Pulse of the Peninsula: Cuomo offers hope in LIPA plan

Karen Rubin

Gov. Andrew Cuomo is pressuring the state Legislature to pass his plan privatizing LIPA before the session ends, June 20 – remarkably fast considering how much time anyone has had to review the legislation.

 Such speed is normally suspect, but to put it into its best light, it is understandable, because for the new organization in place by January 1, 2014, it would have to be adopted ASAP. 

And one could argue that the governor has been working since the day after Hurricane Sandy on precisely this. 

The Moreland Commission hearings were established to set the stage – it was clear from the tone that the mindset had already been in place to remake or replace LIPA and the result a foregone conclusion that the recommendations of the commission would match Cuomo’s vision for a reorganized Long Island utility.

I attended the hearing at SUNY Old Westbury on June 5 and there is a lot to commend the plan, but also some large questions and a couple of flaws.

The plan that is being described does not strike me as “privatization” at all, which would suggest that the public entity sell off its assets and all control to a private entity. The way this plan is presented, it is more like a “rationalization” – more commonsense allocation of responsibilities.

In fact, that is exactly the way the state officials presented it at the hearing: “the best of both worlds” an oft-repeated phrase. 

The new plan preserves a much leaner, more narrowly focused LIPA, preserves public oversight and the public ownership of the assets, with the same ability to get low-cost interest rates afforded a public utility as well as eligibility for FEMA reimbursement (following Sandy, LIPA expected to receive up to $2 billion to repair and harden infrastructure; Con Ed is passing their storm costs to ratepayers). 

It also preserves a “transparent” process for rate increases. Indeed, true to his word, Cuomo would set up a Long Island-based division of the Public Service Commission to provide stricter oversight, the oversight that I presume the LIPA trustees were supposed to provide on behalf of ratepayers.

Essentially the plan replaces National Grid with the New Jersey-based PSE&G, with a much larger role than the current private company has (the question of throwing out the just-renewed contract with National Grid is probably the reason why this has to be cast as a more radical reorganization and privatization).

PSEG, which was coming in to Long Island anyway to take up some of the operations functions, will come with a much larger role: it is a better company, and the state hopes to bring that level of professionalism to Long Island, so that anyone who was in the room would say, “Yes, that is what we need! Finally!”

You can go down a list of the failures of the woefully dysfunctional “bifurcated” management structure of LIPA/National Grid which was glaringly apparent before, during and after Superstorm Sandy and prior events, and see why the state is doing whatever it needs to do to step in and reorganize.

Indeed, the Moreland Commission issued a withering denunciation of LIPA after Superstorm Sandy, finding:

 “LIPA has moved away from original mission which was debt management, not power delivery to customers, or political press relations operation…

 “Substandard storm preparation and response…

 “Dysfunctional management structure led to operational and communications disconnect between LIPA and National Grid and inadequate response..

 “Failed to implement past state recommendations.

 “Need to upgrade outage management system (OMS)- LIPA’s OMS is unable to deal with large scale storms…

 “Need to Improve communications with the public- LIPA failed to change its communications system, causing it to be unable to provide accurate outage information and restoration estimates

 “The Moreland Commission found the only option for change is a complete overhaul of LIPA and how power is delivered on Long Island.”

 Now everyone knows that Long Islanders pay some of the highest rates in the country, yet we also complain about having terrible customer service. 

So there are two critical elements of the reorganization: one has to do with operations management and the other with finance that are addressed by bringing in PSEG, a widely respected professional organization that says it will bring its “best industry practices” and “customer-centric orientation” to Long Island’s beleaguered ratepayers.

 A newly formed private company, PSEG-Long Island would earn a fee in exchange for managing the day-to-day operations with a commitment to reduce costs (achieving $50 million-60 million in efficiency savings) and earn performance-based bonus, rather than a cost-plus-profit arrangement.

 The radical plan though attacks the fiscal mess that LIPA has left, and what is proposed to address the mess – refinancing nearly half of the  $6.8 billion in outstanding debt to take advantage of lower interest rates, paying down debt, and eliminating LIPA’s perverse system of spending millions of dollars on outside consultants which a professional operation, like PSEG, would have in-house, and finally (and most controversially), a proposal to reduce the utility’s property tax obligations.

LIPA debt has not decreased since 1990s – debt service represents 15 percent of ratepayers’ bill, noted Thomas Congdon, Gov. Cuomo’s assistant secretary for energy.

 Yet, it would seem that  all of these fiscally prudent steps could have been accomplished by LIPA – most egregiously, why didn’t LIPA take advantage of refinancing debt at historically low rates?

 When I ask, I am told it was up to Long Island’s state legislators to propose legislation that would have enabled LIPA to refinance. 

So? What’s the point? Wouldn’t LIPA have simply gotten on the phone and asked the legislators to propose the legislation? Where were the LIPA trustees? Where was the LIPA management? We’ve wasted three years, and now, it is likely that interest rates will soon be rising again.

 Another cost-saving measure is to eliminate the state gross receipts tax, which saves $26 million/year, presumably for ratepayers.

 But I found another mechanism of the money-saving aspects to the plan more troubling: to reduce LIPA’s property tax liability.  

This aspect was fairly glossed over in a cursory way during the presentation and my attempts to get clarification were unsuccessful. One element is to establish a 2 percent annual property tax cap for taxes paid on the LIPA distribution system, but I also heard a call to eliminate or reduce PILOT (Payments In Lieu of Taxes, currently amounting to $850 million to localities), and lowering assessments.

