January 2004

New York State Public Service Commission to Conduct Hearing on Village Electric Rates: NYSPSC and Village Negotiated Preliminary Settlement for Rates to Fund Power Plant #2 Generation Project, Support Increased Utility Operating Costs and Stabilize Long-term Rates, With Future PP2 Revenues to Offset Bond Costs, Projected Utility Rates Remain Lower Than LIPA

(Freeport, New York, January 5, 2004) - The New York State Public Service Commission will conduct a hearing on Wednesday January 7, 2004 regarding a preliminary settlement negotiated with the Village of Freeport to phase in new electric rates over a two-year period beginning in mid-year 2004. This rate increase, initiated by the Village in April of last year, is driven by several factors, primarily funding the new Power Plant 2 generation project which is nearing completion, and supporting the rising routine operating costs of the Utility. Revenues from sale of electricity to other than Freeport Electric customers will be returned to the Village ratepayers in an innovative rate plan.

The Power Plant 2 combustion turbine project has been advancing through construction, with major components including the foundations, turbine generators, emission controls (SCR) and the stacks installed. The Village is required to begin payments on the $51 million project bonds this month, with the first payment now estimated at $1 million.

Concurrent with the new rate structure, Freeport introduces a unique and innovative profit sharing concept into ratemaking. The new Power Plant 2 generation project is projected to begin commercial operations by April 1, 2004. Under the proposed rate settlement, the Village ratepayers will share in all profits made from the sale of energy to the wholesale energy market. At the end of each year the Utility will calculate the profits made from "off-system" sales. The Utility will then apply credit to each customer's monthly bill in the following year in the form of a reduction to the fuel adjustment. This rate adjustment strategy is an extension of the current Utility practice, which applies LIPA capacity payments to pay down the debt on the new PP2 unit. The sale of energy should help minimize the cost of energy and keep Village rates competitive with other utilities.

To further mitigate the effect of the proposed rate increase, the terms negotiated by the Village and Public Service Commission (NYPSC) will allow the Electric Utility to utilize monies it received from the settlement of an old NYPA hydroelectric case involving incorrect billing to mitigate the rate increase. That case netted the Village approximately $3.8 million. The NYPSC concurred in negotiations to allow approximately $2.0 million of the NYPA settlement to be applied to offset the first year of the proposed rate increase. The preliminary settlement, which will be subject to the Wednesday hearing, involves a proposed first year rate increase of 11.4%. That increase will rise an additional 11.4% in the second year for a total rate increase of 24.2 %.

The increased expenses associated with the new Power Plant 2 project are inevitable, commented Hubert Bianco, Superintendent of Electric Utilities. "Not only is the new combustion turbine generation project at Power Plant 2 needed to keep our energy system in working order for our residential and commercial customers and to meet the still-growing energy demand," explains Mr. Bianco, "the New York State Department of Environmental Conservation has issued an order requiring closure of the existing Power Plant 2 diesel units by the end of this month, regardless of the start date of the new combustion turbine."

"Further, the new Power Plant 2 generation project development costs are above and beyond current operational maintenance of existing facilities," continued Bianco. "Therefore, the development costs can't be absorbed by the current rate structure, and these new costs to repay the bonds have to be built into the next rate structure. The estimated cost to complete the new combustion turbine project is $60,000,000."

In addition to the cost associated with the new generation unit, significant regulatory changes over the past several years have added to the operational expenses of the Utility. The 1999 implementation of the New York Independent System Operator (NYISO) resulted in increased costs due to higher energy purchase costs. Adding to the financial demands is deregulation, which was originally intended by federal initiatives to increase competition and reduce energy costs. In fact, deregulation has resulted in significant increases in wholesale energy prices. Wholesale energy market prices have increased the cost of electricity purchased by the Village by 30% since 1998.

A main source of energy purchased by the Village is hydroelectric power supplied by the New York Power Authority (NYPA). NYPA itself has approved a 40% rate increase phased in over three years. The first year of the NYPA increase took effect May 1, 2003. Phase one of the NYPA rate increase has been folded into the Village's bills as a passed-through expense beginning in the second quarter of 2003. The Village's contract with NYPA was also extended as part of a global settlement, which included the rate increase, with all Municipal Utilities in the State, and now expires in 2025. The future terms, costs and availability of this energy are not known at this time. Therefore, the Village seeks to establish a rate structure now to create better revenue flow and stabilize long term rates.

"Freeport Electric is proud of its century-long history of providing the most reliable and cost-effective electric service possible to its residents and business," stated Mr. Bianco. "We are trying everything we can to hold rates down. We have tried to identify innovative ways to reduce our independent system operator costs, our energy costs, and we have aggressively negotiated contracts to get reduced costs for additional capacity."

"The municipal electric system, in providing this cost effective and reliable power has played a very significant role in the economic growth and stability of the Village," added Mr. Bianco. "Low cost electricity is a strong asset for businesses locating in the Village's industrial park, as demonstrated by low vacancy rates. Stable business operation of the Utility, and continued favorable electric rates are critical components of the continued health of the Village economy."

The Utility was last granted a rate increase of 7.1% in February 2002, under the terms of a negotiated settlement answering the 2001 filing. That increase addressed immediate financial requirements of the Utility, which had developed over the six years since the preceding filing in 1995. The rate petition prior to that was filed in 1986.