Long Islanders' long nightmare with LIPA will soon be over.
Governor Andrew Cuomo came to Mitchell Field in Uniondale this week to officially sign legislation turning our electric utility operations over to PSE&G, which will establish a Long Island company. As of January 1, 2014, the Long Island Power Authority will be a holding company only, and PSEG will be all most of us see.
"Finalmente," Cuomo said. "Finally," quoting his grandfather, "but the way he would say it - half out of disgust and half out of relief… That’s the word for today. This should have been done a long, long time ago.
"LIPA was wasteful, expensive and incompetent, and that is bad combination … especially bad when you are a utility company, and they were that way for a long, long time.
"Bureaucracy begets bureaucracy, that’s what LIPA is a case study in – starting as a small entity, It was supposed to be holding company, and grew and grew. A beast..
"Today, we go back to system that should have existed a long time ago."
Governor Cuomo continued, "This was a difficult problem and the solution was more difficult to find.
"Sometimes in government, on the tough ones, it's easier to stay silent. LILCO, LIPA was one of those that for years, defied solution. Everyone would tell you the same things - that things are terrible, something has to be done. But nothing is done, year after year..
"[Senator Dean] Skelos is right, we knew something had to be done, but we also knew we would get it done. That’s the difference. We were willing to take on. This is another snapshot of government working."
It took Superstorm Sandy to finally burst the blockade of political gridlock.
Superstorm Sandy, Cuomo said, was the "straw that broke the camel's back." It was also the "silver lining" to the tragedy that befell Long Islanders.
LIPA has been dysfunctional for years and years, Cuomo noted. The question I posed (which was not answered) was whether Cuomo had the intention of reforming LIPA when he came to office, but that Sandy, like Pearl Harbor and 9/11, presented the opportunity, when every political power that be had to come together.
Truly, Cuomo did not waste a moment after Sandy before he was already calling for LIPA to be privatized.
I mean, it wasn't as if "the people" were clamoring to save LIPA. As Assemblyman Robert K. Sweeney said, "For as long as I can remember, if you wanted to rev up a Long islander, you only had to mention LIPA. Sandy may have been the most immediate issue, but there is a long history…"
The LIPA restructuring is appropriately described as a "win-win-win" and a "best of both worlds" - privatization and government oversight - with the benefits of the efficiency and expertise of a professional company (PSE&G), one of the most respected in its industry, taking over the operations, management, and strategic planning, but with the public continuing to own the assets (and the debt), and government having robust oversight so that ratepayers are not at the mercy of a rapacious for-profit corporation with monopoly control over a vital service.
The legislation privatizes utility operations on Long Island under PSE&G which is forming a new entity, PSE&G Long Island. The reorganization focuses on improving customer service, including stabilizing rates and enhancing emergency response and preparation. It reduces the cost of Long Island Power Authority (LIPA) debt; and implements tough state oversight for the new utility company through a newly established Long Island office, the Department of Public Services, an arm of the state's Public Service Commission. It also freezes rates for 2013, 2014 and 2015; thereafter, the utility will have to get government consent to raise rates. Also, the legislation establishes a 2% annual property tax cap for the transmission and distribution system.
The solution to the complex problem posed by LIPA, which Cuomo says was hashed out over hours, days and months sitting around a table with all the stakeholders, seems fairly practical and straight-forward, but all the politicos hailed Cuomo's leadership in getting the deal done.
Nassau County Ed Mangano, speaking under a banner, "Protecting Long Island ratepayers," said, "A dramatic overhaul of LIPA is long overdue. I commend the Governor for leadership in restructuring utility."
So what was the source of political gridlock?
It couldn't be the Shoreham debt issue, because Cuomo seems to have gotten over that hurdle in one easy stride - not like what Detroit wants to do in erasing the city's pension and health care obligations to workers who have spent decades working for the city, or even what New York State attempted to do in amending its own pension obligations to public workers.
The fact that Long Islanders continue to be strapped by $7 billion in Shoreham debt is probably the biggest mystery - or scandal - to the whole thing.
Since the late 1990s, LIPA’s debt has not decreased and represents almost 10% of ratepayer bills. (Cuomo's office also said that escalating property taxes have also contributed to high rates, which I guess means that LIPA had to pay into property taxes. At the public hearing on the legislation, Cuomo's representatives Larry Schwartz and Richard Kauffman said that as part of this restructuring, there would be an effort to reduce the utility's property tax liability, though that would put further pressure on school districts and the property owners who are responsible for those taxes. That was not addressed in the signing ceremony.)
The Shoreham debt has been what has strangled the utility and Long Island's economy. It is the primary reason our rates are so high, discouraging businesses from locating here.
The legislation just signed by the Governor reduces the cost of LIPA’s debt by refinancing up to half of the $6.7 billion debt at a lower interest rate.
