Commission report: LIPA paid contractor 'astronomical' rates

Power lines seen at sunrise in Melville on Power lines seen at sunrise in Melville on Jan. 11, 2013. Photo Credit: Newsday / Karen Wiles Stabile

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The Long Island Power Authority paid "astronomical" rates and exorbitant travel costs to a consulting firm whose top executives rode a "revolving" door of employment between the two entities, according to a report by a commission appointed by Gov. Andrew M. Cuomo.

The Moreland Commission has referred the findings to the U.S. attorney's office in the Eastern District of New York for investigation.

The report found that LIPA paid Navigant Consulting Inc., a firm that advised LIPA on everything from storm preparedness to its future structure, over $28 million between 2008 and 2011 -- nearly half of the authority's budget for consultants over the same period.

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Explanations for some of the Navigant work "lack clear descriptions for some of the services rendered," according to the report's summary. Most of the consultants were senior in rank with hourly rates from $300 to $500, exclusive of expenses, the report said.

"The problems the Commission found at LIPA are extremely troubling and some of them need to be further investigated by criminal prosecutors," Benjamin Lawsky, commission co-chairman, said in a statement.

"Our extensive investigation uncovered breathtaking waste and inefficiency at LIPA that helped jack up rates for Long Island families," he said. "A revolving-door culture and lack of oversight stuck ratepayers with the bill for lavish, questionable expenses."

Cuomo, in a statement, said: "The findings released today raise a series of questions regarding LIPA's management of a consulting contract that passed unexplainable costs to ratepayers and involved exorbitant expenditures that appear to have nothing to do with providing power to Long Island residents. I second the Commission's call for a full and thorough investigation by a prosecutorial body."

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The Moreland Commission originally was empaneled by Cuomo to investigate LIPA and Con Edison's performance in the aftermath of superstorm Sandy, which left more than 1 million LIPA ratepayers without power.

Criticism of LIPA's storm performance led to Cuomo's proposal to turn over nearly all of LIPA's responsibilities to another utility, PSEG of New Jersey. The State Legislature approved that plan last week.

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The Moreland Commission probe found many Navigant consultants who worked for LIPA were based off Long Island and billed LIPA for travel expenses. In one instance, LIPA reimbursed Navigant $6,815.30 for one consultant's 11-day Manhattan hotel stay, which included a room cost of $542 a day -- well over the state-mandated cap of $295, the report says.

A spokeswoman for Navigant, based in Chicago, didn't immediately return a call seeking comment.

Navigant charged LIPA for an executive's seaplane flight from Washington, D.C., to Puerto Rico, without an explanation. LIPA's former chief financial officer approved the expense, the report said.

The commission also found a revolving door of executives moving from LIPA to Navigant, or from the consultant to LIPA, in a way that "could violate state law," the report states.

It noted that LIPA's former interim chief executive, Michael Hervey, now serves as an energy consultant director to Navigant after leaving LIPA in January.

Hervey reviewed and approved more than $15 million billed by Navigant to his division between 2007 and 2012, the report said. He also signed a $23 million contract extension with Navigant in 2010, keeping the firm working for LIPA until 2015.

Hervey said he had not seen the report and declined to comment.

All LIPA contracts undergo a series of approvals that include the State Comptroller and Attorney General, and Hervey as acting chief executive would have signed Navigant contracts as he would have hundreds of others that crossed his desk. LIPA's code of ethics preclude Hervey from dealings with LIPA for a period after leaving the authority.

Jim Peterson, who served as LIPA's director of power contracts from 2001 through 2008, now serves as a Navigant director earning a $353-per-hour billable rate.

The report lays the blame for any questionable consulting practices at LIPA's feet.

"The primary problem appears to be that LIPA lacks effective quality controls for reviewing consultant charges," it states. "As such, there may be several alleged instances of overbilling, improper expensing, and other questionable charges passed on to the ratepayers."

The report incorporates more than two years of investigative work by the state inspector general's office, which was commissioned to investigate LIPA in 2011 after the discovery of a $231 million overcharge related to the money it pays power plant owners for energy lost in transmission and concerns about a 2011 rate increase, the report says.

A commission official who requested anonymity said he discovered several officials had LIPA and Navigant listed on their resumes. The commission then requested a list of all LIPA contractors and the amounts paid to them, but received only a partial list, the official said.

"We knew it couldn't be correct," said the official. "We asked them [LIPA] to go back to their accounting department and put together a list of all outside consultants and what they paid over the years, and realized there could be a lot more there."

After identifying potential conflicts with LIPA and Navigant, the official said, the commission concluded "you could expect the same could be in place for many other consultants." But it hasn't looked at them, instead referring the matter to the U.S. attorney.

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