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Why the #@&% are gas prices so G** damned high?

By: Cynthia Kouril Sunday October 13, 2013 1:22 pm

Jed Morey’s “Book of Morgan”

So, my neighbor made this video about why gasoline prices are so high when demand is down and supply is up.   You should watch this.

You are not going to like the answer,  …………………………. at all.

 

LIPA Squared

By: Cynthia Kouril Sunday June 9, 2013 4:05 am

The draft legislation which the Governor is trying to jam through the legislature in the next two weeks contains a provision to create a LIPA Refinance Authority. That is a LIPA for LIPA or, as I like to think of it, LIPA Squared.

During the dog and pony show on Wednesday night, there was a Power Point presentation which suggested that LIPA could refinance its bond to take advantage of lower interest rates. At the time I assumed that meant lower interest rates created because of Quantitative Easing by the Federal Reserve, I was wrong.

The draft legislation contains a provision to create a new LIPA Financing Authority that will issue new bonds.

 7. Securitized restricting bonds are likely to be the most attractive to the investing public and result in the lowest possible yields if they are issued by a newly organized, special purpose public benefit corporation or other corporate municipal instrumentality of the state.

The bonds are going to be created as a “bankruptcy remote vehicle”.

 6. If the securitized restricting bond were issued by a bankruptcy remote entity with an AAA or equivalent rating in current market conditions to finance a portion of the cost purchasing, redeeming or defeasing the outstand debt of the authority, and other associated costs, the debt service on the authority’s debt could be reduced and the cost of electric utility service could be lowered.

Sound familiar? That’s because it’s pretty much the same concept as the REMICs used by banks to securitize mortgages. Remember how that worked? The bank would bundle together great mortgages with not so great mortgages and the top quality mortgages made the top tranches of the Residential Mortgage-Backed Security (RMBS) attractive and glamorous. Additionally, the RMBS would also carry default insurance from some giant like AIG. The combination of some great mortgages plus the default insurance allowed the top tranches to attain a triple A rating. This, of course, means the lower tranches had worse ratings.

The problem is that the existing LIPA bonds which are to be bundled into the “bankruptcy remote” vehicle that would issue new derivatives do not have any “great” bonds to create the needed glamour.

5. As of December 31, 2012, the three major rating agencies generally rated the authority’s debt in the single-A range, though Moody’s Investors Services assigns approximately seven hundred million dollars of the authority’s debt slightly lower ratings of Baa1 and Baa2.

There is no New York state guarantee or other default insurance. So how the heck are you going to transform Single A, Baa1 and Baa2 rated bonds into Triple A rated derivatives? All of the elements you need to create a Triple A rating for the top tranche are missing, plus the increased borrowing costs for the lower tranches are not mentioned. The borrowing costs for the lower tranches with lower ratings are obviously much higher.

Those of you in finance, please give the draft legislation linked above a read, starting at Part B on page 29, and let me know in the comments if I have missed something. If this LIPA Squared idea is really as completely illogical and impossible as it seems, I’m going to have to raise a ruckus. However, I find it hard to believe that anyone would do something this obviously dumb and not expect to get caught, so am I missing something? Please, forward, tweet, etc. to your buddies in finance and get me some expert opinions.

New Adventures in LIPA Privatization

By: Cynthia Kouril Thursday June 6, 2013 6:51 am

As I have previously written (here, here, here, here, and here), the relationship between LIPA (Long Island Power Authority) and National Grid has been dysfunctional for a long time. This is mostly the result of a poorly written contract between them, but has been made worse by the fact that LIPA has not had a CEO for years and the long term interim CEO was known to have been turned down for the permanent job, rendering him the lamest of all ducks.

The LIPA Board of Trustees set out to remedy those problems that it could on its own. It engaged in multiple management and operations studies by well known and respected consulting companies. Based upon the recommendations from the consultants, it developed a new plan for LIPA that would allow for greater day-to-day control by LIPA of operations and costs and more accountability for the contractor hired to do the operation of LIPA’s Transmission and Distribution System (T&D System).

