Storm clouds gather over LIPA revamp – By George J. Marlin

Storm clouds gather over LIPA revamp – By George J. Marlin

The following appears in the June 7-13, 2013 issue of the Long Island Business News:

Since Gov. Andrew Cuomo unveiled his LIPA reorganization proposal last month there has been plenty of public weeping and gnashing of teeth, much of it justified.

The lowering of LIPA’s bond rating by Moody’s Investor Services to borderline junk, BAA1 from A3, did not help the governor’s cause. LIPA, Moody pointed out, has “little, if any, cushion for the unforeseen events that seem to occur every year.”

Political interference, Moody concluded, could make it “increasingly challenging for the board to take steps to systematically enhance the long-term financial and operational stability of the utilities, particularly if those actions would lead to rate increases.”

The feasibility of the governor’s pledge to freeze rates for three years has also been challenged.

The Director of Evercore Wealth Management’s municipal research department, Howard Cure, observed, “To start off with saying we’re not going to have any rate increases for three years when there’s a lot of capital needs – the math doesn’t work for me.”

The loudest complaints have been over the political decision to continue the $586 million in annual PILOT payments to local municipalities and school districts. Many commercial real estate proprietors and homeowners are tired of subsidizing municipal entities in which they do not own property or reside.

I, for instance, live in the New Hyde Park school district and paid about $9,000 in taxes this past school year. Because 15 percent of my monthly LIPA payments go to PILOTs, I also contribute year in and year out to the operating budgets of other school districts where LIPA owns land. That is truly “taxation without representation.”

Eliminating these egregious PILOTs could lower rates or at the very least freeze rates. Also, the revenues could be used to finance much needed capital improvements.

Another concern is the review and oversight of LIPA contracts over $50,000. Cuomo’s plan would amend Public Authority Law Section 1020-CC to eliminate the present requirement that “all contracts of the Authority shall be subject to the provisions of the state finance law relating to contracts made by the state.”

Such a change in the LIPA statute would cut the office of the State Comptroller out of the process to review and approve contracts. This in turn could open a new era in crony capitalism.

Finally, there is the issue of the proposed “advise and recommend” role of the Department of Public Service. Many are fearful that DPS will be a toothless tiger permitting the new five-member board to run wild.

The Cuomo administration has defended this structure, pointing out that LIPA bond covenants prohibit direct DPS control over rates and management.

This claim is substantially true. The rating agencies prefer public utilities to be free from crawling through state bureaucratic mazes to get approval for rate increases in order to meet principal and interest payments on outstanding debt.

Nevertheless, the DPS will not be opening an office in Long Island merely to take in the sights. Hovering over the LIPA board, scrutinizing budgets and capital project plans, utilizing the bully pulpit and issuing critical public edicts of board practices or policies, will most likely keep the trustees on the path of righteousness.

The clock is ticking. The governor has only a month to get a LIPA reorganization plan through the state Legislature and hurricane season is rapidly approaching. This may mean Cuomo will have to put aside his pride and address some of the issues raised here and by other critics.

If Cuomo fails and Long Island gets hit with another Sandy debacle, he will not be able to evade responsibility for the miserable response of one of his state agencies as he did last year. The finger he will be able to point will only be at himself.

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Op Ed: need for accountability and oversight involving lipa restructuring


   For Immediate Release: June 10, 2013

   Op Ed: Need for Accountability and Oversight Involving LIPA Restructuring

Long Island Press Releases —
Assemblyman Hennessey on LIPA Restructuring: Oversight, Rates, PILOTS:

(Long Island, NY) Govern
Continue reading

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Freedom Of Information Request Submitted to Moreland Commission For LIPA Restructuring Proposal

Dear Moreland Commission Records Access Officer:

Please email the following records if possible (include as much detail about the record as possible, such as relevant dates, names, descriptions, etc.): 

“All detailed records associated to the analysis, correspondence, discussions and or consultant advisory opinions of the Governors restructuring proposals, including but limited to comparisons to other alternatives, specifically full municipalization and any and all detail regarding the Internal Revenue Service.”


Please inform me of the cost of providing paper copies of the following records (include as much detail about the records as possible, including relevant dates, names, descriptions, etc.). 


If all of the requested records cannot be emailed to me, please inform me by email of the portions that can be emailed and advise me of the cost for reproducing the remainder of the records requested ($0.25 per page or actual cost of reproduction).

If the requested records cannot be emailed to me due to the volume of records identified in response to my request, please advise me of the actual cost of copying all records onto a CD or floppy disk.

If my request is too broad or does not reasonably describe the records, please contact me via email so that I may clarify my request, and when appropriate inform me of the manner in which records are filed, retrieved or generated.

If for any reason any portion of my request is denied, please inform me of the reasons for the denial in writing and provide the name, address and email address of the person or body to whom an appeal should be directed.

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DiNapoli: LIPA plan doesn’t protect customers

June 5, 2013 3:19 PM   By MARK HARRINGTON Newsday

State Comptroller Thomas DiNapoli, in a preliminary analysis of Gov. Andrew M. Cuomo’s proposal to restructure LIPA, raises questions about lessened accountability and oversight and whether the new utility would be able to maintain its tax-exempt status.

DiNapoli provided the analysis to state lawmakers Tuesday, a day before public hearings on the new legislation are scheduled to take place on Long Island. DiNapoli’s oversight role at LIPA in reviewing contracts would be eliminated under Cuomo’s bill.

