BACKGROUND OF LIPA Op-ed


We face many complex issues relating to the Long Island Power Authority (LIPA).  The average ratepayer cannot and should not be required to master the details of utility
economics in order to receive affordable and reliable electric service.  Still, we need to recognize that the world has changed and, in our own defense, we need a greater understanding of how utilities provide the energy we use, and how utility charges are billed.

Public testimony before the Suffolk County Legislature’s LIPA Oversight Committee on Monday, June 13th suggests that there is considerable confusion amongst Long Island’s electric ratepayers at the most fundamental level – who is providing them with electric service (?).  The following is an attempt to clarify some of the “identity” confusion between LIPA and National Grid.  This brief summary also highlights some of the arrangements resulting in the current utility operations providing electric and natural gas service to Long Island energy consumers, and issues we face moving forward.
Long Island’s Electric and Natural GasUtilities (Effective May 1998):

The Long Island Power Authority (LIPA) assumed ownership of the electric transmission and distribution systems formerly owned by the Long Island Lighting Company (LILCO) in May of 1998.  The transaction transformed what was an investor owned (for profit) electric utility into a New York State Public Authority (not-for-profit) and was primarily driven to reduce electric rates on Long Island (by 20%).  In May of 1998 LIPA’s debt was approximately $7 billion (including the cost of LILCO assets and debt associated with the Shoreham nuclear power plant).

In a “companion” transaction, the balance of LILCO holdings, including employees, were joined with KeySpan (now National Grid).  The holding company that resulted included two (2) regulated natural gas utilities (the former Brooklyn Union Gas Company, and the former natural gas division of LILCO).  The holding company also included several unregulated subsidiaries that entered into special long-term contracts with LIPA.  The two most significant contracts included:

  • Power Supply Agreement (PSA)  this agreement provides a “cost plus” supply of electricity from the “lightly regulated” fleet of power plants formerly owned by LILCO.  This arrangement provides payments to KeySpan (now National Grid) for both electricity generated and also for power plant capacity, even when the plants are not in operation.  LIPA ratepayers also pay the property taxes
    incurred by these investor owned plants, and for maintenance and upgrades
    implemented at the plants.  (NOTE:  LIPA also purchases power from other power generators based on special contracts and/or “market prices” that are set on a daily basis.)
  • Management Services Agreement (MSA) under this agreement the former LILCO employees that were dedicated to electric system operations continue to provide that service under contract to LIPA.  In addition, KeySpan (now National Grid)
    employees provide billing, customer relations, and other services on LIPA’s behalf.

LIPA Has Focused on the Near-term at the Expense of the Long-term Perspective:

After the May 1998 transaction, and primarily as a consequence of LIPA’s “tax exempt” status, Long Island electric rates were reduced by approximately 16%.  Using proceeds resulting from a lawsuit against Suffolk County relating to taxes levied on the Shoreham nuclear power plant, and other funds, LIPA further “bought-down” electric rates to fulfill its projected 20% rate reduction.  While LIPA was able to “deliver” a rate reduction in the short-term, it maintained the “perception” of lower rates at the expense of long-term debt burden.  A striking example of LIPA’s near-term obsession is the bonding of excess fuel
and purchased power costs that LIPA ratepayers are still paying for, with interest.  This is atypical of regulated utility practices, which require such costs to be passed through to ratepayers within thirty to ninety days.

  • While an initial LIPA goal was to retire much of its debt by 2013, after more than thirteen years of operation LIPA has publically stated that its debt remains at approximately $7 billion.

Issues to Address Moving Forward:

  • Special Contracts:  The Power Supply Agreement (PSA) and the Management Services Agreement (MSA) are worth billions to the Long Island economy. Both the PSA and the MSA expire in May of 2013 – and the Management Services Agreement is so complex that there is a built-in transition period of two (2) years.  LIPA is currently evaluating responses to a public bid for a successor MSA, but this is the first time the agreement has been put out to bid. Unlike other “municipal” utilities, LIPA is paying a subcontractor to operate and maintain its systems. If LIPA is transformed into a fully municipal utility – or – transformed back into an investor owned utility, it would no longer need an MSA.
  • Governance (Board of Directors): Safe, reliable, and affordable electric service is
    vital to our local economy.  If LIPA were returned to an investor owned utility the Board of Directors would be comprised of major stockholders.  As a not-for-profit public authority the Board of Directors has been comprised of political appointees.  The questions at hand are whether LIPA’s existing “appointed” Board of Directors adequately balances best utility practices and ratepayer interests, or would ratepayers be better served by an elected board answerable to an electorate, or would a paid professional board be best suited to balance near term public sentiment with long-term best practices?
  • Can we afford more of the same?  Energy efficiency is the best way to reduce
    the need for new power supply, and eliminate the need for old power generators,
    however during its first ten years LIPA spent approximately $360 million ratepayer dollars on energy efficiency and renewable energy programs that were at best marginally effective – with no actual measurement and verification of energy savings.Over the next ten years LIPA plans to spend approximately $1 billion ratepayer dollars on energy efficiency and renewable energy programs – with no actual measurement and verification of energy savings.
  • Traditional Utility Focus is on Revenues: Utilities have an inherent conflict of interest when it comes to promoting energy efficiency. Acknowledging the dilemma, the New York State Public Service Commission has adopted a “decoupling” mechanism whereby utilities can recover “lost revenues” attributable to energy efficiency gains.

Measurement and Verification of Efficiency Gains: A significant problem with utility sponsored energy efficiency programs, and the decoupling mechanism, is that neither trulyrelies on actual measurement and verification of energy use reductions.
Absent actual measurement, utilities typically rely on approved calculation methods to “approximate” efficiency gains. A striking example of “What we measure is what we get” is found in LIPA’s modification to its own energy efficiency programs, shifting from “energy use reduction” to “demand reduction”:

  • Electric meters measure kilowatt hours.  A kilowatt hour (kWh) is a measure of electricity used over time (i.e. over an hour). 

Many commercial properties are equipped with a “Demand Meter” that captures the peak fifteen minute interval during a billing cycle.  Demand (kW) is a measure of instantaneous electricity use (i.e. when electric appliances are turned on). By focusing on “demand” rather than measuring something that is less measurable, LIPA can claim efficiency gains that cannot be independently verified.  This also perpetuates a disconnect between ratepayers and their energy use which makes it more difficult to change the culture of energy use.

Ultimately, efficiency gains that cannot be measured and verified cannot be counted on to offset the need for new power supply.
The Cost of Electricity: The lack of transparency by LIPA has resulted in uncertainty as to whether we are charged “appropriately” for the cost of electric service.  This is especially so
in light of the recent revelations relating to erroneous charges attributed to storm response, line loss, and even simple billing mistakes.  All ratepayers are sensitive to the cost of electricity but, unfettered by obligations to shareholders, LIPA ratepayers should expect that their public authority is providing the lowest cost – that legitimately covers all expenses.

Based the level of debt that LIPA holds (only one of many influences on the cost of electricity), we should not expect utility rates to drop significantly as a consequence of organizational changes.  In fact, we should wonder if electric rates will inevitably increase.

In the case of LIPA debt there is a “double trap” for ratepayers. First, if LIPA is still carrying the same level of debt as when it started can we ever hope to be free of its influence on the cost we pay for electricity? Second, if LIPA is adding to future indebtedness in order to keep current rates “artificially low” then LIPA is communicating
that energy is cheaper than it really is and they are encouraging us to consume more. When spikes in the cost of energy occur consumers naturally conserve.  If consumers are “insulated” from price spikes, consumers do not tend to conserve.

During LIPA’s tenure Long Island ratepayers have set several record peak demand levels – the most recent during a severe economic downturn.  Without accurate price feedback, ratepayers will keep consuming at growing rates of demand, which in turn requires more investment in power supply that can only be satisfied by incurring more debt.

In conclusion what is desperately needed from LIPA is an accounting of what the true and total cost of energy is, and what ratepayers should legitimately pay per kilowatt hour. We then need LIPA to act responsibly to reconcile ratepayer bills to reflect that cost and for LIPA to live within the means we can afford.

Joseph Schroeder , LIPA Oversight Committee

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