Op-Ed: Lupinacci Is Correct On LIPA Settlement

In 1990, I was hired as an engineer out of college by the Long Island Lighting Company (LILCo) and assigned to the Northport Power Station.  I worked there for 10 years in various management roles with increasing responsibilities.  In 1997, L.I.’s electric transmission system was taken over by the State (LIPA), while the power stations and natural gas business were merged with Brooklyn Union Gas, and became KeySpan.

After the merger, I was promoted to government relations manager.  I worked in that role for 9 years interfacing with Long Island elected officials, and served as one of KeySpan’s lobbyist representing the company in Albany.  I attended high level meetings and interfaced regularly with LIPA senior management.

After the takeover in 1997, LIPA signed a long term “Power Purchase Agreement” [PPA] with KeySpan to provide electricity for the power grid.  LIPA reimbursed KeySpan for all plant Maintenance & Operating costs including fuel purchases, property taxes, and regulatory requirements.  A small profit for KeySpan was also built into the contract.  The term of the PPA was for 15 years (ending 2013).

Basically, the State and KeySpan had a public/private partnership that allowed KeySpan to continue to operate as LILCo had … fixing wires, and operating power plants.  The benefit of the state takeover was primarily to refinance the Shoreham debt at municipal rates and give a full 18% rate reduction to ratepayers.  LIPA was only designed to have some 30 employees working out of a small office in Uniondale to set policy, and make strategic, long term decisions on LI’s electric future. 

Many Huntington residents are unaware that prior to the LILCo take-over by the State, LILCo had filed a tax certiori case (as a private, investor owned utility) on Northport seeking to reduce the property tax assessment by 75%.   So in 1997, the Northport Power Station tax certiori case was winding its way through the courts with an all but certain outcome:  The plant was over-assessed !

To understand how Northport’s tax assessment got so out of control, one must understand that under the old publicly regulated utility model, utilities like LILCo were allowed to roll the cost of property taxes into their rates as a matter of right.  So in that sense, LILCo never really cared about the property taxes on Northport.  They were fully recoverable, and essentially a pass-thru with the Public Service Commission (PSC) during rate cases.  So over the years, the Town would raise the assessment every time new machinery was purchased even if the old machinery was being ripped-out.  The assessments kept increasing with every new addition, and nothing was ever removed from the assessment roll.  And this practice went on this way from 1968 to 1995.

So you might ask what triggered LILCo’s decision to file tax certiories in the early 1990’s?  LILCo became concerned with high taxes at their power plants after the Shoreham settlement.  The settlement caused LILCo’s rates to become the highest in the nation.  In an effort to reduce rates to combat bad publicity, LILCo took action.  LILCo decided that it was no longer willing to sit back and act as a tax collector for local government.

The State had a different problem.  Business groups wanted the State to solve the problem of LILCo’s high electric rates, and the crushing effect they had on the Long Island economy.  The State’s idea was to take over LILCo, and refinance the $6B Shoreham debt with tax free municipal bonds.  This would generate an immediate 18% rate reduction.  But in order to sell a LILCo takeover to the public, the State needed to quell concerns in communities with power plants since State Authorities such as LIPA are typically tax exempt.  So the State agreed that it would terminate the LILCo tax certiori cases that were on-going in the courts.  More specifically, language was written into the 15 year Power Purchase Agreement (1997 to 2013) that explicitly stated that LIPA would reimburse KeySpan for the property taxes, and that KeySpan would never act on its own to file a tax grievance.  

During Gov. Pataki’s visit to Norwood Avenue School in Northport to promote the take-over, the Governor was specifically asked about the taxes on the Northport Plant.  His response appeared in the Northport Observer article written by Editor David Ambro that states, “He [Pataki] also made the promise that the PILOT payments to the school district would “last for the life of the deal.””  And true to his word, the promise to continue the tax payments without any reduction was written into the PPA contract in 1997 that lasted until 2013.

Huntington residents need to understand that there was never an agreement to continue tax payments unchanged in perpetuity.  All power plants have life cycles like any other piece of machinery.  And from a 1997 perspective, the year “2013” felt as far in the future as the year “2035” would seem to us today.  The “promise” that was made was for the 15 year term of “the deal” just as Pataki stated.