Because the legislation as written would allow LIPA alone to negotiate terms of an amended contract with new system operator, PSEG, “virtually all existing laws that relate to transparency, accountability, oversight, and best practices to ensure lowest costs and protection of ratepayers would be effectively bypassed,” under Cuomo’s proposal, the analysis says.

EXPLORE: Employee-politician connections | LIPA salaries MORE: Report on LIPA’s Irene response | Utility ignored 2006 warnings PHOTOS: LIPA protest | Stunning scenes from Sandy

Among those entities that normally review LIPA contracts is the state comptroller himself, who would be excluded from approving the new PSEG contract, and all future contracts. DiNapoli, noting Cuomo’s proposal considers comptroller review “redundant and unnecessary,” disagreed, saying it’s an important check. The analysis notes that because it’s still not known precisely how LIPA’s new contract with PSEG will be changed, “it is impossible to assess whether sufficient public control would be preserved to maintain LIPA’s public ownership tax-exempt status.”

“The pre-approval function of the comptroller provides a mechanism to ensure that Long Island ratepayers are protected fiscally and from a public safety perspective, and should be preserved,” the analysis says.

Further noting that the legislation would eliminate competitive bidding requirements for certain LIPA contracts, the comptroller’s analysis asserts that they should be preserved because they help guarantee better, cheaper goods and services and “greater openness and transparency.”

In a statement in response to DiNapoli’s analysis, Cuomo spokesman Matthew Wing defended the governor’s proposal.

“Unlike nearly every resident on Long Island, Comptroller DiNapoli wants to preserve the broken LIPA status quo when it has time and again failed on performance, customer service and most of all during superstorm Sandy,” he said, suggesting DiNapoli “wants to keep in place a bifurcated structure with LIPA acting as its on operator and regulator — the very structure that the Moreland Commission found was dysfunctional and ineffective. This is not an option that Long Islanders want and, especially given the response after Sandy, not an option the Governor is willing to accept.”

Wing said Cuomo “has proposed what Long Islanders have been calling for: a new utility structure that would keep rates affordable, improve performance and disaster preparedness, and create real accountability through DPS oversight, ending the accountability loophole that has allowed LIPA to avoid facing responsibility for its failures.”

The comptroller’s analysis takes issue with Cuomo’s idea of creating an entity to issue so-called restructuring bonds to refinance a portion of the LIPA debt. It notes the new bonds wouldn’t be subject to Public Authority Control Board approval, that ratepayers would be subject to new “transition charges,” atop existing rates, and that it’s unclear how much of LIPA’s debt would be restructured.

“It is unclear what regulatory or statutory mechanism would protect ratepayers against the erosion of checks and balances, transparency and accountability in the constitution and operation” of the new bond issuing entity, DiNapoli’s analysis says, “and in the shifting of debt from LIPA to the new entity. The proposal as currently structured seems to lack basic financial limitations or parameters on the issuance of restructuring bonds.”

DiNapoli’s analysis also raises questions about how LIPA budgets will be drawn up and executed, noting that they are now approved by LIPA’s board of trustees.

“It is unclear how this control and public accountability will be preserved, if budgeting is shifted to PSEG and no regulatory entity is authorized to impose restrictions on costs,” the analysis says.

The analysis takes issue with the new Department of Public Service entity that would be created to monitor the new utility’s operations, noting it has only limited enforcement powers.

“The bill does not identify a new entity to provide regulatory oversight of LIPA and PSEG, other than the new” Long Island Department of Public Service entity, “which is given power to ‘audit, review and make recommendations’ without the power to enforce such recommendations.”

It notes that while the DPS entity would review any rate increase greater than 2.5 percent, LIPA’s board could choose “not to abide” by the DPS’ rate recommendations, after public hearings.

In the end, the analysis states, Cuomo’s bill “does not provide Long Island ratepayers with the same protections afforded ratepayers in the rest of the State.”

A senior Cuomo administration official who asked not to be identified called it “unfortunate” that DiNapoli never reached out to the governor’s office for a briefing before issuing his analysis, which the official said was “full of errors and omissions.” The official acknowledged that the administration never reached out to DiNapoli either, but said it would be difficult if unprecedented given the amount of legislation that could technically involve the comptroller’s office.

The administration is near to finalizing a new term sheet for an amended contract with PSEG that will specifically outline the New Jersey company’s larger role. That document will be submitted to the U.S. Internal Revenue Service for review so that LIPA’s tax-exempt status can be maintained, the official said.

“Our lawyers believe the IRS will approve  based on their expertise,” the official said. “If they don’t, the original operating service agreement applies.”

The administration has said that under the legislation, LIPA and its board would approve the utility’s budget, and that a new office of the Department of Public Service “cannot set rates” because it would violate existing LIPA bond covenants.

The only way around it would have been to privatize LIPA, a path state lawmakers objected to, the official said. “They can’t have it both ways,” he said.

Administration officials also defended the notion of removing comptroller pre-approval of LIPA contracts, saying that maintaining it would have created red tape that would have hobbled the new utility. They noted that the comptroller continues to have the authority to audit LIPA. “The only thing the comptroller is doing is maintaining the status quo and being a Monday morning quarterback,” the official said.

The officials noted that LIPA’s obligation to competitively bid contracts over $1 million, including sole source contracts, remains intact under the proposed legislation, as it does for all other state entities.

They said they believe they will have the support of the state Senate and Assembly by the end of the current legislative session.

