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New Adventures in LIPA Privatization

6:51 am in Economy, Executive Branch, Government, Legislature, State Government by Cynthia Kouril

As I have previously written (here, here, here, here, and here), the relationship between LIPA (Long Island Power Authority) and National Grid has been dysfunctional for a long time. This is mostly the result of a poorly written contract between them, but has been made worse by the fact that LIPA has not had a CEO for years and the long term interim CEO was known to have been turned down for the permanent job, rendering him the lamest of all ducks.

The LIPA Board of Trustees set out to remedy those problems that it could on its own. It engaged in multiple management and operations studies by well known and respected consulting companies. Based upon the recommendations from the consultants, it developed a new plan for LIPA that would allow for greater day-to-day control by LIPA of operations and costs and more accountability for the contractor hired to do the operation of LIPA’s Transmission and Distribution System (T&D System).

It put out a request for proposal (RFP) based on this new concept, and the bidder with the highest score for quality of bid and lowest cost was chosen, PSEG. The new “ServCo” contract with PSEG is currently set to begin on January 1, 2014. An approximately 2 year transition contract was also issued to PSEG for 2012 -2013 during which PSEG came in and familiarized itself with the system, made over 80 suggestions for improvements and began installing new software and hardware in preparation for the 1/1/2014 takeover. All good so far, then came Hurricane Sandy.

I believe that Governor Cuomo sincerely wanted to help, to do something wonderful to make things better for the people of Long Island who were left in the dark for weeks while National Grid and the leaderless LIPA staff mis-communicated and failed to properly supervise the work of the out of town crews. He appointed the Moreland Commission to study what went wrong and make recommendations.

Governor Cuomo’s Moreland Commission produced a report about LIPA that was such an example of towering ineptitude that it set off a firestorm both on Long Island and in Albany. It blamed the public/private concept for the disfunction and called for privatizing LIPA, which would saddle ratepayers with approximately $4 Billion in orphan debt and give a windfall to some unnamed private buyer. It would have dramatically increased borrowing costs. Considering the sophistication and business acumen of many of the Commission members, it was unfathomable that such cluelessness could have been allowed to be published over their signatures. Did they even read what their staff had written?

It was such an obviously ridiculous proposal that one had to wonder what backroom baksheesh occurred or was anticipated. Now royally screwed by his own Commission, the governor was in a tough spot. Short of imitating Emily Litella, what could he do to avoid admitting failure?

After influential groups, such as the Long Island Association began voicing support for allowing the ServCo contract with PSEG to go forward as planned, the Governor apparently seized on the fact that PSEG’s good customer service record was popular on Long Island (rather than considering that the ServCo model was a vast improvement over the status quo) and suddenly proposed that the start date for PSEG be accelerated to put them in place RIGHT NOW, so that they would handle the 2013 summer storm season. That would have gutted the carefully planned rollout and caught PSEG flat-footed and without the new storm management system it is building. It was a recipe to force PSEG to fail. I assume that PSEG turned that idea down, because as of last night’s hearing in Nassau County, PSEG is not starting until 1/1/2014.

On May 13th, the Governor doubled down again on the terrible privatization idea and issued draft legislation that would put most of the planning and budgeting and policy functions of LIPA into the hands of PSEG, which orphans decisions such as new power plants, modernizing existing plants and renewable energy. Worse, it would created a third party bureaucracy, a new 50 person arm of the Public Service Commission on Long Island which would have advisory powers only since LIPA’s bonds require all decisions to be made by the LIPA Trustees, while stripping LIPA of some 70 people, making it impossible for LIPA to perform the aggressive day to day oversight called for in the ServCo contract.  So, if the governor is down on public/private partnerships why in heaven would he want to go from a two party public/private to a three party public/private that has LESS daily supervision?

After the various storms, the NY State Comptroller’s Office performed audits. After Hurricane Earl, the audit showed staggering waste fraud and abuse on the part of out of town crews and led to major management reforms. The new legislation strips the Comptroller’s Office of its oversight function, one of the few things that have been actually effective in dealing with storm costs. The Comptroller, a native Long Islander who still lives here, has slammed the proposal.

Last night I attended a forum in Nassau County about this legislation. The overwhelming response of citizens was either negative or questioning.  Elected political allies of the Governor’s came to offer their support, but their remarks so closely parroted the talking points offered by the panelists sent by the Governor that is was apparent that they were reading from the same talking points

Worse, I have been getting telephone calls from financial analysts and hedge funds concerned that there seems to be a new hair-brained scheme every couple weeks. LIPA bonds are in danger from being put on a “sell” recommendation from the current “hold”.  Holders of large positions in the bonds have hung in there because of the improvements in oversight and management promised by the new ServCo model, but their loyalty to those bonds will be betrayed if this legislation becomes law. Oh, and there is no guarantee that the IRS will continue LIPA bond’s tax exempt status under the arrangement in the draft legislation and it creates yet a another new bureaucracy to do refinance. Yep, that’s now a four way public/private partnership.