Here's my question: why didn't LIPA refinance the debt these past few years, when interest rates for municipalities were at historic lows - essentially calling the bonds and paying for them with cheaper ones? You didn't have to structure or privatize the operation to do that. In fact, that was the obstacle to total privatization, because Long Islanders would have lost that safe harbor of government finance and also eligibility for FEMA reimbursement after some disaster.
LIPA came into existence to protect the LILCO investors. LILCO was going bankrupt under the Shoreham Nuclear Plant debt - $7 billion worth. A public entity, LIPA, was formed to be able to refinance the debt at low interest rates available to municipalities. At the time, the LIPA bond offering was the largest municipal bond issue in the nation’s history (and this week, we have the largest municipal bankruptcy, Detroit, in history).
"Bond Bonanza Amid LILCO Takeover," is how David Lerner brokerage reported the news.
"All 150 brokers at the David Lerner offices were doing virtually nothing else but fielding telephone orders for the bonds....
"Such scenes were duplicated at brokerages around the region and the country as the Power Authority began marketing its first hatch of tax-free bonds that will pay for a $7 billion takeover of the Long Island Lighting Company’s electricity service. With savings from lower interest costs, Gov. George F. Pataki has promised to cut local electricity bills by 20 percent by summer. Islanders now pay the highest electricity rates in North America....
"The total of $7 billion would dwarf the largest previous municipal bond issues, $2.8 billion for a New Jersey state pension fund last year and $2 billion for the New Jersey Turnpike several years ago.
"'There is a certain pizzazz to these bonds,' said Lerner's founder and president, David Lemer. Long Islanders, he said are especially aware of the background making for easier sales here.
‘'‘I am confident there will be a lot of happy investors that it will deliver exactly as promised,' Mr. Lerner said. He added he had followed his own advice. 'I’ve taken a sizable position on the bonds myself,' he said."
The excitement in David Lerner's office was about the investment - not about how the service would be delivered. The most convoluted, dysfunctional management structure in the world was conceived in order to make the LIPA deal happen. The investors clearly weren't worried about risk. One way or another, the investors would get their interest payments from ratepayers or taxpayers or both.
What's so interesting about it, is why the public got saddled with the debt, LILCO, now broken up into Keyspan, later acquired by National Grid - so the private entities continued to serve as the utility company, but without the Shoreham debt. And after all these years of payments, why are we still stuck at $7 billion?
Indeed, why do we still have the debt at all? Trillions of dollars of "toxic" assets from AIG, Citibank and scores of the biggest private financial institutions were waved away in the Great Recession. Billions in debt owed by the car companies magically erased overnight. But now, Detroit has declared bankruptcy with the express aim of erasing its obligations, not just to investors but to public workers and retirees. Amazing how that can happen.
Now, with the bankruptcy of Detroit, that equation is turned around. Banks are still able to keep the profit but unload their losses onto the public, but municipalities, well, they can go bankrupt, preferably taking retirees with them. Just after the Detroit bankruptcy, interest rates on municipal bond offerings started rising.
In May, when the LIPA restructuring was being finalized, Moody's downgraded LIPA's bond rating - making borrowing more expensive - an action that it said was related to Sandy but I might guess had something to do with the fact that government might exercise its sweeping power to simply make the debt vanish.
Another aspect of the bonding, is that a high rating for municipalities (translating into lower interest) was generally predicated on the ability to raise revenue (and repay investors) because of the tax base. But I question whether the tax cap imposed by the state raises the risk for investors, because even though debt service isn't counted toward the formula for calculating the cap, it does limit overall ability to raise revenue to provide services, and if services decline, so will the tax base.
The trick of the LIPA deal seems to have come from privatizing - that is professionalizing - the operations while retaining the benefits of public ownership including tax exempt financing for new capital investments and eligibility for FEMA reimbursement for major storm costs.
So, on the one side, the DPS staff will be responsible for reviewing proposed rates, including a 9 month process with public hearings and reviewed by independent DPS staff.
On the other side, I am told, it is PSEG that will decide long term capital investment decisions.
But how will these be financed?
The silver lining to Superstorm Sandy is that at least in the near-term, the utility will already have much of its long-term capital investment covered through a 90 percent reimbursement from the federal government. And, as Cuomo said, "We’re not just going to build what was, we’re going to build to a level that never was before." (Here's where Jon Kaiman, who was just appointed by Governor Cuomo to be Special Advisor for Long Island Storm Recovery, will likely have considerable impact.)
The newly formed private company, PSEG-Long Island would earn a fee in exchange for managing the day-to-day operations with a commitment to reduce costs (achieving $50 million-$60 million in efficiency savings) and earn performance-based bonus, rather than a cost-plus-profit arrangement. And PSEG can be terminated for poor performance with no termination fee.
How does the payment scheme to PSEG compare to actual revenue from ratepayers? What happens if there is a difference, either too little collected (a loss) or too much (a profit). What happens with the profit and who decides?