It put out a request for proposal (RFP) based on this new concept, and the bidder with the highest score for quality of bid and lowest cost was chosen, PSEG. The new “ServCo” contract with PSEG is currently set to begin on January 1, 2014. An approximately 2 year transition contract was also issued to PSEG for 2012 -2013 during which PSEG came in and familiarized itself with the system, made over 80 suggestions for improvements and began installing new software and hardware in preparation for the 1/1/2014 takeover. All good so far, then came Hurricane Sandy.

I believe that Governor Cuomo sincerely wanted to help, to do something wonderful to make things better for the people of Long Island who were left in the dark for weeks while National Grid and the leaderless LIPA staff mis-communicated and failed to properly supervise the work of the out of town crews. He appointed the Moreland Commission to study what went wrong and make recommendations.

Governor Cuomo’s Moreland Commission produced a report about LIPA that was such an example of towering ineptitude that it set off a firestorm both on Long Island and in Albany. It blamed the public/private concept for the disfunction and called for privatizing LIPA, which would saddle ratepayers with approximately $4 Billion in orphan debt and give a windfall to some unnamed private buyer. It would have dramatically increased borrowing costs. Considering the sophistication and business acumen of many of the Commission members, it was unfathomable that such cluelessness could have been allowed to be published over their signatures. Did they even read what their staff had written?

It was such an obviously ridiculous proposal that one had to wonder what backroom baksheesh occurred or was anticipated. Now royally screwed by his own Commission, the governor was in a tough spot. Short of imitating Emily Litella, what could he do to avoid admitting failure?

After influential groups, such as the Long Island Association began voicing support for allowing the ServCo contract with PSEG to go forward as planned, the Governor apparently seized on the fact that PSEG’s good customer service record was popular on Long Island (rather than considering that the ServCo model was a vast improvement over the status quo) and suddenly proposed that the start date for PSEG be accelerated to put them in place RIGHT NOW, so that they would handle the 2013 summer storm season. That would have gutted the carefully planned rollout and caught PSEG flat-footed and without the new storm management system it is building. It was a recipe to force PSEG to fail. I assume that PSEG turned that idea down, because as of last night’s hearing in Nassau County, PSEG is not starting until 1/1/2014.

On May 13th, the Governor doubled down again on the terrible privatization idea and issued draft legislation that would put most of the planning and budgeting and policy functions of LIPA into the hands of PSEG, which orphans decisions such as new power plants, modernizing existing plants and renewable energy. Worse, it would created a third party bureaucracy, a new 50 person arm of the Public Service Commission on Long Island which would have advisory powers only since LIPA’s bonds require all decisions to be made by the LIPA Trustees, while stripping LIPA of some 70 people, making it impossible for LIPA to perform the aggressive day to day oversight called for in the ServCo contract.  So, if the governor is down on public/private partnerships why in heaven would he want to go from a two party public/private to a three party public/private that has LESS daily supervision?

After the various storms, the NY State Comptroller’s Office performed audits. After Hurricane Earl, the audit showed staggering waste fraud and abuse on the part of out of town crews and led to major management reforms. The new legislation strips the Comptroller’s Office of its oversight function, one of the few things that have been actually effective in dealing with storm costs. The Comptroller, a native Long Islander who still lives here, has slammed the proposal.

Last night I attended a forum in Nassau County about this legislation. The overwhelming response of citizens was either negative or questioning.  Elected political allies of the Governor’s came to offer their support, but their remarks so closely parroted the talking points offered by the panelists sent by the Governor that is was apparent that they were reading from the same talking points

Worse, I have been getting telephone calls from financial analysts and hedge funds concerned that there seems to be a new hair-brained scheme every couple weeks. LIPA bonds are in danger from being put on a “sell” recommendation from the current “hold”.  Holders of large positions in the bonds have hung in there because of the improvements in oversight and management promised by the new ServCo model, but their loyalty to those bonds will be betrayed if this legislation becomes law. Oh, and there is no guarantee that the IRS will continue LIPA bond’s tax exempt status under the arrangement in the draft legislation and it creates yet a another new bureaucracy to do refinance. Yep, that’s now a four way public/private partnership.

