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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?
16 Comments
great series Cindy, thanks for pulling back the covers.
We deregulated and privatized our electricity market back in the late 90′s, and it didn’t work out so well. In fact, it was the single largest outflow of wealth in the state of California since the gold rush. However, this outflow didn’t spur economic activity world-wide. Instead, it enriched, the few, the powerful, and the greediest amongst us – and they laughed in our faces – or at least the face of “gramma Millie.”
But in a world where so called Democrats vow to look forward and never back, it’s looking like New York will find that the vaunted “free market solution” is the way to go. Your private owners won’t give a tinker’s damn about reliable energy at reasonable rates.
I should have clarified that the “result” of deregulation/privatization was that the new market participants jacked rates so high that electricity bills sky-rocketed, all by design, and companies like Pacific Gas & Electric ring-fenced the portion of the company that would otherwise have been on the hook for the cost of purchasing electricity in real time and left the rate-payer on the hook for the increases. Socialized cost & privatized profit.
What the worst possible deal for the consumers and the public?
The Public pick up the debts of LIPA, the company does not assume and liability for nukes (if any) in its privatization, and the consumers get a 30% rate hike?
That’s my formula to take it private, if I were the buyer.
Is this back when Enron was manipulating the energy markets and nobody believed Grey Davis when he tried to talk about it
Beautiful series. Keep going.
It’s crazy. Even if public picks up some billions of $, the private company will still need to borrow at private rates which will be at least double what it gets as a public bond issuer. Plus you have to set aside $ to retire the existing bonds some of which are required by law to have guaranteed repayment fund
Lord knows I’ve been to enough LIPA meetings and read enough management reports about them. There is just so much material, and yet the Moreland Commission website shows only the Lazard report. As if they were starting from scratch, as if all that work had not been done already.
Grey Davis did not use the State’s powers to drag the CEO of all the energy companies, and energy trading companies into a public hearing, and question them under oath.
And question them minutely when they used rolling blackouts as a weapon in February 2001, when peak electricity use in CA is in Summer for Air Conditioning.
He was perceived as doing nothing. A Democratic wonderkind he was not.
It was obviously going to be a clusterfuck when San Diego’s consumer power prices went up by a factor of three or more the summer of 2000.
Davis was in charge then and the price explosion was widely reported. So well reported in fact that I remember going out and replacing all the bulbs in my house with compact florescents, to my wife’s scorn.
I manage to keep my bill level over the transition. Others were not so lucky.
True, but the “Privateers,” Bankers and Bondholders will make money. Paid for by the consumer.
The new company will be so laden with debt it will go into Bankruptcy, and the break all its promises to labor on pensions, pay and conditions, before the bondholder that a haircut.
It’s fraud, pure and simple. Needs a pre-emptive class action suit by employees and consumers to prevent the fraud.
“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?”
Same place it could get the revenue to rehire all the public employees it laid off, and provide the public services it curtailed: the NY State Stock Transfer Tax.
As Ralph Nader pointed out in 2011, during Andrew Cuomo’s campaign for governor, this stock transaction tax generated $16 billion in tax revenue in one year alone, more than enough to wipe out the state’s budget deficit and then support programs needed by the poor and middle class.
But, as Nader further explained, since 1979, 100% of the revenue generated by that miniscule tax on every stock transaction has been rebated to Wall Street.
“Liberal” Dumbo Cuomo refused to change this, and the Dumbocrat-controlled NY Assembly as well as the Repulsive-controlled NY State Senate have also resisted any efforts to change this.
Last year, State Senator Tony Avella (I am a constituent in eastern Queens County, NY) sponsored a timid bill to use 20% of the revenue from that NY state stock transaction tax for state programs. It still languishes without any action.
Similarly, a national stock transaction tax (also known as a Robin Hood Tax) would generate a significant amount of revenue to quiet the deficit hawks and debt screamers. But Obomber, the Dumbos, and the Repulsives all refuse to tap into this source of revenue for fear of alienating their Wall Street puppet-masters. And corporate media will not tell us about this, for obvious reasons. Better we should all run around screaming “DEFICIT!”, “DEBT!”, “FISCAL CLIFF!”, and “CUT ENTITLEMAENTS!”
Gee, privatizing and deregulating power. Nothing could possible go wrong there. Except where it turned into a disaster in California, Montana and quite a few other places.
Funny how power was cheap, stable when power companies were well regulated utilities. Funny how when states, counties, etc strapped for cash sell off their assets at rock bottom prices and the new owners proceed to gut the customers while saddling their new company with even more impossible debt (often ultimately forcing it to be “re-acquired” by the state, city, etc at another tremendous loss.)
This is how Wall St makes money and everybody else gets raped.
This is looking more and more like a scheme to stick taxpayers with the bill for cleaning up a private mess and letting the private sector start anew to mess things up royally. Not that we hadn’t already been stuck with the bill, but this gives the private sector the new start on profits without losses.
And in the process, anyone else think there isn’t a chance in hell that service gets better.
Sort of like the bus strike in NYC. Anyone paying attention to the last few years, knows the only way private bus companies make money is by cheaping out on the employees, equipment and maintenance. Still the city is trying to ‘privatize’ the service to save money. But let’s blame the damn workers for standing up for not getting paid so that one or two people can make a profit.
Anyone who was paying attention during the “deregulation” of electric power in the ’90s will tell you that this was nothing more than a re-regulation of electric power that was heavily influenced and financed by the then existing industry. Prior to re-regulation, NY State had a provision in section 66C of the NY Code that required the purchase of electricity generated by independents, and small generators at a rate of 6 cents per kilowatt hour. This was part of the “conservation of energy” section of the law. Miraculously, this provision was repealed with the help of the lobbying firms employed by the major NY State utilities.
I agree that we need Robin Hood tax. The reason there is hesitation about the state tax is the threat that Stock Exchange will leave NYC and go to Kansas or someplace
Actually, in defense of the Mooreland Commission, they suggested INCREASING regulation of all NYS utilities. Currently, LIPA is not regulated by the same body that regulates all the other NYS utilities.
So DE-regulation is not a factor here