Long Island Business News
Cordaro: Structure is cause of LIPA’s problems
Published: November 29th, 2012
In reaction to its dismal Hurricane Sandy performance, the Long Island Power Authority is facing scrutiny from the public and every level of government. So how did it get here and how can it best be fixed?
Formed in 1995 by an act of the state Legislature, LIPA’s original mission was to oversee the abandonment of the Shoreham nuclear plant and consider the takeover of the Long Island Lighting Co.
By 1998 LIPA had moved to dismantle Shoreham and acquire LILCO’s assets. This established New York state as the owner of a fully operating electric utility managed through an odd structure in which an outside private contractor actually operated the utility and power was purchased from existing power plants on Long Island.
Keyspan, through a contract with LIPA, became the first operator of the utility. These days, LIPA’s transmission and distribution management is conducted via a contract with National Grid, which acquired KeySpan. This contract will expire at the end of 2013, and the system is scheduled to then be run by Public Service Electric and Gas of New Jersey.
LIPA is also under a 15-year contract to purchase electricity from the National Grid-owned electric plants that were acquired from KeySpan. LIPA for reliability purposes is required to have nearly all of its power generated from facilities on Long Island. The Long Island-based generation requirement constrains LIPA financially and operationally.
LIPA’s current problems prompted in many ways by its faulty structure should surprise no one. A July 1997 consultant’s report to the Suffolk County Legislature commenting on the proposal to form LIPA warned, “the combination of public buyout, private control and consumer vulnerability has no precedent in the United States electric industry.” It also contended that LIPA would incur massive public debt and yield little savings while denouncing the LIPA concept as “a worst-case scenario.” Presently, LIPA’s total debt obligation exceeds $11 billion.
LIPA did not get to its current neglected state by accident. Its current chairman is a holdover from Gov. George Pataki’s administration, the CEO post remains vacant and there are at least six board positions that are yet to be filled. Over the years most of New York’s governors have only given LIPA attention when it had very public embarrassments.
Gov. Andrew Cuomo needs to remember first that LIPA is a state agency, not an investor-owned utility. LIPA is under his full command and he should fix it. In pledging to do so, the governor’s central prescriptive actions must ensure Long Island ratepayers are served by an electric utility that has full accountability.
In considering a fix, privatization of the utility is not the way to go. Such an alternative would require the conversion of all LIPA’s tax-exempt debt to taxable debt. This alone would result in roughly a 20 percent increase in rates for customers. On top of this, the shift to a for-profit entity, requiring a return on investment and the payment of income taxes, would add even more to Long Island electric rates, which are already among the highest in the nation.
The most practical way to reform LIPA is to reorganize it as a full-service municipal utility.
Under this structure, LIPA would be led by a professional utility management team overseeing all functions to be carried out by LIPA workers and not major outside contractors. Such reform would establish clear accountability and control while providing the means to ensure timely communication and operational efficiency.
This solution has ample precedent and, unlike LIPA’s current structure, is commonly used. There are over 2,000 municipal government-owned utilities in the country, a testament to the proven benefits of this ownership structure. These utilities are able to maintain competitive electric rates while achieving high customer satisfaction.
Full-service municipalization is the only realistic alternative for LIPA reform. It has the potential to provide the operational improvements from privatization without significantly higher costs. It could also be achieved without major legislation.
All that is needed to move ahead with this is approval from the administration in Albany. Let’s hope it comes quickly.
Cordaro is chairman of the Suffolk County Legislature LIPA Oversight Committee and the former CEO of utility companies.