."
As a general matter, it is worth observing that the
clarity and uniformity of the EDPL imposes certain risks on
the acquisition of utility assets through condemnation,
particularly because the process required under the EDPL
(which was enacted in 1977) has somewhat of an imperfect "fit"
with the procedural requirements for establishment of a
municipal utility under General Municipal Law Article 14-A
(which was enacted initially in 1934 and last amended in 1965,
when the former New York Condemnation Law controlled the use
of the eminent domain power conferred by General Municipal Law
Section 360(6)).5-/ A~ong these risks are:
Potential practical tension between
the requirement of General Municipal
Law Section 360(3) -- that the
maximum and estimated cost of the
acquisition of plant and facilities
be established at the outset of the
formal utility formation process --
5_/
It should be noted that the Town of Massena's condemnation
cases, discussed in more detail below, proceeded under the
former Condemnation Law and not under the EDPL. The
principal substantive difference between the former
Condemnation Law and the EDPL that is relevant to the
condemnation of utility property is that Section 5-a of the
former Condemnation Law required that the Public Service
Commission render what amounted to an advisory opinion on
the valuation of the utility assets subject to condemnation.
The EDPL has no such provision. The valuation of utility
assets is thus more uncertain under the EDPL.
- 17 -
and the foreseeably lengthy and
uncertain process of finally fixing
compensation (after acquisition)
under the EDPL.
The EDPL provides for two rounds of
judicial oversight of the
condemnation process: once in
connection with appellate review of
the initial determination and
findings in the Appellate Division
and the Court of Appeals, and again
in connection with the fixing of
compensation.6/ Given the
otherwise relatively lengthy time
frame envisioned by the EDPL for the
completion of eminent domain
proceedings, the occasions for
potential judicial review under the
EDPL can inject considerable elements
of delay and uncertainty in the
utility formation process.
The negotiation and offer
requirements of EDPL Article 3 (and
the possibility that LILCO might
accept the highest approved appraisal
for its facilities as a partial
payment) could result in the
commitment of substantial amounts of
capital with no operational benefit
to condemning municipalities over
what, again, could be a rather long
period for carrying unproductive debt
service.
There may be offsetting advantages under the EDPL
condemnation process as well. For example, the possibility of
immediate occupancy under EDPL Section 402(B) (6) may offer the
6/
We note here that, given the structure of the EDPL, an order
for the vesting of title in the condemnor under EDPL Section
402 is probably viewed as interlocutory and therefore not
subject to appeal, although we have not reviewed this
question in any detail. If a vesting order under EDPL is
not treated as interlocutory, there may be yet a third level
of judicial review.
- 18
East End Towns (or any of them) the opportunity to get into
the utility business more quickly -- and consequently to
finance at least part of the costs of condemnation with the
proceeds of utility operations -- than would be the case if
occupancy of the property had to await a final condemnation
award. However, this procedure has not been used in any
electric utility condemnation under the EDPL and the law is
therefore unclear concerning what, if any, risks may follow
from using the "quick take" procedure authorized by EDPL
Section 402(B) (6). In addition, there are various other cost
shifting devices that the EDPL uses to discourage unjustified
delay in the eminent domain process, and that may therefore
result in a somewhat quicker resolution of that process than
would have been the case under the former Condemnation Law.
At this point in the East End Towns' consideration
of the possibility of utility formation, the essential point
is that condemnation is not the only means by which the Towns
can get into the utility business. From the standpoint of
evaluation of options, the establishment of one or more
municipal utilities through the construction of self-owned
facilities should definitely be considered as a viable option.
This option also merits consideration because of the LIPA pre-
emption issue, discussed below in Part III.D. of this
memorandum.
III. ANALYSIS OF SPECIFIC LEGAL ISSUES
This section of the memorandum analyzes the eight
specific legal issues identified at page 2 above. For s,~mmary
purposes, these issues are:
Generic Utility Defensive Strategies
In Opposing Condemnation Proceedings;
Valuation Methods Applied to
Condemnation of Utility Property
Under New York Law;
Strategic Overview and Lessons from
Town of Massena/Niagara Mohawk
Municipalization;
Possible Preemption of Municipal
Authority Under the LIPA Act and
Responsive Strategies;
- 19 -
Analysis of East End Towns Present
Franchise Arrangements with LILCO;
Implications of Energy Policy Act of
1992
7. Federal Income Taxation Issues
Concerning Municipal Utility Bonds
8. Legal Issues Concerning Formation of
Municipal Joint Action Agency.
Each of these issues is important to any ultimate
decision by the East Towns concerning the feasibility of
establishing a municipality and the appropriate means to
achieving that objective. Each of these issues is therefore
analyzed below in a manner more intended to assist in that
decisional process, rather than to support any specific
recommendation as to whether (and if so, how) to proceed.
A. Generic Utility Defensive Strategies
In Opposinq MuniciDalization Efforts
The specific question posed in our scope of services
is to "identify obstacles and challenges that utilities have
employed to seek to frustrate attempts by localities to
acquire utility property." As a matter of general experience
in this area, an investor-owned utility will respond to any
effort to establish a municipal utility within its service
territory (including the establishment of a competing
municipal utility) in much the same way that it will respond
to an effort actually to acquire its facilities through
condemnation. There are three main components to the typical
investor-owned utility's anti-municipalization strategy, each
of which is directed ultimately to the erosion of the public
will to create a municipal utility:
1. Attempting to make the process of
utility establishment too expensive
to complete. Whether or not the
municipality seeks actually to
acquire utility facilities through
condemnation, the single most common
responsive strategy of an investor-
owned utility confronting the
establishment of a municipal utility
is to claim ,,stranded investment" --
that is, to allege that the new
20 -
municipal utility has financial
responsibility for the high cost
generating assets that have driven
rates to the point where
municipalization becomes attractive.
Challenging, at every possible point,
the municipality's compliance with
whatever procedural requirements are
incumbent upon it. In New York, this
would likely include challenges to:
(a) the initial plan of utility
establishment; (b) the municipality's
legal authority to engage in the
particular course of utility
establishment it selects (see
discussion of LIPA pre-emption,
below); (c) any determination and
findings made in connection with
eminent domain proceedings; (d) other
aspects of eminent domain
proceedings; and (e) the
municipality's compliance with other
regulatory requirements (e.g.,
environmental issues). The name of
the game here is both delay for its
own sake, and disruption of the
possibility of municipal financing of
the establishment of its utility.
The extensive use of propaganda
(including misinformation) to
dissuade popular support for
municipalization.
Some aspects of the predictable anti-
municipalization strategy are subject to ready answers.
Others have to be viewed as risks to be assessed and mitigated
to the extent possible. We discuss each of these strategies
in broad outline below.
1. The "Stranded Investment" Arc~ument
An investor-owned utility confronting an effort to
establish a municipal utility in its service territory will
frequently try to defeat that effort through the assertion of
a ,'stranded investment" argument. The argument originated
long ago as a defense to municipal efforts to condemn utility
- 21 -
facilities, in the form of a claim that a municipal
condemnation of electric distribution or transmission
facilities necessarily deprived the investor-owned utility of
the value of a proportionate share of its generating assets
that, absent the condemnation, the utility would have devoted
to the service of the customers proposed to be served by the
municipal utility. In this context, claims for "stranded
investment" were originally claims for "severance damages" or
,,consequential damages" to the property (i.e., generating
assets) remaining in the hands of the utility after
condemnation. See, for example, Puqet Sound Power & Liqht Co.
v. City of Puyallup, 51 F.2d 688, 691-694 (9th Cir. 1931)
(rejecting claim for "severance damages" to entire investor-
owned utility system, including generation, resulting from
appropriation of electric distribution facilities); City of
Thibodaux v. Louisiana Power & LiGht Co., 225 F. Supp. 657,
661-663 (E.D. La. 1963), modified on other qrounds, 373 F.2d
870 (5th Cir. 1967), cert. denie~, 389 U.S. 975 (dictum
suggesting that lessening of income producing potential of
generation facilities is properly includable in condemnation
damages award, actual holding is that only the value of nearby
substations was affected by appropriation; case involved
franchise with 64 years left to run). More recently,
investor-owned utilities have attempted to claim (although not
in any reported litigation) that the mere act of establishing
a municipal utility, without actual condemnation, results in
an actionable claim for "stranded investment" because the
formation of a competing utility purportedly amounts to a
governmenta% taking of property.
Recently, the Federal Energy Regulatory Commission
("FERC") initiated a rulemaking proceeding (FERC Docket No.
RM94-7-000) in which it attempted, without notable success, to
formulate a proposed rule for dealing with "stranded
investment" claims on the wholesale level. The FERC's
rulemaking on the "stranded investment" issue is both ongoing
and hotly contested, and the proposed rule would apply only to
wholesale stranded cost issues. It therefore offers little in
the way of useful guidance on the valuation of utility assets
in a state law condemnation proceeding, although the ultimate
rule may have some bearing on transmission pricing if the East
End Towns find it necessary to seek a mandatory transmission
order against LILCO under Section 211 of the Federal Power Act
(see discussion at Part III.F.1. and 2. below). In addition,
a number of utilities have attempted to file transmission
tariffs with provisions for the recovery of "stranded
investment" resulting from the formation of municipal
utilities that use the host utility's transmission system.
- 22 -
See, e.q., Cajun Electric Power Cooperative, Inc. v. FERC, 28
F.3d 173, 176-180 (D.C. Cir. 1994) (rejecting FERC approval of
"stranded investment" provision in transmission tariff).
There are a number of short answers to stranded
investment claims. First, and perhaps most succinctly, as the
court observed in Cajun Electric Power Cooperative, Inc. v.
FERC, supra, 28 F.3d at 179:
IT]he concept of stranded investment
has no meaning in a competitive market,
since a surplus of productive capacity can
always be readily eliminated simply by
lowering price. That is, a price can
always be found that is low enough that it
increases demand sufficiently to eliminate
any excess in productive capacity.
Hence, there really is no such thing as
stranded investment, only a failure to
compete.
In addition, it has been held in some cases that an
offer by the condemning municipality to purchase power at
wholesale from the utility that, prior to the condemnation of
distribution facilities, served the municipality's citizens at
retail, precludes any claim for stranded investment. Puaet
Sound Power & Liqht Co. v. City of PuvalluD, 51 F.2d at 695-
697. Although the New York courts do not appear to have
confronted the issue of "stranded investment" in express terms
in utility condemnation, the general policies applied in
valuation of utility property in cases under the former
Condemnation Law tend to suggest that such a claim would be
met with disfavor. See Onondaga County Water Authority v. New
York Water Service CorD., 285 App. Div. 655, 662, 139 N.Y.S.2d
755, 763 (Fourth Dept. 1955) ("[S]everance damages might be
proper under circumstances not present here"; valuation based
on full reproduction cost of entire utility system rejected as
irrelevant to the value of the plant condemned).
Finally, it is well settled that there can be no
valid claim for damages of any sort where a municipal utility
is established in competition with, but does not condemn the
physical assets, an investor-owned utility -- at least where
the investor-owned utility does not hold an explicitly
exclusive franchise from the municipality. ~ East
Rochester v. Rochester Gas & Electric CorD., 289 N.Y. 391, ,
46 N.E.2d 334, 339 (1943); Puget Sound Power & Liaht Co. v.
cit of Seattle, 291 U.S. 619, 624-625 (1934) ("In conducting
- 23
the business [of supplying electric light and power to
consumers] by state authority, the city is exercising a part
of the sovereign power of the state which the constitution has
not curtailed. The decisions of this Court leave no doubt
that a state may, in the public interest, constitutionally
engage in a business commonly carried on by private
enterprise, levy a tax to suppor~ it . . and compete with
private interests engaged in a like activity"); Madera
Waterworks v. city of Madera, 228 U.S. 454, 456 (1913)
(Holmes, J.) ("But if, when the plaintiff built, the
Constitution of the state authorized cities to build
waterworks as well after works had been built there by private
persons as before, the plaintiff took the risk of what might
happen. An appeal to the 14th Amendment to protect property
from a congenital defect must be in vain. . There is no
pretense that there is any express promise to private
adventurers that they shall not encounter subsequent municipal
competition. We do not find any language that even encourages
that hope, and the principles established in this class of
cases forbid us to resort to the fiction that such a promise
is implied").
2. Other Litigation Challenges
The opportunities for imposing cost and delay
through litigation generally on the establishment of a
municipal utility by condemnation or otherwise are as numerous
as the procedural requirements involved in the establishment.
Niagara Mohawk's claim that the Town of Massena "materially
deviated" f~om its plan of utility establishment by deciding
not to build a transmission line and thereby forfeited its
right to condemn Niagara Mohawk's distribution facilities --
rejected by the Court of Appeals in Town of Massena v. Niagara
Mohawk Power Corp., 45 N.Y.2d 488, 489-490, 410 N.Y.S.2d 276,
280-281 (1978) -- is illustrative, but by no means exhaustive,
of utility creativity in this type of endeavor. Other
examples include sponsorship (or direct initiation) of
taxpayer litigation alleging that municipal activities
relating to utility formation are beyond municipal powers, or
fail to satisfy relevant procedural requirements. Se~, e.g.,
O'Flynn v. Village of East Rochester, 292 N.Y. 156, 164-165,
54 N.E.2d 343, 347 (1944), cert. denied sub nom. Despatch
Shops, Inc. v. Village of East Rochester, 323 U.S. 713 (1944)
(taxpayer litigation challenging municipal establishment of
utility with insufficient capacity to serve large industrial
customer); Cleveland Electric Illuminating Co. v. City of
Cleveland, 37 Ohio St.3d 50, 524 N.E.2d 441 (1988) (taxpayer
- 24 -
suit challenging municipal utility financing arrangement on
grounds of inconsistency with city charter).