This issue has been misunderstood largely due to the language in the short, one page letter from LIPA Chair Rich Kessel to Supervisor Petrone in 1997.  In the letter, Kessel stated that all existing LILCo tax certiori cases would be withdrawn should the LIPA take-over happen, and that LIPA promised to not challenge the taxes.  This was a poorly written sweeping generalization.  Kessel’s letter should have said that LIPA planned to enter into a long term Power Purchase Agreement (PPA) that would last until 2013, and taxes would remain unchanged as a contractual condition contained in the PPA.

In any event, the courts have ruled that the Kessel letter does not constitute a promise, and that the PPA (1997 to 2013) was the actual contract.  The court’s decision is supported by an avalanche of case law that basically says that an executive in government can’t make a promise or pronouncement that future leaders have to follow.  But language in a long term contract is different, and is enforceable.  The general public seems to not understand that the long term PPA contract was the legal vehicle that enshrined LIPA’s commitment to keep the taxes unchanged at all LILCo legacy electric generating plants.

With LIPA’s right to pursue the tax certiori now validated by the court, the merits of the actual case are to be decided.  And in a tax certiori proceeding, there is only one legal question for the court to consider:  Is the assessment on the property based on a uniform percentage of fair market value?  Beacause that is what a tax assessment is, and that is the determination that is to be made.  It’s a uniform, proportional value given to a property that must be based on the fair market value of the property.  No other factors can be considered in a tax certiori case.  The impact to teacher salaries doesn’t matter.  Or the Town’s need for additional funds to pave highways.  Or the ability of the community to absorb the tax impact if a reduction is granted, or the visual blight of having 4 ugly smoke stacks still on the horizon.  There is only one question for the court:  What is the fair market value of the facility?

Given the situation we find ourselves in, it would seem that intelligent, rational people when given the same facts, should all arrive at the same conclusion.  And yet the Northport and Huntington communities seem split about accepting the settlement or rejecting it.  The only way for this to happen is if there is misinformation in the public domain about the fair market value of the plant or the success of any remaining legal challenges.

As a former manager of the plant and someone who was intimately involved in the energy sector for over 20 years, I can tell you the following:  The plant is not even worth half the proposed assessment that LIPA is actually agreeing to in the settlement.  Let that sink in for a moment.  This is why.

The electric industry has been deregulated nationwide.  Unlike the old utility models of the 1930’s thru 1995, the model today is to have one regulated utility in a region that is the service provider to transmit power across wires and to bill customers.  LIPA, ConEd, Central Hudson, and Florida Power & Light are examples of regional regulated transmission service providers.

Then you have companies that own generating stations that bid their power into a clearing-house system that dispatches generation in a competitive marketplace.  Today you’ll find power plant owners like Tans-Canada, National Grid, Mirant, Calpine and numerous other companies that bid their power into regional independent system operators (ISO’s).  Efficient plants make money and un-efficient plants can’t compete and get driven out of the marketplace.

When I started at LILCo, the Northport Power Station was the jewel in LILCo’s crown.  It generated about half of Long Island’s power, and was a “base load” plant.  LILCo’s other base load generating plants were Port Jefferson, Glenwood Landing, Island Park and Far Rockaway.  As in any field, technology improves and new infrastructure is built.  Between 2001 and 2010, LIPA added more efficient capacity to the system.   New underground cables (Neptune, PJM) were built to import power into Long Island from New Jersey.  And existing cables (Y-49, Y-50 and Northport- Norwalk) were upgraded to import more cheap power.  A long term PPA was signed with a new power plant in Brookhaven (Caithness).  Solar panels were installed on numerous rooftops, and LED bulbs and efficient appliances were promoted with energy rebates and replaced energy hogs.  

In today’s energy marketplace, steam power plants are being shuttered.  They simply can’t complete with new combined cycle plants.  A steam plant like Northport is 30 to 35% efficient compared with new plants like Caithness that are over 70% efficient.  With the cost of fuel being the biggest expense at power plants, old inefficient plants cannot compete.  The value of getting twice the megawatts for the same amount of fuel burned is huge.  So huge that in 2013 when the PPA expired, LIPA opted to exclude the Glenwood and Far Rockaway power stations from a new power supply agreement (now called a PSA) signed with National Grid (successor to KeySpan).  And National Grid as the owner of those plants immediately demolished them.  