We are given sketchy assurances that PSEG will continue on the course LIPA had set in terms of renewables (Kaiman might be able to have influence here, as well).
"LIPA's commitment to energy efficiency and renewables – LIPA a leader in this – will be enshrined in this new law," Assemblyman Sweeney said.
There isn't much detail, except this statement from the Governor's office, "The new Long Island utility will also remain committed to renewable energy and becoming more energy efficient. Under the Governor’s legislation, the new utility will not only design and administer efficiency and renewable programs, and continue recently approved renewable power procurement programs; it will also be required to produce a new capital and operating plan. The plan will include recommendations for energy efficiency, smart grid solutions and distributed generation to give customers more value and reliability from their service. "
I'm not hearing "offshore wind farm" or "massive investment in solar panels on government offices and shopping mall garages."
It will be interesting to see what happens after the three-year rate freeze, how the company chooses to go forward with capital improvements and renewables, whether it is as responsive as it promises to customer service.
But PSEG does seem like a good choice based on its performance record - especially, how well it did get New Jersey residents back up after Sandy. And the company is operating on a contract basis, so it isn't permanent.
As Dave Daley, Vice President, PSEG – LIPA Transition, said, the company brings "more than 100 years of a proud history. Embedded in our name, our brand, is reputation for providing highest level of reliability and customer satisfaction. We've earned numerous awards- the most reliable utility in the nation five times in last eight years, and most reliable in Mid-Atlantic for the last 11 consecutive years. Last year, J.D Power Associates ranked PSEG customers most satisfied… We bring a core commitment to customer service and superior performance." That reputation was tested last fall after Sandy, when the company "restored power to more customers in the history of any utility" - 1.9 million customers. "The Edison Electric Institute gave PSEG a prestigious emergency response reward for Sandy, "This is the commitment… our Long Island-based team is already hard at work."
In fact, going back to December 2011, PSEG was already awarded a contract from LIPA to take over the day-to-day utility operations. Then in January 2013, after Sandy, the decision was made to increase PSEG's role and decrease LIPA's, pruning LIPA back to what it was supposed to be originally, a holding company; LIPA will have one-third the staff it has now.
"This legislation brings immediate reforms to LIPA, stabilizes rates and provides the framework for a better electric utility," Assemblyman Sweeney said. "LIPA will now have a professional regulator in Long Island office of Public Service, that will provide accountability that has been missing for a long time and is so badly needed. Also, with review from a new Department of Public Service, PSEG will be required to craft comprehensive emergency response plan that won’t repeat the mistakes of Sandy.
"I thank Cuomo for his leadership. Over the years, LIPA has sometimes been treated as more of a political entity than a professional utility operation, This bill under the Governor’s leadership changes that, it shifts to professional utility operation. That is what is so badly needed and wouldn’t happen but for leadership of Cuomo."
It is still not clear to me who, exactly, will be appointed to be the LIPA trustees - the LIPA holding company - and who will be appointed to the Department of Public Service. Conceivably, LIPA could be thrust back into the same trap, yet again.
Cuomo said Long Islanders will finally "have a real operator running a utility company – that’s not what they had. LIPA was running a utility company. LIPA is not organization of utility professionals, more a bunch of politicians."
The Governor seems to have answered his own question of why restructuring LIPA took so long.
But the genius to the solution was in preserving the best features of privatization (which Republicans love), public ownership and government oversight, which Democrats embrace.
In fact, there was a sort of bizarre political lovefest, with politicos of both sides embracing the LIPA restructuring and (significantly) lauding Cuomo's leadership (at least the Democrats used the term "leadership;" Republicans found a different label.)
"We spent a lot of time together after Sandy, a lot of time in Albany working on legislation, early budget, doing what we thought was right for the people of our state," Senator Skelos said, "But the defining moment for the governor and local officials – Nassau County Executive Ed Mangano, Suffolk County Executive Steve Bellone – was that we worked together so closely, not as Republicans or Democrats, but seeing a tragedy hitting our communities, people losing their homes, not having power, coming together to restore the life, the quality of life that people want and deserve on Long Island. But that couldn’t have happened without the efforts of Governor Cuomo.
"This wasn’t a Republican issue or a Democrat issue," Skelos emphasized again, "trying to get a leg up - that happens in our business - but restoring people’s faith in government and restoring lives as quickly as possible.
"This legislation put forward by the governor will go a long way toward reliability of energy, affordability, transparency and government oversight – all this is provided in the legislation, And it couldn’t happen unless the governor stepped forward and took the bold steps.. He took a chance," said Senator Dean Skelos.
Which makes you wonder where the political gridlock came from to begin with.
And why it took Superstorm Sandy to be the straw that broke the camel's back.
Karen Rubin, Long Island Populist Examiner
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