This entire fiasco happened because there is a false premise that the new ServCo contract that begins 1/1/2014 is the same as the status quo, it is not. The choice is not between the craptastic contract between LIPA and National Grid and the Governor’s hasty and ill conceived draft legislation. There is a third choice, to allow the ServCo contract, slowly, deliberately and thoughtfully arrived at and already in the transition stage, to go forward as planned.

Governor Cuomo could do something important to make things better. He could finally appoint a CEO for LIPA and obtain a commitment from that CEO to appoint and support the work of an in house inspector general for LIPA.

Did Long Island Power Authority Try to Poison Pill National Grid From Buying PSEG LI?

By: Cynthia Kouril Thursday March 14, 2013 1:31 pm

More on Long Island Power Authority: So What’s Up With Privatizing LIPA? Part 1 and Part 2. Testimony on Privatization part 1 and Part 2.

In 1986, then Governor Mario Cuomo announced creation of Long Island Power Authority (LIPA). See, “Andy’s fuzzy math” Nichole Gelinas, New York Post, 1/10 /13

It took until 1998 to complete the sale of all of Long Island Lighting Company’s assets.  LilCo employees, managed by LiICo managers continued to provide day-to-day running of the system.

The  transmission and delivery (T&D) system and the Shoreham debt were purchased by LIPA for a combined total of $7Billion. The gas system and power plants are sold to a new company that merged with Brooklyn Union Gas to form Keyspan. Keyspan hired the LilCo workers and managers. And they continued to run the system in a contract called the Management Services Agreement (MSA).

In 2005, a management study was done by FTI Consulting which says:  

FTI believes that the contract renegotiation with KeySpan provides the Authority with the optimum economic outcome for its customers at this time. It facilitates the overall monitoring of the new MSA by the Authority by changing the nature of the contract from a cost plus type contract to a fee for service contract.

[p. 37 in the document, p.41 in the pdf].

In 2006, the negotiation mentioned in the FTI report took place; however instead of tightening up any vague language which was allowing mismanagement to occur, the contract was further weakened even up to the point of allowing a pass through of storm costs to LIPA. The system operator no longer has any incentive whatsoever to control storm costs. See, p. 38 of the document, p. 46 of the pdf.

A Comptroller Office audit  reveals that immediately  after this weakening of the contract, storm costs surged from the tens of millions of dollars to the hundreds of millions of dollars. See, p. 3.

In 2007, soon after the pass-through of storm costs went into effect,  National Grid bought KeySpan. Evidently, LIPA didn’t get a vote. Customer satisfaction ratings failed to meet the contractually required threshold. This failure to meet customer satisfaction thresholds continues all the way into 2012  .

After Hurricane Irene, I attended a public hearing where the acting CEO of LIPA and a representative from National Grid were questioned. It was very clear at that meeting that the relationship was that of a failed marriage. If any of you watched the press conferences during Super Storm Sandy or its aftermath, you could see how broken the relationship was between LIPA management and National Grid. Recall, National Grid came into the Long Island market not because anyone at LIPA chose National Grid, but because National Grid bought KeySpan.

In 2010, there was another management study done by Navigant Consulting which concluded that full municipalization would result in the lowest rates for power.

There was also a study done by Lazard in 2010; however Lazard did not reach any conclusions, instead suggesting further research was needed:

Has the Decision Already Been Made to Sell Long Island Power Authority’s T & D System to National Grid?

By: Cynthia Kouril Tuesday March 12, 2013 4:54 am
Author’s note: Many, many thanks to our own Kelly Canfield who made all these gorgeous professional video clips. This post would not have been possible without him. 