 “LIPA makes tax payments for four new power plants on Long Island, plus PILOT for transmission and distribution system,” Larry Schwartz, secretary to the governor, explained. “LIPA filed tax certiorari suit regarding the four power plants (two in Nassau, two in Suffolk) We have to strike a balance so we pay the proper tax on T&D, but in a way that we don’t tax school districts, localities out of business with a massive property tax increase..We have to come up with a responsible plan.”

 “We will use the transition to a new utility to address fair and balanced solution to taxes – we will seek a fair solution that reduces rate payer burden but in a way that does not hurt localities,” is how Congdon, put it ever so diplomatically.

 But do not be deceived: if LIPA pays less property tax that means that residential owners will pay more.

 Another troubling aspect of the presentation was that there really was no comparison of financials – presumably you should be able to add the total expense associated with LIPA plus what we pay National Grid, and compare that to what it will cost for the new, meaner, leaner LIPA plus the more robust but presumably more professional and efficient PSEG-Long Island.

 The only hint I had of what the PSEG-Long Island deal would cost, compared to National Grid comes from state Comptroller Tom DiNapoli’s office: “During the contract review, the Comptroller’s office demanded a competitive bid for the PSEG contract, saving ratepayers  $100 million over the next lowest bid from National Grid, the prior contractor.”

Granted, the role that PSEG is being asked to play is much more expanded than what National Grid is currently doing, and the role that LIPA now plays, with 60-90 people, is much more convoluted (and costly) than the meaner, leaner LIPA envisioned, with 20 or so people, with  additional anticipated savings of “millions” of dollars that LIPA now spends on outside consultants which PSEG is expected to do in-house.

Much was made of the need to invest in infrastructure – modernize and “harden” – but how much and where will this money come from? Will it come from the federal money toward restoration of Sandy? 

LIPA is supposed to be getting up to $2 billion from FEMA. And where will the money come from to set up operations  here?

 Another area which raised questions at the hearing was what will happen to renewables. LIPA had actually made strides in terms of introducing solar power, and is a party to a project that would promote a wind-power generation 12 miles off the south shore in the Atlantic Ocean, which offers some of the best conditions in the nation for offshore wind. LIPA allocates $130 million a year to green energy, but there is a question whether that investment will be continued, or whether the $130 million will go to maintain the rate freeze.

Thomas Congdon, said that “PSEG would take over the administration of LIPA’s efficiency and renewables programs, and would submit a long-range plan in 2014 to integrate clean energy solutions to meet the energy needs on Long Island” and that LIPA and PSEG would  administer 100 mw solar Feed in Tariff and the 280 mw renewable energy competitive solicitation, while NYPA and NYSERDA would expand energy efficiency program opportunities on Long Island.

 Indeed, when the merits of PSEG were listed – $29 billion in assets; almost 10,000 employees, 13,000 MW of electric generation – one of the elements was “renewable energy subsidiaries” so you would expect that PSEG has some expertise that might be welcome.

Interestingly, the public officials who attended were universally in favor (not surprising after attacking LIPA so viciously at the Moreland Commission hearings) – Suffolk County Executive Steve Ballone, Nassau County Deputy County Executive Charles Stefan; North Hempstead Deputy Commissioner Justin Meyers, Wayne Hall, Hempstead mayor.

 The only public official who raised questions was Nassau County Legislator Dave Dennenberg, who said in a statement “No one is knocking PSEG – this is not about you – this is about whether or not we will scrap a contract five years in development, the substantial investment in management studies, mitigations that have been made, take away meaningful oversight this SERVCO model provides for first time.”

 But the most provocative questions came from Comptroller DiNapoli, who has oversight over LIPA contracts and audit authority over LIPA.

 Also, as  a public authority, LIPA is subject to certain reporting requirements under the state public authorities law and under comptroller’s office regulations. LIPA reports to the OSC through the Public Authorities Reporting Information System. 

In his report, DiNapoli raised several objections to LIPA-PSEG proposal:

The executive’s bill would allow LIPA to renegotiate the operating service agreement with the Public Service Electric and Gas Company (PSEG), bypassing all existing laws that relate to transparency, accountability, oversight, and best practices to ensure lowest costs and protection of ratepayers.

The proposal would eliminate comptroller and attorney general contract review oversight under state finance law for all future LIPA procurements. 

The existing PSEG contract, approved by the comptroller, was designed to address two of LIPA’s most significant problems – high rates and unsatisfactory customer service. During the contract review, the comptroller’s office demanded a competitive bid for the PSEG contract, saving ratepayers $100 million over the next lowest bid from National Grid, the prior contractor. 

The proposed legislation would eliminate competitive bidding requirements for many LIPA contracts including construction and purchase of some materials and equipment.  In public procurement, competition provides the optimal means of securing the best goods or services at the most reasonable prices, and provides greater openness and transparency to the public.

 (A link to the report can be found at http://osc.state.ny.us/reports/pubauth/preliminaryanalysisLIPA.pdf):

“The Governor’s proposal is an important step toward relief for LIPA ratepayers,” DiNapoli said in a written statement.  “My office wants to help ensure that customer service is improved and that independent oversight is continued to protect ratepayers.”

Share this Article