Legislation Will Privatize Utility Operations Under Strengthened State Oversight with Focus on High Performance
Albany, NY (June 19, 2013)
Governor Andrew M. Cuomo, Senate Co-Majority Leaders Dean Skelos and Jeff Klein, and Assembly Speaker Sheldon Silver today announced a landmark agreement on legislation to dramatically revamp the electric utility on Long Island. The legislation will privatize utility operations on Long Island, focus on improving customer service, including stabilizing rates and enhancing emergency response and preparation; reduce the cost of Long Island Power Authority (LIPA) debt; and implement tough state oversight for the new utility company. It will also achieve savings to allow the new utility to seek a rate freeze for 2013, 2014 and 2015.
“Today’s agreement will finally end LIPA as we know it and create a new utility company on Long Island that puts ratepayers first,” Governor Cuomo said. “For years, LIPA has provided lackluster service while asking ratepayers to foot the bill for its financial problems. LIPA’s failure during Superstorm Sandy was a wakeup call for action. This legislation delivers on performance by privatizing utility operations under PSEG Long Island to ensure it is ready for future storms and accountable for its response. It also establishes real state oversight of Long Island’s utility system for the first time and protects ratepayers from rate hikes in the immediate future. I commend the Senate and Assembly for joining with us in committing to finally give Long Islanders a utility system they deserve.”
Senate Majority Coalition Co-Leader Dean G. Skelos, said, “This legislation will bring much-needed oversight, protect ratepayers and ensure those in charge are prepared to deal with dangerous storms in a responsive and accountable way. I thank Governor Cuomo, Speaker Silver and my Senate colleagues for their hard work on behalf of Long Island ratepayers and their families.”
Majority Coalition Co-Leader and Independent Democratic Conference Leader Jeffrey D. Klein said, “After witnessing the delays and dysfunction at LIPA in Sandy's aftermath, it's clear that something needed to change. Long Island residents work too hard--and pay too much in their monthly utilities bills--to have anything less than a top flight utility provider. I commend the Governor, his staff, and my legislative colleagues for developing a plan that will finally provide Long Island ratepayers with the service and oversight that they deserve.”
Assembly Speaker Sheldon Silver said, “Following the response to Superstorm Sandy, there has been a clear mandate by ratepayers on Long Island to reform the way LIPA operates. Key provisions included in this measure were developed with the essential input of the Assembly Majority’s Long Island delegation with the intent to restore confidence in LIPA. It will protect the interests of homeowners and businesses by stabilizing rates and implementing a comprehensive storm response system.”
Assemblyman Robert Sweeney, sponsor of the bill, said, “Superstorm Sandy and Hurricane Irene highlighted the need to bring more accountability and transparency to LIPA. This legislation begins to do that by ensuring we put in place an effective storm response mechanism and addressing key issues such rate stability and renewable energy programs.”
In response to LIPA’s failures during and after Superstorm Sandy, Governor Cuomo convened a Moreland Commission to investigate the utility company’s response, preparation, and management, among other utility companies. Upon completing its investigation, the Moreland Commission concluded that LIPA’s failures were the result of a dysfunctional bi-furcated management structure that allowed poor customer service, high rates, lackluster storm preparations, and inadequate infrastructure to persist without being addressed.
The agreed upon legislation eliminates this failed management structure by giving PSEG full authority over the utility’s day-to-day operations including budgeting, maintenance, storm preparedness and response, infrastructure improvements, and energy efficiency and renewable activities.
LIPA will in effect be reduced to a holding company with a significantly reduced staff, set at levels only necessary to ensure that the authority is able to meet its core obligations, and with a new board reduced to nine members. This would maintain the utility’s eligibility for FEMA and tax benefits, but would offer the benefits of PSEG Long Island’s more efficient management structure as a private company.
Since the late 1990s, LIPA’s debt has not decreased and represents almost 10% of ratepayer bills. Escalating property taxes have also contributed to high rates. To provide relief for ratepayers, the Governor’s legislation will reduce the cost of LIPA’s debt, by refinancing up to half of the $6.7 billion debt at a lower interest rate, and a 2% annual property tax cap will be established for the transmission and distribution system. It will also eliminate state gross receipts tax to save ratepayers $26 million per year. As a result of these and other expected savings in the Governor’s legislation, LIPA and PSEG Long Island are seeking a rate freeze for 2013, 2014 and 2015.
Under the legislation, utility performance and rates would be subject to tougher state oversight under a new Long Island office of the Department of Public Service (DPS) which will have the authority to review PSEG Long Island’s operations and issue recommendations to the LIPA Board for implementation. Proposed rates would undergo an independent review by DPS that would include public hearings. DPS would also perform independent reviews of PSEG Long Island’s storm preparedness and performance. This oversight process will include reviewing whether PSEG Long Island has met performance metrics and the appropriateness of storm costs, and make recommendations to adjust compensation accordingly. Capital planning would also be subject to DPS review on an annual basis, and the State Comptroller would retain the auditing powers that it currently holds.
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.
The Governor’s office has also secured an agreement between National Grid and PSEG to make additional workers available to help with power restoration efforts during storms. National Grid has trained some of its IBEW gas utility workforce to perform various storm response tasks for the electric system, including storm damage assessment and restoration work. The agreement will allow these workers to be included in PSEG’s storm response plan, which means hundreds of additional IBEW workers will be available to PSEG during storms providing more resources for a safe and rapid recovery.
More information on the benefits of the privatized structure according to today’s agreement is below:
|State Ownership: Investor Owned Utilities vs. New Structure|
|Investor Owned Utilities||New Structure|
|Earn a rate of return on capital investments?||Yes||No|
|Tax exempt financing for new capital investments?||No||Yes. System will remain under public ownership.|
|Eligible for FEMA reimbursement for major storm costs?||No||Yes.|
|Rates subject to professional DPS review?||Yes||Yes. Rate review process will be identical to IOUs, including stakeholder involvement and evidentiary hearings.|
|Who approves final rates?||PSC – a 5-member board appointed by the Governor; rate decisions are based on the record established by the DPS.||Reduced LIPA Board – Rate decisions are based on the record established by the DPS|
|If final decision differs from DPS’s recommended decision, is there further public process?||No||Yes. If the Board amends or modifies the DPS recommendation, it must hold a public hearing to explain its actions|
|Can DPS perform regular management and operations audits?||Yes. DPS recommendations to PSC for action.||Yes. DPS recommendations to the Board for action. If the Board does not accept recommended actions, then it must hold hearing and explain basis.|
More information on state oversight for the new structure according to today’s agreement is below:
|State Oversight: Status Quo vs. New Structure|
|Status Quo||New Structure|
|Independent review of proposed rates?||No. LIPA proposes and sets its own rates.||Yes. DPS staff will review proposed rates.|
|Transparent rate making process?||No. 3-month closed process||Yes. 9-month process with public hearings and reviewed by independent DPS staff.|
|Storm Plan subject to independent review?||No||Yes. First storm plan must be filed in February 2014, under same standards that other utilities must meet.|
|Storm performance and costs subject to independent review and penalties?||No||Yes. Based on DPS recommendation, the Utility can be found liable for up to $10 million for incurred costs|
|Can contract be terminated for poor performance?||No||Yes|
|Does DPS have access to PSEG-Long Island financials and other information to ensure compliance with contract terms and standards?||No||Yes|
|Independent review of capital planning?||No||Yes. PSEG-Long Island will submit annual updates to a 5-year capital expenditure plan for DPS review. First capital plan will be submitted in January 2015.|
|Can State Comptroller audit LIPA?||Yes||Yes. OSC retains its auditing powers.|