This entire fiasco happened because there is a false premise that the new ServCo contract that begins 1/1/2014 is the same as the status quo, it is not. The choice is not between the craptastic contract between LIPA and National Grid and the Governor’s hasty and ill conceived draft legislation. There is a third choice, to allow the ServCo contract, slowly, deliberately and thoughtfully arrived at and already in the transition stage, to go forward as planned.

Governor Cuomo could do something important to make things better. He could finally appoint a CEO for LIPA and obtain a commitment from that CEO to appoint and support the work of an in house inspector general for LIPA.

Did Long Island Power Authority Try to Poison Pill National Grid From Buying PSEG LI?

1:31 pm in Economy, Executive Branch, Government, Politics, State Government by Cynthia Kouril

More on Long Island Power Authority: So What’s Up With Privatizing LIPA? Part 1 and Part 2. Testimony on Privatization part 1 and Part 2.

In 1986, then Governor Mario Cuomo announced creation of Long Island Power Authority (LIPA). See, “Andy’s fuzzy math” Nichole Gelinas, New York Post, 1/10 /13

It took until 1998 to complete the sale of all of Long Island Lighting Company’s assets.  LilCo employees, managed by LiICo managers continued to provide day-to-day running of the system.

The  transmission and delivery (T&D) system and the Shoreham debt were purchased by LIPA for a combined total of $7Billion. The gas system and power plants are sold to a new company that merged with Brooklyn Union Gas to form Keyspan. Keyspan hired the LilCo workers and managers. And they continued to run the system in a contract called the Management Services Agreement (MSA).

In 2005, a management study was done by FTI Consulting which says:  

FTI believes that the contract renegotiation with KeySpan provides the Authority with the optimum economic outcome for its customers at this time. It facilitates the overall monitoring of the new MSA by the Authority by changing the nature of the contract from a cost plus type contract to a fee for service contract.

[p. 37 in the document, p.41 in the pdf].

In 2006, the negotiation mentioned in the FTI report took place; however instead of tightening up any vague language which was allowing mismanagement to occur, the contract was further weakened even up to the point of allowing a pass through of storm costs to LIPA. The system operator no longer has any incentive whatsoever to control storm costs. See, p. 38 of the document, p. 46 of the pdf.

A Comptroller Office audit  reveals that immediately  after this weakening of the contract, storm costs surged from the tens of millions of dollars to the hundreds of millions of dollars. See, p. 3.

In 2007, soon after the pass-through of storm costs went into effect,  National Grid bought KeySpan. Evidently, LIPA didn’t get a vote. Customer satisfaction ratings failed to meet the contractually required threshold. This failure to meet customer satisfaction thresholds continues all the way into 2012  .

After Hurricane Irene, I attended a public hearing where the acting CEO of LIPA and a representative from National Grid were questioned. It was very clear at that meeting that the relationship was that of a failed marriage. If any of you watched the press conferences during Super Storm Sandy or its aftermath, you could see how broken the relationship was between LIPA management and National Grid. Recall, National Grid came into the Long Island market not because anyone at LIPA chose National Grid, but because National Grid bought KeySpan.

In 2010, there was another management study done by Navigant Consulting which concluded that full municipalization would result in the lowest rates for power.

There was also a study done by Lazard in 2010; however Lazard did not reach any conclusions, instead suggesting further research was needed:

Read the rest of this entry →

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.

Sandy Is the October Surprise

2:17 pm in 2012 election by Cynthia Kouril

possible storm tracks for Sandy

It seems that there is a hurricane coming up from the tropics. It seems that there is also a cold front zooming down from Canada; depending on the path of the hurricane, the two could meet right over Long Island.

During a full moon.

Should those three events come together in a “perfect storm”, New York City, The Hudson Mohawk Valley, The Raritan Valley, pretty much all of Southern Connecticut, and all of Rhode Island will likely see damage, maybe some in Massachusetts too.

Hurricane Irene is still fresh in my mind, probably because here on LI, we are still fighting with LIPA (Long Island Power Authority) about it and because of the abysmal storm response we suffer through,  the Governor is appointing new LIPA management next month.

I’m planning for power outages. Another storm track projection has the storm making a sharp inland turn and plowing through Pennsylvania.

If we have the kind of damage that happened during Irene, we might not have power in many Democratic strongholds like Philadelphia on Election Day. Even if they can get the power back on by that day, we will have lost the last critical week of GOTV on the bluest part of the very blue Northeast coast.

NPR reported earlier today that Massachusetts’s Gov. Duval Patrick had already ordered emergency response plans to be delivered to him by Friday from utility companies there. I think Governor Cuomo should be on the phone to our utilities as well.  So should a few other governors.

Remember, Irene was just a hurricane. Sandy will be a hurricane, plus a cold front, plus a full moon.

If I were President Obama, I might consider the possibility that some of those swing states may become disaster areas (one storm track puts Virginia and Maryland in harm’s way) and have a contingency campaign schedule in case POTUS needs to drop everything and do crisis management. You would not want Sandy to turn into Obama’s Katrina.

On a somewhat related note, those of you who live in any of the storm threatened areas, please make preparations, heed any evacuation orders, keep up-to-date with the storm’s progress and try to stay safe. After the storm, a myFDL diary to check in and let us know you made through OK would be a relief from worry.

 

And NO, NY does not have early voting.