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LIPA board gives green light to contract with PSEG

From the October 7, 2013 issue of Public Power Daily

Originally published October 7, 2013

By Jeannine Anderson

The Long Island Power Authority's board of trustees on Oct. 3 approved a 12-year contract that will put PSEG-Long Island -- a subsidiary of New Jersey-based Public Service Enterprise Group -- largely in control of LIPA's operations, starting on Jan. 1.

"We are pleased that new operating service agreement has been approved," said LIPA Chief Operating Officer John McMahon. "This is another major milestone in the transition to our new service provider, PSEG."

In a competitive bid for the management services contract, the New York utility selected PSEG in late 2011. PSEG will replace National Grid, which currently manages LIPA's distribution system.

In May 2013, New York Andrew Cuomo proposed a plan to restructure LIPA. The governor took that step after the Long Island utility was criticized for its response to Hurricane Sandy, which hit the New York coast in late October, 2012. The state Legislature passed the governor's plan, which will dramatically reduce the number of LIPA's employees from about 90 to 20. Cuomo signed the bill on July 29.

In an Oct. 3 statement, the governor applauded the LIPA board's decision to approve the contract with PSEG. "I commend the board for approving a contract that will gradually give PSEG full authority over the utility’s daily operations," Cuomo said. "As the anniversary of Superstorm Sandy approaches, it is fitting that Long Island ratepayers will have a utility system that puts them first, operated by a company with an award-winning record of performance during disasters."

The board's vote to approve the PSEG contract came the week after the board received a report from the New York State Department of Public Service that found serious problems at LIPA. The 402-page audit, conducted for the DPS by NorthStar Consulting Group, made 83 recommendations for improving the way the utility is run.

"LIPA is unlike any typical utility," the audit report noted. "Its unique organizational structure is a product of state law and it has had to operate its utility business, providing electric power to Long island ratepayers, within the confines and constraints of its enabling statute. Core functions that are normally central to a utility, such as operations, maintenance and construction work, are executed by National Grid and LIPA has minimal direct involvement in day to day activities."

LIPA is an agency of New York state. It began serving electricity customers on Long Island in 1998, after the Long Island Lighting Co., an investor-owned utility, incurred billions of dollars in debt to build the Shoreham nuclear plant on Long Island. The plant was finished, but never operated commercially because of public concerns about whether the island could be evacuated safely in case of an accident at the plant. New York state bought the doomed nuclear plant from LILCO for $1 and dismantled it, under an agreement worked out by then-Gov. Mario Cuomo, Andrew's father.

When LIPA acquired LILCO's electric distribution system, it also inherited $6 billion in debt related to the Shoreham plant and other investments.

"The continued high level of debt, coupled with property taxes and other fees, means that LIPA's retail rates are second highest in New York state (after Consolidated Edison Companies of New York, Inc.)," NorthStar said in its Sept. 27 audit report. Among the recommendations made in NorthStar's report is that LIPA "has to keep its contractors accountable for results -- all the time."

The Long Island utility's contract with its service provider "must drive performance, allowing LIPA to exercise its responsibilities as system owner and intervene as necessary to improve performance," the report said.

The governor's plan to revamp LIPA calls for the utility's debt to be refinanced. To accomplish that, the Internal Revenue Service will have to approve the new structure.


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Senior Vice President, Publishing 
Jeanne Wickline LaBella

Editorial Director
Robert Varela

Editor, Public Power Daily
Jeannine Anderson

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Fallon W. Forbush

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David L. Blaylock

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Laura D’Alessandro