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COUNTY OF SUFFOLK v. LONG ISLAND LIGHTING CO.

July 28, 1998

COUNTY OF SUFFOLK, a municipal, corporation, and ROBERT ALCORN, CHRISTOPHER S. GEORGE, FRED HARRISON, PETER MANISCALCO, WILLIAM F. QUINN, ROBERT HOFFMAN, SUSAN CHASE, YOLANDA OWENS, JAMES ROTH, MYRA BERKOFF and SANDRA ROSENBERG on behalf of themselves and other similarly situated, Plaintiffs, against LONG ISLAND LIGHTING COMPANY, et al., Defendants, and LONG ISLAND POWER AUTHORITY, et al., Intervenors.


The opinion of the court was delivered by: WEINSTEIN

MEMORANDUM AND ORDER

 WEINSTEIN, Senior District Judge :

 TABLE OF CONTENTS

 I. INTRODUCTION

 II. PROCEDURAL BACKGROUND

 III. RECENT INSTITUTIONAL CHANGES

 IV. CONSTITUTIONALITY OF PROPOSED MODIFICATIONS

 A. DUE PROCESS CLAUSE

 B. CONTRACT CLAUSE

 V. EQUITY

 VI. PROTECTION OF FUNDS PAYABLE

 VII. CITIZENS ADVISORY PANEL

 VIII. CONCLUSION

 I. INTRODUCTION

 The Long Island Lighting Company (LILCO) and the Long Island Power Authority (LIPA) have petitioned for a radical revision of LILCO's contractual and judicial obligations to pay electric ratepayers in Nassau, Suffolk and Rockaway, Queens, over $ 100,000,000 through rate reductions in 1998, 1999, and 2000. Instead of paying proportionally to the size of the electric bills, they propose to pay each ratepayer the same amount, reducing the payments due some ratepayers in order to increase payments to others. Instead of paying the full amount in monthly installments as reductions on electric bills, they seek to reduce the amount due by some $ 7,000,000 and to pay it in one lump sum by check. Instead of LILCO paying it, its partial successor, the MarketSpan Corporation, says it will pay the amounts due out of MarketSpan funds.

 For the reasons stated below, this petition must be denied. There is no warrant in fact or in law for the state or one of its agencies to take the property of some ratepayers and pay it to others; or to restructure the contractual and judicial decree obligations of LILCO and shift them to another entity in the way proposed.

 II. PROCEDURAL BACKGROUND

 This dispute involves a twenty four year old political and legal struggle over the provision of electric power to the residents of Long Island. The details of the story have been previously recounted. See, e.g., County of Suffolk v. Long Island Lighting Co., 685 F. Supp. 38 (E.D.N.Y. 1988); 710 F. Supp. 1387, 1405, 1407, 1422, 1428, 1477, 1485, 1487 (E.D.N.Y. 1989), aff'd as modified, 907 F.2d 1295 (2d Cir. 1990); 1995 WL 761828 (E.D.N.Y. Dec. 19, 1995). For the purposes of this decision, it is only necessary to provide an abbreviated account of the underlying litigation.

 At the center of the controversy stands the Long Island Lighting Company (LILCO), whose ill-fated efforts to construct the Shoreham nuclear power facility in Suffolk County resulted in a multi-billion dollar loss for the utility company. As a result of its successful petitions to the New York State Public Service Commission (PSC), LILCO began in 1974 to raise its electric rates in order to recoup its losses from the nuclear power fiasco.

 In March of 1987 the rate increases became the subject of Racketeer Influenced and Corrupt Organizations (RICO) litigation. It was alleged that LILCO and those associated with it had fraudulently obtained rate increases from the PSC by making deliberate misrepresentations to the Commission respecting Shoreham. After the claims were severed and a judgment was issued against one of the plaintiffs, Suffolk County, the remaining plaintiffs were certified as a class of over one million past, present and future ratepayers of LILCO pursuant to Rule 23 of the Federal Rules of Civil Procedure. In February of 1989 a settlement was reached between the class and LILCO. Following hearings conducted in Nassau, Suffolk and Kings counties with respect to its fairness, the court approved the settlement. See County of Suffolk v. Long Island Lighting Co., 710 F. Supp. 1428 (E.D.N.Y. 1989), aff'd, 907 F.2d 1295 (1990). A consent decree incorporated the settlement terms. See County of Suffolk v. Long Island Lighting Co., 710 F. Supp. 1487 (E.D.N.Y. 1989).