 As some of you may know, I testified before the joint hearings of the NYS Senate Committee on Investigations and Government Oversight and the NYS Senate Committee on Corporations, Authorities and Commissions on February 27th. Some clips from that hearing will appear below. After the hearing I had a 3+ hour drive back from Albany which gave me time to reflect on what I had seen and heard. Some things jumped out at me:

1)      The Moreland Commission evidently already knows that the private entity that buys the LIPA electric Transmission & Delivery (T&D) system stands to make $100s of millions a year in profits.

2)      The primary basis for claiming that privatization could be economically feasible, even though not a single study has ever concluded that—not even the Lazard Study cherry picked it because it  did not specifically conclude privatization is a non starter like all the others did– is that it creates “new synergies between the new private owner and its existing nearby facilities.

3)      However, there are no “new synergies.”  National Grid already has a presence in the North East and has a related gas business on Long Island itself, whatever synergies which might be possible are already being enjoyed. There are no “new synergies”. I pointed this out to the NYS Legislators.

4)      Further, a letter submitted by the NYS Comptroller’s Office cast doubt on the existence of new synergies saying it was “difficult to quantify” the savings from synergies that the Moreland Commission was projecting. See, Newsday 3/7/13, “New doubts on privatizing LIPA”, by Mark Harrington [online title varies from print edition]. That same letter “notes the benefits of public ownership in getting federal reimbursement for storm costs” and notes that a private entity will have much higher financing costs. Id.

5)      A study commissioned by LIPA and conducted by the Navigant Group in 2010 assessed the value of LIPA’s T&D system at $5.4 billion. LIPA has debt of approximately $7 Billion, so a sale for $5.4 would leave taxpayers or ratepayers on the hook for approximately $1.6 Billion. See, Newsday 2/27/13, “LIPA study: Rates up if privatized”, by Mark Harrington.

6)      However, the Moreland Commission assumed a value of only $3.5 Billion, leaving $3.5 Billion in orphan debt. Id. Further, it seems that the studies currently being conducted by Lazard and NYPA, which I discussed yesterday , is using a valuation of only $3.5Billion.

7)      Perhaps the discount in value is the result of National Grid’s performance reports consistently putting its customer service performance at the bottom of national rankings? Supra, “New doubts on privatizing LIPA”, link at para. 4 above. Everyone you can name, including the Moreland Commission, the Governor, and both houses of the NYS legislature and local government of every stripe have denounced the poor management of National Grid over the T&D system.

The Tale of Three Non-Transparent Investigations Into LIPA

By: Cynthia Kouril Monday March 11, 2013 4:50 am
Author’s note: This post, and the post to follow tomorrow, would not have been possible without the hard work and talent of our own Kelly Canfield who excerpted all the video clips from hours and hours of committee hearing testimony. I owe him a huge debt of gratitude. 

Currently there are three investigations going on into the future of Long Island Power Authority (LIPA). The first is the Moreland Commission investigation, which caused quite a bit of controversy when it recommended selling all of LIPA’s assets, the electrical transmission, and in how public bond debt would be paid for, or how a privately held utility could afford cost of capital if it had to borrow at 10.7% instead of the 5% that LIPA’s bonds currently enjoyed.  Crain.s New York Business and Bloomberg Newsweek predicted that this would lead to a 20% hike in costs to customers.

The Moreland Commission has held few public meetings, but also claims to have conducted depositions and to have subpoenaed many documents. None of this other investigative work is posted on their website, or at least I couldn’t find it.

The interim Moreland Commission Report compared the current, moot, contract between LIPA and National Grid to privatization.  This is a false comparison. The National Grid contract expires at the end of this year. LIPA engaged in a multiyear, multi-consultant, series of management reviews and crafted a new contract which will begin January 1, 2014. This contract is a dramatic departure from the expiring contract and works on a new collaborative model that will allow for a transition to a fully municipalized LIPA, as the LIPA in-house team gains experience and expertise in directly running the T&D (transmission and delivery) system. The new business model is called ServCo, and its financial incentives align the new operator with the ratepayer’s interests.

