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

5:54 am in Executive Branch, Government by Cynthia Kouril

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.