“I believe there is going to be support at the end of day,” one administration official said. “If not, then everybody on Long Island will know that the Senate and the Assembly support the status quo. The blame will be squarely on them.”

The first of two public meetings on Cuomo’s plan to overhaul the Long Island electric utility convenes at SUNY Old Westbury Wednesday night.

The meetings will include presentations by Cuomo’s senior staff, the Moreland Commission — empaneled to review utilities’ performance after superstorm Sandy — and new system operator PSEG of New Jersey. Those interested in attending can send an email to: The governor’s office has requested attendees to RSVP in advance, but those who have not will be allowed to attend and comment.

Ratepayers will have an opportunity to ask questions at the Nassau meeting, which starts at 6:30 p.m. in the Multipurpose Room of SUNY Old Westbury’s Student Union, 223 Store Hill Rd. The Suffolk meeting is at 6:30 p.m. Thursday at the Western Suffolk BOCES Conference Center, 31 Lee Ave., Wheatley Heights.

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Politics of Power: Session Countdown on Long Islands Energy Future

“There’s been this insistence [on] refus[ing] to make LIPA a real utility, and the latest version just perpetuates that. LIPA employs an outside, for-profit contractor to carry out most of its operations, and has since day 1. This is totally different than the structure that 2,000 other utilities throughout the country follow. They function as full-service municipal utilities responsible for operations. LIPA has been through three iterations, trying to improve it and deal with the problems. This latest, fourth iteration the governor has proposed is not an outright privatization. It’s a camouflage privatization to try to retain some form of LIPA to have tax-exempt financing and some of the benefits of public power. I don’t think that will work very well. Having gone through this and dealt with the IRS on privatizations for municipal utilities, the IRS just won’t buy the fact that a private entity can benefit from tax-exempt financing.”
—Matthew Cordaro, LIPA trustee

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Proposed Cuomo Bill on LIPA Will Increase Electric Rates

The proposed Cuomo bill on LIPA will without question increase electric rates and no absolute rate freeze is possible for any length of time. In fact if the IRS does not approve the proposed structure, rates could increase astronomically.
Many of the benefits offered in the bill could be applied to LIPA as it now exists while pursuing a transition to PSEG as its major contractor by January, 2014. There is no emergency since progress is being made in the transition and no urgency in expanding PSEG’s scope exists.
For this reason the Governor’s bill should not be rushed through the State Legislature in the last few weeks of the session. The monumental financial impact of the proposal on Long Island is too great not to take a deep breath and step back to fully review all of its implications, as well as alternative courses of action.
Acting in haste in an artificially created atmosphere of impending doom, would be a serious mistake and produce something more flawed than the original LIPA concept. There is more than enough time to examine the full consequences of the Governor’s proposal in the next session of the Legislature. The decisions to be made are just too critical not to make every effort to get it right.
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LIPA Ratepayers Deserve A Full Review Of All Alternatives – And That Review Should Be Conducted In Full Public View


The LIA is calling on the governor to let the SERVCO model continue and also – in deference to the governor – continue to fully evaluate the potential for privatization.  Regrettably, the LIA does not call on the governor to fully evaluate all options, including moving LIPA to a fully municipal operation, and this can be attributed to a collective mindset that it is predisposed to the assumption that a municipal utility would not be as “efficient” as an investor owned utility.

There is a general misunderstanding of utility operations, over simplified in the minds of many, and this is especially true in context to the negative attributes of deregulation (especially the additional layers of cost that flow to ratepayers by having utility leadership with one foot in the regulated and one foot in the unregulated marketplace).

The “cost”  of the governor’s push to privatize, and the LIA’s predisposed conclusion relating to municipal utilities, will weigh heavily on the entire Long Island Community, and the business community members currently coalesced into the body and leadership of the Long Island Association will not be spared that burden.

It would seem that some of the LIA’s recommended adjustments could lead to more efficient operation of the LIPA system, especially during storm response, but LIPA ratepayers deserve a full review of all alternatives  – and that review should be conducted in full public view.

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Division Between LIPA and NG Had Spawned Confusion Over Responsibilities, Lack Of Accountability, Misaligned Incentives

Tangled: Can Gov. Andrew Cuomo Fix the Long Island Power Authority?

