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LIPA staff recommends 4,000 MW purchase from Keyspan

By the OGJ Online Staff

HOUSTON, Jan. 3, 2002 — The Long Island Power Authority staff recommended LIPA exercise an option to buy 4,000 MW of generating capacity from Keyspan Corp.

The LIPA board is expected to conduct public hearings on whether to buy the KeySpan generation in January and make a decision in February. The facilities had previously been owned by LILCO.

In May 1998, LIPA purchased LILCO’s electric retail business, including the electric transmission and distribution system. At the same time, Brooklyn Union merged with LILCO to form KeySpan Energy and retained LILCO’s natural gas business and electric generation facilities.

Under the deal, LIPA has to make a decision to buy the five base load plants and 42 gas turbines and diesel peaking units before May 27. The acquisition price would be determined through negotiation by investment bankers hired by LIPA and Keyspan. The deal would have to close within 90 days of the determination of the price.

“Over the last 14 months, we’ve undertaken an extensive review of our right to purchase KeySpan’s generation,” said LIPA Chairman Richard M. Kessel.

He said a 14-month evaluation indicated it made sense to buy the plants, if LIPA hopes to give Long Island’s electric consumers rate reductions, in addition to the 20% island-wide rate cuts implemented more than 3 years ago.

The LIPA staff study recommending the board authorize purchase of the KeySpan’s generation assets found that:

— Operating the generation facilities under LIPA ownership could be cheaper due to LIPA’s lower cost of capital and the avoidance of federal income taxes.

— LIPA would be able to make all decisions regarding operations and investments in the generation units. It would control unit retirements and expansion, potential repowering, and make more effective use of generation sites.

— Repowering opportunities can be analyzed and implemented at LIPA’s cost of capital, which is cheaper than private financing mechanisms.

— LIPA will competitively bid the services of the generation manager, which could result in more favorable terms for LIPA’s ratepayers.

— LIPA could more directly influence the course of competition on Long Island.

The purchase is also subject to the state Public Authorities Control Board approval.

Separately, the LIPA board approved a $331.8 million capital budget, up 37% from 2001. LIPA said the higher spending level this year reflects the required interconnections and other system improvements needed to bring generation on line this summer.

The new, on-island generation projects are needed to help meet the region’s growing electric demand. LIPA said interconnection costs this year will total $115 million.

LIPA forecasted it will spend approximately $1.02 billion for fuel and purchased power, up about $78 million over 2001. Electric sales for 2002 are forecasted at 18.8 million Mr-hr, a 2% rise over 2001’s budgeted level.

Sales in the commercial and industrial market are expected to grow 2.4% over 2001, LIPA said. Residential sales are expected to increase by 1%. Revenues are budgeted at $2.4 billion.