A fully public LIPA would mean lower rates, more accountability, study says

Converting LIPA to a fully public power model would result in an “overall positive benefit” for LIPA customers, with “important financial benefits” including lower rates, more accountability and greater local control, a draft study by a legislative commission found.

In a report due out Monday and obtained by Newsday, the commission found that all the major challenges of converting LIPA to a fully public model are doable, but special legislation and amendments to the original LIPA Act would be required to make it happen.

The commission found that an appointed board, as is the current model, would be the best for utility governance, though it left open how an appointed board will be structured. Currently, the governor controls the LIPA board with five of nine trustee appointments, with two each from the state Senate and Assembly.

The report said the new LIPA model would provide for more transparency and accountability, with the chance for more local input on investments, system hardening and future power choices. The report cited years of storm-related outages, despite overall good system reliability, in saying customers need “an improved level of system resiliency.”

The commission said the potential annual savings could be "more conservative" than some LIPA estimates, but could amount to $48 million to $78 million annually. There would be a one-time transition cost of $16 million to $59 million, with the payback time over 3 to 16 months.

“Over the long term, favorable rates should also result from operational excellence, adherence to industry-proven models and the consistent implementation of reliability and public power industry best practices,” the report found.

The move toward a fully public LIPA kicked into high gear following admitted missteps by PSEG Long Island following Tropical Storm Isaias, which left more than 500,000 customers without power for up to a week, with many unable to report outages and get restoration times in the first hours of the storm. LIPA ultimately sued PSEG over its handling of the storm, and the suit was settled with a new contract that puts more of PSEG's annual compensation at risk for a broad list of failures. 

Contained in state recommendations to LIPA following the storm was one that LIPA considered fully municipalizing, taking advantage of the potential increase in service that public power entities generally show over investor-owned utilities while potentially lowering rates by eliminating the utility contractor. 

PSEG, at public hearings and elsewhere, has said the current public-private model of managing LIPA works best, and it has raised questions about risks LIPA faces on its own, including loss of a critical check and balance on the state authority.

"We believe it is a proven, tested model for PSEG Long Island to continue to provide the people of Long Island and the Rockaways the outstanding electric service they expect and deserve,” PSEG senior director/vice president Christopher Hahn said at a hearing in November. 

But Assemb. Fred Thiele (D-Sag Harbor), one of the authors of the LIPA commission legislation, has pushed back against PSEG and the public-private model, telling PSEG at one hearing, "It wasn’t just your lack of performance” during Isaias that was a problem. “It was the fact that you didn’t tell the truth to LIPA," when LIPA was investigating PSEG's failures. "And you didn’t tell the truth to the public. And maybe the reason your performance ratings are so low is that people don’t like being lied to.”

PSEG's contract with LIPA, valued at more than $121 million a year including management and other services, expires in 2025. 

Thiele on Friday said the report identified no major obstacles to a fully public LIPA, which he has noted was the original plan for the utility after its takeover from the Long Island Lighting Co. a quarter century ago. A fully public LIPA “clearly has the potential to save money and reduce rates, and there’s the potential for more locally based decision-making and governance,” Thiele said.

But he also noted, “We have some decisions to make,” including what role the state Department of Public Service will have in LIPA oversight.

The commission report suggests keeping the current structure of triggering a rate review by the state Department of Public Service when LIPA’s proposed rates increase by more than 2½%. “Operationally, the transition to a fully integrated public power model should not materially impact the methodologies and best practices that are currently utilized in the LIPA rate-making process,” the report said.

Further, the report draws a limit on any increased scrutiny by the state. “Public power authorities are rarely subject to regulatory oversight by a public utility commission,” the study says. “The potential that increased regulation could impact LIPA’s cost of borrowing, and correspondingly, adversely impact the ratepayers, means there should be no increase in DPS’ level of regulation of LIPA as it transitions to a public power model.” At present, the DPS has a "review and recommend" role at LIPA, but the Public Service Commission has no jurisdiction over the Long Island utility, which PSEG manages under contract.

The report found there should be “no impact” on the level of LIPA’s current indebtedness as a result of the transition. The utility’s current long-term debt exceeds $9 billion.

Taxes and payments in lieu of taxes also shouldn’t be impacted, the report found. LIPA has spent years challenging tax assessments on properties and has settled payments for the largest plants.

Going fully public also "will allow LIPA to evaluate renewable energy sources, including battery storage, internally while increasing transparency and community involvement,” the report said.

About 1,500 PSEG employees, employed in a subsidiary known as ServCo, can be transitioned to LIPA without shifting them to state employees. “Selection of the most appropriate model remains an open issue,” the report found. “Once the future ServCo structure is identified and secured through legislation, the transition requires collaboration with IBEW Local 1049 and PSEG LI.”

New legislation is required to make the transition, in part because LIPA’s staffing authority is currently “not sufficient” to run the bigger utility. LIPA will need to increase staffing above its current 63 employees, though it’s unclear how many more will be needed.

LIPA may also need to eliminate its current requirement to have all contracts over $50,000 audited by the Office of State Comptroller. “Amendment of the existing approval requirement is necessary,” the report said.

New legislation also would be needed to expand the role of the LIPA board, with the board’s role and function needing to be “revised to account for compliance with the roles and responsibilities of a board of a public authority … ,” the report said.

There’s also the need to amend the LIPA Act so that employees are not required to transition to Civil Service status and aren’t members of the state retirement system. Legislation also may be needed to ensure transition of ServCo retirement plans.

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

Mark Harrington, a Newsday reporter since 1999, covers energy, wineries, Indian affairs and fisheries.