Written by Jon Lentz on March 25, 2013.
(Photo Credit: Bruce Bennett)
It was the worst storm to hit Long Island in a generation. Torrential rains and high winds knocked out power for more than half a million customers of the Long Island Power Authority, making it the largest customer outage in LIPA’s coverage area in over a quarter century. Thousands of workers were deployed to clear fallen trees and repair downed electric lines. A week later, some frustrated residents were still waiting to turn on their lights.
In the days after the storm made landfall, Gov. Andrew Cuomo blasted LIPA and demanded that it quickly restore power. He warned that National Grid, the public utility’s private contractor, might even lose its contract. “Today, tens of thousands of Long Islanders are still in the dark,” he said. “I have also received numerous complaints about poor communication to LIPA’s customers during the restoration effort.”
What the governor failed to mention was that LIPA and National Grid were not the only figures responsible for the response on Long Island. Cuomo himself has a clear if indirect role in overseeing the public utility—and, like his predecessors, it is a role he had often neglected.
Though he has the power to fill nine of the 15 seats on the board, including the chair, prior to the storm the governor had installed only one LIPA trustee. The utility had limped along for months with the chief operating officer filling in as CEO. Lawmakers had pushed for legislation to subject LIPA to regulatory oversight, but Cuomo watered it down. A few months after taking office he had directed the New York State Inspector General to investigate the utility’s rates, but to this day no audit has been released.
Some observers wondered if the governor was deliberately steering clear of LIPA. Michael Fragin, a former trustee who had left the board earlier in the year, guessed that Cuomo was keeping the unpopular utility at arm’s length because of its electricity rates, which are among the highest in the country, and its $7 billion debt, which exceeds its assets by more than $3 billion.
“If the second floor doesn’t want to deal with those head-on, then they might be making an astute political move by allowing LIPA to kind of drift on its own for a while,” Fragin suggested in the days following the storm.
This may sound like the aftermath of Superstorm Sandy, but in fact it was Tropical Storm Irene, which hit New York in August of 2011. Despite the damage that Irene inflicted and the challenges it exposed at LIPA, the governor was able to maintain some distance from the public utility for a while longer. Board seats stayed vacant. The CEO position remained unfilled. A review of LIPA’s performance during Irene was conducted, but the utility was not required to make any changes.
But if the lessons of Irene did not spur a sufficient response, the unprecedented destruction of Superstorm Sandy just 14 months later made dealing with LIPA unavoidable. Only after Sandy slammed Long Island in October 2012 did the governor finally take a serious look at the Long Island Power Authority in search of a solution to its longtime problems.
* * *
In a cabinet meeting in the Red Room of the Capitol in early January 2013, the governor’s Moreland Commission, which was created to investigate utility storm preparedness in the wake of Superstorm Sandy, presented its preliminary findings. Cuomo congratulated his commissioners for their quick work and said that he wanted to incorporate their “big ideas” into his State of the State address that week.
Benjamin Lawsky, the state’s Department of Financial Services commissioner and a co-chair of the Moreland Commission, explained during a PowerPoint presentation that the structural relationship between LIPA, a not-for-profit government authority, and its for-profit contractor was fundamentally flawed. The division between owner and operator had spawned confusion over responsibilities, a lack of accountability, misaligned incentives and—especially during Superstorm Sandy—a breakdown in communications with customers.
The commission weighed several restructuring options, Lawsky said. One would end the relationship with the private contractor by having LIPA assume the duties it had outsourced, resulting in a traditional municipal or public power utility. Another option called for an investor-owned utility to buy out LIPA, eliminating direct government involvement.
The commissioners recommended privatization. They argued that LIPA would benefit from an investor-owned utility’s private sector expertise and “synergies,” while the privatization would also subject LIPA for the first time to oversight by the Public Service Commission (PSC), the state’s utility regulator.
Furthermore, Lawsky said, privatization would also be “more cost-effective than the ‘expand state authority’—the municipalization option.”
Cuomo left little doubt that he preferred privatization over full municipalization.
“The option that says, ‘Expand LIPA’—whatever number that was, Mr. Lawsky—if I had something to throw at the screen, I would have then,” he said. “It doesn’t work now. I don’t think any expansion for them is an option.”
In his State of the State address two days later, Cuomo made selling off LIPA a key part of his 2013 agenda.
“When it’s come to the Long Island Power Authority, it’s never worked, it never will, the time has come to abolish LIPA, period,” he said. “We want to privatize the Long Island service, which will be regulated by a new and empowered PSC that will happen simultaneously, and we want to do it in a way that protects the ratepayers and freezes the rate for a period of years.”
In the ensuing months, the Cuomo administration has struggled to sell its case for privatization.
Utility experts warn that electrical bills will go up, even if rates are frozen, while Long Island lawmakers are exploring public power and other alternatives. Some welcome the governor’s newfound interest in fixing LIPA but worry that he is being driven by politics, not policy.
And in the end, it’s far from certain that his proposal will be successful, either for him or for Long Island.
* * *
On the North Shore of Long Island, about a 55-mile drive east of Queens, a massive concrete structure of teal and gray looms over a wetland area bordering the Long Island Sound. It is here where the Long Island Power Authority’s troubles began.
In 1973 the Long Island Lighting Company, a private utility, began constructing the Shoreham nuclear power plant on the site, the first of several nuclear facilities planned for Long Island. LILCO’s project was assailed by wealthy landowners and opponents protesting the expansion of nuclear power, and plagued by delays and cost overruns. The partial nuclear meltdown at Pennsylvania’s Three Mile Island in 1979 fueled the fears of local residents.
Nonetheless, construction continued, and the plant was largely completed by 1983, but then Gov. Mario Cuomo halted the project. In 1986 lawmakers created the Long Island Power Authority, and the new state entity took possession of the Shoreham facility three years later. As part of the agreement, LIPA assumed the full cost of constructing the defunct facility, which had ballooned to more than $6 billion.
In 1998 Gov. George Pataki orchestrated LIPA’s acquisition of LILCO’s transmission and distribution system, pushing through the deal with a pledge to lower electricity rates. His administration also took the unusual step of contracting out the operation and maintenance of LIPA’s utility system to a private utility. Among the 2,000 public power utilities dotting the country, only a handful of them outsource operations.
Over the years LIPA did little to pay down its debt, a failure critics attribute to a lack of oversight, a legacy of political appointees with little understanding of the utility business and a misguided emphasis on restraining rate increases.
A Long Island Power Authority truck in Queens on Nov. 12, 2012. More than 70,000 LIPA customers were without power that day, two weeks after Superstorm Sandy. (Photo Credit:Craig Ruttle)
The Shoreham facility, which was built so solidly that it is too expensive to tear down, now stands as a monument to the dashed hopes for cheap, reliable electricity and the ongoing energy challenges of Nassau and Suffolk counties.
* * *
Following the Moreland Commission’s presentation early in January 2013, a reporter asked why the public utility wasn’t overhauled two years earlier, when Cuomo first took office.
