LIPA’s Only Real Option
Over time LIPA has wasted millions of dollars in ratepayer funds on consultants to study alternative structures while the answer to their needs is quite evident.
Basically the authority has 3 options: remain as it is now organized with some augmentation: become privatized: or transform itself into a full service municipal utility.
Obviously, with very high rates, recent news of millions of dollars in customer overcharges, and excessive and questionable storm repair costs, remaining as is becomes a very hard sell. The fact that almost all of the authority’s operations are carried out by National Grid under a Management Services Agreement (MSA) compounds this and also introduces the question of what does LIPA actually do. The present arrangement involves a management structure which is duplicative, inefficient and costly, and putting the MSA out for bid, as LIPA is now doing, would not change this.
Privatizing LIPA is also not an acceptable option. It would result in much higher rates for customers, possibly 20% or higher, because private utilities rely on taxable debt, which is more costly than LIPA tax exempt debt, pay income tax and generate a profit for stockholders. Usually a private utility trying to make this more feasible would propose significant cuts in operating costs, but with the utility workforce on LI already cut to the bone this is really not an option.
In the final analysis, municipalization, essentially a transformation into a community owned utility, is the only practical alternative for LIPA. It would involve abandoning the concept of the MSA and hiring the people who actually maintain and operate LI’s transmission and distribution system as LIPA employees. It would also require cleaning house at the authority and bringing aboard accountable leadership with public power experience and at the same time eliminating the whole layer of expensive profit based management established by the MSA. In the end LIPA would become more than a paper utility.
As a former municipal utility CEO and trustee of the American Public Power Association, I have seen first hand the benefits of public power. These benefits are derived from the ability of these nonprofits to utilize tax exempt debt and the customer ownership concept underlying the public power model. Most municipal utilities operate reliably, have high customer satisfaction ratings and are well-managed.
Reflecting on LIPA’s current situation, many successful municipal utilities also carry high levels of debt because as nonprofits they cannot rely on stockholders for capital. Surprisingly, they also make substantial payments in lieu of taxes, often qualifying them as the highest tax payer in an area. Yet public power utilities in general have the lowest rates in the country.
Also a plus for the municipal concept, is that public power can work well in a union environment. For example, the largest public utility in the US, Los Angeles Department of Water and Power, is unionized. Additionally, Memphis Light Water and Gas is staffed with IBEW personnel, and Nashville Electric Service hosts SEIU workers. Hopefully, this should comfort the many utility union workers on LI about the municipal concept.
As another concern, some on LI fear that municipalization would involve added costs for absorbing utility workers and their benefits, but this is not the case. Under the MSA as it is now structured, LIPA pays almost all of National Grid’s cost for employees who work on the electric system. Similarly, LIPA also makes payments for the infrastructure used in maintaining the transmission and distribution system. Municipalization, therefore, would not add a type of cost to LIPA bills not already included.
Finally, there is the question of regulatory oversight. In contrast to the current situation at LIPA, many municipal utilities in the country function under some form of regulatory oversight. There is no reason why pursuing the municipal option for LIPA should not allow for regulatory oversight. Presently, this is the case for other municipal utilities on LI like Freeport and Rockville Center.
During the next few months, in considering its structural alternatives and the potential award of another MSA, hopefully LIPA will give serious consideration to municipalization, it really is the only option.
Matthew Cordaro is Co-chair of the Suffolk Legislature’s LIPA Oversight Committee and a former public utility CEO, Trustee of the American Public Power Association, and Senior LILCO Executive.