The LIPA restructuring analysis conducted by the Brattle Group only considered the economic impact of options in terms of transmission and distribution costs, which represent only 15% of the utility’s total operating costs. On this basis they concluded that privatization was uneconomical, but that municipalization and the servco model were about equivalent from a cost standpoint. Under the municipalization structure, all employees would work for LIPA in contrast to the servco model where operating personnel would work for a profit based subsidiary very similar to how LIPA now functions.
A very important economic factor overlooked by this approach, however, is what impact each of these options would have on fuel and power purchase costs which comprise around 50% of LIPA’s costs. When this is taken into account, municipalization emerges as the option with the most economic upside for ratepayers by transforming LIPA’s existing structure into one with an enhanced professional management base better able to perform. On the other hand, under the servco option, nothing would change with respect to LIPA’s existing management structure, and so it would be business as usual when it comes to making decisions affecting the largest component of LIPA’s costs.
With LIPA poised to make decisions about 2500 MW of new electric capacity in the near future, the most significant economic impact of restructuring alternatives for LIPA has not been dealt with directly in the Brattle Group’s analysis. It may be that the tried and true nature of the municipalzation model may not be its most notable advantage over the first of a kind, experimental servco option after all, but economics as well.