In this context, it is worth particular note that
the first phase of judicial review under Eminent Domain
Procedure Law Section 207 (judicial review of municipal
determination and findings preliminary to condemnation)
provides ample opportunity for a public utility facing
condemnation to attempt to derail the process. Under EDPL
Section 207(C), the Appellate Division,s review of the
municipality's determination and findings is "limited to
whether:"
(1) the proceeding was in conformity with
the federal and state constitutions,
(2) the proposed acquisition in within
the condemnor's statutory jurisdiction or
authority,
(3) the condemnor's determination and
findings were made in accordance with the
procedures set forth in this article [EDPL
Article 2], and
(4) a public use will be served by the
proposed acquisition.
Items 1 and 4 in particular may be interpreted with
sufficient breadth to permit a creative public utility
litigant to raise a host of challenges to the condemnation
undertaking. Although the statute plainly contemplates a
narrow standard of judicial review for the determination and
findings, the language used to describe that standard is not
necessarily narrow at all. Accordingly, we would expect to
see a significant and thorough challenge to the dete~ination
and findings at the initial stage of the condemnation process,
which could serve to slow the process considerably.
- 25 -
3. Pro_~9~D~anda
Public utilities enjoy the right, under the First
Amendment, to communicate freely with their ratepayers on
matters of public concern. Pacific Gas & Electric Co v.
Public Utilities Cnmmission of California, 475 U.S. 1, 11-15
(1986); Consolidated Edison Co. of New Y~rk v. Public Service
Commission of New York, 447 U.S. 530, 544 (1980). It should
be expected that this right will be used (and abused) to
attempt to chill citizen support for any municipalization
effort.
B. Valuation Methods Applied to
condemnation of Utility
Property Under New York Law
Almost everything that can be said about methods of
valuing utility property in condemnation was said in 0nondaqa
County Water Authority v. New York Water Service Co., 285 App.
Div. 655, 662, 139 N.Y.S.2d 755, 762-763 (4th Dept. 1955) and
the decision is therefore worth quoting at some length
(citations'omitted):
The valuation of utility properties
in eminent domain presents unique
problems. The absence of sales of similar
property is one difficulty. For another
thing, the taking includes not just the
property but also the business, and the
two are practically inseparable.
Various tests have been employed, alone
and in combination. The usual method of
fixing the value of property for taking is
by ascertaining market value. But there
is hardly a market, in the usual sense,
for a public utility, particularly a
regulated utility. We must, therefore,
turn to other tests of value. What we use
is largely a matter of judgment and
circumstance.
Original cost is admissible in
evidence, but is never controlling.
By virtue of the vast distinction between
the value for rate-making and the value of
property for purchase or condemnation,
this measure of value should not, and
- 26 -
seldom does, carry much weight in the
determination of just compensation.
Evidence of reproduction cost less
depreciation is more widely employed as
the test of value for condemnation,
although by no means conclusive .
Capitalization of earnings, .or the
"economic" value is another method of
appraisal that has met with approval in
some jurisdictions, although usually
rejected as the sole test. This test also
has its limitations (primarily because of
the speculative factors involved) but is
unquestionably relevant, particularly when
attempting to measure the intangibles of a
public utility.
Onondaqa remains good law in New York. Saratoaa
Water Services, Inc. v. Saratoqa County Water Authority, 83
N.Y.2d 205, 210, 608 N.Y.S.2d 952, 954 (1994). However, its
chief problem as a source of reference for valuation
methodologies is that it only indicates what is not
acceptable, and does not establish any particular valuation
methodology as the methodology to be applied in New York.
There Is Some Arguable Support
For Capitalization of Earnings
As A Preferred Approach to
Valuation of Utility ProDert¥ in Condemnation
As a matter of policy, there appears to be a slight
but discernable preference among New York courts for some
variation on the capitalization of earnings formula. This may
be because Section 5-a of the former Condemnation Law --
providing for reference of utility condemnation cases to the
Public Service Commission for certification of the rate base
valuation of, and rate of return on, utility property
subjected to condemnation -- expressed a preference for this
methodology. Niaaara Mohawk Power CorD. V. Public Service
Commission, 52 A.D.2d 388, 390, 383 N.Y.S.2d 913, 916 and n. 1
(3d Dept. 1976) (legislative findings on adoption of
Condemnation Law Section 5-a concluded that condemnation
awards with respect to utility property tended to be
excessive, and that Section 5-a was intended "to direct the
attention of the courts . to the general desirability of
- 27 -
the result derived by capitalizing the income which the
private company could be expect to earn while subject to
regulation as a private utility").
The precedential force of the legislative
determinations underlying Section 5-a of the former
Condemnation Law is open to question for several reasons.
First, the current EDPL expresses no such preference for
capitalization of earnings or any other valuation methodology
(EDPL Section 512). Second, where capitalization of earnings
is indicated as an advisory preference for valuation
methodology in utility condemnation cases, the indication now
appears only in specific enabling legislation. See, e.q.,
Saratoqa Water Services, Inc. v. Saratoga County Water
Authority, supra, 83 N.Y.2d at 212-214, 608 N.Y.S.2d at 955-
956 (Saratoga County Water Authority's enabling legislation
(Public Authorities Law Section l199-eee(5)) expresses
advisory preference for capitalization of earnings
methodology, but use of methodology in particular cases not
mandatory).
In short, it is unclear which way the old
Condemnation Law precedent cuts. It could be argued that the
old precedent remains good law, and that the New York
Legislature simply did not see fit to specify any particular
methodology in enacting the EDPL because the policy underlying
Condemnation Law Section 5-a was so well established. It
could also be argued, with perhaps equal persuasive force,
that doing away with the general principle of Condemnation Law
Section 5-a'in the EDPL, coupled with the appearance of that
principle only in specific public authority enabling
legislation, means that there is no longer any policy
preference for capitalization of earnings as a valuation
methodology. There is no precedent on either proposition at
the moment. On balance, the former view seems to enjoy
slightly more support (including Onondaga, which arose prior
to the enactment of the former Condemnation Law), but not
enough to state definitively that capitalization of earnings
is the condemnation valuation method in New York.
Additional Observations on
Capitalization of Earninqs
Subject to further emphasis of the point that there
is no single, controlling valuation methodology for utility
property that has been accepted by the courts of New York (or
any other state), there are some mechanical elements of the
capitalization of earnings approach that may be worth further
- 28 -
consideration in this context. These elements do not advance
the search for concrete guidance on a dollar amount that the
East End Towns could expect to pay for whatever LILCO assets
(if any) they might determine to acquire by condemnation.
However, they furnish some conceptual background on how this
methodology might work in practice.
First, from an economic and engineering perspective,
although not necessarily from a legal perspective, a
capitalization of earnings approach tends to drive the
valuation of utility property toward a value approximating
original cost less depreciation, plus severance damages. The
qualification "plus severance damages" is an important one for
our purposes, and will be revisited later in this discussion.
The rationale for the basic observation that capitalization of
earnings tends to drive the valuation of utility property
toward original cost less depreciation (also known as "book
value") is straightforward. The capitalized earnings of a
utility on specific property are simply the present value of a
stream of future earnings associated with that property. The
earnings of a regulated utility for a given year are based on
an approved rate of return applied to the then-current net
book value of the facilities, i.e., their original cost, less
depreciation accumulated to that point. In broad and
theoretical terms, the allowable rate of return and the
appropriate discount rate to be used in the present value
determination are approximately equivalent and the net result
of the discounting exercise should yield approximately book
value.
Second, it is by no means clear what earnings get
capitalized where part, but not all, of a utility's facilities
are acquired in condemnation. As a matter of logic, but not
necessarily of law, capitalization of earnings ought to be
applied only to the specific property acquired. The OnondaGa
case, discussed above, suggests -- but stops far short of
establishing for all purposes -- that this ought to be the
case. See Onondaqa County Water Authority v. New York Water
Serve, 285 App. Div. 655, 662-665, 139 N.Y.S.2d 755,
764-765 (4th Dept. 1955) ("[S]everance damages might be proper
under circumstances not present here"; valuation based on full
reproduction cost of entire utility system rejected as
irrelevant to the value of the plant condemned).
Third, and perhaps most importantly, there is the
question of what "plus severance damages" means in this
context. As suggested in Part III.A.1. above, LILCO would
very likely argue that severance damages include its "stranded
- 29 -
investment" -- i.e., that condemnation damages should include
its carrying costs, over a certain period, of generation
assets that would have been dedicated to serving electric
demand in the condemning municipality had the condemnation not
occurred. The arguments against this kind of claim are also
outlined in Part III.A.1 above, but it is simply not possible
to predict with any certainty at this point how the courts of
New York would ultimately resolve the issue in the context of
a condemnation.
Additional Observations on
Market Value and Comparable Sales
Although the New York case law does not express a
clear preference for one valuation theory over another, there
is an observation in Onondaqa (later confirmed in Saratoqa) to
the effect that comparable sales represent the best evidence
of the value of property in any condemnation context --
including condemnations of utility property. There are two
examples that furnish some limited evidence of the "market"
value of utility property in New York that may be of some
value in fixing a price for LILCO's assets in condemnation.
There is also a detailed statement of the New York
Legislature's views on appropriate valuation methodologies
specifically for LtLCO's facilities in the LIPA Act (Public
Authorities Law Section 1020-h(1) (f) through (m), which tends
to suggest -- assuming that municipal condemnation were not
otherwise pre-empted (see discussion in Part III.D. below) --
that the legislature favors (or favored) original cost less
depreciation as a valuation methodology for LILCO's assets.
Because the LIPA Act presents a distinct set of problems, we
focus here on the other available evidence of "market value"
for utility property.
The first evidence of "market" valuation appears
inferentially in a case in which LILCO attempted to condemn
certain utility easements on railroad right of way belonging
to the Long Island Rail Road (LIRR). Although the ultimate
disposition of that case was that LILCO was not entitled to
condemnation of LIRR property, the factual discussion in the
reported decision offers some insight into the negotiation
process used to value utility rights-of-way. Lon I 1 nd Rail
Road Co. v. Lonq Island Liahtin~ Co., 103 A.D.2d 156, 157-159,
479 N.Y.S.2d 355, 357-358 (2d Dept. 1984).
The second, and probably more useful, example is the
voluntary sale of the electric distribution facilities of
Kenwood Power & Light Co. (a wholly-owned subsidiary'of Oneida
- 30 -
Silver Corp.) to the Town of Sherrill, New York in 1977. We
understand, from information supplied to us by Sherrill's
counsel in the acquisition, that the valuation of utility
assets for the purpose of this sale was at net book value, or
original cost less depreciation. The Sherrill-Kenwood sale
furnishes at least one example of a "comparable" sale of
utility assets that is generally regarded as the most
compelling evidence of market value.
Finally, it should be noted that the Commissioners
of Appraisal in the Town of Massena condemnation case
(discussed in the following section of this memorandum)
arrived at a valuation of Niagara Mohawk Power Corp.'s
facilities that appears to have been based on the reproduction
cost new less depreciation (RCNLD) methodology discussed in
the portion of the Onondaaa decision quoted above. Although
the Massena condemnation thus provides an example of the use
of RCNLD as a valuation methodology, the valuation
recommendation of the Commissioners of Appraisal never
received judicial approval because the case was settled.
Thus, the valuation in Massena (which was reached under the
former Condemnation Law rather than the EDPL) has no
precedential effect.
Ce
Strategic Overview and Lessons from
Town of Ma~sena/Niaqara Mohawk Municipalization
The one fundamental lesson to be learned from the
Town of Massena municipalization is that a high level of
enduring public commitment to the formation of a municipal
utility is probably the single most indispensable ingredient
in that process. It should be anticipated that investor-owned
utility opposition to the municipalization will be tenacious
and, in all likelihood, considerably better funded than the
municipalization effort itself. The other principal lesson of
the Massena municipalization is that -- given an economically
viable alternative source of power supply -- the long-term,
high intensity public commitment required to complete the
creation of a municipal utility will ultimately result in
substantial benefits to the community that undertakes the
commitment. We set forth in Attachment A a chronological
s~mmary of events in the Massena municipalization~/
This s,~mmary is based on the testimony of Edward J. Kaneb,
then-Chairman of the Massena Electric Utility Board in FERC
Docket No. EL86-24-000 -- Municipal Electric Utilities
(continued...)
31 -
Some statistical background is also informative.
The electric demand in the Town of Massena was approximately
15 MW during the period when Massena was establishing its
system. Massena had originally predicted a maximum cost of
$4.5 million for acquisition of facilities. The Commissioners
of Appraisal appointed in the condemnation proceedings (under
the former Condemnation Law) determined the value of the
physical facilities that Massena sought to condemn as being
$4,214,000, and the costs of severing that system from NIMO's
system and reconnecting NIMO's system to be an additional
$537,000. After the Commissioners of Appraisal issued their
valuation decision, Massena and NIMO agreed that Massena would
acquire an expanded distribution system (including facilities
in four neighboring communities) for a purchase price of
approximately $8 million.
Between the initiation of its opposition to the
Massena municipalization effort in December 1973 and September
22, 1981 -- when the fighting finally stopped for good -- NIMO
spent approximately $4.2 million opposing the Massena
municipalization. Net savings to Massena's citizens resulting
from the municipalization equalled the initial purchase price
of Massena's utility facilities by May 1986 -- about five
years after operations commenced. According to the U.S
Department of Energy, Energy Information Administration (EIA
Form 861) and the Federal Energy Regulatory Commission (FERC
Form 1 for NIMO), 1992 rates (the most recent available data)
compare as follows:
Niagara Mohawk
Avq. Revenue/kWh
Town of Massena
Av . Rev nue kwh
Residential $.106 $.047
Commercial .100 .052
Industrial .055 .037
On average, Massena's citizens save approximately 50
percent over what they would have paid if they had remained
Niagara Mohawk customers as a result of their
municipalization.
~/(...continued)
Association of New York State v. Power Authority of the
State of New York (filed October 20, 1986), and the various
reported court and administrative decisions.