LIPA then put that ServCo contract out for competitive bid via an RFP (request for protocol) process.  Ninety electric companies bid. The winner was PSEG, which is currently ranked second in the Eastern United Sates for customer satisfaction from J. D. Powers & Assoc.  PSEG is also in the second year of a two year transition contract that terminates January 1, 2014, when PSEG is slated to take over operation of the system.

You would think that if Moreland were investigating the future of LIPA, they would be comparing the soon-to-begin new contract against all other possible alternatives, wouldn’t you? Yet when asked about the specifics of the new contract in a recent New York State Senate hearing, the Executive Director of the Mooreland Commission could not answer the question and deferred to a representative of the New York State Power Authority (NYPA).

This brings me to the other two non-transparent investigations.

Over the years, LIPA has hired a number of consulting firms to come in and diagnose what was going wrong with its management of the various private companies that were operating the T&D system for LIPA and to suggest alternative business models that might be an improvement. All but one of those consultants rejected privatization out of hand as too costly to the consumer. One consultant, Lazard, did not reject any model, they merely stated that they did not have enough information to make a recommendation.  See, Lazard Report, Section 5 “Recommendations” page 71, et seq (page 87 et seq in the pdf).

So, as you may have guessed, New York has now given Lazard a contract to find out if any private entity wants to buy LIPA’s T&D system and to evaluate the cost and benefits of that. This process has been entirely out of public view. I have no clue what they are looking at, or what they might be willfully ignoring.

This brings us to the third non-transparent investigation. According to the testimony of its CEO, NYPA is also doing a crosscheck investigation of the Lazard investigation.

About Privatizing Long Island Power Authority- Part II

By: Cynthia Kouril Sunday January 27, 2013 8:11 am

LIPA Storm Costs Budgets, the chart on page 3. (click to embiggen)

In his State of  the State speech, Governor Andrew Cuomo advocated taking Long Island Power Authority (LIPA) private. This is fascinating since LIPA was created to bailout private LILCO. LIPA owns most of LILCO’s former assets and has issued debt in the form of government bonds to the tune of over $6 billion. You can read more about it in Part I of this series.

Over the years LIPA has spent a fair amount of money ordering up management reports from a variety of consulting firms. In 2005, there was a Strategic Review performed by FTI Consulting in conjunction with Bear Stearns and three white shoe law firms. The consultants looked at three operational options: 1) continuing as a public private hybrid, 2) full municipalization, a public run utility, and 3) privatization.

The study concluded that privatization would result in an immediate and dramatic increase in electric rates. It also concluded that there would be problems with adding so many workers to the public payroll and pension system. The contract with Key Span was up for renewal and FTI thought that LIPA could extract concessions that would make it possible to improve performance and pay down the Shoreham debt. Instead, in the renewal negotiations, LIPA gave away something VERY important. LIPA changed the contract to allow Key Span to pass through its storm damage costs instead of budgeting for and absorbing them. A report by the NYS Comptroller shows how storm damage costs skyrocketed once Key Span/National Grid lost any incentive to control them. The chart on page 3 will knock your eyeballs out.

In February 2010, Lazard put out another Strategic Review of LIPA and explored the same three operational options as well as variations involving acquiring one or more generators and an enhanced status quo version that included an aggressive “green” initiative as well as smart grid technology. Lazard concluded that there was not enough data available to make a determination about whether continuing the public/private structure, privatization or full municipalization is best, and urges data gathering saying it should not be left until the current contract with National Grid expires until 2013.

In May 2010, Navigant Consulting did just that and concluded that full municipal would be the best deal for ratepayers.

In August 2011, there was another Strategic Review, this time by The Brattle Group. Brattle was tasked with providing the cost data comparisons that the Lazard Report requested. Brattle found that privatization would immediately increase rates by 10-20% but that the rate impact of both the Serv-Co option and full municipal options would be comparable to current rates and within inches of each other. The Serv-Co option was a new option to improve upon the existing public/private hybrid. It is a sort of training wheels approach for LIPA to allow its employees time to develop expertise and institutional memory necessary to be able to one day run the utility outright. If you click on the link above there is a more detailed explanation of the ServCo option. The conclusion of the Brattle Group was that privatizing would cost a fortune and immediate full municipalization might result in LIPA personnel not being able to manage the system. The training wheels Serv-Co won out by default.

