When Superstorm Sandy ravaged the coast of New York in October 2012, nearly a million Long Islanders lost power and Gov. Andrew Cuomo wasted no time in blasting the Long Island Power Authority and its system operator, National Grid, for what he characterized as a “failed” restoration effort and “poor communication” between LIPA and its customers. After some ratepayers didn’t see their lights come back on for well over a week, the governor convened a commission to investigate utilities’ responses during the storm.
In June 2013, Cuomo announced a “landmark agreement on legislation to dramatically revamp” Long Island’s troubled power utility, promising to eliminate LIPA’s dysfunctional management structure, increase government oversight, stabilize rates – Long Islanders pay some of the highest utility bills in the country – and improve customer service. In the process, National Grid lost its contract with LIPA, to be replaced by PSEG Long Island, a newly formed subsidiary of the for-profit Public Service Enterprise Group headquartered in New Jersey.
But the governor’s restructuring has come under fire from customer advocates, the state comptroller’s office, and even from some who sit on the LIPA board, who maintain that the customer’s best interests have not been accounted for.
“There is a problem with the LIPA Reform Act,” said Matthew Cordaro, a member of the LIPA board of trustees who was appointed by then-Assembly Speaker Sheldon Silver. “It doesn’t hurt to have additional oversight, but it’s not the ultimate answer. There is a better way to do this.”
Cuomo had initially proposed privatizing LIPA in 2013 – perhaps, some speculated, in an attempt to wipe his hands of any responsibility he had over the utility once and for all. Although the governor had the power to fill nine of 15 seats on the authority board, he had made only a single appointment in the years leading up to Sandy. LIPA’s last president and CEO, Kevin Law, had stepped down the same year Cuomo took office in 2011, and the governor had never replaced him. When Sandy hit, LIPA’s management had already been adrift for some time, and the utility was notorious for its high rates, high debt, and poor service and customer relations.
In the end, however, LIPA remained a public authority under the governor’s 2013 reform act. But stripped of much of its staff, the utility was largely reduced to a holding company with a newly reduced, nine-member board charged with overseeing PSEG Long Island, which would take care of all day-to-day maintenance and operations. Before, LIPA had largely been the face of utility service on Long Island. Now PSEG would try to fill that role.
As part of the reform act, LIPA and PSEG have also become subject to scrutiny from the state Public Service Commission for the first time. And the very first rate case since the reform, which wrapped up last month, resulted in the approval of a $325.4 million rate hike – nearly 5 percent over three years. The LIPA board declined to vote on the proposal, in effect tacitly approving it.
“One of the other reasons that LIPA’s rate increase was fairly big, or if you want, why the cost of the commodity on Long Island is fairly high (is) you have a lot of deferred maintenance that is being made up for,” said Richard Berkley, executive director of the Public Utility Law Project of New York. “LIPA was not spending enough money on its storm preparation and basic operations and maintenance before.”
The increase disturbed customer advocates like AARP, however, which has noted that over 17,000 LIPA accounts were terminated in 2014 – around 46 a day. It also unnerved some LIPA board members, who say the increase could have been further reduced.
“There are always ways of manipulating the budget to provide adequate service and minimize revenue requirements, minimize rates. You can always sharpen your pencil a little bit more,” Cordaro said. “And I had a concern that we hadn’t gone far enough in doing that.”
The problem, advocates say, lies in the structure of the reform act itself, which made revisions to the so-called operations services agreement, the master document according to which PSEG operates the system for LIPA. The new agreement, they contend, fails to account for customer affordability when calculating rate increases.
“I would say there was a whole slew of issues that the reform act addressed, but clearly, from what occurred recently, it appears there is a flaw in that law – that affordability needs to be considered when the trustees examine the official recommendation from the PSC,” said Bill Ferris, AARP’s legislative representative for New York state.
Under the 2013 reform act, LIPA’s board must implement the recommendations of the PSC, unless LIPA decides that the recommendation is “inconsistent with the authority’s sound fiscal operating practices, any existing contractual or operating obligations, or the provision of safe and adequate service.”