 Pursuant to the settlement and judgment, LILCO agreed to pay to the individual class plaintiffs a total of $ 390,000,000. All but $ 10,000,000 was to be paid in the form of credits on class members' electric charges. These payments were to be spread over the course of 10 years, commencing in December of 1990 and terminating in May of 2000. Payments were to be "in proportion to the electric rate payments that would otherwise have been made by each ratepayer." Stipulation of Partial Settlement of Rico Class Action and False Claims Action § 4e (February 27, 1989), reprinted in County of Suffolk v. Long Island Lighting Co., 710 F. Supp. 1428, 1456-57 (E.D.N.Y. 1989). In addition, LILCO provided a fund to reimburse the plaintiffs for legal fees and related costs. The plaintiffs also secured the establishment of a Citizens Advisory Panel (CAP) to assist and help protect Long Island's electric consumers.

 In return for LILCO's promises, the plaintiff class agreed to release all its rights to sue on those RICO claims "which were or might have been brought from the beginning of time up to the date [of the settlement]." Stipulation of Partial Settlement of Rico Class Action and False Claims Action §§ 1(rr), 17(d) (February 27, 1989), reprinted in County of Suffolk v. Long Island Lighting Co., 710 F. Supp. 1428, 1456, 1460-61 (E.D.N.Y. 1989).

 LILCO, along with its successor in delivering electric service to the ratepayers, LIPA, now petition for a "modification" of the settlement and decree. The use of the term "modification" denigrates the magnitude of the changes proposed. First, the applicants seek to accelerate the remaining approximately $ 110,000,000 of electric bill reductions, discounted at 6%, to a one time cash payback. Second, the applicants wish to substitute the per usage basis of repayment with a "per customer" basis; all current ratepaying entities or persons would receive the same amount of rebate regardless of the size of the ratepayer's electric usage and bills. Were the second provision approved, those members of the class who are to receive the greatest compensation under the settlement would be relegated to collecting only a fraction of what is due to them.

 The example of the modification's impact on the United States, one of the largest ratepayers on Long Island, is instructive. By virtue of its numerous facilities, the United States consumes a sizable amount of electric power. Under the terms of the settlement agreement, in which the United States played an active role by virtue of its status as plaintiff in a related case, United States ex rel. Dick v. Long Island Lighting Co., 710 F. Supp. 1485 (E.D.N.Y. 1989), the United States is entitled to receive a credit for approximately $ 441,000 of the remaining funds payable by LIPA-LILCO. Under the modifications proposed by the applicants, however, the United States would receive less than $ 17,000. See Letters from U.S. Dep't of Justice regarding County of Suffolk v. Long Island Lighting Co. (June 25, 1998), opposing modification of decree. Other large commercial and governmental users stand to lose similar sums of money if the proposed modifications are approved.

 Class counsel, all the named plaintiffs, and many ratepayers object to the proposed modifications. While Suffolk County objects, Nassau County and some of Nassau County's town officials support the proposals.

 III. RECENT INSTITUTIONAL CHANGES

 In order to appreciate the complicated relationship among LILCO, BL Holding Corp., LIPA, Brooklyn Union Gas Corp., and MarketSpan Corp., and the method of converting this private utility, LILCO, to partial public ownership, a brief summary of recent events is necessary. Some detailed aspects of the labyrinthian arrangements, including, for example, the merger of KeySpan (the parent holding company of Brooklyn Union Gas), are omitted for the sake of simplicity.

 The Long Island Power Authority was created as a state entity by legislation in 1986. See Long Island Power Authority Act, ch. 517, 1986 N.Y. Laws 1140 (codified as amended at N.Y. Pub. Auth. Law §§ 1020-1020-hh (McKinney 1994 & Supp. 1998). LIPA became a "corporate municipal instrumentality of the state . . . exercising essential governmental and public powers." N.Y. Pub. Auth. Law § 1020-c (McKinney 1994). It is controlled by fifteen trustees: nine are appointed by the governor, three by the president of the senate, and three by the speaker of the assembly. See N.Y. Pub. Auth. Law § 1020-d (McKinney Supp. 1998). The legislature's design was for LIPA to acquire LILCO. See N.Y. Pub. Auth. Law § 1020-h (McKinney 1994).

 In 1997 LILCO began a corporate transformation which ultimately resulted in its acquisition by LIPA. The conversion began with the shareholders of LILCO exchanging their shares of LILCO for 68% percent of the shares of another corporate entity, BL Holding Corp. (BL). Brooklyn Union Gas Corporation shareholders assumed ownership of the other 32% of BL. As a result of this transaction, BL became the sole shareholder of LILCO. BL then created and gave to its wholly owned subsidiary, MarketSpan, all of LILCO's natural gas ...


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