“There’s something called ‘political will,’” Cuomo replied. “Why haven’t a lot of things happened? Why haven’t we passed gun control in this state and in this nation, right? ‘Well, it was so obvious.’ Well, a lot of things are obvious, but you need the political will to change them, and sometimes you need an event that galvanizes public opinion to actually move the process.”
The governor had that political will, another reporter countered, as well as the opportunity to appoint trustees. So did he bear any blame for LIPA’s poor performance?
“Absolutely not,” Cuomo insisted.
Why is that?
“Because LIPA was flawed from inception,” Cuomo said. “There’s nothing you can do with the existing structure. Whether it had 10 people on the board or 14 people on the board, do you think that was a difference?”
In fact, appointing a full slate of trustees can make a difference, utility experts say. Dr. Matthew Cordaro, a former LILCO executive and a longtime LIPA critic who was appointed to LIPA’s board by Assembly Speaker Sheldon Silver last month, said the governor was directly responsible for the leadership vacuum when Sandy hit.
“He was saying, ‘LIPA this, that, it’s totally terrible, and it doesn’t work,’ ” Cordaro recalled. “And this was right after the storm. I said, ‘Well, where have you been? It reports to you.’ ”
Vacancies have continued to be an issue. In December Moody’s Investors Service placed LIPA under review for a possible downgrade, in part due to a recent exodus of trustees, including the chairman, and the failure to quickly appoint replacements. The new departures, combined with the other longstanding vacancies, meant that the utility barely had enough trustees to constitute a quorum, hindering its ability to take action for a brief period. The governor has since appointed a chairman, but today four board seats remain vacant, all of them for gubernatorial appointees.
“The inability of government officials to promptly address the expiring terms is, in our opinion, a governance deficiency, and one that could severely impede prompt decisive leadership, which we believe is needed given the challenges at LIPA,” the ratings agency wrote.
Cuomo may not have judged the political winds to be auspicious when he took office, but he could have started restructuring the utility earlier in his term. When he was elected, the trustees were asking the same question the Moreland Commission is trying to answer today. National Grid’s contract was set to expire in 2014, and the utility was weighing whether to privatize, municipalize or tweak its existing structure. A consultant deemed the decision “very important, indeed central, to LIPA’s future operational performance and strategic success.”
Had the governor quickly appointed his full slate of trustees, they would have constituted a majority and could have begun the long process of restructuring LIPA any way he wanted well before Superstorm Sandy. Instead the board went with the status quo, modifying somewhat but sticking with the dual structure criticized by the Moreland Commission.
Another key commission recommendation was to strengthen the Public Service Commission and grant it the authority to regulate LIPA.
“We empowered a Moreland Commission which said, basically, and I quote, ‘Put real regulatory and enforcement teeth into the Public Service Commission, which has for too long been a toothless tiger,’ ” Cuomo explained in his State of the State address.
But in 2011 the governor rebuffed efforts to boost oversight of LIPA, sources said. He rejected a bill that required Public Service Commission approval before LIPA could raise its rates, a provision already applied to other utilities.
“Gov. Paterson vetoed the bill, saying it would affect LIPA’s bonds, which I strongly disagreed with,” said Assemblyman Bob Sweeney, who sponsored the legislation. “Everyone I spoke with disagreed with that, but that was his position. So we dashed the bill. When Cuomo became governor, he took the same position. But he also said, ‘Can we talk about this?’—to his credit. And so we did.”
In February 2012 the governor signed a weaker bill, which requires a periodic audit of LIPA’s management and operations. Under the law, the utility’s customers also can register complaints with the state’s consumer protection division.
“So the Public Service Commission does now have the ability and is required to audit LIPA on a periodic basis and produce that report as a public document,” Sweeney said. “But it doesn’t give them authority over rates or anything.”
Sweeney said he had hoped for more, but at least the law provides some oversight.
“One of the problems arguably with LIPA up until my bill was [that] nobody had any oversight over LIPA—literally, nobody,” the lawmaker said. “They could do whatever they wanted to, essentially. And there was nobody there to say ‘This is right’ or ‘This is wrong’ or to audit them and publicly provide that information.”
Matt Wing, a Cuomo spokesman, said Sweeney’s original legislation had nothing to do with the actual regulation of LIPA or holding the authority accountable when it failed to perform for customers. “It was a gimmick to claim that action was being taken against rate hikes, though in reality LIPA has never proposed rate increase at the level stipulated under the bill,” said Wing, adding that the legislation the governor ultimately signed “improved the law so that it actually resulted in new oversight for the first time.”
Wing also disputed the idea that the governor had neglected LIPA, saying it was “inaccurate” to characterize Cuomo as having any oversight since he has no role in day-to-day operations and no regulatory power to issue fines or in any way hold LIPA accountable.
“The idea that the number of LIPA trustees would have had any impact on LIPA’s abysmal performance during Sandy is absurd,” Wing said. “As the Moreland Commission report makes clear, LIPA failed to respond to the disaster because its bifurcated structure is completely dysfunctional.”
As for the delay in releasing the Inspector General’s report on LIPA’s rates, which was initiated early in 2011, Wing said that its findings were referred to the Moreland Commission and would be incorporated into its final report.
* * *
By late last month administration officials had grown cautious about the prospects of privatization. At a Senate hearing in Albany, top state energy officials testified that it was premature to identify the best structure for LIPA, and declined to say whether selling it off would increase costs or raise rates.
Gil Quiniones, who heads the New York Power Authority, repeatedly reminded the senators that an analysis was ongoing and that the governor would select whichever option would best meet several criteria, including stabilizing rates and property taxes, improving service and positioning the utility to weather the next storm.
“We are open to any plan that others may have that can be clearly demonstrated to meet those objectives,” Quiniones said. “In the end, what Gov. Cuomo wants is what’s best for Long Island ratepayers.”
Robert Lurie, a senior vice president at NYPA, described a potential privatization scenario in which LIPA’s transmission and distribution system would be sold for about $3.5 billion, leaving $3.5 billion in debt from the Shoreham facility. That debt would then be separated out and paid for as a charge on customers’ bills distinct from the actual rates.
State Sen. Carl Marcellino asked Lurie how LIPA could transition from a public utility to a private one that makes a profit without raising rates. Lurie said he didn’t know.
“If the only factor were the transition from a tax-exempt entity to a taxpaying entity, then certainly the costs of privatization would be a nonstarter, and it would not even be on the table,” Lurie said. “But there are other factors, including the synergies which reduce costs substantially and other factors that will be included that may or may not offset the cost that you rightly point out, but that’s exactly what we’ve got to determine.”
A battle over Shoreham nuclear plant led to the creation of the Long Island Power Authority in 1986. The defunct plant now stands as a monument to Long Island’s enduring energy challenges. (Photo Credit: Daniel S. Burnstein)