- 32 -
What the citizens of Massena had that citizens of
other communities -- Toledo and New Orleans, to give two
reasonably current examples -- have lacked is the enduring
commitment to the goal of municipalization that enabled them
to withstand a relentless barrage of propaganda and litigation
designed to frustrate their political will to establish a
municipal utility. Obviously, it did not hurt Massena's cause
to have engaged the services of first rate engineers and
attorneys to assist them in their efforts.
Should the East End Towns expect a similar fight if
they decide to pursue the formation of a municipal utility?
Certain aspects of the process will certainly be different.
The enactment of Section 211 of the Federal Power Act as part
of the Energy Policy Act of 1992 (see discussion in Part
III.F. below) will make the process of obtaining transmission
rights a good deal quicker and more certain than it was in
Massena's case. In addition, many of the specific legal
issues that Massena had to confront were resolved in its favor
and therefore likely will not confront the East End Towns in
precisely the same form. However, vociferous utility
opposition, both in the marketplace of ideas and in the
courts, is a fact of the municipal utility formation process,
and no one should expect that process to be easy.
De
Possible Preemption of Municipal
Acquisition Authority Under the
LIPA Act and Possible ResDonsive Strateaies
The question of whether to acquire LILCO's
facilities within any or all of the East End Towns (whether by
condemnation or by voluntary purchase), or whether to proceed
with construction of the Towns' own electric facilities, must
be examined in the light of two recent New York State court
decisions. The basic issue here is whether the enabling
legislation for the Long Island Power Authority (Public
Authorities Law Section 1020 through 1020-b_h (the "LIPA Act")
pre-empts the authority of municipalities in LILCO's service
territory to acquire LILCO's assets by purchase or
condemnation. LILCO would undoubtedly argue that two court
decisions establish this proposition: citizens for an Orderly
Enerc~ Policy v. Cuomo, 78 N.Y.2d 398, 576 N.Y.S.2d 185, 582
N.E.2d 568 (1991) (hereafter "COEP v. Cuomo") and ~
Liqhtinq co. v. County of Suffolk, 119 A.D.2d 128, 505
N.Y.S.2d 956 (2d Dept. 1986), aDDeal denied, 506 N.Y.S.2d 1031
(1986) (hereafter "LILCO v. Suffolk"). In order to understand
the "LIPA pre-emption" issue, and to evaluate the feasibility
- 33 -
and desirability of possible approaches to the issue, it is
first necessary to appreciate how and why the issue arises.
1. The LIPA Act
On July 24, 1986, the LIPA Act became law. In very
brief summary, the LIPA Act is the response of the New York
Legislature to what it perceived as the threat to the
continued viability of LILCO's electric service on Long
Island, growing out of the regulatory and financial disaster
that LILCO's efforts to construct its Shoreham Nuclear Power
Plant ultimately became. Several provisions of the LIPA Act
-- the legislative findings and declarations in Public
Authorities Law Section 1020-a, the general powers vested in
LIPA under Public Authorities Law Sections 1020-g and 1020-h,
and the rules of statutory construction in Sections 1020-ff
and 1020-gg -- are central to the LIPA pre-emption issue.
The legislative findings and declarations underlying
the LIPA Act (Public Authorities Law Section 1020-a) list six
related consequences of LILCO's development of the Shoreham
Nuclear Power Plant which the Legislature finds create
situation threatening the economy, health and safety in
[LILCO's] service area." These include:
(1) rapidly escalating and excessive costs
of electricity in LILCO's service area,
which pose a "serious threat to the
economic well-being, health and safety of
the residents and the commerce and
industry in the service area";
(2) lack of confidence in LILCO's ability
to meet the electric service needs of its
customers;
(3) deterrence of development of new
commerce and industry in LILCO's service
area as a result of escalating and
excessive electric rates;
(4) the imprudence of LILCO in initiating
and continuing the Shoreham project;
(5) general economic strain caused by
present LILCO rate levels due to Shoreham,
and anticipated future increases; and
- 34 -
(6) uncertainty as to whether Shoreham
would ever go into commercial operation,
and uncertainty as to the safety and
reliability of its operation if it did
enter commercial operation.
The Legislature "expressly determined" in Public
Authorities Law Section 1020-a that the problems arising from
LILCO's pursuit of the Shoreham project were "matters of state
concern within the meaning of" Article IX, Section 3(a) (3) of
the New York Constitution,~/ (i.e., matters as to which
municipalities do not have Constitutionally protected
exclusive authority) and that "these matters of state concern
best can be dealt with by replacing such investor owned
utility [i.e., LILCO] with a publicly owned power authority."
The remainder of the LIPA Act sets up a
comprehensive structure for the establishment and operation of
LIPA as a "corporate municipal instrumentality of the state
which shall be a body corporate and politic and a
~o~i~ical subdivision of the state, exercising essential
governmental and public powers." Public Authorities Law
Section 1020-c. Among the "essential governmental and public
powers" that the Legislature vested in LIPA were the powers
(1) to acquire LILCO's stock through tender offer or
otherwise, and (2) to acquire some or all of LILCO's stock or
physical assets through eminent domain. Public Authorities
Law Section 1020-h.
Moreover, Public Authorities Law Section 1020-g(n)
provides for the assumption of all LILCO service rights and
obligations by LIPA, as follows:
(n) After the establishment of Long Island Power
Authority (LIPA) and the commencement of its
Article IX, Section 3(a) (3) of the New York Constitution
provides in relevant part that:
(a) Except as expressly provided, nothing in
this article shall restrict or impair any
power of the legislature in relation to:
(3) Matters other than the property, affairs
or government of a local government.
- 35 -
function as a utility, LIPA shall acquire from LILC0
all franchise and utility service responsibilities
for all ultimate consumers of gas and electricity
within LILCO's former service territory, including
the responsibility to provide safe and adequate
service.
Insofar as relevant to this discussion, Public
Authorities Law Section 1020-h establishes a detailed, and
rather extraordinary, regime for LIPA's acquisition of LILCO's
physical assets, including:
detailed principles of property
valuation to be applied in fixing
compensation for any taking (Public
Authorities Law Section 1020-h(1) (f)
through (m));9/
a requirement that LIPA's board of
trustees determine, prior to
initiating any eminent domain
proceedings against LILCO's assets,
"that the rates to be charged after
9/
Certain of these detailed valuation principles are plainly
specific to a LIPA acquisition of Shoreham, and are not
likely to be accepted by a court as legislative findings
generally~ applicable to a condemnation of LILCO's facilities
-- assuming that condemnation of those facilities is
otherwise available. See, e.g., Public Authorities Law
Section 1020-h(1) (g),(h) and (k) (iii). In other instances,
most notably the Legislature's repeated finding that LILCO's
economic viability is "dependent upon extraordinary
financial stability adjustments granted by the public
service commission" (Public Authorities Law Section 1020-
h(1) (k) (i) and (ii), (m)) may properly be subject to
judicial notice in a condemnation initiated by an entity
other than LIPA. In any event, it should be pointed out
that the Legislature may not direct that specific ualuation
principles control the determination of condemnation
damages. Rather, consistently with the constitutional
requirement that "just compensation" for a taking of
property be determined by the courts, the Legislature may
only suggest that certain principles be considered in the
valuation process. See, e.q., Saratoqa Water Services, Inc.
v. Saratoqa County Water Authority, suDra, 83 N.Y.2d at 212-
214, 608 N.Y.S.2d at 955-956.
- 36 -
such acquisition and for such
reasonable period of time as the
board may determine will not be
higher than the rates projected to be
charged by LILCO during such period
if such acquisition had not occurred"
(Public Authorities Law Section 1020-
h(2));
detailed procedures for condemnation
of LILCO's assets at significant
variance from those procedures set
forth in the EDPL (Public Authorities
Law Section 1020-h(6)); and
e
a requirement that, upon acquisition
of LILCO's stock or physical assets,
LIPA will make payments in lieu of
taxes ("PILOTS") both to the state
(in consideration of gross receipts
taxes that would otherwise have been
payable by LILCO) and to
municipalities and school districts
(in consideration of property taxes
that would otherwise have been
payable by LILCO) (Public Authorities
Law Section 1020-q(1) and (2)).
Finally, Section 1020-fl of the Public Authorities
Law states that the LIPA Act is to be "liberally construed to
effect [its] purposes," and Section 1020-gg states that the
provisions of the LIPA Act shall control over the provisions
of any other law with which they may be inconsistent.
Against this very basic background on the LIPA Act,
it is possible to assess the effect of the LIPA Act and court
decisions construing it on the ability of the East End Towns
to acquire LILCO's facilities within their territorial
jurisdictions using their own eminent domain authority under
General Municipal Law Section 360(6). As discussed
immediately below, unless altered by legislative action or
judicial action or both, the foregoing provisions of the LIPA
Act and the court decisions construing those provisions could
pose a significant obstacle to condemnation of LILCO's
facilities within the East End Towns.
- 37 -
2. The Pre-Emption Problem
a. LILCO v. Suffolk
At approximately the same time that the LIPA Act
became law, the Suffolk County Legislature adopted a
resolution establishing the Consumer Electric Corporation of
Long Island ("CEC") as a not-for-profit corporation with the
purposes of acquiring LILCO's stock or assets and closing and
decommissioning Shoreham. LILCO immediately sought and
obtained an injunction against the implementation of Suffolk
County's CEC resolution, and Suffolk County appealed.
On appeal, the Second Department of the Supreme
Court Appellate Division, found that the Suffolk County CEC
resolution was invalid both because it was pre-empted by the
"detailed, highly comprehensive enactment" of the LIPA Act and
because it was inconsistent with the method which the State
had chosen for dealing with the problems posed by LILCO's
Shoreham debacle. LILCO v. Suffolk, 119 A.D.2d 128, 132-134,
505 N.Y.S.2d 956, 959-960 (1986), appeal denied~. 506 N.Y.S.2d
1031 (1986).
The basic principle here, as in any pre-emption case
under New York law, is that local governments have, for the
most part, only that authority which they derive from the
state through legislation (such as Article 14A of the General
Municipal Law), and they are pre-empted from regulating in
areas where a State law "indicates a purpose to occupy an
entire field of regulation" (505 N.Y.S.2d at 959, citation
omitted).
The court in LILCO v. Suffolk found that the LIPA
Act, which established LIPA for the purpose of acquiring all
or part of the stock or assets of LILCO, decommissioning the
Shoreham nuclear plant and replacing LILCO as the electric and
gas utility serving most of Long Island, pre-empted Suffolk
County from establishing CEC to do essentially the same thing.
Moreover, the court ruled that the intent of the legislature
to pre-empt local government action in this field could be
inferred from the LIPA Act. It relied on the following
observation by the Court of Appeals in Consolidated Edison Co.
of New York v. Town of Red Hook, 60 N.Y.2d 99, 106, 468
N.Y.S.2d 596, 599 (1983) (citations omitted):
The intent to pre-empt need not be
express. It is enough that the
Legislature has impliedly evinced its
- 38 -
intention to do so . . . A desire to
pre-empt may be implied from a declaration
of State policy by the Legislature. . or
from the fact that the Legislature has
enacted a comprehensive and detailed
regulatory scheme in a particular
area.10/
Because (a) the LIPA Act contains a declaration of
legislative policy that the issues it addresses are "matters
of state concern" on which the state retains supreme
legislative authority by virtue of Article IX, Section 3(a) (3)
of the New York Constitution; and (b) the LIPA Act itself is a
,'comprehensive and detailed regulatory scheme" governing the
public acquisition of LILCO's shares or assets, Suffolk
County's attempt to exercise local authority in this area was
held pre-empted. LILCO v. Suffolk, sumra, 505 N.Y.S.2d at
959-960.
The court also held that Suffolk County's CEC
Resolution was barred because (1) "Suffolk County's 'authority
to enact local laws under the Constitution or the Municipal
Home Rule Law is conditioned on the exercise of such authority
not being inconsistent with any State enactment' ([citing Town
of Red Hook])" (505 N.Y.S.2d at 959); and (2) "the differing
treatment accorded these significant issues [(i.e., taxes and
preference power)] by [the LIPA Act] and the county resolution
represents a marked inconsistency in important areas of
substantive policy" (505 N.Y.S.2d at 959).
lO/:
Essentially the same formulation of the issue can be found
in a number of cases. See, e.q, PeoDle v. DeJesus, 54 N.Y.
2d 465, 469, 446 N.Y.S.2d 207, 430 N.E.2d 1260 (1981); Robin
v. Incorporated Villaqe of HemDstead, 30 N.Y.2d 347, 350-
351, 334 N.Y.S.2d 129, 285 N.E.2d 285 (1972) (once state
policy is expressed, "a village or other municipality lacks
authority to deal with the matter unless it is specifically
empowered to do so by terms clear and explicit"); Dou a~.
County of Suffolk, 102 A.D.2d 531, 532, 477 N.Y.S.2d 381,
382 (2d Dept. 1984) (pre-emption of county regulation of
"drug paraphernalia"); Matter of Ames v. Smoot, 98 A.D.2d
216, 218, 471 N.Y.S.2d 128, 130 (2d Dept. 1983) (village not
required to file environmental impact statement prior to
repeal of local regulation on use of pesticides because
local regulation was pre-empted by state law and therefore
invalid).
