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:

However, LIPA currently lacks the detailed information to properly evaluate the MSA as compared with other options it could pursue. Once the requisite detailed information is obtained and these options are evaluated, LIPA should test the market to determine which alternative would best serve ratepayers.

See, p. 72 of the document, p.88 of the pdf.

For some reason this is the only study relied on in the Moreland Commission report.

There is an even more recent study, done by the Brattle Group in 2011, which concluded

ServCo ? MSA

See, page 6.

In 2010, the LIPA Board of Trustees voted to adopt a new business model called ServCo to replace the existing Management Services Agreement it has with National Grid which expires on 12/31/13, based on the recommendations in the Brattle Report. See, “LIPA trustees OK tighter operating model” Mark Harrington, Newsday,10/27/11.

LIPA put out a request for proposal (RFP) and 90 utilities responded. At the end of this competitive process, LIPA selected PSEG, which enjoys a high customer satisfaction rating from J. D . Powers & Associates; they are ranked number two in the Northeast.

Now here is the interesting little tidbit, there is a penalty clause in the contract between LIPA and PSEG. Take a look at page42 of the document, 50 of the pdf:

 SECTION 7.4 ADDITIONAL LIPA TERMINATION RIGHTS.

(A) Change of Control. In the event a Change of Control of the Service Provider, the Guarantor or the Parent Company shall have occurred on or after the Service Commencement Date, LIPA may terminate this Agreement upon not less than thirty (30) days written notice to the Service Provider; provided, however, that such notice must be given not later than thirty (30) days following LIPA’s receipt of written notice from the Service Provider of the occurrence of such Change of Control. If LIPA fails to give such notice to the Service Provider within such thirty (30) day period, LIPA’s termination rights with respect to such Change of Control under this Section 7.4(A) (but not with respect to any other or future Change of Control) shall expire and be of no further force or effect.

And page 43 of the document, 51 of the pdf:

(2) Termination Fee. If LIPA exercises its option under Section 7.4(A) hereof to terminate this Agreement due to a Change of Control, the Service Provider shall pay or cause to be paid to LIPA on the Termination Date the applicable termination fee set forth on Appendix 11 hereto.

Appendix 11 has the poison pill. If PSEG gets a change in control and LIPA decides to terminate them for it, PSEG has to pay a fee to LIPA that starts at $7 million. See, p. 220 of the pdf for the penalty fee chart.

It sure looks like LIPA is under the impression that National Grid, like a spurned lover who won’t take no for an answer, may try to undo the competitive process that resulted in PSEG getting the contract and may try to simply buy its way back into the  Long Island market by buying up PSEG. Of course that poison pill will also apply if anyone else tries to buy PSEG LI. It is pretty clear that what LIPA contracted for and what LIPA wants is the superior customer satisfaction that PSEG’s management practices have produced in other markets.

Whether or not a $7million penalty is large enough to prevent a takeover remains to be seen, but it seems pretty clear that what LIPA bought into was the quality of a particular management team and that team’s track record for customer satisfaction. LIPA appears to have tried to keep that team in place with this poison pill clause.

It would be helpful if LIPA, either through the few remaining C-Suite executives or through its Board of Trustees would explain what they did and why they did it, in public. I’m sure there are more than one media outlet that would welcome an Op Ed about this.

On March 15th, I will be testifying before some members of the Long Island delegation to the New York State Assembly about this.