Past reports exploring that question have concluded that privatization is more costly. A 2010 Navigant Consulting draft report predicted that dropping the private contractor and fully municipalizing LIPA would lower costs by 1 percent, while privatization would raise costs by 7 percent to 12 percent over a decade. “Of the strategic options under consideration, the privatization option would likely result in significant revenue requirement increases for energy delivery to Long Island electric customers,” the Navigant report found.
In October 2011 the Brattle Group issued a study that echoed the Navigant report. “Cost and rate impact analysis clearly indicates that implementation of the privatization option would result in an average rate increase for LIPA’s customers,” the Brattle report said. “This serves to remove privatization as an option at the current time.”
Wing, the governor’s spokesman, said the reports are generally outdated and have three basic flaws: overstating how much equity is needed, overestimating the benefit of tax-exempt borrowing since interest rates have fallen while municipal and corporate rates have converged, and failing to fully account for synergies with a private, investor-owned utility buyer.
Not everyone agrees. On the day of Cuomo’s 2013 State of the State, Moody’s issued a brief stating that the governor’s proposal would have no immediate impact on LIPA’s credit rating. It also predicted that the costs of privatizating would outweigh the synergies of combining with another utility.
Some of the reasons for the higher costs projected are straightforward. As a private utility, LIPA could no longer issue tax-exempt debt, and its existing tax-exempt debt would have to be replaced by taxable debt. Eligibility for FEMA assistance would be curtailed. A portion of the utility’s profits would have to be diverted to shareholders.
“It’s hard to come up with a scenario that makes economic sense to privatize the utility, because of its large debt and because of the fact that its rates now are among the highest in the country,” Cordaro said. “By bringing in a private company, that only projects higher rates in the future. Your private utility has got to refinance using taxable debt, which is 20 percent more expensive. They’ve got to make a profit for their ratepayers, which is at least a 10, 11 percent number. And they’ve got to pay taxes.”
Matt Fabian, managing director of debt research at Municipal Market Advisors, said the process would face other hurdles, like requiring the termination or rewriting of interest rate swaps.
“The problem is that it’s such a big and complicated debt structure that it’s really hard to speculate on the net impact,” Fabian said. “It’s going to be very difficult to be done at all, so I would place their probability at being able to do it as fairly low. In theory, they would only do it if they could demonstrate a neutral impact on ratepayers and a promise of better service delivery.”
Cuomo administration officials have floated the idea of issuing bonds to pay off the debt that would remain after a sale of the transmission and distribution system. Of course, the debt will still be there, and someone will still have to pay for it.
“Either it’s ratepayers or it’s not ratepayers,” Fabian said. “Ratepayers can pay through the rate structure, or they can pay through some other tax on their properties that is collected, or it can be paid by a statewide levy or a regional levy or some other money that shares the burden. It’s just restructuring how they pay. You could stretch out the terms, but LIPA’s debt is already pretty long. So stretching it out further wouldn’t necessarily be prudent.”
Given the challenges and costs of privatization, some lawmakers suggest returning to the public power model which was initially intended at LIPA’s inception. In 1986 Gov. Mario Cuomo’s “Sawhill Commission” concluded that a LIPA takeover of LILCO could result in significant savings for utility customers. A generation later, Gov. Andrew Cuomo seems intent on undoing his father’s work and having LIPA revert to being a private company, despite evidence that the elder Cuomo got it right when it comes to the costs.
In fact, Pataki made an executive decision to outsource LIPA’s operations to a private company—a decision that required no change in legislation. As such, if Cuomo wanted to fully municipalize LIPA, he could do so with relative ease.
“The traditional concept of privatization is something that has been looked at and rejected in the past because it doesn’t work financially,” Assemblyman Sweeney said. “It’s not a benefit to the ratepayers. The governor seems to think that he can avoid the pitfalls of that, but until we know the details, we don’t know whether that’s the case or not. LILCO, going back years ago, was the private utility company that provided utility services, and then it was so disliked that it ended up being replaced by LIPA. I’m not sure that the best option is to go back and forth between private and some other form. Maybe we ought to just take LIPA and look at it the way it was originally intended to be and make it work.
“It never has been a true municipal utility,” he added. “And so, from my point of view, the original concept of LIPA has never been given an opportunity to succeed.”
Despite the governor’s opposition to fully municipalizing LIPA, public power has a strong track record in the United States, where it serves 47 million people, or about 14 percent of the nation’s electricity customers. There is some evidence that public utilities provide electricity at lower rates, and proponents tout the advantages of local control.
“Another benefit is obviously that public power companies are not-for-profit, so they don’t have shareholders,” said Ursula Schryver, a vice president at the American Public Power Association. “So all of the revenue from the utility is invested back into the utility or the community, and rates tend to be lower.”
Gary Krellenstein, a managing director at the energy finance consulting firm Oxford Advisers, said that LIPA would be in far better shape if it had followed the management practices of successful public power utilities like the Los Angeles Department of Water and Power and the utility systems in Orlando and San Antonio, all of which are AA-rated.
“The argument that a private utility is inherently better doesn’t follow historical precedent,” said Krellenstein, who previously headed the utility group at Kroll Bond Rating Agency and was as an investment banker at J.P. Morgan. “Historical precedent is that both ways can work, but as a general rule municipal utilities offer slightly better service and slightly lower costs.”
* * *
In the debate over restructuring, the fate of LIPA is as likely to pivot on political considerations as on the outcome of cost-benefit analyses and financial concerns. Public utilities only garner attention when rates go up or power lines go down. Privatization may be simply the most attractive solution for a politician who wants to distance himself from a troubled state entity while demonstrating decisiveness in responding to a brutal natural disaster.
“For the most part this is a political decision,” said Fabian, the managing director at Municipal Market Advisors. “This is not being driven by economics. So in order to make it work, you may need more political intervention for it to happen, because it’s not necessarily a market-driven change or an economics-driven change.”
Krellenstein said there was little to be gained by pointing fingers regarding LIPA’s mishaps, and he cautioned the governor against getting swept up in the politics of the moment and making a rash decision as a result.
“It’s really got to be thought through, and so they’ve got to be careful of doing a knee-jerk reaction just to satisfy the public,” Krellenstein said. “You really want to do what’s in the long-term best interest of LIPA’s customers, the utility’s state, the reliability of service—I mean, electric power is so essential now. There is a health and safety aspect, not just an economic one, to doing LIPA right.”
Despite his reluctance to assign blame, Krellenstein said he did see a pattern of culpability.
“I’m afraid that New York State politicians created this problem, and now they’re blaming it on everybody but themselves to fix it,” he said.
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Testimony of David Daly, PSEG Vice President-LIPA Transition Appearing Before a New York State Senate Joint Committee










