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.
8) LIPA has entered into a new type of contract, with a new business model called ServCo, with PSEG which goes into effect 1/1/14. It contains provisions meant to correct many of the deficiencies of the current National Grid contract which expires at the end of this year. The contract is here . Take a look at appendices 3, 4 and 8 and you will see that the new ServCo model provides clear metrics for measuring PSEG’s performance and allows LIPA a level of involvement they never exhibited under the poorly defined National Grid contract.
9) PSEG currently enjoys a number 2 ranking for customer satisfaction in the NE from JD Power, in part because they have a state of the art storm outage system.
10) LIPA also entered into a two year transition contract with PSEG when it won the main contract in a competitive bid among 90 utility companies. The transition contract began January of 2012 and ends January 1 of 2014, when PSEG completes the transition and begins operating the T&D system. During the first year of its transition contract, PSEG has already made 80 suggestions for management improvements. During the second year (now) PSEG will begin installing its state of the art storm outage reporting and communications system.
11) This suggests that by the end of the transition period, once PSEGs superior customer satisfaction measures are in place, the value of the LIPA utility will have increased because the National Grid mismanagement problems will have been corrected.
12) It also means, that at the end of the transition contract there will be only two companies that are in a position to immediately take over the LIPA assets and run them as a privatized utility without the need for a new transition period: National Grid which continues to run the system throughout this ongoing transition period and right up to 1/1/14, and PSEG which is slated to run the system come 1/1/14.
13) If you loop back to the issue of these alleged cost savings from as yet unquantified “new “ synergies, the following testimony offered by a representative of the electrical union local that represents the linemen currently employed by National Grid and soon to be employed by PSEG if the 1/1/14 ServCo contract is not thwarted by privatization, makes no sense. The bulk of his testimony was not about whether any given model would help or hurt the electrical workers he represents, it was about synergies that will be lost because going forward National Grid’s gas utility workers will no longer offer mutual aid to the electric workers (which I must say sounds pretty petty on NG’s part). Why would an electrician’s union representative being making this argument? When I heard it, it sounded like the sales pitch for why you should chose National Grid over PSEG as the buyer to privatize. Listen for yourselves:
Think about it:
What is the ONLY advantage NG has over PSEG? The gas workers can provide local mutual aid. What is the advantage PSEG has over NG? It’s JD Powers high rated management practices which it is currently bringing into LIPA in the transition contract. LIPA gets to keep this intellectual property that PSEG brings in even if it cancels the PSEG contract that starts in 2014.
So to recap, in 2005 NG buys LIPA’s operator, Keyspan, and begins a program of mismanagement that skyrocket’s LIPA costs and drives down customer satisfaction. In 2010, a fed up LIPA puts out a highly competitive bid and chooses from among 90 respondents and picks an RFP awardee with a high customer satisfaction rating and enters into a contract that addresses many, many of the complaints about the old NG contract.
Right now, it appears that there is a real danger that PSEG will spend two years fixing the management problems and then the state will sell the company back to NG, after 1) valuing it at the dragged down rate cause by NG mismanagement, 2) never comparing the new ServCo contract against the privatization model, instead comparing privatization against a moot expiring contract, 3) the actual assets sold will be worth more than their current valuation after PSEG fixes the management problems, 4) after taking advantage of LIPA under the 2006 restatement and settlement, NG could once again get a windfall at the expense of LI electric consumers. I will have more about this last bit in an upcoming post.
I won’t swear to it, but on the drive back from Albany it did occur to me that the decision to sell LIPA’s T&D system to National Grid for somewhere south of the $4Billion price LIPA paid for it back in the 1990’s might have already been made, and all these non transparent studies are actually investigations that could instead be casting about looking for “facts” they can back into a pre ordained conclusion. Instead of the facts leading to a conclusion, could there be a foregone conclusion in search of some facts to support it? Maybe that’s why these investigations are so secretive?