“The misleading part of it is the LIPA reform act really limits the grounds under which the board can challenge the (PSC’s) recommendations,” Cordaro said. “It narrows it to three specific fiscal-type issues. It doesn’t give the board the responsibility to make a determination on whether indeed the (Department of Public Service) in its final recommendation has come up with something which represents the lowest achievable rates while still providing adequate service. … I think it is a failing of the LIPA reform act and definitely something which complicated this concept of oversight by the PSC.”
A Department of Public Service spokesman, however, said the reform act has been “a tremendous success.” He pointed out that LIPA trustees could have voted down the rate recommendation if they could demonstrate that it was not set at the lowest achievable level or consistent with sound financial practices, but that they couldn’t point to a single item that could have reduced rates. “After a three-year rate freeze customers will save $720 million over the next three years. Additionally, storm preparedness plans and massive upgrades are underway to provide improved service and reliability for all of Long Island.”
A July report from state Comptroller Thomas DiNapoli’s office was also critical of the 2013 renegotiation of the operating agreement between LIPA and PSEG, claiming that “many of the beneficial terms and protections built into the original contract were modified or eliminated … (including) budget oversight and cost control mechanisms, performance measurement metrics, storm cost provisions, and compensation terms.” LIPA customers, the comptroller noted, on average paid 22 percent above the state median and 78 percent above the national median in 2013.
Specifically, the comptroller pointed out that, unlike in the old agreement, PSEG is not required to give monthly budget reports to LIPA comparing actual results of month-to-month collection of customer payments against the overall budget – eliminating LIPA’s ability to watch for early warnings of cost overruns or schedule delays.
Finally, the comptroller contended that “LIPA’s 2014 performance evaluation, prepared in accordance with the Public Authorities Reform Act of 2009, does not identify any specific efforts to limit or reduce costs for ratepayers, or to provide reliable and responsive electric service.”
A memorandum filed by the LIPA board of trustees disputed the comptroller’s report, saying it “misstates the authority’s financial condition” and ignored a new financial plan to reduce the level and cost of future borrowings while using the Utility Debt Securitization Authority to reduce the cost of existing debt for customers. The memorandum also says the comptroller’s report “fails to acknowledge that the authority’s rates are up to 40 percent lower than neighboring electric utilities operating in the same region.” LIPA pointed out that taking inflation into account, rates have declined by 30 percent since 1998, whereas the rates of neighboring utilities have gone up as much as 27 percent, adjusted for inflation.
It should be noted that as part of the LIPA Reform Act, the state comptroller’s office was stripped of its mandate to review and approve any LIPA contract worth $25,000 or more.
Berkley of the Public Utility Law Project says there is no doubt that oversight was inadequate before Sandy, and says giving the Public Service Commission a role in the ratemaking process is an “important step towards transparency and accountability.” But he says the comptroller should not have been left out of the equation either.
“I think maintaining or establishing a powerful role for the comptroller is equally important because the Public Service Commission and the comptroller do two different things by statute,” Berkley said. “The Public Service Commission is designed to work in the area of rates – they also do management audits of utilities and emergency plan audits – but it is less of their everyday function than doing rate proceedings. The comptroller’s primary job is financial audits, management audits and program audits. And isn’t it better for the public interest to have the two acknowledged experts in this area in the state both be involved?”
As far as storm preparedness is concerned, board member Cordaro says PSEG does appear to be better prepared than before. The utility has installed new computer systems to help better manage and track work and repair efforts, and is replacing outdated equipment, modifying substations that are vulnerable to flooding and generally hardening the system against future severe weather.
“It does appear that they have made strides for better preparation. But you never really know until a major storm hits,” Cordaro said. “They have been very fortunate up to this point that there has been a very minimum amount of severe weather where they can be tested. … But having been in the utility industry for over 40 years, I can tell you that definitely they have improved the level of preparedness. And they have a significant amount of experience.”
Cordaro also concedes that LIPA’s operating structure is better than it was, but thinks the for-profit utility model is fundamentally flawed.
“It’s not as haphazard – at least there is some formula to the madness here. I think as it was, it was totally ad hoc and LIPA was the judge, jury and executioner,” he said. “But I don’t think it’s an improvement over what would have been the case if when LIPA was restructured it had been restructured as a full-service municipal utility without having a for-profit entity provide its service.”
The LIPA board is expected to make a final vote in December, which will include the new, PSC-approved rates.