FEBRUARY 27, 2013


Good Morning.  My name is David Daly, Vice President – LIPA Transition for PSEG Long Island LLC, a Public Service Enterprise Group Incorporated (PSEG) company.  I want to thank Chairs Marcellino and Ranzenhofer, and Committee members for the opportunity to appear before you this morning.  I am the lead executive responsible for managing PSEG Long Island’s Transition and Operations Services Agreements with the Long Island Power Authority (LIPA).  As you may be aware, PSEG Long Island is scheduled to assume management of LIPA’s electric transmission and distribution system on January 1, 2014.  In the time allotted, I’d like to provide some background on my company our core competencies, and how we plan to deliver high levels of service and improve customer satisfaction for Long Island’s 1.1 million electric consumers.

PSEG is one of the nation’s largest energy companies and we’re also a neighbor.  We own Public Service Electric and Gas Company (PSE&G), New Jersey’s oldest and largest electric and gas utility company.  PSE&G serves 2.2 million electric customers and 1.8 million gas customers in a 2,600 square mile service territory similar to Long Island.  We joined New York’s business community in 1999 when our electric generation business, PSEG Power, acquired the Albany Steam Station, an aging 450-megawatt electric generating plant located just south of Albany in Bethlehem, NY, and transformed the facility into the state-of-art BethlehemEnergyCenter. In the process, we doubled the site’s electric generating capacity while making dramatic reductions in air and water environmental impacts.  We’d be happy to have you visit this facility here in the Capital District.

In total, PSEG has approximately $29 billion in assets and we employ almost 10,000 men and women.  About two-thirds of our employees are represented by unions and we are proud of our strong relationships with the unions representing our employees.  We own about 13,000 megawatts of generating capacity and we’re industry leaders in promoting and investing in energy efficiency and renewable energy.

What may be of particular importance to Long Island residents is that our work has gained considerable recognition by national, independent organizations for electric system reliability, storm response, and customer satisfaction.  We’ve been cited as America’s most reliable electric utility five out of the last eight years and the most reliable in the Mid-Atlantic region for 11 consecutive years.  The Edison Electric Institute, the industry’s national trade association, cited PSE&G for outstanding work restoring service after Hurricane Irene and Super Storm Sandy, and JD Power Associates recently ranked PSE&G second in the eastern U.S. region for residential customer satisfaction.  It is this track record and the experience and expertise associated with it that we intend to bring to Long Island.