- 39 -
Read narrowly, LILCO v. Suffolk holds only that a
municipality may not legislate a takeover of LILCO when (a)
the State has enacted comprehensive LILCO takeover
legislation, or (b) the municipal "legislation" is
inconsistent with State legislation. If the East End Towns
were to attempt to condemn facilities of LILCO for the purpose
of establishing municipal electric systems, LILCO would surely
assert that the LIPA Act, as interpreted in this case,
precludes any exercise of the East End Towns' eminent domain
powers against LILCO's facilities, on grounds of pre-emption
and inconsistency. This would raise the following two
questions: (1) Does the LIPA Act pre-empt towns from
exercising their eminent domain powers under pre-existing
legislation against LILCO facilities? (2) Is condemnation of
LILCO facilities within the town boundaries for
municipalization purposes inconsistent with the LIPA Act and
therefore barred? Those issues have not previously been
addressed by a New York court. The only case concerning the
LIPA Act decided by the Court of Appeals of New York is
citizens for an Orderly Enerc~ Policy v. Cuomo, discussed in
the next section.
b. COEP v. Cuomo
Several parties brought a court challenge to the
validity of the 1989 Settlement Agreement among LILCO, LIPA
and the State of New York providing for the transfer of
Shoreham to LIPA for $1 and its subsequent decommissioning or
conversion to a fossil fuel generating facility. (The State
Legislaturehad voted not to ratify the substantially
identical 1988 Settlement Agreement, and although the 1989
Settlement Agreement did not require ratification, the
Legislature refused to pass the requested legislative approval
thought to be necessary for performance of the
agreement.)ll/ Among other things, the challengers argued
that the 1989 Settlement Agreement violated the LIPA Act and
exceeded the authority of the Executive Branch. By a tenuous
4-3 margin, and over a stinging dissent, the Court of Appeals
upheld the validity of the 1989 Settlement Agreement in
citizens for an Orderly Enerq7 Policy v. Cuomo~ 78 N.Y.2d 398,
1_~1/ citizens for an Orderly Enerq¥ Policy v. Cuomo, 576 N.Y.S.2d
185, 199 (dissent) (Ct. App. 1991).
- 40 -
576 N.Y.S.2d 185, 582 N.E.2d 568 (1991) ("COEP v.
Cuomo").12/ The Court held that LIPA and the Executive
Branch had discretionary authority under the LIPA Act to
acquire Shoreham from LILCO without LIPA replacing LILCO as
the electric service provider in LILCO's service territory.
The New York Court of Appeals also concluded that
the closure of Shoreham was not necessarily the end of LIPA's
statutory mission. Thus, the Court found in COEP v. Cuomo, 78
N.Y.2d 398, 414, 576 N.Y.S.2d 185, 192., 582 N.E.2d 568 (1991)
that (citations omitted, emphasis in original):
Further, under the terms of the Agreement,
LIPA did not permanently forego the
exercise at some time of its delegated
power to acquire and supplant LILCO should
it decide in its "sole discretion" that
doing so would accomplish the Act's
objective of controlling utility costs to
LILCO's customers. The Agreement is
not structured to expressly prohibit
acquisition by LIPA of any part of LILCO
other than Shoreham, as the Agreement in
no way precludes LIPA from exercising its
full range of statutory choices under the
LIPA Act depending on the time and
circumstances, including market conditions
and the State's fiscal situation. Rather,
the Agreement plainly accomplished an
u~gent objective of the Act: the
prevention of further rate increases
attributable to the Shoreham enterprise.
LILCO would argue that L_~LCO v. Suffolk and COEP v.
Cuomo, read together, frustrate any possible exercise of
municipal eminent domain powers against LILCO's facilities.
On the one hand, the State has "occupied the field" of
possible public acquisition of all or any part of LILCO's
facilities -- thereby leaving no room for individual municipal
action in this area (LILCO v. Suffolk). On the other hand,
the State having accomplished its principal objective under
the LIPA Act of stopping Shoreham, it nonetheless continues to
12/
Judge Hancock wrote a strong dissent, joined by two other
judges. The swing vote in the case was provided for the
majority by Chief Judge Wachtler, who is no longer on the
Court of Appeals.
- 41 -
Occupy the field to the exclusion of municipal acquisition
activities -- even though it has no discernable present
intention to do anything further under the LIPA Act (COEP v.
Cuomo).
However, no court has construed the LIPA Act or the
two court decisions interpreting it in the context of a
limited, municipal condemnation of LILCO facilities. The
flexible approach to implementation of the LIPA Act en~lorsed
by the slim Court of Appeals majority in COEP v. Cuom~ may in
fact have weakened the precedential effect of the Appellate
Division's holding in LILCO v. Suffolk. We discuss below a
number of possible approaches to the LIPA pre-emption issue
that ought to be considered as part of an analysis of the
feasibility of establishing a municipal utility by the East
End Towns.
3. Possible Approaches
We have identified four possible approaches to the
LIPA pre-emption issue: (a) seeking a declaratory judgment,
prior to the initiation of condemnation proceedings, that the
LIPA Act does not bar municipal condemnation of LILCO assets;
(b) entering into an arrangement with LIPA under which LIPA
would either (i) condemn facilities and transfer them to the
East End Towns, or (ii) authorize the East End Towns to
exercise their own eminent domain authority, or (iii) some
combination of the foregoing; (c) seeking one or more
legislative alterations of the LIPA Act; and (d) establishing
a competing'municipal utility without condemning LILCO assets.
Depending on local will and the wherewithal to proceed, any of
these options could conceivably result in the elimination or
neutralization of the LIPA pre-emption issue.
a. Declaratorv Judc~ment
The East End Towns could consider, as a prelude to
individual condemnation proceedings, jointly petitioning the
Supreme Court of Suffolk County for a declaratory judgment
that the LIPA Act does not pre-empt municipal condemnation of
LILCO facilities within the Towns' borders and that such
condemnation would not be inconsistent with the LIPA Act. For
one thing, the Towns could argue that a local, municipal
condemnation under longstanding legislation is distinguishable
from a county's overreaching attempt to compete with the State
in taking over all of LILCO within and without the county's
borders. After all, the mere fact that a local law touches
upon the same matters as State legislation does not, in and of
- 42 -
itself, render it invalid on pre-emption grounds. People v.
New York Trap Rock Corp., 57 N.Y.2d 371, 378, 456 N.Y.S.2d
711, 442 N.E.2d 1222 (1979).
Indeed, since nothing in the LIPA Act even remotely
purports to limit the right of municipalities to build their
own utilities to compete with LILCO (as discussed below),
thereby potentially rendering LILCO's local facilities
valueless, then arguably it would be anomalous to find that
the LIPA Act pre-empts municipal condemnation of LILCO
Facilities, which would protect other LILCO ratepayers by
requiring payment to LILCO of fair value as compensation.
Municipal condemnation of limited pieces of the LILCO system
is also not necessarily inconsistent with the LIPA Act. It
would merely reduce the size of the LILCO system available for
eventual takeover by LIPA. Moreover, if necessary, LIPA could
acquire the municipalized portions of the system back from the
Towns by contract or condemnation under Sections 1020-g and
1020-h of the Public Authorities Law.
In addition, there are certain constitutional
arguments that the East End Towns could advance. For example,
Article IX, Section l(e) of the New York Constitution
guarantees municipalities the "power to take by eminent domain
private property within their boundaries for public use"
subject only to legislative regulation of eminent domain
proceedings against property outside of municipal boundaries.
Thus, a condemnation effort limited in territorial scope to
within municipal boundaries of the East End Towns, or any of
them, coul~ be argued to be constitutionally protected and not
subject to state pre-emption.
Furthermore, facts such as (1) the consummation of
the 1989 Settlement Agreement among LIPA, the State and LILCO,
(2) the passage of eight years without acquisition of LILCO by
LIPA and (3) the current Executive inclination in New York
effectively to "defund" LIPA, establish that whatever the
legislative intent to occupy the field of acquisition of
LILCO's assets may once have been, that intent has plainly
been abandoned as a practical matter.
These arguments appear persuasive, but would have to
be tested in court. It may be possible to obtain a
declaratory judgment on motion for s,~mmary judgment, thereby
avoiding time-consuming and costly discovery battles, but this
cannot be guaranteed. Any decision would be appealable to
both the Appellate Division and the Court of Appeals, but
LILCO may not want to risk losing an appeal of a decision
43 -
favorable to the Towns. These are risks to be weighed in
making a strategy decision.
b. Cooperative Action with LIPA
Various provisions of the LIPA Act itself may offer
a way around the LIPA pre-emption impasse through joint action
among the East End Towns and LIPA. First, LIPA is generally
authorized by Public Authorities Law Section 1020-f(h) "to
make and execute agreements, contracts and other instruments
necessary and convenient in the exercise of the powers and
functions of the authority under this title, including
contracts with any . · municipality in accordance with
the provisions of section one hundred three of the general
municipal law, and . all municipalities are hereby
authorized to enter into and do all things necessary to
perform any such agreement with the authority." Second,
LIPA is specifically authorized by Public Authorities Law
Section 1020-f(t) "to transfer any asset of the authority to
one or more (ii) municipal gas or electric agency
established pursuant to article 14-A of the general municipal
law, for such consideration and upon such terms as the
authority may determine to be in best interest of gas and
electric ratepayers in the service area."
Another possibility is for LIPA simply to conclude,
in the exercise of its discretion as to how best to achieve
whatever remains of its statutory mission, that the exercise
of eminent domain authority by the East End Towns is an
appropriate'means of implementing the objectives of the LIPA
Act. The principal issue in pursuing this possibility is that
LIPA's discretion under Public Authorities Law Section 1020-
h(2) appears to be limited to the use of its own acquisition
authority, and not applicable to the authorization of the
acquisition through purchase or eminent domain of LILCO's
facilities by others.
There are three issues that may make cooperative
activity with LIPA problematic. Although none of these issues
conclusively rules out cooperative action with LIPA, all of
them counsel in favor of careful consideration before
attempting to proceed further. First, as a condition prior to
exercising LIPA's own eminent domain powers, the LIPA board is
obligated to determine that LIPA's rates after the acquisition
will be at worst no higher than LILCO'S rates would have been
if LIPA had not undertaken the particular acquisition under
consideration. (Public Authorities Law Section 1020-h(2)).
Second, where LIPA exercises its acquisition authority, it is
- 44
obligated both to the state and to local municipalities for
PILOTS for gross receipts and property taxes, respectively.
(Public Authority L. Sec. 1020-q.) Thus, any arrangement for
joint action with LIPA would have to factor in some mechanism
for paying PILOTS (and obviously for determining in advance
how the allocation of the obligation to pay PILOTS affected
the feasibility of the undertaking). Finally, LIPA's
Settlement Agreement with LILCO provides that, in the event
that LIPA ever does determine to exercise its acquisition
authority over any LILCO asset other than Shoreham, LILCO is
entitled to resume its federal court challenge to the
constitutionality of the LIPA Act. COEP v. Cuomo, 78 N.Y.2d
at 409, 576 N.Y.S.2d at 188, referrinq to Lona Island Liahtin~
Co. v. Cuomo, 666 F. Supp. 370 (N.D.N.Y. 1987), anneal
dismissed and iudc~ment vacated, 888 F.2d 230 (2d Cir. 1989).
It is unclear at this point whether or to what
extent any of these considerations may deter LIPA from
cooperating with the East End Towns, or whether any of these
considerations make it more worthwhile for the East End Towns
to attempt to proceed without LIPA's cooperation.
Nonetheless, cooperation with LIPA represents a potentially
viable way around the LIPA pre-emption issue and the possible
benefits of its cooperation (or obstacles to that cooperation)
are clearly worth exploring and evaluating further.
c. Le=islative Amendment
The most direct and obvious solution to the LIPA
pre-emption, issue is to persuade the New York Legislature to
adopt an amendment to the LIPA Act which eliminates the pre-
emption problem. There are a number of variations on this
theme, which might be worth pursuing depending on the East End
Towns' perception of the political climate.
The first and simplest option would be legislation
adding a Section 1020-h(12) to the Public Authorities Law
which would read:
Nothing in this title shall be construed
as pre-empting, or otherwise limiting, the
rights of any municipality located in
whole or in part in the service area from
exercising any power or authority granted
to it by article 14-A of the general
municipal law, including the right to
acquire facilities through eminent domain
as set forth in subsection six of section
- 45 -
three hundred sixty of the general
municipal law.
It is, of course, possible to add other options.
One that might be helpful to the East End Towns would be to
add Public Authorities Law Section 1020-h(13), to read:
In connection with the exercise of the
power of eminent domain specifically
reserved to municipalities located in
whole or in part in the service area, the
legislative findings with respect to the
appropriate valuation of LILCO's property,
as set forth in subsection one (f) through
(m) of section ten hundred twenty-h of the
public authorities law, shall be
considered by the court in establishing
just compensation for any property taken
by any such municipality.
Finally, it may prove possible to obtain an entirely
new enabling statute for a new power authority -- say, the
,,Peconic Power Authority" having its own title under the
Public Authorities Law, and provided with a specific preferred
valuation methodology similar to that made available to
various county water authorities. See, e.~., Public
Authorities Law Section l199-eee(5) (legislative pronouncement
on capitalization of earnings method for valuing property
condemned by Saratoga County Water Authority).
d. Establishin~ a Com~etinq Utility
Each of the foregoing options assumes to some extent
that the East End Towns would be willing to confront the LIPA
pre-emption issue directly. We believe, in addition, that the
establishment of a competing municipal utility by any or all
of the East End Towns, without acquiring any LILCO assets,
does not run the risk of being invalidated by pre-emptive
effect of the LIPA Act.
First, it is clear that the central objectives of
the LIPA Act are (1) the takeover of LILCO if necessary, and
(2) the closure of Shoreham at all costs. Neither of these
objectives has any relationship to the establishment of a
municipal utility that does not seek to acquire LILCO's
assets. The mere fact that a local law touches upon the same
matters as State legislation does not, in and of itself,
render it invalid on pre-emption grounds. People v. New York
- 46 -
TraD Rock CorD., 57 N.Y.2d 371, 378, 456 N.Y.S.2d 711, 442
N.E.2d 1222 (1979).
Second, in enacting the LIPA Act, the Legislature
was expressly operating under A~ticle IX, Section 3(a) (3) of
the Constitution (Public Authorities Law Section 1020-a).
Article IX, Section (3) (b) of the Constitution states that:
"The provisions of this article shall not affect any existing
valid provisions of acts of the legislature ." Thus, it
would appear that whatever the effect of the LIPA Act on the
specific field of activity it undertakes to regulate -- the
acquisition of LILCO's stock or assets -- the LIPA Act could
not constitutionally restrict pre-existing municipal powers
under General Municipal Law Article 14-A which are outside
that field. Thus, we believe that the East End Towns could
create a municipal utility that competes with LILCO without
running afoul of the pre-emption issue, provided that they do
not seek to acquire any of LILCO's assets.
