The Moreland Commission's finding in June that LIPA paid exorbitant and questionable fees to a Chicago energy consulting firm casts a new light on the billions of dollars the authority has paid to outside entities over its 15-year history.
After months of investigation, the state commission reported that LIPA spent nearly half its $64 million professional services budget between 2008 and 2011 on Navigant Consulting Inc. The panel found that Navigant charged LIPA for expensive hotel stays, airline upgrades and a chartered sea plane to Puerto Rico.
The commission described a "revolving door" in which top LIPA officials moved to Navigant after leaving the authority, and vice versa. Navigant has denied any impropriety. The U.S. attorney for the Eastern District and the FBI are gathering information about the LIPA-Navigant relationship.
Since its inception, LIPA has been dependent on outside consultants and contractors. And for almost as long, critics have complained about the high cost of some of those contracts and the fact that many went to businesses with ties to major political figures and to companies employing former LIPA officials.
Officials have indicated the LIPA overhaul bill approved by the state legislature in June and signed by Gov. Andrew M. Cuomo on July 29 could address the problem by putting a new company in charge. The bill gives PSEG of New Jersey, a utility that already had been scheduled to take over management of the Long Island electric grid in January, near total control of the system. Elimination of some contractors is an expected source of savings, officials have said.
In addition, LIPA officials and trustees, in the aftermath of the Navigant revelations, have said they are reviewing all contractor relationships and charges, and have instituted new controls on contractor approvals.
LIPA wasn't a fully equipped utility when it started out with 33 employees in 1999 after taking over for the former Long Island Lighting Co., so it had to increase its stable of contractors. But even as its employee ranks swelled to more than 100, the list of contractors and consultants also grew, and so did the role of political players in the mix.
An example of the ties between contractors and LIPA is Plug Power, the Albany-area maker of a once-experimental energy technology known as fuel cells. LIPA spent more than $21 million with the company between 1999 and 2006, before discontinuing the relationship with few tangible benefits. LIPA had predicted widespread use of fuel cells on Long Island.
Ties to LIPA or LILCO
Newsday reported at the time that three Plug Power directors had ties to LIPA or LILCO, including the late Louis Tomson, a chief architect of the LIPA-LILCO deal under former Gov. George Pataki. Tomson was the company's senior vice president of corporate development. A one-time acting executive director of LIPA, Anastasia Song, had been a Plug Power director, but resigned when hired as LIPA's acting chief financial officer. An internal LIPA report in 2007 found the Plug Power project was plagued by "missing or erroneous reports" and lack of documentation on spending.
Observers say such connections are part of the fabric of LIPA. "There is a political, legal network that's driving these decisions," said Thomas Bjurlof, managing director at Bruguel Advisors, an energy expert who once served as an adviser to the Village of Port Jefferson in its efforts to overhaul the LIPA-contracted plant there. The utility has been "driven by political, legal and financial players in the background. The whole process for major decisions made by LIPA is an opaque process."
The U.S. attorney's office looked into LIPA's political ties once before. In May of 1998, the office launched an investigation into charges that political connections and contributions led four bond-underwriting firms to win lucrative contracts to handle more than $3 billion in LIPA debt offerings. The probe ended in 1999 without any charges filed.
"What screams out at you is how extremely expensive all these contracts are," said LIPA trustee Matthew Cordaro. "How much extra money are LIPA ratepayers paying to satisfy LIPA appetite for outside help?"
Cynthia Kouril, a former special assistant U.S. attorney in Manhattan and an expert on contract law at the firm Robert L. Folks & Associates, said her review of LIPA's contract spending, at Newsday's request last month, confirms her belief that the authority needs more oversight, including an independent internal inspector general.
1st director of internal audit
LIPA last year named its first director of internal audit after reports in 2011 showed contractors billed the authority for work unrelated to storms including Earl and Hurricane Irene, as well as exorbitant invoices for meals, equipment and labor. National Grid later reimbursed or reclassified around $1 million of those invoices.
Kouril said the Navigant case seems to indicate that those problems carry across other sectors of the authority's operations. "Bottom line, this is all looking like the same total indifference to reviewing invoices that is the hallmark of the storm cost-invoicing," she said.
The cost of the Navigant contract is small compared to others that LIPA has handed out over the years, including to politically connected firms.
Newsday reported in June that partners at Ruskin Moscou Faltischek had a minority interest in a company that had an option to buy land in Yaphank on which the $1.6 billion Caithness power plant was built. LIPA awarded the Caithness contract at a time when Ruskin lawyers were retained by LIPA for unrelated litigation and lobbying, and separately were working at the same time for Caithness.