In 2013, Northport’s sister plant consisting of two units in Riviera Beach, FL was shuttered and imploded (google it on YouTube to watch the red and white stacks fall to the ground).  And the giant Norwalk Power Station that can be seen from Ocean Avenue in Northport dominating the shore of Connecticut was shuttered in 2013.  Northport’s other sister plant, Bowline, located on the Hudson River, is for sale by its current owner.  The top bid reported in Power Magazine was $240M for the plant that is 3/4 the size of Northport.  And Bowline, like Riviera Beach, is an identical plant in terms of the same Combustion Engineering boiler and General Electric G-2 large steam turbine generator set constructed by EBASCo.

Today, Northport and Bowline are merely “peaking” plants designed to be used as standby reserves in case there’s a heat wave and more on-island generation is needed to meet peak demand.  But with new solar conversions and increasing appliance efficiencies, the peak load demand on Long Island’s hottest days is now falling every year.  So much so that a recent third-party study concluded that at least one Northport unit could be retired immediately with zero effect on the grid’s peak annual day.

Contrast these facts with the rhetoric of some elected officials.  Councilman Eugene Cook has suggested the Town float a bond issue to take the Northport plant by eminent domain for about $300M and run the facility.  Aside from the plant’s unknown environmental legacy that the Town would be absorbing and the interest payments to bondholders who would finance the purchase, how exactly could Northport compete in the energy marketplace?  The Town would have to sell the output as a merchant plant, and also incur the cost of hiring a third party company to run the facility.  Think of this business model.  This would be akin to purchasing a 1960’s era car with loan payments to compete in the commercial taxi industry.  Does it seem like a smart idea to use a 50 year old car that gets 12 miles per gallon with very high operating and maintenance costs to compete against a new car that get twice the mileage with few repairs?

To put this matter to rest, consider the actions taken by National Grid when LIPA declined to renew the PSA with Glenwood and Far Rockaway.  I worked at those stations, and knew them inside and out.  The technology was essentially identical to Northport.  Both plants were paid-off and owned outright by National Grid (no bonds).  And both did not require hiring an outside contractor to run them as they were run by in-house personnel.  And yet both were shuttered and bulldozed immediately by their owner rather than be used as merchant generators in the competitive energy marketplace.

The thought of the Town purchasing Northport as a competitive investment is absurd, and exposes a complete lack of understanding by Councilman Cook.  Equally ludicrous is his claim that the plant is actually under-assessed, and that the true value of Northport exceeds the $3.4 Billion value that is the market value basis of the current tax assessment on the plant.  To justify this statement, Cook has suggested that “other” infrastructure on the Northport site such as the Iroquois pipeline, FLAG data cable, and Northport-Norwalk cables make the site very valuable.  These “other” items are not owned by National Grid.  They are owned by other entities that were given easements.  They occupy space on the property as an easement for landfall access and in some cases provide fuel (Iroquois) or transmission options (LIPA Norwalk cables that are incidentally owned by LIPA).

The most outrageous claim made by Cook during a recent radio broadcast was that the plant has a replacement value of $10 Billion.  This figure was arrived at by the notion that the Northport plant was used in 2008 during the big northeast black-out to help restart the electric grid of NYC.  And the cost of a NYC Black-out going unresolved is $10 Billion.

By the same logic, if I own a Humvee, and during a Nor’easter the Eaton’s Neck ambulance is unable to get off the Neck, and I’m called to use my Humvee to transport a neighbor to Huntington Hospital saving his life, is the replacement value of my automobile now worth the net value of a life?  Millions, right ?

There should be little debate as to the market value of a 50+ year old steam generating station.  Every power plant in NYS and similar geographic suburban areas has been sold many times since deregulation.  The data is there, and the facts are the facts.  

The other reason cited by those who don’t want to settle is the notion that there’s a remaining legal argument that might work.  This notion has been floated by at least two lawyers who have teamed up with Councilman Cook.  They suggest that the tax certiori efforts of LIPA should have been reviewed and approved by the NYS Public Authorities Control Board (PACB).