Ew
Analysis of East End Towns Present
Franchise ArranGements with LILCO
We have reviewed franchises either granted to, or
passing through merger or asset acquisition to, LILCO from the
following municipalities among or within the East End Towns:
1. Town of Southampton
a. Village of Southampton
b. Village of Sag Harbor
2. Town of Riverhead
3. Town of Southold
4. Town of East Hampton
5. Town of Shelter Island
at
Village of Dering Harbor
(Shelter Island Heights)
The key historical and contractual elements of the
various franchises are s~marized in the Table appearing on
the following page. For the reasons s,,mmarized below, none of
the franchises poses an obstacle to the formation of a
municipal utility by any one or more of the East End Towns.
47 -
The franchises granted by the Villages of Southampton, Sag
Harbor and Dering Harbor may pose certain service territory
issues involving the New York Public Service Commission, if
those villages are not part of the municipalization effort.
A few general observations about the nature of
franchises under New York law are pertinent to this
discussion. First, a franchise is a property right under New
York law, and is thus generally protected from curtailment or
taking without just compensation. 60 New York Jurisprudence
2d (Franchises), Sections 2 and 3, pages 373-374. Although a
franchise is regarded as property and may not be "taken" in a
constitutional sense without just compensation, it is equally
well settled that no "taking" occurs where a municipality
establishes a competing utility -- at least where the
municipality has not granted an exclusive franchise. Villaqe
of East Rochester v. Rochester Gas & Electric CorD., 289 N.Y.
391, 399-400, 46 N.E.2d 334, 339 (1943).
Second, exclusive franchises do not arise by
implication under New York law. Monopoly is not an essential
element of the franchise. Milhau v. Sharp, 27 N.Y. 611
(1963). Thus, "except where a grant is by its terms
exclusive, the grantor reserves the power to grant a
subsequent franchise competitive with it, no matter how
injurious the competition; and such a subsequent grant is not
violative of the constitutional provision against impairing
the obligation of contracts." 60 N.Y. Jur. 2d (Franchises)
Section 9, p. 383. Indeed, because the New York Legislature
may not grant exclusive franchises by private or local bill
under Article III, Section 17 of the New York Constitution, it
is difficult to see how it could have delegated a power it did
not have to towns under Section 64(7) of the Town Law, or to
villages under Sectio~ 414-2(1) of the Village Law -- the
relevant enabling statutes for the municipal grant of
franchises in this instance.
Third, the~e is no necessary exclusivity of utility
service areas under ~ew York law. The right of a utility to
serve in a particular locality depends (a) on the grant of a
franchise, and (b) the subsequent certification by the Public
Service Commission under Public Service Law Section 68 that
the exercise of the franchise is in the public convenience and
necessity.
Finally, several of the franchises we examined were
of indefinite duration. Under New York law, the grant of a
franchise without a definite term is treated as a perpetual
- 48 -
grant. PeoDle v. O'Brien, lll N.Y. 1,
(1888); Brauer v. Iroquois Gas CorD.,
N.Y.S.2d 166, 168 (Sup. Niagara 1975).
38-55, 18 N.E. 692,
85 Misc.2d 936, 381
None of the franchises that we reviewed are by their
terms exclusive (see Table). Accordingly, none of the
franchise reviewed presents an obstacle to the establishment
of a competing municipal utility. In the event that one or
more of the East End Towns determines to proceed by
condemnation, the franchise may be assigned some value in
condemnation -- although how much value is very much open to
question. Village of East Rochester v. Rochester Gas &
Electric Cor., 289 N.Y. 391, 399, 46 N.E.2d 334, 338 (1943).
A couple of fine points are worth noting.
Franchises exist from both towns and villages within the
towns. This may counsel in favor of getting the villages on
board; otherwise, the extension of service to the villages
would (a) require their consent, and (b) require approval of
the NYPSC under General Municipal Law Section 361(1) and
Public Service Law Section 68. To the extent that we have
franchises granted by different levels of governmental bodies,
the foregoing administrative issue exists and will need to be
resolved at some point. However, it is not an impediment to
proceeding with municipalization.
F. Implications of Enerqy Policy Act of 1992
The most significant feature of the Energy Policy
Act of 1992, for purposes of this discussion is the authority
given to FERC to order mandatory transmission service under
Section 211 and 212 of the Federal Power Act (16 U.S.C. §§
824j, 824k). In short, Section 211 provides a reasonably
certain means for the East End Towns to require LILCO to
transmit power from other utilities to them -- a means of
acquiring power supply that is likely to prove considerably
more cost effective than constructing submarine cables.
Prior to the enactment of these provisions, it was
typically held that the FERC had no general authority to
require electric utilities to transmit (or "wheel") electric
power, although it could do so in particular circumstances
(e.g. as a condition to authorization of a utility merger, in
order to remedy antitrust problems). Under Section 211, the
FERC now indisputably has such general wheeling authority. We
discuss below (1) the general requirements and operation of
Sections 211 and 212 of the Federal Power Act, and (2) a
potential application of those provisions in the context of a
APPENDIX B
Estimated Operating and Maintenance Expensem
Operating and
Town Maintenance Expenses
Southampton $6,850,000
East Hampton 3,750,000
Riverhead 2,500,000
$outhold 2,300,000
Shelter Island 600,000
TOTAL $16,000,000
Joint-System $15,250,000
(*) -
(Includes an Allowance For Administrative
and General Expenses but does not include Power
Cost, In-Lieu Property Tax Payments, Debt Service
on Borrowed Funds and Depreciation)
B-18 East End Municipalization
ACQUISITION OF ~ECTRIC PROPERTIES
OPERATING AND MAINTENANCE EXPENSES
We have reviewed the on-going annual operating and maintenance expenses
of operating murticipal electric departments in New York, as well as others for
which we have information, and have developed a preliminary estimate for
the annual operating and maintenance cost each of the Towns could be
expected to pay for this expense. The cost we have estimated does not
include power supply expenses, in-lieu-of-tax payments, depreciation expense
or debt service on the funds which will be needed to purchase the properties
and set-up operation. The power supply cost will need to be developed
separately and the other expenses are dependent on the cost of the properties
acquired as well as the current level of taxes paid by LILCO. It is assumed
that each Town would plan to pay in-lieu tax payments equal to the amount
of taxes LILCO is now paying on the pr6perty to be acquired. The expenses
developed does however consider all other annual cost each utility will incur.
In reviewing the annual cost of other operating municipal utilities, it was
appaient that the operating and maintenance cost varies substantially between
utilities based on the conditions in the particular municipal service area and
the general operation policies of the managing board. The new Town
municipal electric departments will have the same leeway in establishing the
operation policies of the new utilities.
Based upon the information available at this time, we have developed the
following preliminary estimate of each utliity's operation and maintenance
cost.
s.~'our~Mp~ R.W. Beck B-17
APPENDIX B
Initial Set-up
Town Cost
Southampton $3,250,000
East Hampton 2,250,000
Riverhead 1,800,000
Southold 1,675,000
Shelter Island 850,000
TOTAL $9,825,000
Joint-System $5,300,000
In addition to the materials and supplies required to initially set up the
departments; a working capital fund is needed to pay operating and
maintenance expenses during the period between acquiring of the properties
and the time revenues are first received from the sale of elect:ricity (i.e., until
the new electric customers have paid the initial round of electric bills). For
the purpose of this Study, we have assumed an amount equal to
approximately 45 days of operating and maintenance expenses, excluding
power purchase expense, would be required as the working capital fund. This
results in the following estimated working capital fund for each Town.
Working
Town Capital Fund
Southampton $1,000,000
East Hampton 500,000
Riverhead 400,000
Southold 400,000
Shelter Island 100,000
TOTAL 2,400,000
Joint-System !,250,000
B-16 East End Municipalization
ACQUISITION OF-~-~.ECTRIC PROPERTIES
Preliminary Estimated Engineering Costs
Five Separate
One Joint- One Town Town
System System Systems
Phase I $600,000 $500,000 $1,500,000
Phase II 250,000 250,000 1,250,000
Phase III 500,000 400,000 1,750,000
TOTAL $1,350,000 $1,150,000 . $4,500,000
UTILITY OPERATIONS AND START-UP COST
The ,amount of cost ultimately expended to initially establish the operation of
a municipally-owned electric system in each of the Towns or as a single
system to serve all the Towns, will depend on the particular procedure which
each Town, or group of Towns, follows. For the purpose of estimating the
comparative cost of start-up on an individual Town basis versus a joint-system
basis, we have assumed each Town and the joint-system would establish,
equip and organize a municipal electric department comparable to the
municipal light departments other towns in New York have established and
currently operate.
The start-up cost for a new electric department is primarily associated with
providing office and garage space, acquiring office equipment, transportation
vehicles and work equipment, purchasing an inventory of maintenance and
replacement materials and setting up a working capital account. The amount
each Town will be required to spend on start-up costs is also related to the
size of the electric system the new department must maintain, and the cash
flow estimate of the individual electric system.
We have assumed each new utility would initially lease office and garage
space. We recommend this approach because it both reduces the initial capital
requirement and gives the Towns time to plan for the type of facility that
would best fulfill the needs of the new electric department.
Based upon a review of the materials and equipment other municipal
departments maintain and the above considerations, we estimate each of the
Towns and the joint-system would expend the following amounts to initially
establish and equip their new electric departments.
s.~-.ou,.~., R.W. Beck B-15
APPENDIX B
Preliminary layout and cost estimate for separation and
reconnection plan
Preliminary organization and operation plan for utilities (or
utility)
Engineering and economic study of potential severance damages
LILCO may claim
Engineering assistance to legal council and Towns in evaluating
and responding to questions raised by LILCO and Town.
Prepare exhibits and testimony to be used in eminent domain
proceedings
The second phase (Phase II), eminent domain proceedings, are expected to
take several months and the effort required during this period could involve
a large number of engineering hours to assist the legal counsel in evaluating
claims made by LILCO and preparing rebuttal testimony.
The final phase (Phase III) activities will be based on the final rulings of the
court and/or negotiations with LILCO. It would address the separation and
reconnection plan, the method of separating the new distribution system(s)
from LILCO system would be finalized, and construction contracts would be
awarded. During this time, the organization and operation plan would be
finalized and staffing would be undertaken.
The amount of effort required to complete the engineering tasks in each of the
above phases, and therefore the costs, will be dependant on a number of
factors, the most important of which, is the amount of information LILCO
cooperatively provides and the effort required to obtain it from LILCO or
from other sources.
We do not estimate that there would be a major difference in the engineering
cost between proceeding with a eminent domain proceeding for either:
(1) one Town, or (2) for all the Towns to form a joint-system to supply all the
Towns. The difference in this case is estimated to be in the range of 10
percent to 15 percent. However, if each Town elected to establish its own
independent system and each had to go through the total eminent domain
proceeding on their own, we estimate the engineering cost on a total basis
would be much higher. Our preliminary estimate of the engineering cost for
each of the above phases is as follows.
B~14 East End Municipalization
ACQUISITION OF .,LECTRIC PROPERTIES
Distribution
System Modify
Separation and Power Supply
Reconnection Facilities
Southampton $1,250,000 $1,000,000
East Hampton 1,000,000 1,000,000
Riverhead 500,000 3,500,000
Southold 150~000 1,000,000
Shelter Island 150,000 3,500,000
TOTAL $3,050,000 $9,500,000
Joint-System $5,000,000 $45,000,000
ENGINEERING EXPENSES
It is unknown at this time how willing LILCO will be to negotiate the sale of
its electric properties in each Town. If they oppose the acquisition by the
Towns, it can be anticipated that significant funding will be needed to support
the legal and engineering effort required to determine the value of the
properties as well as the negotiation and litigation related to certain
subsequent contractual obligations.
The amount that will be required for legal and engineering expenses could
also vary substantially depending upon the whether each Town proceeds
independently with litigation or litigation is undertaken as a group. Chapter
360 of the New York General Municipal Law sets forth the procedure that all
municipals must follow to set up and acquire an electric system.
The process to be followed prior to commencing the eminent domain
proceeding could take up to one year. The engineering work that is
anticipated as necessary during this initial phase (Phase I) includes the
following.
1. Mapping of all primary distribution lines
2. Inventory of all properties to be acquired
3. Valuation of properties to be acquired
~soum,~,~ R.W. Beck B-13
APPENDIX B
The 69 kV lines that cross the western border of Riverhead supply local load
in Riverhead as well as extending westward into Brookhaven. We anticipate
LILCO wanting to retain this 69 kV transmission line, therefore, we have
added to the overall cost of the work required along this border, the cost of
constructing a new 69 kV line from LILCO's Riverhead substation to connect
with the Grumman Plant and a second line to Wildwood.
We have also identified several potential locations along the western borders
of Riverhead and Southampton where separation and reconnection work may
be required on the lower voltage distribution lines. We have provided an
allowance of $5,000,000 to do this reconnection work and construct the new
69 kV lines discussed in the preceding paragraph.
Another cost we anticipate that the joint-system plan would incur that the
separate-system plan would not, is the cost of acquiring the 69 kV
transmission line that loops through the five Towns. The jointly-owned
system's ownership of this portion of the 69 kV transmission system and the
69 kV substations would allow the joint-system to establish a single delivery
point at LILCO's 138 kV Riverhead Substation and take advantage of
coincidental metering of the group's peak kW demand. Based on a very
preliminary estimate of the Reproduction Cost New of this tine tess an
allowance for depreciation, we have estimated a cost of $45,000,000 for the
purchase of the 69 kV transmission lines and stepdown substations in the five
Towns. This cost does not include the cost of the 69 kV lines that extend from
the Riverhead Substation to the west which we have assumed would not be
acquired. It represents the incremental cost of properties obtained for a
jointly-owned system that are over and above the properties which the
individual Towns would individually acquire for stand-alone systems.
