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LIPA is a response to the problems of private investment, better known as LILCO.

Fitch believes the suggested privatization of Long Island Power Authority (LIPA) could be extremely expensive and may not result in the ratepayer benefits projected. Yesterday, the Moreland Commission recommended privatizing the utility and increasing state oversight and fines that all state utilities would pay if they are found to perform poorly. The commission was created by the Governor of New York after Hurricane Sandy to investigate the storm response, preparedness, and emergency management by New York's power utility companies.

In our view, the primary challenge to privatizing LIPA remains mitigating the higher cost of capital that would likely result from refinancing or defeasing the utility's more than $6.8 billion of outstanding debt and addressing the authority's other obligations. LIPA's high debt burden and nominally high electric rates remain a key credit concern. Debt to funds available for debt service was 19.0x for fiscal 2011, compared to Fitch's rating category median of 8.1x.

Although some reduction in operating costs may be attainable under privatization, other initiatives, including reductions in property tax payments (or payments in lieu of taxes) are likely to be politically unpopular. Fitch therefore believes that total cost reductions would be more than offset by higher capital costs of new debt and equity associated with privatization, absent some broader plan to reduce LIPA's debt burden. While it serves mainly residential customers in some of the wealthiest counties in the country, the current political environment seems unlikely to support privatization-driven rate increases.

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