Most of PSEG’s assets and investments are focused in the Northeast and Mid-Atlantic.  We consider New York part of our core market for business growth and investment and we viewed the opportunity to compete for the LIPA Operations Services Agreement in this context.

As you may know, LIPA selected PSEG Long island in December, 2011 after a two-year, competitive procurement process, to manage its electric transmission and distribution system and provide customer services, for a 10-year period beginning on Jan. 1, 2014.  Both the Operations Services Agreement and the Transition Services Agreement have been approved by the New York State Attorney General and the State Comptroller.  We’ve been working diligently on the transition for more than a year.

Importantly, the Operations Services Agreement is structured in a way that aligns LIPA’s and PSEG Long Island’s interests.  We will receive a flat fee for providing the management services, with a potential to earn financial incentives keyed to achieving significant improvements in customer satisfaction and other performance metrics.  For example, there are incentives in the contract – and our plan is to achieve – a first-quartile customer satisfaction ranking within five years.  Also, any cost savings and efficiencies that are achieved in the process will flow through to Long Island customers.  In short, our success will be closely linked to our ability to improve the customer experience.

PSEG has created PSEG Long Island as a separate subsidiary dedicated to managing its Long Island responsibilities.  This subsidiary, its management team, and the assets required to manage operations will be located on Long Island, an arrangement that will increase transparency and focus attention on the needs of Long Island’s electric customers.  It is also our intention to incorporate the current workforce into our Long Island operations.  Our management team will live on Long Island and will be visible and available.  PSEG and its family of companies have a long history of involvement with the community and community service and this will be a core value of our Long Island business.

As noted, we bring to this task an established record of performance, reliability, and customer satisfaction.  We’ve been hard at work in the transition and we think we understand the challenges.  We’ve identified specific areas for improvement and we are developing the plans and processes to address them.  We will be ready to make a difference on Day One.  In consultation with LIPA and subject to its approval, we’ll implement:

  • Improvements in Customer Service and Customer Satisfaction:
    • New call center and state-of-the-art customer-facing technologies
    • Enhanced customer and stakeholder communications using multiple channels of communications and all available media technologies
    • Best-in-class customer service Quality Assurance and Quality Control (QA/QC) processes
  • Proven storm restoration processes:
    • State-of-the-art outage management technology
    • Enhanced storm planning and a management structure that better consolidates and coordinates outage management and storm response
    • Logistical plans necessary to make the most efficient use of outside work crews and marshal the equipment and resources necessary for responding to a major storm
    • Best industry practices in transmission and distribution (T&D) electric system maintenance and operations
    • Data-driven analytical tools, including lean six sigma and a balanced scorecard process, to optimize T&D asset management

In the area of customer operations, we’re implementing over 80 recommendations to improve service and customer satisfaction.  LIPA has approved our recommendation to replace the existing call center Interactive Voice and Response (IVR) system and we’ve mapped plans for replacing the current Customer Information System (CIS) and for implementing a new Enterprise Resource Planning (ERP) system.

We’ve also proposed a new Outage Management System (OMS) that will more quickly and accurately assess and locate system damage, direct work crews, and provide critical information on status of repairs.

Our experience in New Jersey during Super Storm Sandy provides some guidance on how technology, processes, and planning come together to benefit customers:

Sandy knocked out electric service to almost 2 million of our utility‘s 2.2 million electric customers.  About a third of our system’s major switching stations and 40% of our substations were affected, many by significant flooding.  And about 33% of our transmission circuits were damaged.

About 1,000 out-of-state workers arrived in New Jersey in advance of the storm and that number grew to more than 4,500 during the restoration effort.  We were able to make sure that all of these workers were housed, fed, and their vehicles had fuel.  These workers knew where they were going, had work orders in hand, and were able to get on the road with little wasted time.  All of our workers had the material and supplies they needed.  We never ran out of poles, transformers, wire, or fuel.

We restored electric service to more than one million customers in three days.  Over the two-week period that included the Nor’easter that hit on the heels of Sandy, PSE&G restored power to more than 2.1 million customers.  This is more than in any storm in the history of any electric utility in the nation.  We accomplished these service restorations at a cost of approximately $295 million.

And all through this process we worked diligently to provide as much and as accurate information as possible to customers, public officials, the news media, and other stakeholders.  In particular:

  • In advance of the storm, pre-emptive calls were made to more than 700 municipal officials to provide points of contact for use during restoration
  • Daily conference calls were held that linked our electric operations divisions, regional public affairs managers, and municipal officials to provide updates on restoration planning and progress
  • Ralph LaRossa, PSE&G’s president and chief operating officer, and other senior executives, held face-to-face meetings with more than 100 state legislative leaders and mayors
  • Two conference calls a day were conducted with New Jersey Governor Chris Christie
  • Company executives held daily news media conference calls
  • Newspaper, radio, internet ads, and email blasts were used to communicate storm preparation, damage assessments, outage updates, and restoration progress
  • Social media played a key role in customer communications

It is this kind of effort –planning, logistics, up-to-date technology, proven processes and procedures, analytics, and communications – bound together by a relentless focus on the customer that PSEG Long Island is bringing to the task of managing Long Island’s electric system.  We think we know what needs to be done and we look forward to the opportunity to serve the people of Long Island.

Thank you and I’d be happy to respond to your questions.

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