New Adventures in LIPA Privatization
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.