Senate Energy and Telecommunications Committee – New York State Legislature – April 7, 2011


Testimony

Dr. Matthew C. Cordaro

Senate Energy and Telecommunications Committee

New York State Legislature

April 7, 2011

My name is Dr. Matthew Cordaro and I appreciate this opportunity to address the committee. Although I am currently Co-Chair of the Suffolk County Legislature LIPA Oversight Committee, I am presenting this testimony on the basis of my 40 years of personal experience as a senior executive and chief executive officer of 3 major utilities, a trustee of the American Public Power Association and a participant in many utility industry associations. For your information, I have attached a one page biography to this testimony.

Operating a retail utility is indeed a challenge but with recent revelations about customer overcharges and excessive storm repair costs, it appears that the Long Island Power Authority (LIPA) needs some urgent attention.

On January 27th, with little or no discussion, the LIPA Board quietly accepted an accounting change to correct a practice of over collecting from customers a charge for “lost and unbilled energy”. The balance of these charges had reached $231 million and the Board in its discretion decided to refund about one half to customers over a 3 year period.

LIPA explained the overcharge by claiming it was following a formula or procedure for estimating “lost and unbilled energy” going back to LILCO days. After spending $2.5 billion of ratepayer money on upgrading the transmission and distribution system, and naturally assuming some benefit from it, how could LIPA ever expect that system loses could be accounted for in the same way it was for the LILCO system. The curious thing though, I cannot recall any instance where LILCO encountered similar problems with overcharges. Perhaps this was because LILCO was regulated by the PSC.

Although refunding just one half of the overcharge gradually overtime is disturbing, what is even more unsettling is that in reality LIPA’s finances are in such bad shape, it appears the authority would have to borrow money to improve upon this. The obvious question remains what actually happened to the $231 million it over collected, or for that matter the $136 million it over collected for fuel costs last year, reported just recently in its 2010 financial report. Common sense would suggest that out of the almost $400 million in consumer over payments LIPA has on its books, it could do better in the amount it plans to refund to customers.

In any case the whole incident raises a red flag about LIPA’s accounting procedures and suggests other problems that may be lurking in the shadows. For example in the early 2000’s, LIPA claimed to customers it would absorb some of the runaway fuel costs at the time and not charge for them. What it did not communicate, however, was that it was going to borrow $360 million to do this and in effect set customers up to eventually pay those costs with interest. Ironically a portion of the $231 million in overcharges is being used to pay off some of the fuel cost debt.

Another area where LIPA needs some help is in dealing with major storms. At the end of this last summer in preparation for Hurricane Earl forecasted to graze Long Island’s east end, LIPA prematurely decided to launch a full scale emergency mobilization well in advance of the storm, importing many foreign utility and contractor personnel from off of Long Island. The good news is that the storm essentially by-passed Long Island creating little damage. The bad news, however, is that LIPA’s ratepayers were saddled with an approximate $33 million bill for storm preparations, a number still in question that may actually be higher.

Based on my 40 plus years of experience in confronting major storms for utilities here and in other parts of the country, I believe that LIPA made a serious error in departing from standard utility practice by staffing –up and committing resources too far in advance. When a hurricane actually strikes it produces devastation and could result in electric service disruptions lasting weeks. Among the first steps taken in reacting to the situation is to clear away debris for access and then survey the outages to develop a plan of attack. In parallel, efforts are immediately initiated to restore critical facilities such as hospitals and police stations.

Because of how this unfolds, it is actually very difficult in the first 2 days following a storm to employ significant numbers of repairmen in the field productively. In fact in this phase of storm restoration having too many people around actually interferes with progress. This is why most utilities for this type of an event will schedule foreign crews to start arriving after the storm strikes so they can be efficiently factored into the restoration process and also called off if the level of damage does not justify their use. In the case of Hurricane Earl in the Mid-Atlantic region, this is precisely the approach Progress Energy took even though that area was one of the few in the continental US forecasted for a direct hit.

To be fair, a committee of LIPA trustees has investigated the utility’s actions regarding Earl and has made some reasonable recommendations for improvement as a first step. However, there are still some nagging concerns with respect to the charges LIPA incurred for the storm.

On the basis of some partial cost information acquired from LIPA through a FOIL request, a number of questionable issues have become apparent. First, it seems that many charges were made to the storm account days after it had passed. Next, in the list of personnel charges, costs for bonuses were included. There were also excessive charges for warehousing which would normally be available to LIPA. Very troubling, there were costs recorded for materials and equipment going out but not accounted for  coming back when not used. Finally, the pay rates for individual personnel were much higher than they normally are. Even more can be said but at this point it is reasonable to question even just this partial information on the costs for a storm that never happened where in fact bonuses were actually paid.

Because of time limitations, I have focused on just a few LIPA concerns so far in this testimony, even though I have many. The important question, of course, for this committee is how to deal with the issues emerging from its review of LIPA, and in this respect I have two observations.

As a first priority, and in view of the almost out of control issues that have developed concerning LIPA, a comprehensive and independent management audit must be conducted. This audit would examine not only LIPA’s financial statements but all of its policies and procedures as well. For example, it would investigate the charges for Hurricane Earl and determine whether record keeping errors there are more pervasive and actually affect the validity of all of the authority’s reliability numbers.

Such an audit is not unprecedented. In the past, the PSC has conducted full management audits of the private utilities on a routine basis. Generally the audit is paid for by the utility and independently managed. To ensure independence in the case of LIPA, possibly the Suffolk Legislature’s newly established LIPA Oversight Committee could have some involvement. However organized, the firm conducting the audit must report to a neutral party and not LIPA.

Far from punitive, the results of such audits are generally reassuring to the public and very helpful to the utility in improving its operations. As such the benefits of a comprehensive audit to both LIPA and its customers would more than justify its costs.

Finally, and perhaps most important, the current state of affairs at LIPA desperately calls for regulatory oversight of the utility. In the past, LIPA has ferociously resisted this, claiming it would have a negative impact on its financial ratings. Yet, many public utilities in the country just like LIPA are subject to some form of regulatory oversight and actually have higher bond ratings. Right here on Long Island the public utilities in Freeport, Rockville Center and Greenport are regulated by the NYSPSC and appear to function quite well.

It should not be overlooked that when LIPA was first established, the financial community completely supported its issuance of billions in debt for the merger, knowing fully at the time that there was a provision in place requiring LIPA to have any rate increase greater than 2.5% approved by the PSC. Now, the authority has been skillfully able to side-step this requirement over the years, but, nevertheless, the financial community was aware of it and had accepted it in developing LIPA’s financial ratings.

Even accepting LIPA’s fear and assuming the utility’s financial ratings are affected somewhat, the benefits of oversight would still probably far exceed any of the costs involved. You only have to look as far as the $231 million overcharge and how it may have been possibly avoided through oversight to appreciate what positive results regulation could produce.

In my opinion, it is vital that the NYS Legislature adopt a law requiring the Long Island Power Authority to be subject to PSC regulation.

That concludes my testimony and thank you again for the opportunity to present it.

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About lipaoversight

LIPA Oversight Committee was created to analyze the rates and practices to determine if it is working in the best interests of the Suffolk County ratepayers
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