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.

Sounds pretty impressive, eh? They would know all about the new PSEG ServCo contract, right? Wrong.

When the Moreland Commission representative punted on the question about what was in the new PSEG ServCo contract, she punted to the person who is directly heading the NYPA cross investigation, the guy who should be an expert since he’s doing all this modeling and stress testing. Seems logical? He actually answered the question, but got the answer wrong.

In point of fact, there is no cost to LIPA to get out of its contract with PSEG other than paying up the regular monthly billing already incurred and any pass-through cost associated with winding down.  There is a link to the contract here; the relevant provisions begin on page  42 (pdf page 51) Section 7.4(B) and (C) and Section 7.5. In fact, in a later panel the representative of PSEG sets that record straight.

So, we have three non-transparent investigations. We have no idea what they are examining, yet we are supposed to rely on their conclusions. The only clue we have to date is the interim report from the Moreland Commission which made it clear that they were comparing the expiring, moot, national Grid contract to the alternatives. And we also have the shadows on the wall. It’s pretty obvious that none of these investigators has working knowledge of the ServCo contract, nor do they seem to be aware that it departs dramatically from the prior contract in how the economic incentives are aligned to increase customer satisfaction with the service they receive. Nor do any of the investigations seem to be dealing with the economic realities of increased borrowing cost and loss of tax-free status by a private owner. There is also the issue of access to FEMA funds.

Last note, there is a lot of conflating the terms “rate increase” with cost to consumers. You can freeze the rates for all eternity if you want, but that does not mean that the bill to the consumer won’t go through the roof. The increased costs can, and likely will, be in the form of a surcharge added on top of those frozen rates.