The Long Island Power Authority is shelving the idea of becoming a privately owned entity as an alternative to maintaining its current structure, under which another utility manages the authority's transmission and distribution system.
Instead, LIPA in the coming months will examine ways to reform the existing model or forgo the partnership arrangement entirely and instead manage the system itself, per a directive issued Dec. 16 by LIPA's board of trustees. The move is in line with recommendations contained in an analysis outlining options for improving the management of LIPA's assets.
The analysis, conducted by LIPA staff and outside consultants and presented to the board Dec. 16, is tied to an ongoing review of PSEG Long Island LLC's response to Tropical Storm Isaias. The Public Service Enterprise Group Inc. subsidiary operates LIPA's electric system under a services agreement that runs through 2025. The Aug. 4 storm caused widespread power outages in multiple East Coast states, including New York.
On Long Island, some customers were without power for more than a week in the wake of that storm. LIPA recently filed a lawsuit seeking at least $70 million in damages from PSEG Long Island, arguing that the company failed to adequately oversee outage management and communications systems and lacked plans to provide backup when key systems broke down.
The analysis looked at three potential structures for LIPA: privatization, reform to the existing "single-partner municipal model" and municipal management.
Customers on Long Island at one time got electricity from an investor-owned utility, the Long Island Lighting Co., or LILCO. But LIPA bought LILCO's transmission and distribution assets in 1998 to access lower financing costs available to a public power utility, the analysis recounted. Since then, LIPA has considered, and ultimately rejected, privatization three times because of its high cost to customers.
Privatization would involve the sale of LIPA's assets to an existing investor-owned utility or the spin-off of an independent self-managed LIPA to private investors. But taking that step would come with several downsides, the analysis found.
One downside would be that the move would raise financing costs by about $447 million a year and LIPA would lose eligibility for federal disaster recovery grants that have totaled $1.7 billion since 2010. Overcoming those higher costs would involve cutting investments in customer satisfaction, reliability and clean energy initiatives or raising customer bills, LIPA CEO Tom Falcone told the board. An average residential customer would see an additional estimated cost of $32 a month with privatization, he noted.
"It just costs too much," Falcone said, adding that focusing on the other two options makes more sense.
One of those options, maintaining the existing structure but with reforms to the partnership arrangement, would involve changing the agreement with PSEG Long Island or entering into a new contract with another partner.
The other possibility, moving to a municipal management model, would require LIPA to end its contract with PSEG Long Island and PSEG Long Island's ServCo subsidiary to become a direct subsidiary of LIPA, leaving LIPA responsible for utility operations — a move that is allowed under the agreement between LIPA and PSEG Long Island. The analysis found that the latter option could bring savings of $65 million to $75 million per year compared to the existing PSEG Long Island contract.
"All we have to conclude today is we've got attractive options," Falcone said.
A decision on what LIPA's future will look like is months away.
In the near term, though, LIPA and PSEG Long Island are in the process of implementing management, IT and emergency restoration improvements. But they also will start meeting to renegotiate the current contract. The results of that process will be presented to the board by March 31, 2021, along with a further analysis of the nonprivatization options.
During the Dec. 16 meeting, the board also heard from PSEG Long Island President and COO Daniel Eichhorn, who pledged that the company would learn from the storm experience and improve going forward. Eichhorn said PSEG Long Island understands the frustrations with its storm response.
"We have taken full responsibility for that from day one," he said. "You have never heard PSEG Long Island try to explain, try to downplay the experience, or make excuses. We own it, we've taken accountability."