While we have added in the cost of acquiring the 69 kV loop in this
Preliminary Study, it is important to note that this 69 kV line is also tied to
several small generating stations that LILCO operates. We believe these
stations are used to maintain stable voltage conditions during high load
periods as well as provide capadty to serve LILCO's overall load. It is our
preliminary opinion that LILCO can and should continue to own and operate
these small generating stations, and in fact, will need to operate these stations
to deliver stable power to the joint-town system and LILCO's other customers
on Long Island. This issue should receive future study if the Towns continue
developing a joint-system.
COMPARISON OF SEPARATION AND RECONNECTION COSTS
A comparison of the amounts we have estimated to fund the separation and
reconnection cost and for making modifications to power deliver facilities for
each Town on a separate-system basis and for the combined Towns on ,a joint-
system basis is shown below.
B-12 East End Municipalization
ACQUISITION OF, .ECTRIC PROPERTIES
Shelter Island is bordered on all sides by the shoreline of the island. This
natural boundary eliminates the need to consider severance damages along the
border. The only points where disconnection and reconnection work is
assume to be required is where the lines come on to the island.
We have estimated an allowance of $150,000 for the disconnection and
recormection work to be done to the distribution lines both inside and outside
the town for the points the distribution lines enter the island.
Power is delivered into Shelter Island through a 69 kV transmission line that
extends through the town and circles ~rough the other Towns included in
this Study. LILCO's reports do not indicate that there is any stepdown
substation on the island, therefore, we have assumed that if a separate electric
system were established on the island a 69 kV substation would need to be
constructed and connected to the existing distribution system.
We have estimated a cost of $3,000,000 to construct a new substation and
reconnection of the distribution lines.
SEPARATION AND RECONNECTION UNDER JOINT-SYSTEM
If the five Towns proceeded to establish one jointly-owned system to serve the
power needs of all the Towns, we believe it is reasonable to assume the power
requirements would justify the Towns ioint-system taking power at the 69 kV
level at the Riverhead Substation.
The combined number of customers and customer energy usage in the five
Towns based upon the information obtained from LILCO is as follows.
Customers
Energy Sales (MWh)
85,335 903,664
From the information provided, we have estimated the five Towns' total
annual peak kilowatt demand for electridty is approximately 200,000 kW and
the annual kilowatt hour energy requirements, including system losses, is
approximately 961,000 MWh.
Assuming the five Towns establish a single operating system, it will result in
a substantial reduction in the separation and reconnecfion work required by
eliminating that work along the borders between the five Towns. The only
border where work would be required would be the western border of the
area. The lines that would be affected along this border are the 69 kV
transmission lines and the lower voltage distribution lines.
s.~sou~-~, R.W. Beck B-Il
APPENDIX B
The western border of Southold joins the Town of Riverhead which is also
included in this Study and is currently supplied retail electric service by
LILCO. If separate utilities are established in each Town, we have identified
several potential locations of separation and recormection work which may be
required.
We have estimated a cost of $150,000 for the disconnection and reconnection
work to be done to the distribution fines both inside and outside the town
along the borders.
Power is delivered into Southold through a 69 kV transmission line that
extends through the town and circles through the other Towns included in
this Study. LILCO's reports indicate LILCO reduces the voltage to 23 kV at
a 69 kV stepdown substation and extends the 23 kV line through the town.
The 23 kV line appears to be the primary source of electric power for the
town.
The existing substations in Southold appear to have adequate capacity to
supply electric requirements of the town, therefore, the power supply plan
would be to continue to receive power delivery through these LILCO-owned
substations. Some reconnection of the lines leaving the substations is
anticipated. We have provided an allowance of $1,000,000 to fund necessary
modifications to the substations and reconnection of the distribution lines.
The esiimated purchase price of the 23 kV distribution line and substation
would be included in the purchase price of the properties in the town for both
a separate- or jointly-owned electric system.
LILCO also maintains a 14 MW generating station in Southold. We have
assumed LILCO would continue to own and operate this generating station.
SHELTER ISLAND
LILCO reported the entire Town of Shelter Island had the following number
of customers and customer energy usage.
Customers
Energy Sales (MWh)
2,493 20,141
From the information provided, we have estimated the Shelter Island's total
annual peak kilowatt demand for electridty is approximately 5,000 kW and
the annual kilowatt hour energy requirements, including system losses, is
approximately 21,000 MWh.
B-lO East End Municipaiization
ACQUISITION OF, ..ECTRIC PROPERTIES
We have estimated a cost of $500,000 for the disconnection and reconnection
work to be done on the distribution lines both inside and outside the town
along all the borders.
Power is delivered into the general area of Riverhead through 138 kV
transmission lines and a 138 kV stepdown substation (Riverhead Substation)
which is located just across the border of the town in the Town of Southold.
From this substation, 69 kV transmission lines extend through the town and
circle through the other Towns included in this Study. A 23 kV
subtransmission line also extends across the town from the Riverhead
Substation. LILCO's reports indicate that LILCO has three 69 kV stepdown
substations in the Town. The primary source of electric power for the town
appears to be 13.8 kV distribution lines from the Riverhead Substation, the
69 kV substations and the 23 kV lines passing through the town.
The existing distribution substations in Riverhead do not appear to have
adequate capadty to supply all of the electric requirements of the town,
therefore, for the town to establish a separate electric system, the power
supply plan would potentially have to include a new 69 kV stepdown
substation to supplement the power it would continue to receive through the
existing LILCO-owned substations in the town. In addition to the substation,
some reconnection of lines leaving both substations is anticipated. We have
estimated a cost of $3,500,000 to fund necessary construction of a new
substation and make modifications to the existing substations and
reconnecfion of the distribution lines.
SOUTHOLD
LILCO r.eported the Town of Southold had the following number of customers
and customer energy usage.
Customers
Energy Sales (MWh)
11,928 108,330
From the information provided, we have estimated the Southold's total annual
peak kilowatt demand for electricity is approximately 25,000 kW and the
annual kilowatt hour energy requirements, including system losses, is
approximately 115,000 MWh.
Southold is bordered on the north, east and south by the shoreline of Long
Island identified by Long Island Sound, Gardiners Bay, and Great and Little
Peconic Bays. These natural boundaries eliminate the need to consider
severance damages along the north, east, and south borders of the town.
~sou~M~ R.W. Beck B-9
APPENDIX B
anticipated. We have estimated an allowance of $1,000,000 to fund necessary
modifications to the substations and reconnection of the distribution lines.
The estimated purchase price of the 23 kV distribution line and substation is
included in the allowance we have provided to purchase LILCO's distribution
properties.
LILCO also maintains a two generating stations in the town. One generating
station is located near the eastern border and the other is located near the
western border of the town. The eastern station contains 6 MW of diesel
generation and the western station contains a combination of diesel and
combustion turbine generation totaling 28 MW. We have assumed LILCO
would continue to own and operate these generating stations.
RIVERHEAD
LILCO reported the Town of Riverhead had the following number of
customers and customer energy usage.
Customers
Energy Sales (MWh)
13,143 173,137
From the information provided we have estimated Riverhead's total annual
peak kilowatt demand for electricity is approximately 38,000 kW and the
annual kilowatt hou~ energy requirements, including system losses, is
approximately 184,000 MWh.
Riverhead is bordered on the north by the shoreline of Long Island Sound and
on the south by FIanders Bay and the Peconic River. The area south of the
Peconic River is within the Towns of Southampton and Brookhaven.
Southampton is one of the other Towns included in the Study. While the
river serves as a natural boundary, there are several points where line
reconnection work is required.
The eastern border of Riverhead adjoins the Town of Southold which is also
included in this Study and is currently supplied retail electric service by
LILCO. If separate utilities are established in each Town, we have identified
several potential locations where separation and reconnection work may be
required.
The western border joins the Town of Brookhaven which is also supplied
retail power by LILCO. We have identified several potential locations along
this border where separation and reconnection work may be required.
B-8 East End Municipalization
ACQUISITION Or- ;LECTRIC PROPERTIES
LILCO also maintains a 11.5 ,MW combustion turbine generating station in
Southampton. We have assumed LtLCO would continue to own and operate
this generating station.
EAST HAMPTON
LILCO reported the entire Town of East Hampton had the following number
of customers and customer energy usage.
Customers
19,787
Energy Sales (MWh)
186,217
From the information provided, we have estimated East Hampton's total
annual peak kilowatt demand for electricity is approximately 44,000 kW and
the annual kilowatt hour energy requirements, including system losses, is
approximately 198,000 MWh.
East Hampton is bordered on the north, east and south by the shoreline of
Long Island, identified by Gardiners Bay, Block Island Sound and the Atlantic
Ocean. These natural boundaries eliminate the need to consider severance
damages along the north, east, and south borders of the town.
The western border of the town is defined by Town Line Road which divides
the town from the Town of South Hampton. South Hampton which is also
include,d in this Study is currently supplied retail electric service by LILCO.
If separate utilities are established in each Town, we have assumed both
utilities would construct a new distribution line along the full length of this
border. We have estimated a cost of $1,000,000 for the disconnection and
recormection work to be done to the distribution lines both inside and outside
the town along the borders.
Power is delivered into East Hampton through a 69 kV transmission line that
extends through the town and circles through the other Towns included in
this Study. LILCO's reports indicate LILCO reduces the voltage to 23 kV at
a 69 kV stepdown substation and extends a 23 kV line through the town. The
23 kV line appears to be the primary source of electric power for East
Hampton.
The existing substations in East Hampton appear to have adequate capacity
to supply electric requirements of the town, therefore, the power supply plan
would be to continue to receive power delivery through these LILCO-owned
substations. Some recormection of the lines leaving the substations is
s.~'our,,*,~,~, R.W. Beck B-7
APPENDIX B
From the information provided, we have estimated that Southampton's total
annual peak kilowatt demand for electridty is approximately 97,000 kW and
the annual kilowatt hour energy requirements, including system losses, is
approximately 442,000 MWh.
Southampton is, with minor exception, bordered on the north and south by
the shoreline of Long Island identified by Great Peconic and othe~ bays on the
north and the Atlantic Ocean on the south. These natural boundaries
eliminate the need to consider severance damages along the north and south
borders of the town.
The eastern border of Southampton is defined by Town Line Road which
divides Southampton from the Town of East Hampton. East Hampton which
is also included in this Study is currently supplied retail electric service by
LILCO. If separate ulilities are established in each Town, we have assumed
each utility would need to construct their own new, completely separate
distribution line along the full length of this border.
A short section of the northwest border of Southampton abuts the Town of
Riverhead which is also included in this Study. This portion of the border
follows the Peconic River, The remainder of the western border of the town
is over land and adjoins the Town of Brookhaven. It is assumed that the new
munidpal utility will need to isolate its newly formed distribution system
from LILCO's distribution system which will continue to serve Brookhaven.
We have identified ten potential locations along these borders where some
separation and reconnection work may be required.
We have estimated a cost of $1,250,000 for the disconnection and reconnection
work to be done to the distribution lines both inside and outside Southampton
along all the borders.
Power is delivered into the general area of Southampton through 138 kV
transmission lines and a 138 kV stepdown substation (Riverhead Substation)
which is located in the northwest corner of the town. From ttUS substation,
69 kV transmission lines extend through the town and circle through the other
Towns included in this Study. LILCO's reports indicate that LILCO has six
69 kV stepdown substations in the town. These 69 kV substations appear to
be the primary source of electric power for the town.
The existing distribution substations in Southampton appear to have adequate
capacity to supply electric requirements of the town, therefore, the power
supply plan would be to continue to receive power delivery through these
LILCO-owned substations. Some reconnection of the lines leaving the
substations is anticipated. We have estimated an allowance of $1,000,000 to
fund necessary modifications to the substations and reconnection of the
distribution lines.
B-6 East End Municipalization
ACQUISITION OF..ECTRIC PROPERTIES
general plan for serving each municipal area independently is discussed in the
following subsections.
SEPARATION AND RECONNECTION UNDER SEPARATE-SYSTEMS
The establishment of a separate Town-owned electric system in each of the
municipalities has been assumed to require the complete separation of the
electric system distribution properties in that Town from the electric
distribution system outside of that munidpality. In order to estimate the cost
of disconnecting and then reconnecting the systems of the electric company
outside the Town as well as the electric distribution system inside each
municipality, we have used maps of each of the Towns and the adjoining
areas. Based on these maps, we have developed a basic plan of supplying
power to the electric distribution system in each of the Towns and the
reconnection work required to establish each of the independent Town-owned
electric systems.
It was assumed that if each of the Towns established their own individual
distribution system, they would not acquire any of the properties operating
above the 23 kV voltage level. However, if the Towns joined together to form
one utility they would, as a group, also acquire the 69 kV transmission line
that passes through the Towns and the 69 kV stepdown substations that are
used to supply the Towns. Cost were included in each plan for construction
and/or modifications to the existing substation and/or subtransmlssion lines
to provide a point of power supply.
LILCO has small generating stations located throughout the Towns which
appear to be used both to provide LILCO with capacity and energy, and also
to stabih~ze the voltage to all area customers. Since LILCO's transmission
system will continue to be the method of power delivery to the Towns, and
as such, they will continue be responsible for voltage stability, we have
assumed that LILCO would retain all of its existing generation. Therefore, the
cost of acquiring the electric system does not include the cost of this existing
generation.
A description of the power supply and separation plan, as well as, estimated
severance cost for each Town is set forth in the following paragraphs.
SOUTHAMPTON
LILCO reported the entire Town of Southampton (including the five villages)
had the following number of customers and customer energy usage.
Customers
Energy Sales (MWh)
37,984 415,839
s~soun.~,~M~, R.W. Beck B-5
APPENDIX B
EXISTING ELECTRIC PROPERTIES
The basic electric properties existing in each of the Towns is assumed to
consist of open wire primary voltage distribution lines supported by wood
poles that extend alongside the streets in each community. The majority of
these open wire lines are supported by wood crossarms; however, it is also
assumed that LILCO has used some amount of spacer cable-type construction,
as generally found in other utility service areas.