Two Ruskin partners, Michael Faltischek and Arthur Kremer, who worked on the original legislation that created LIPA, had served as LIPA trustee and LIPA's special litigation counsel, respectively. Stanley Klimberg, who has a $188,669 state pension from his long tenure at LIPA, has worked for Ruskin Moscou's Empire Government Relations arm on behalf of PSEG, soon to be LIPA's biggest contractor yet at upward of $4 billion over 12 years.
A spokeswoman for the law firm said LIPA was fully informed of its client and partner relationships. "All of our business relationships and transactions were fully disclosed to LIPA," the firm said. "In no case was any Ruskin Moscou Faltischek attorney working for LIPA involved in dealings with LIPA on Caithness's behalf."
Last week, LIPA announced it was moving forward with Caithness, a 707-megawatt facility that will cost ratepayers more than $3 billion over its 20-year contract -- increasing rates up to 3 percent by 2018.
Another big contractor throughout LIPA's history is FPL Energy, now known as NextEra Energy. LIPA, under former chairman and chief executive Richard Kessel, had awarded FPL more than $1.3 billion in contracts, including a $914 billion contract with a plant in Marcus Hook, Pa. That deal, which provides LIPA with more than 660 megawatts of capacity, has been criticized because LIPA can purchase energy in only the rarest of circumstances.
FPL also was awarded contracts for two peaking plants -- plants used only during peak demand times. In November 2001, FPL Energy was awarded a $182-million, 18-year power purchase agreement for the Bayswater Peaking Facility. Two years later, LIPA awarded FPL a $190.1 million, 15-year contract for its Jamaica Bay Peaking Facility.
Connections between LIPA and FPL run deep.
Former LIPA chairman Frank Zarb, another architect of the LIPA buyout of LILCO, was a member of FPL Energy's parent, FPL Group, from 2002 to 2006.
Park Strategies, the influential lobbying firm started in 1999 by former U.S. Sen. Alfonse D'Amato, has worked as a consultant for FPL Energy. D'Amato has been a friend and ally of Kessel, who served as LIPA's chairman at its inception and ran it until he left in 2007.
Kessel currently works as a consultant to Florida Power & Light, a subsidiary of NextEra Energy. During his tenure at LIPA, he fought hard to have the authority build an $800 million wind farm proposed by FPL Energy in the waters off Jones Beach. His successor, Kevin Law, killed the project in 2009 as too costly.
A NextEra Energy company spokesman declined to comment.
The Moreland Commission's focus on former LIPA chief Michael Hervey's move to become a consultant director to Navigant is only the latest in a parade of former LIPA and LILCO officials who have moved on to consult for other LIPA contractors. LIPA has said Hervey at Navigant has not been involved in any LIPA business, adhering to LIPA's ethics code.
Klimberg, before he went to Ruskin Moscou, was executive vice president and general counsel for Hawkeye LLC, a major LIPA contractor for projects such as the Brookhaven National Lab solar farm and owner of a Greenport power plant under contract to LIPA.
Hawkeye, the successor to a construction company once known as KeySpan Energy Construction, is also a major subcontractor to National Grid in its restoration efforts for LIPA during storms. National Grid bought KeySpan in 2007, and Hawkeye is now independently owned. Edward Grilli, former chief of staff at LIPA, also worked at Hawkeye after he ended his LIPA career in 2007. (He's now an independent consultant).
In addition to FPL Energy, D'Amato's Park Strategies has represented four other LIPA vendors since 2006. The combined value of those vendors' contracts with the authority is more than $2 billion.
Park Strategies, Covanta
Westbury-based Covanta Energy has three contracts with LIPA totaling $929 million. From 2006 through 2011, Covanta paid Park Strategies $765,000 for lobbying LIPA and other governmental entities, according to state records. Calls to Covanta were not returned.
Brookfield Renewable Power, which has a $330 million contract with LIPA for energy and energy renewable certificates, has paid Park Strategies $120,000 for lobbying electrical utilities, according to federal records. A spokesman confirmed that the company has had a long-standing relationship with Park Strategies, but declined to offer other details.
The Carrier Corp., which manufactures heating and air conditioning equipment, has a $4.8 million contract with LIPA for the energy efficiency program, LIPA Edge. Federal records show that Carrier's parent company, United Technologies, has paid Park Strategies $960,000 for lobbying electrical utilities since 2006. Calls to Carrier were not returned.
TransEnergie U.S. has a $603 million contract with LIPA for an undersea cable across the Long Island Sound. The company paid Park Strategies $20,000 for lobbying in 2003, according to records.