In October 2011, LIPA began a public Strategic Review process that included hearings and input from the public to explore the Serv-Co option. On October 27, 2011, the LIPA Board of Trustees voted to adopt the Serv-Co option and the public process was to decide the details of how it would be done. I went to a number of the meetings, and followed the accounts of the others. There were a lot of good ides offered, including from the unions about how to manage the workforce and how to deal with the pension issue if the utility went full municipal. In fact, the electrician’s union had an elegantly simple idea which was for LIPA to contract directly with the union and the union is a contract labor provider and the workers stay in the union pension plan. There may be legal issues with that, but I thought it showed cooperative brainstorming by those involved.

LIPA put together and RFP based on the ServCo model that came out of this public process and bid out the new contract. PSE&G was the successful bidder and the contract was entered into in December 2011.

Bottom line, years of study and effort have gone into figuring out what form LIPA should take going forward. The only thing that all the consultants seemed to agree on was that privatization was too expensive. Lazard wrote the only report that held any prayer for privatization, sooooooo guess who has a new contract to go find a private company to buy LIPA? You guessed it, Lazard.

Then, the Mooreland Commission comes out with this privatization recommendation. They don’t explain how privatizing will do anything about the causes of LIPA’s failures during Sandy or other storms. They don’t explain how it will be possible to finance LIPA’s billions of dollars in debt at commercial rates; they don’t explain why any private entity would want to take on all that debt. Nope, they just have some vague gut feeling that a private entity will be more “accountable”.  Never mind decades of study and analysis. Crain’s is reporting that the idea of privatizing will amount to a bailout of Long Island by the rest of the state.

But analysts believe that persuading a private company to buy the much-maligned utility would require the state to assume at least $4 billion of LIPA’s $7 billion in debt. A sale would then trigger nearly $1 billion in additional costs: early-termination fees paid to bondholders, as well as penalties for the derivatives contracts that would suddenly become void, according to people who have studied a privatization.
.               .               .               .               .               .

Any private buyer would seek to raise rates so it could pay down debt, cover the costs of stormproofing LIPA’s infrastructure—and generate a decent shareholder return. But higher rates are a nonstarter. Mr. Cuomo earlier this month demanded they be frozen as part of any privatization. The only way out of this box, analysts say, is for the state to assume a portion of LIPA’s debt so a buyer gains some financial flexibility.

New York State just struggled to close $1Billion budget gap. Where in hell is it going to get another $4-5 billion to bail out LIPA?

So what’s up with this LIPA privatization idea? Part One

By: Cynthia Kouril Saturday January 12, 2013 5:54 am

The history of how LIPA got to where it is today.

In a 10+ year construction project that was originally estimated at $75 million, but ultimately cost $2 billion, LILCO (Long Island Lighting Company) built the Shoreham Nuclear Power Plant. It was completed in 1984. In 1983, the Legislature in Suffolk County, where the plant was located, voted not to allow the plant to come online because there was no safe way to evacuate Long Islanders in the event of a meltdown or other serious event. Other municipal entities throughout Long Island followed suit.

After massive public protest, Governor Mario Cuomo acquiesced to the environmentalists and ordered that no state official should approve any LILCO evacuation plan. Still, LILCO thought they could change public opinion or litigate its way out of the problem or something (hostage taking?) because in 1984-5, LILCO doubled down on its bad investment and got Nuclear Regulatory permission to do testing at 5% power. This caused all the piping, etc., to become radioactive.