The facilities included with these distribution properties include transformers,
secondary (lower voltage) conductors, service drops to customers, and meters.
Other facilities included along the distribution lines include switching devices,
capacitors, risers that extend underground electric service to some customers.
In addition the above basic electric distribution properties, a 69 kV
transmission line extends in a "looping" fashion from a 138 kV substation in
Riverhead through each of the Towns and then back to Riverhead. We have
assumed the Towns would not acquire any of the 138 kV or 69 kV
transmission properties if they formed individual electric system but we have
assumed that they would acquire the 69 kV transmission line i_f the Towns
established one jointly-owned electric svstem. While the potential acquisition
of the 69 kV transmission will increase t~e acquisition price significantly, there
are associated benefits for including the 69 kV loop in the acquired fadlities.
The cost of wheeling in purchased power is generally lower if receipt is taken
at a higher voltage, and acquisition of the 69 kV systems would allow the
combined mu/ti-town utility to benefit through metering of their combined
load at a single delivery point and the subsequent lower peak demand due to
load diversity (i.e., the coincident peak demand of the Towns 'will be lower
than the sum of the five Towns' individual non-coincident peak loads).
There are also several small generating stations in the Towns, as discussed
later, we have assumed LILCO would retain ownership of these generating
stations.
Review of the border area around each of the Towns established that, with
limited exceptions, the Town border is the shoreline of Long Island. This
aspect results in there being a small number of points that need to be
separated and reconnected, and consequently results in generally low
reconnection cost.
While in the case of five independent new utilities, we have assumed that the
Towns would not acquire any of the high voltage (138 kV or 69 kV)
transmission lines or high voltage stepdown substations used to supply power
to service areas outside the Towns, we did assume that every new service area
established would have to pay for some type of power delivery facility. The
B-4 · East End Municipalization
ACQUISITION OF ~.ECTRIC PROPERTIES
sum of the five individual peak demands, which would equate to
corresponding savings in annual wholesale energy costs of about $2.2 million;
(3) other economy-of-scale operating cost reductions for a single system could
easily more than make up the remaining difference. The actual costs and
benefits cannot be estimated or assessed without further study.
BASIC COST OF ELECTRIC SERVICE
A basic component of the cost charged to customers for the electric service
they receive is the annual cost incurred by the utility assodated with the
ownership of the properties used to serve these customers. In this Study, we
have not developed an estimate of this annual cost because the scope of the
Study did not include estimating the cost of acquiring the existing electric
properties within each Town. We have, however, estimated all the other cost
of setting up an operating utility based upon both the separate-system plan
and the joint-system plan.
The annual cost of this difference in setup cost and differences estimated for
the other operating cost under both the separate-system plan and joint-system
plan are discussed in the report.
A description of the existing electric system properties in each of the Towns
and the basic plan we have assumed for setting up a town-owned electric
system in each area, together with the basis for estimating each of the above
costs, is contained in the following subsections.
COSTING METHODS
The estimated amount that would have to be paid to acquire the existing
electric distribution properties within the Towns will either be based upon the
amount negotiated between LILCO and the Towns or, if negotiations prove
to be unsuccessful, the amount ultimately determined as the result of a
condemnation proceeding. The purchase amounts determined appropriate for
past condemnation proceedings of which we are aware, have ranged from:
(1) the recorded book cost to initially construct the properties, less an
allowance for depreciation, to (2) the cost to reconstruct the properties new,
less an allowance for depreciation, which is generally referred to as the
Reproduction Cost New Less Depreciation ("RCNLD").
For the purposes of a Preliminary Feasibility Study, we believe it
appropriately conservative to assume that the amount that would have to be
paid for the properties would approach the RCNLD amount, which is the
higher of the two valuation approaches. Therefore, the approach we would
recommend in subsequent studies would be to develop an estimate of this
RCNLD amount for the properties in each of the Towns.
s.~,,~our~M~,., R.W. Beck B-3
APPENDIX B
Estimate of Partial Costs to Establish Electric Systems
($000)
Disconnection and Modify Power $~rt- Working
Reconnection of Delivery Engineering up Capital To~al
Syetem Facilities Coats Coats Costs Costs
Southampton
E. Hampton
Riverhead
Southold
Shelter' Island
Total
Joint System
$1,250 $1,000 $1,1S0 $3,250 $1,000 $ 7,650
$1,000 $1,000 $1,1S0 $2,250 $ 500 $ 5,900
$ 500 $3,500 $1,150 $1,800 $ 400 $7,350
$ 1SO $ 1,0(]0 $1,ISO $1,67S $ 400 $ 4,37S
$ 150 S 3tO00 $Ir150 S 850 S 100 $$5,250
$3,050 $ 9,500 $4,500c~ $9,825 $3,400
S:9,~
$3,0~0 $45,000 $1,350 $5,300 $L2S0 $37,900
TI~ total for five separate individual ublllty systems reflects the potential for some economy gained by
simultaneous, parallel efforts by the individual Towns.
At first blush, the summary table above appears to indicate that a single, joint
system is sibrgtificantly less economic that the case where the five individual
Towns go it alone. This is not necessarily the case. While the above table
addresses a portion of the up-front costs necessary to get into business, the
more telling information is the differences in the on-going annual operating
costs for the newly formed utility. The up-front capital requirements translate
into a portion of the on-going annual operating costs of the new utility,
through the mechanism of the annual debt service associated with the long-
term financing of the initial capital requirements.
As discussed in the body of this Appendix, formation of the single joint
electric system may need to entail acquiring an additional portion of the
LILCO distribution system (the 69 kV transmission line which loops through
the five Towns) at an estimated additional costs of about $45,000,000 as
indicated in the s~ummary table above. Acquiring the 69 kV line has some
associated economic benefits which will serve to at least partially offset the
economic impact of the increased capital cost. The benefits will be in the form
of: (1) reduced transmission wheeling costs paid to LILCO to deliver the
Town's wholesale power due to the higher 69 kV delivery voltage; and
(2) lower peak demand (which equates to lower wholesale power costs) as a
result of metering the total combined electric requirements of the five Towns
on a coincident basis at a single delivery point.
Until the economic benefits resulting from the 69 kV line are quantified in the
form of their impact upon the annual operating costs, it will not be dear
whether or not they fully offset the added up-front capital costs. The potential
offset effect can be illustrated with a hypothetical example, assume that:
(1) the difference in up-front capital costs is as shown in the summary table,
at about $30 million, which equates to an increase in annual debt service on
the order of about $2.6 million per year; (2) the resulting peak demand of the
five Towns when metered coincidently turns out to be, say 20% lower than the
B-2 East End Municipalization
APPENDIX B
PRELIMINARY ENGINEERING COST ANALYSIS:
ACQUISITION OF ELECTRIC PROPERTIES
EXECUTIVE SUMMARY
As discussed in Appendix A to this report, New York General Law (Section
360) sets forth the procedures that a municipal corporation must follow to
establish an operating municipal electric department. The municipal
corporation may establish its utility by either purchase or condemnation of the
existing electric properties within its geographic area, or by construction of its
own electric facilities.
Should the Towns elect to form their own community-owned electric utility(s),
they have the option of either creating their own individual electric system or
to band together and create on jointly-owned electric system which serves the
combined electric needs of the five towns. In our analysis, we have explored
the projected economic ramifications associated with the choice between these
two options.
In this Appendix we present a general description of LILCO's existing electric
properties within each Town, and identify the portion of these properties we
suggest the Towns acquire if each establishes a separate utility system, as well
as the properties to be acquired if one jointly-owned system were established.
We also develop a preliminary estimate of the allowance of funds proposed
as necessary to disconnect and reconnect the electric systems from the
remaining portion of LILCO's electric distribution system under both the
separate-system plan and the joint-system plan.
While the scope of this Study does not include estimating the cost of acquiring
all LILCO's distribution properties in the Towns, we have developed a
preliminary estimate of the cost of the differences in the properties which
would be acquired under the joint-system plan as compared to the separate-
system plan so that we could show the total difference in acquisition and
setup cost associated with each plan.
Provided betow is a table illustrating the estimated costs for certain of the
tasks associated with the establishment of electric systems for the Towns.
Please note that the major cost component related to acquisition which is not
addressed below is the cost to acquire the LILCO's electric distribution
infrastructure itself.
Table of Contents
APPENDIX B
PRELIMINARY ENGINEERING COST ANALYSIS:
ACQUISITION OF ELECTRIC PROPERTIES
EXECUTIVE SUMMARY ........................................................................................... B- 1
BASIC COST OF ELECTRIC SERVICE ..................................................................... B-3
Costing Methods ....................................................................................................... B-3
Existing Electric Properties ....................................................................................... B-4
SEPARATION AND RECONNECTION UNDER SEPARATE-SYSTEMS .................... B-5
Southampton ............................................................................................................. B-5
East Hampton ............................................................................................................ B-7
Riverhead .................................................................................................................. B-8
Southhold .................................................................................................................. B-9
Shelter Island ...........................................................................................................
SEPARATION AND RECONNECTION UNDER JOINT-SYSTEM .......................... B- I l
COMPARISON OF SEPARATION AND RECONNECTION COSTS ......................... B-12
ENGINEERING EXPENSES ................................................................................ B- l 3
UTILITY OPERATIONS AND START-UP COST ................................................. B-15
OPERATING AND MAINTENANCE EXPENSES .................................................. 13-17
Appendix B
Preliminary Engineering Cost Analysis:
Acquisition of Electric Properties
TABLE
FRANCHISE HISTORY AND DESCRIPTION
EAST END TOWNS
- 60 -
municipal joint action in utility formation, financing and
even in eminent domain processes.
There are a number of pragmatic administrative
issues that will likely need to be addressed as and when the
East End Towns decide in general terms on what municipal joint
action structure best fits their needs. Such issues as may
arise later in the utility formation process appear likely to
revolve around specific and concrete practical situations that
are beyond the scope of this study and that cannot be
addressed informatively at this point in any event. The
formulation of agreements for joint governance, allocations of
costs and rate formulae, and the integration of whatever
limitations may exist on the individual and collective
abilities of the East End Towns to finance are examples.
However, in each case, these kinds of issues can only be
informatively addressed on the basis of concrete concerns and
concrete data which are simply not available to us at this
point in the evaluation process.
- 59 -
by a nongovernmental entity, such as an investor-owned
utility. Such bonds are called "private activity bonds" for
purposes of Section 141. In short, municipal bonds used to
finance the condemnation of utility assets will generally be
taxable.
As is true of many provisions of the Internal
Revenue Code, there are exceptions to the general rule of
Section 141. Specifically, there are four exceptions to the
taxability of interest on "private activity bonds," only one
of which has any possible definitional relevance to the East
End Towns. Bonds used to finance acquisition of utility
property may be subject to favorable tax treatment if they
qualify as "exempt private activity bonds." There are eleven
criteria that have to be met to achieve this qualification --
typically the most difficult of which is for the issuer to
obtain an allocation of the relevant state's "volume cap"
under Section 146 of the Code -- which may or may not be
applicable depending on the structure of financing ultimately
selected by any one or more of the East End Towns for the
acquisition of LILCO's assets. Discussion of these eleven
criteria for achieving "exempt private activity bond" status
is beyond the scope of this study, and is in any event
premature until one or more of the East End Towns reach a
decision as to the mode of facility acquisition that they
propose to pursue. Interest on "exempt private activity
bonds" is subject to the "alternative minimum tax" or "AMT,"
but is not subject to full taxation as ordinary income.
For purposes of the present level of inquiry, two
basic assumptions should be kept in mind. First, if bonds are
used to finance the condemnation of utility assets, interest
on those bonds should be presumed (for planning purposes) to
be taxable as ordinary income under Section 141 of the Code.
Second, if the bonds are used instead to finance the
construction of new municipal facilities, interest on them
will continue to enjoy exemption from taxation under Section
103 of the Code.
Legal Issues Concerning Formation of
MuniciDal Joint Action Aaencv
As outlined in Part I.A.2 of this memorandum, New
York law offers more than ample support for municipal joint
action structures, and no obvious impediments to their use in
the utility formation process. Articles VIII and IX of the
New York Constitution and General Municipal Law Sections 119-o
and 361(2) provide both general and specific support for
- 58 -
its customers which might be affected by the municipalization
and in franchise agreements should be reviewed in light of the
FERC's Stranded Investment NOPR.
Given the Commission's relatively aggressive reading
of the statute generally, it is likely that an aggregator such
as a municipality may enjoy the benefits of access to the
wholesale markets afforded by the Energy Policy Act with out
having to endure the c~mbersome process of acquiring an entire
transmission or distribution system. Just how many
transmission or distribution facilities the aggregator must
own is still an open question. It is likely, however, and may
be plausibly argued that an aggregator will not have to own
all of the transmission or distribution facilities over which
all of the energy it delivers to its customers flows because
Congress used the word "all" only to qualify the energy
delivered, not the facilities owned. If so, the electricity
markets will become even more competitive and all consumers
will be eligible to enjoy the benefits of emerging competition
in the electric power industry.
Federal Income Taxation Issues
Concerning Municipal Bonds Used To
Finance Condemnation of Utility Facilities
As part of the omnibus Budget Reconciliation Act of
1987, congress amended Section 141 of the Internal Revenue
Code (26 U.S.C. Section 141) so as to restrict severely the
ability of municipal utilities to use tax exempt financing to
acquire the operating assets of investor-owned
utilities.20./ The general rule under Section 141 of the
Code is that interest on any municipal bonds is taxable as
ordinary income if the lesser of five percent or $5,a00,000 of
the proceeds of such bonds are used to acquire utility "output
facilities" -- including electrical transmission, substation
and distribution facilities -- previously used or held for use
20/
Some cynics have suggested that there may be a
relationship between the fact that the city of Chicago
was evaluating a possible municipal condemnation of the
distribution facilities of Commonwealth Edison Company
during 1985 and 1986, and that the fact that then-
Chairman of the House Ways and Means Committee, Rep.