The PACB was created during the NYC fiscal crisis in the early 1970’s, and after Robert Moses had ceased his powerful hold on a number of state authorities.  PACB was created to give the Governor, State Senate and Assembly approval authority over public authorities creating any indebtedness or putting state assets at risk with their project financing.  The Cook legal argument is that the current LIPA PSA and tax certiori are “projects” that should have had PACB approval.  There are several problems with this strategy.  A court would have to rule that the PSA and certiori fit the legal definition of a “project.”  Another problem is that Councilman Cook does not have legal standing to bring this challenge on behalf of PACB, and the current members of this state oversight board are appointed by the Governor and are silent on this issue declining to take any action.  Another problem is that the new PSA was actually a very transparent process in which LIPA signed a series of contracts for power generation at very competitive rates, and the NYS Comptroller’s Office was involved in oversight.  Lastly, the purpose of PACB oversight is to regulate spending by a state authority.  Yet the tax certiori itself is an action designed to save the authority money, as opposed to an action that costs the authority money or incurs a debt on the authority.

During the recent Zoom meeting of the Northport-East Northport School District where the School Board voted overwhelmingly to approve the settlement, the District’s attorney John Gross opined.  Choosing his words carefully so as to not insult the efforts of Councilman Cook, Mr. Gross basically said that the Cook PACB legal argument has a success rate approaching zero.

In conclusion, it is paramount that the Town Board approve this settlement at their September 3rd hearing.  Any notion that the Town should wait until the judge makes a determination in the certioi case is reckless.  Back taxes will be owed, and there is ample precedence that NYS will not step-in to bail-out communities that refuse to settle.  And the legislation passed by Sen. Jim Gaughran to remove the threat of back taxes has not been taken up in the Assembly.  I worked in Albany as a registered lobbyist for KeySpan for many years, and I assure you that the Speaker of the Assembly has zero interest in passing this legislation.  It’s obvious that the Governor does not support it.  And what does the Speaker gain by passing a piece of legislation that now forces the Governor to take a stand?  How does that benefit the Speaker to pass an innocuous piece of legislation outside his legislative caucus that fires a shot across Cuomo’s bow?  To help a suburban white democrat running for an open seat?  To help another mouth for the Speaker’s lopsided majority to feed?  This legislation is not going to happen.

Councilman Cook made a name for himself as a regular blue-collar guy who was successful in the construction business, and wanted to bring his hands-on experience to local government.  I worked very closely with him for several years when I was a Town Department Head.  Although his “talents” might be of value with heavy equipment purchases or repaving the golf course parking lot, he is completely out of his league on this issue.  His blind spot is relying on an odd cast of characters who have ideas of taking over the Northport Plant through eminent domain, or trying to convince a Court of Law that a tax certiori case meets the definition of a PACB project.  These cast of characters are writing his press releases and filing lawsuits with his name on them.  He is unable to articulate these arguments himself during radio broadcasts or at Town meetings.  Everyone has a particular talent in life, and dispensing legal advice in a complex tax certiori case is not his.

My sincere hope is that Councilman Cuthbertson and Smyth and Councilwoman Cergol will step-up to the plate and make the right decision.  Two are accomplished lawyers and the other a longtime experienced public servant.  They understand the stakes that are involved and should join with Supervisor Lupinacci to reject the simplistic “jonny-lunch-pail” arguments that are being dispensed by Councilman Cook.

As a local resident who pays over $35,000 on two residential properties, I am sick at the thought of my taxes going up.  I no longer have any connections to LIPA or the utility industry, but I have a keen understanding of the marketplace and an intimate nuts and bolts knowledge of the plant.  The Town of Huntington cannot wait until a decision is handed down by the court that exposes the true worth of an obsolete steam plant, and the back tax liability that accompanies it.

Ed Carr is a licensed marine engineer and small business owner, published author, lecturer, fire commissioner and retired Commander in the Naval Reserve.  He’s a former Chief Engineer, Lobbyist, local Civic Association President, Town Department Head and has served as a Director on numerous boards including Northport Historical Society and Vision Long Island.  He resides in Eaton’s Neck.

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