Bias in LIPA Restructuring Study

Published in the July 28th Long Island Business News

By Matthew Cordaro

After about a year, the results of the Long Island Power Authority’s restructuring study by the Brattle Group are in. As expected, the economics of privatizing the utility are prohibitive and it is not a practical alternative. Amazingly, the analysis of the other two alternatives – full-scale municipalization, in which LIPA directly employs all workers, and the servco model, in which the contract is with a subsidiary, similar to how the utility now operates – comes out in a dead heat.

The LIPA board of trustees has done a creditable job of overseeing the Brattle Group throughout the conduct of the study, while attempting to minimize the impact of any inherent conflicts of interest or outside influence. Nevertheless, the potential bias of staff towards the servco model and its effects on the study cannot be disregarded. Whether conscious or not, the understandable desire to keep one’s job represents a conflict and had to have some influence in the many interactions staff has had on the study with the consultants, the board, the governor’s office and other state officials.

In my view, the role of staff may explain why the risks of the municipalization alternative have been inflated to some degree in the study. One of those risks, higher personnel cost, is in disagreement with an analysis done by the Suffolk County LIPA Oversight Committee and other studies which show a 5 to 10 percent savings in employment. Another, high information technology transition costs, would in reality be the same as for the servco option, and, therefore, is not an issue.

On the other hand, the LIPA study does not do enough to emphasize the significant risks with the servco structure. Being very similar to how the authority now operates, it entails a profit-making entity whose major interest is in making money. This raises control issues that can only be addressed by putting in place demanding metrics for performance. The problem with this, as evidenced by LIPA’s recent experience with National Grid, is that before long, the contractor learns how to work around the system and undermine the utility’s ability to control. This kind of structure also requires extensive resources to oversee the contactor’s operations, and carried to extremes, involves almost the same number of people monitoring and observing as those actually working. Obviously this is duplication of effort, wasteful and inefficient.

Yet with all of this, the Brattle Group in the final analysis of the two options, municipalization and servco, finds them more or less economically equivalent. LIPA also maintains that even after adjusting for distortions of risk to improve the economics of municipalization, the two options are still close in terms of dollars and cents. If this is the case and the decision is not black and white, then the LIPA board will have to choose a structure essentially based on public acceptability and politics.

The only other temptation for the LIPA board is to take the easy way out by choosing the servco approach on the notion they could always reverse direction and go to a municipal structure if it does not work out. It is obvious that the current mode of operation similar to servco has not worked. With the few changes proposed in the servco model, it is still doubtful it would be successful. LIPA at this stage, with all of its problems, cannot afford to gamble with ratepayer money and risk a costly change in direction down the road.
It comes down to a choice between the tried-and-true municipal model versus the first of a kind, experimental servco structure. It also comes down to establishing clear accountability once and for all, with no more question of who is responsible for what at LIPA. In all probability, most on Long Island would prefer the municipal model for a change. At least this is what the results of a poll being conducted by the Suffolk LIPA Oversight Committee are telling us.

Dr. 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.


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
This entry was posted in brattle, lipa, long island power authority, municipalization, municpal, Oversight, privatization, Public Authority, servco. Bookmark the permalink.

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