Daniel Rostenkowski, was the original sponsor of this
legislation. In fact, Internal Revenue Code Section 141
was known in the trade press for a while as the
,,Rostenkowski Amendment."
- 57 -
point of delivery to a lawful
reseller, as well as all necessary
associated services to accomplish
such delivery in a reliable manner.
The Commission further noted (id. at footnote 36 (emphasis in
original))lS/:
The fact, therefor, that transmission
services may encompass the use of
facilities that in other contexts
would be classified as distribution
facilities has no effect on the
Commission's authority to order
transmission services under section
211.
In its recent Stranded Investment NOPR19/, the
FERC indicated that it expects some new municipal electric
utilities to be formed for the purpose of providing electric
service to major industrial customers of franchised electric
utilities. Other statements in the NOPR suggest that the FERC
may be liberal in allowing jurisdictional utilities to recover
for so-called "stranded investment" in rates for transmission
and ancillary services for the benefit of former retail
requirements customers during a three-year transition period
as a trade-off for liberally interpreting the exception to the
prohibition against retail wheeling (i.e., in favor of newly-
formed municipal electric utilities). The stranded investment
provisions,'if any, in existing contracts of the utility with
18/
Former Ohio regulator Ashley Brown addressed the question
of where the line between transmission and distribution
lies in provocative terms in a recent address to NARUC.
He is reported to have said, "'No one knows for sure,'
but 'imperialists on the Federal Energy Regulatory
Commission staff,' believe that transmission - and hence,
the FERC's jurisdiction - goes right up to the meter.
They concede, he said, 'that somewhere in the meter,
there is state jurisdiction.'" The Electricity Daily,
Vol 4, No. 40, March 1, 1995.
Notice of Public Rulemaking on Recovery of Stranded
Investment Costs by Public Utilities and Transmitting
Utilities (the "Stranded Investment NOPR"), Docket No.
RM94-7-000, FERC Statutes and Regulations ~ 32,507 at pp.
32,864 n.18, 32,865 n.27.
- 56 -
Sufficiency of Ownership of Transmission or
Distribution Facilities
The most aggressive reading of the term
,,transmission or distribution facilities" would start with the
FERC's long held positionl7/ that, under Section 201(b) of
the Federal Power Act, an entity's accounts, books, records
and contracts used for transmission, or sales for resale, of
electric power in interstate commerce, constitute
jurisdictional "facilities." However, since "transmission or
distribution facilities" is used in Section 212(h) of the
Federal Power Act to condition an exception to the general
prohibition against retail wheeling, it will likely be
narrowly construed to require a municipality to own m~re than
just books and records to qualify as a facility owner even
though books and records are part and parcel of facility
ownership.
The FERC's pronouncements so far on the subj~ect of
facilities are contained in its response to an attempt by
Texas Utilities Electric Company ("TU") to fend off a wheeling
request by Tex-La Cooperative in 1994. FERC rejected TU's
suggestions that because "local distribution facilities" were
involved in a Section 211 wheeling application, the Commission
lacked jurisdiction to issue a wheeling order (Tex-La Electric
Cooperative of Texas, linc, 67 FERC 461,019 (1994) at 61,056):
... [W]e believe that we may order
transmission services under Section
211 even when they involve the use of
"local distribution" and "generation"
facilities that are otherwise non-
jurisdictional.
The Commission reasoned that (id. (emphasis in original)):
... [W]e believe that Congress, by
the use of the term "transmission
services," intended the Commission to
be able to order delivery of the
electric energy from the point of
receipt of such energy on the
transmitting utility's system to the
17/
E.q., citizens Ene~q"f Corporation, 35 FERC ~ 61,198 at
pp. 61,452-3 (1986); Hartford Electric Liqht Co. vt Federal
~ower C__o~_~ission, 131 F.2d 953, 961 (2d Cir. 1942).
- 55 -
to deliver a11[16/] such electric
enerq¥ to such electric consumer.
Nothing in this subsection shall affect
any authority of any State or local
government under State law concerning the
transmission of electric energy directly
to an ultimate consumer. (Emphasis
added.)
This restriction will prohibit a municipality from
obtaining a wheeling order in order to import electricity for
supplying its customers unless the municipality meets the 2-
part test (A and B in the quoted text above) for avoiding the
prohibition on sham transactions. By definition, a properly
constituted municipal utility will meet the first part of the
test because it will be a political subdivision of a state.
Regarding the second part of the test, because a
municipality in circumstances under consideration here will
likely not be providing electric service on the date of
enactment of subsection 212(h), it can meet the test only if
it "would utilize transmission or distribution facilities that
it owns or controls to deliver all such electric enerow to
such electric consumer." As indicated below, the FERC has
made only limited pronouncements on the nature or amount of
facilities which an entity must own or control and use to
'deliver electric power wheeled pursuant to a Section 211 order
as a prerequisite for eligibility for such an order.
16/
The use of the word "all" will be key to whether the FERC
allows a municipality to overcome the retail wheeling/sham
transaction prohibition to obtaining a wheeling order.
Congress specifically required that "all" of the electric
energy flowing to a municipality's electric consumers must
flow over the "transmission or distribution facilities that
it owns," but did not use the word "all" earlier in the
sentence to qualify the words "transmission or distribution
facilities." Thus, it is logical to conclude that a
municipality need not own all of the transmission or
distribution facilities serving its consumers but only that
all of the power it provides to its consumers must flow over
what ever transmission or distribution facilities it does
O~.
- 54 -
NO order issued under this Act shall be
conditioned upon or require the
transmission of electric energy:
(1)
(2)
directly to an ultimate consumer, or
to or for the benefit of ~ if
such electric enerq¥ would be sold by
such entity directly to an ultimate
consumer, unless:
(A)
such entity is...a State or any
political sub-division of a State (or
an agency, authority, or
instrumentality of a State or a
political subdivision)...[a
~ which is or has been
financed by REA]...a erson havin an
obli~ arising under State or
local law (exclusive of an
obligations arising solely from a
contract entered into by such person)
to Drovide electric service to the
public...; and
~uch e t__~ was providing electric
service to such ultimate consumer on
the date of enactment of this
subsection or would utilize
transmission or distribution
facilities that it owns or controls
- 53 -
In Florida Municipal Power Aqenc¥ v.
Florida Power & Liqht Company [65 FERC
~ 61,125 at 61,165 (1993)] the Commission
determined that, as a general matter, the
availability of transmission service
enhances competition in power markets by
increasing power supply options of buyers
and power sales options of sellers. The
Commission added that, if a transmission
customer determines that transmission
service will allow it to serve its
customers more efficiently, the public
interest will be served by requiring that
the service be provided so long as the
transmitting utility is fully and fairly
compensated and there is no unreasonable
impairment of reliability.
Thus stated, the "public interest" test does not present any
insuperable obstacle to a municipal electric utility obtaining
a wheeling order from the FERC.
be
Avoiding The Retail Wheeling and Sham
Transaction Prohibitions
The main impediment to a wheeling order which
municipalities attempting to escape constructing their own
power delivery facilities will have to overcome is the
prohibition on retail wheeling and sham wholesale transactions
in Section 212(h) of the Federal Power Act. For purposes of
this discussion, we will assume that the municipal utility
will own the very minimal facilities which might only include
retail customer metersl5/, possibly combined with service
drops. Section 212(h) provides, in pertinent part, as
follows:
15/
According to the chief spokesperson for Imatran Voima Oy,
the Finnish State Utility, meter technology has developed to
the point where they now can permit customers to choose
their suppliers on virtually an hourly basis. "Right now,
it costs [approximately $1,000] to buy one...But if the rate
of technological development is as fast as it has been for,
say, mobile phones, the [electric power] market will be
completely different in just a few years." Electric Utility
Week, February 20, 1995 at 16.
- 52 -
is included within the definition of "electric utility." As
discussed in Part F.2.c. below, any "electric utility" is
eligible to apply to the FERC for and obtain a wheeling order
under Section 211(a) of the Federal Power Act and, if
necessary, an interconnection order under Section 210(a) (1) of
the Act. Thus, while the full implications of this law are
still unfolding, a municipal electric utility, once
established, would be eligible to apply for and obtain both
interconnection and wheeling orders from the FERC.
a. Section 211 Access Revisited
Under Section 211 of the Federal Power Act, the FERC
may issue a wheeling order if certain conditions are met, but
is not obligated to do so. Section 211 establishes two
conditions which must be met before the FERC is authorized to
issue a wheeling order. First, the order must meet the
requirements of Section 212 of the Federal Power Act. Section
212:
establishes parameters for the terms
and conditions, including price, of
mandatory transmission service under
Section 211 wheeling orders;
establishes procedural requirements,
including mandatory settlement
negotiations;
prohibits inconsistency with State
laws on retail marketing areas;
prohibits mandatory retail wheeling
and sham wholesale transactions; and
contains certain limitations which
apply only to specified Federal
transmission systems (eq., Bonneville
Power Administration and certain
Texas utilities).
Second, the FERC must find that the proposed
wheeling order "would otherwise be in the public interest."
Regarding the public interest requirement, the FERC has stated
(Old Dominion Electric CooDerative, Inc. v. Delm~rva Power &
Li ht Com an , 68 FEI~C ~ 61,169, 1994 FERC LEXIS 1656 at 31
(1994)):
- 51
desirable option to consider. Such an option appears to be
feasible under the Energy Policy Act of 1992.
As discussed in the preceding section, in the Energy
Policy Act, Congress declared that with few exceptions, all
transmission-owning utilities would henceforth be common
carriers vis-a-vis each other. This has introduced
dramatically enhanced transmission access and with it,
increasing competition in the wholesale generation market.
Since the cost of generation typically comprises 70% of the
cost of electricity delivered to the consumer, anyone who can
aggregate sufficient load to "shop" the wholesale generation
markets can theoretically realize huge savings in the
delivered cost of power but only if they can somehow maintain
the current cost of delivering that power.
The possibility of municipalities creating their own
electric utilities and benefiting from the emerging
competition in the wholesale power market without having to
bear the burden of uneconomical power delivery costs attendant
to condemning or duplicating the existing power delivery
services is a legally untested, but intriguing hypothesis.
The point of view taken here will be that of a municipality
which does not want to acquire or operate significant power
delivery facilities. Instead, the municipality wishes to:
aggregate and "shop" the load of some
or all of its residents in the
wholesale generation market where
competition plays the biggest role,
and
escape the daunting burden and cost
of acquiring the necessary power
delivery facilities through
condemnation or construction of new,
duplicate facilities.
Such a municipality faces one key legal problem.
Assuming it can establish a municipal electric system, how can
that system access the newly competitive wholesale generation
market?
Accessing the wholesale generation market is a
matter of federal law. Once a municipality establishes a
municipal electric utility, it then constitutes a
"municipality" under Section 3(7) of the Federal Power Act.
Under Section 3(22) of the Federal Power Act, a municipality
- 50 -
promote the economically efficient
generation and transmission of
electricity;
be just and reasonable and not unduly
discriminatory; and
d. ensure to the extent practicable that
costs incurred in providing the
transmission service and properly
allocable to providing it are charged
to the party requesting the service
and not to the transmitting utility's
customers.
Section 212(h) also bans mandatory retail wheeling,
and forbids the FERC to order transmission service directly to
an ultimate customer, or through an entity to an ultimate
consumer unless the entity (for our purposes) is a poilitical
subdivision of a state and such entity would use transmission
or distribution facilities that it owns or controls to deliver
electric energy to the consumer.
In general, the FERC has been fairly vigorous in
exercising its Section 211 authority and has been quick to
expand the availability of transmission service where that
authority has been inUoked. See, e.q., Florida Municipal
Power A~enc¥ v. Florida Power & Light Co., 65 FERC ~ 61,125,
reh'q dismissed, 65 F!ERC ~ 61,372 (1993), final order., 67 FERC
~ 61,167 (~994). In iparticular, the FERC has indicated in
rather strong terms that it does not intend to be deterred in
exercising this autharity by unsupported claims of technical
difficulties. E1 PaSo Electric Co. v. Southwestern publiq
service co., 68 FERC ¶ 61,182 at p. 61,938 (1994). Thus, we
would not expect tha~ the East End Towns would confront the
same kinds of delays that the Town of Massena encountered in
obtaining transmission rights for its municipal utility
system, because Section 211 now offers a reasonably quick and
certain way to resolve transmission disputes.
2. "Muni Lite"
Given the high cost, both politically and
financially, of acquiring an investor-owned electric utility's
facilities serving a municipality, creation of a municipally-
owned utility withou~ undertaking the burden of acquiring
significant transmission or distribution facilities is a
- 49 -
municipalization effort by any one or more of the East End
Towns.
1. Overview of Section 211
Section 211 establishes basic requirements for a
FERC order for mandatory transmission service. It seems
likely that, in the event that any one or more of the East End
Towns determines to proceed with the establishment of a
municipal utility, they will be able to satisfy the criteria
for a Section 211 order.
Under Section 211, "any electric utility[13/]
· may apply to the Commission for an order under this
subsection requiring a transmitting utility[14/] to provide
transmission services (including any enlargement of
transmission capacity necessary to provide such services)."
The Commission may grant the order if it finds (1) that the
order meets the requirements of Section 212, and (2) that the
order is otherwise in the public interest.
The requirements of Section 212 are that the rates
terms and conditions imposed by the Commission must:
permit the recovery of all costs
incurred by the transmitting utility
in providing the service, including
(i) an appropriate share of
legitimate, verifiable and economic
costs, (ii) taking into account any
benefits of providing the service,
and (iii) the costs of any
enlargement of transmission
facilities required for providing the
service;
13/ An "electric utility" is defined by Section 3(22) of the
Federal Power Act as "any person or State agency (including
any municipality) which sells electric energy[.]"
14/
A "transmitting utility" is defined by Section 3(23) of the
Federal Power Act as "any electric utility which owns
or operates electric power transmission facilities which are
used for the sale of electric energy at wholesale[.]"