LIPA overcharged customers $231M

LIPA overcharged ratepayers by $231 million because it used a faulty formula to calculate customer charges for power that seeps from its electric grid, officials said.

The Long Island Power Authority last month took steps to return $129 million - slightly more than half the money - through incremental rate cuts over three years. That will amount to $2.85 a month on average bills for the balance of 2011, starting in April, then $1.50 a month for 2012 and 2013.

That's not fast enough, said state Comptroller Thomas DiNapoli. "LIPA should return this money to Long Island families as quickly as possible, so they do not continue to be overburdened with even higher bills," DiNapoli told Newsday Tuesday.

"Lost" power is a common phenomenon on electric grids. LIPA must pay energy suppliers for all the power produced from their plants, even though some energy is lost through natural forces as it is transmitted along wires and through substations. Ratepayers are on the hook for those costs, even though the lost power never reaches their meters.

LIPA's internal auditors and trustee Larry Waldman, an accountant, discovered the "anomaly," as LIPA termed the overcharges, but the faulty method has been applied for two decades, going back to when the utility was owned by the Long Island Lighting Co., LIPA said. LIPA bought LILCO's assets in 1998.

At a board meeting Jan. 27, LIPA trustees approved a measure to change the formula to more closely match actual system losses and costs.

Michael Hervey, LIPA's interim chief executive, said Tuesday that the problem came to light last summer when internal auditors noticed the lost-power cash reserve was growing when it should have been relatively stable.

Waldman began asking questions about it, and LIPA hired industry experts, including former Public Service Commission veterans, to analyze why, Hervey said.

What Waldman, experts and internal auditors found was that LIPA was charging customers too much for lost power - both by overestimating the amount of power lost, and sometimes applying a too-high rate for it.

Most of the $231 million in overcharges accumulated in the past few years because the LIPA system suffered fewer power losses, Hervey said.

LIPA trustees decided to compensate customers by retiring $111 million in borrowings from a 2003 loan used to purchase $365 million in fuel. (It will save LIPA a payment of $36.5 million a year for three years.) LIPA will use another $18 million to offset fuel adjustment costs. Both those savings will be passed on to consumers.

The rest of the funds, $102 million, will go into LIPA's operating coffer as 2010 net income to offset what might otherwise have been a loss last year, largely due to increased storm costs.

DiNapoli, who in December blasted LIPA for its fuzzy accounting on storm costs, criticized the lost-power accounting method and the board's resolution. "LIPA should not be collecting unwarranted money from ratepayers," he said.

Energy expert Matthew Cordaro, recently named to a Suffolk Legislature LIPA oversight board, said the over-collection shows LIPA needs a stronger watchdog. "Customers have been paying more than they should have," he said. "And when you have the highest rates in the county, it matters."