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?