In 1989, Governor Mario Cuomo and LILCO announced a deal where the state would bail out the costs, which now had grown to $6 billion, including a $1.4 billion fine from the Public Service Commission for shoddy construction, mismanagemen,t and hundreds of millions of dollars in decommissioning cost,s and costs to move the radioactive material to Pennsylvania, and created LIPA which would purchase LILCO’s assets and debt. A 3% surcharge was to be added to customer bills and used to pay off the debt, at which point it would be feasible to re-privatize. Although the surcharge was authorized for 30 years, the planned retirement of the debt was in 2013. Which might explain why the current Governor Cuomo thinks 2013 is a good year to talk about privatizing LIPA?

LIPA was able to issue tax-free bonds to finance this debt, which would be ruinous to finance at commercial lending rates. Many of those bonds are not “callable” which means you cannot pay them off at will, but must continue to make periodic payments until the bonds expire. Bloomberg News has estimated that it would require additional debt, just shy of an additional $1 billion, to establish a sinking fund to make those payments if the Authority is abolished. I question whether they can do that without additional legislation because some of these bonds are dedicated funding source bonds which means you cannot just substitute another source for repayment just because you feel like it.

So, let’s relieve this conversation of any notion that investor owned utilities are somehow inherently better managed than publicly run utilities.

During the early period of the bailout, LILCO continued to own and operate most of the generation, transmission and distribution system as well as a natural gas distribution system. It took almost ten years to negotiate a complete the sale of most of the LILCO assets. Its natural gas system was sold to Brooklyn Union Gas which later became Keyspan. Some of the power generators were sold to private investor owned companies and are in private hands to this day. While this was going one, most of the rank and file and middle to upper management people from LILCO stayed in place and ran the electric distributions system the same as always. LIPA had no need to get involved with the day to day running of the power system and was primarily a funding organ with its ability to access funding at less than ½ the commercial rate. The same people, who already knew how to run and maintain the system, reported to work to the same places and went home their own Long Island houses. Since they were customer as well as suppliers, they had self interest in making sure the power stayed on.

I’m not saying they did a perfect job, Hurricane Gloria caused an outage that took 2 weeks to fully restore, but their interests were aligned with those of their family, friends and neighbors. By 1998, Keyspan had hired the LILCO workforce and entered into two primary agreements with LIPA : 1)The Power Supply Agreement whereby Keyspan agreed to keep various generators not owned by LIPA open and available to supply power if needed so that LIPA could meet mandated peak demand generation capacity levels, and 2) the Management Services Agreement under which Keyspan would manage the former LILCO employees for LIPA. LIPA was still primarily a conduit for bond financing. In my humble opinion the Power Supple Agreement is seriously biased in favor of the private investors who own the power plants. LIPA pays for power on a cost plus basis AND pays the property taxes and other costs of keeping these plants open. There seems to be virtually no downside risk to the “entrepreneurs” to justify the generosity of the contract terms.

In 2007 Keyspan merged with a British company, National Grid. Suddenly, the decisions about day-to-day management were being made by suits in London who would not be inconvenienced in the least by a blackout on the other side of the Atlantic. I’m not calling our English brethren out, it’s simply that the natural alignment of interest that occurs when the seller is also the consumer, was now lost. I first found out about the merger when I noticed that the tree trimming methods had changed. I used to be the Capital Construction Counsel at NYC Parks & Recreation and you pick up knowledge about things like proper tree trimming methods. When I noticed the change, I asked the pruning company I used for my own yard and they said that the new method would increase productivity in the short run, but cause new growth to come back in a way that would be even more detrimental to the overhead wires. I asked around a bit and found out about the merger, and that the new overlords were looking to have the company hit certain metrics.

The contract between LIPA and National Grid did allow LIPA to monitor National Grids work and do contract compliance, but LIPA had not developed any real capacity in this area and National Grid proceeded to run roughshod over LIPA. When Andy Cuomo refers to National Grid being in violation of their contract, as he has on several occasions, he’s not kidding.

In the next installment, I’ll take you through the reasons LIPA lacks certain management capacities and what it has done in the past to mitigate those deficiencies and why it is counterproductive and premature to talk about privatizing LIPA right now.
In the meantime, you might want to listen to a conversation I had on WOR radio the other day with John Gambling about the LIPA issue.

References available on request.