LIPA’s Operations and Management
New York State Public March 8, 2012
Dr. Matthew Cordaro, Co-chairman
LIPA Oversight Committee, Suffolk County Legislature
Just prior to the start of 2011 the Suffolk County Legislature established the LIPA Oversight Committee to study and analyze the rates, contracts, and practices of LIPA to determine if LIPA is working in the best interest of Suffolk County ratepayers. With over a year having gone by since its formation, the LIPA Oversight Committee has just produced a report detailing its efforts during 2011, which I would like to discuss with you here today.
The 192 page report is scheduled to be presented in its entirety to a full meeting of the Suffolk County Legislature on March 13, 2012. My plan today at this hearing, however, is to present a glimpse of its findings in very brief terms to accommodate time constraints and as a courtesy to others wishing to speak. The full report will nevertheless be provided for the record.
The Findings and Recommendations section of the LIPA Oversight Committee report serves as an executive summary of its contents. It is organized to present results under 8 major categories, each of which I will now go through and highlight a few findings.
Under Organization and Structure, it was immediately apparent to the Committee from LIPA’s problems with rates, overcharges, accounting difficulties, storm repairs, poor customer satisfaction, and coordination with National Grid, its major contractor, that structural change in its organization was needed. In fact the LIPA Board came to the same conclusion and commissioned studies to explore alternatives.
The unfortunate outcome of the Board’s efforts, however, was to choose a new structure very similar to what now exists at the utility despite its questionable history. To the contrary, the LIPA Oversight Board, based on a review of LIPA’s studies, some with inherent contradictions, and other fragments of information, concluded that full municipalization would be a more cost effective alternative and represent less of a transitional risk. In arriving at this conclusion the Committee observed that the LIPA model is not used at any other public utility in the US, whereas most of those utilities successfully rely on a full service municipal structure.
For the Governance and Regulatory Oversight category, the LIPA Oversight Committee found that the LIPA Board should be reinstituted as possibly an elected board or one with a combination of elected and appointed professional members. Also, that LIPA should be subject to regulatory oversight. The recent compromise legislation for an audit process which is the reason for this hearing is a good start. Nevertheless, in the long run the Committee believes full regulatory oversight will be necessary.
The next category is Customer Satisfaction. Here, as measured in J D Power and other surveys, the Oversight Committee noted very poor customer satisfaction ratings for LIPA. The most important reasons for this appear to be a lack of transparency on information that should be made available to ratepayers and a deficient process for resolving customer complaints.
In the category of Rates and Financial Performance, the Committee observed many factors contributing to LIPA charging one of the highest rates in the nation. Among these, LIPA’s true debt obligation is in excess of $10 billion, its financial health is impacted by poor liquidity and tight cash, and it totally relies on contracts with private developers for constructing major projects. The utility also pays high taxes and depends on expensive fossil fuels, excessive peaking capacity and long term power supply contracts. In addition, other costs having a rate impact include expenditures on efficiency and renewable programs, the services of a for profit contractor to operate the electric system and storm repairs.
Also having a financial impact is LIPA’s budgeting and accounting difficulties that have resulted in significant customer overcharges. Many times, in attempts to stay within budget and pay the bills, LIPA has relied on accounting manipulations and cash from borrowed funds. Billing errors are yet another problem for LIPA and the utility has been slow to deal with it.
Moving on, in the Reliability and Storm category, the Oversight Committee noted that for serious storms LIPA departs from standard utility practice by prematurely bringing in outside crews. In the case of Hurricane Earl that just brushed LI, this resulted in $33 million of unnecessary expense. Also, the Committee’s review of a number of storm invoices revealed questionable charges and statistics. This raises concerns about LIPA’s oversight of its major contractor, as well as the validity of certain reliability measures and overall system integrity.
For the category of Management Practices, the Committee found that LIPA’s general lack of transparency was a major factor. This is reflected in its reluctance to release information supporting decisions or explaining what prompts certain deadlines. Some of LIPA’s actions also give the impression that they are politically influenced. In addition to concerns about short sighted budgeting decisions, the Committee questions LIPA’s handling of the restructuring process, where among other things the impact of a $600 million underfunded pension liability was disregarded.
In evaluating the Energy Efficiency and Renewables category, the Committee developed concerns about how LIPA changed the way it calculates energy savings shortly into the program, and the manner in which the success of the program would be evaluated. Concerns also arose over the incentive of net metering to encourage overbuilding, especially when efficiency improvements are not required prior to the installation of solar systems. It was also observed by the Committee that certain solar projects were not being installed with an optimized orientation.
The final category deals with the Shoreham Settlement Agreement and Surcharge which was put in place to address the historical over assessment of the Shoreham Plant. Very simply, the Committee is critical of LIPA’s administration of this agreement. In fact litigation is now pending on the issue. The bottom line is that the Committee joins with Suffolk County in contending that LIPA owes the County $26 million in damages.
To conclude, it is obvious that LIPA’s problems are quite complex and for that reason the LIPA Oversight Committee had recommended in the past a full management audit of the utility. We are quite pleased that such an audit is now being initiated and offer to support it in any way we can.
Thank you for this opportunity and that concludes my statement.