As the Long Island Power Authority faces what will surely be the most expensive restoration effort in its history -- with cost estimates approaching $800 million -- its measures for scrutinizing tens of thousands of invoices will be tested to the extreme.
LIPA says it is ready. It has beefed up its auditing staff, including the hiring of a director of internal audit, to scrutinize the expenses.
"The board is going to mandate that the staff scrutinize every penny before writing a check for anything to make sure the costs are appropriate," LIPA chairman Howard Steinberg said. "We are going to perform an audit. We are going to scrutinize every penny."
Steinberg called the $800 million estimate to fix Long Island's electrical system a "very preliminary soft estimate," and LIPA expects federal funds to cover 90 percent to 100 percent of those costs, which will protect the authority's ratepayers. Newsday first reported the $800 million figure Thursday.
Two years ago, after Hurricane Earl dealt Long Island a glancing blow, allegations surfaced that storm expenses were inflated, misclassified or unrelated to the work at hand. Tree-cutting and environmental cleanups completed days before the storm wound up on the invoices for Earl, Newsday reported at the time.
LIPA trustees, including noted Long Island auditor Lawrence Waldman, skewered LIPA in Earl's aftermath, and demanded the fixes that are now in place.
After Earl, National Grid, which manages the electric grid for LIPA and pays hundreds of subcontractors who work during storms, said in an audit that $1.1 million had to be credited back to LIPA, including hundreds of thousands of dollars for work done outside the storm but billed to the storm account.
In the aftermath of Sandy, critics wonder if the sheer size of the job -- and the $800 million price tag -- will make a high level of scrutiny a nearly impossible job for an authority of 100 people, including a newly installed director of internal audit, William Melville. He is working with outside auditors to help in the effort, said LIPA chief financial officer Michael Taunton.
With major storms like Sandy, National Grid is permitted to open a special account to bill LIPA separately from its existing fixed budget to manage the electric grid. Former KeySpan and National Grid managers say there are financial incentives to shift expenses to the storm budget to help cut the company's fixed costs with LIPA.
"Every dime associated with a storm is removed from the operating budget," said Peter Schlussler, a former manager for National Grid predecessor KeySpan, and now a member of the Suffolk Legislature's LIPA Oversight Committee. "The more you minimize your operating costs, the greater your bonus is going to be."
All National Grid managers, he explained, have an operational budget that they maintain. "If you reduce it by X percent, your bonus would be calculated by how much you reduce operating overhead," he said. "It's allowing management to take advantage of a system that benefits them more on a personal level."
LIPA's Taunton agreed that the incentives are there.
"On the operations and maintenance budget, we limit them [National Grid] to how much they can spend per the management service agreement," he said.
In addition, he said, federal coverage of some of the costs may also be in play.
"One of the issues could be what's eligible for FEMA reimbursement," Taunton said. "The restoration work is different than permanent repair work," which FEMA typically would not reimburse.
After a request by Sen. Charles Schumer (D-N.Y.) to investigate LIPA storm costs, FEMA had been conducting physical inspections of all LIPA repairs following last year's Tropical Storm Irene to document and verify expenses, an exercise that has delayed reimbursements to LIPA. Last week, FEMA expedited payments.
National Grid said it fixed the problem that led to improper billings after Hurricane Earl. Spokesman Alberto Bianchetti said the company has put "significant plans in place to help ensure that storm costs are appropriate and accurately charged, ranging from per-meal allowances for crews, increased document retention, embedding financial LIPA staff where storm dispersing work is occurring, and establishing plans for rigorous post-storm review of charges."
Bianchetti said the new measures are evident in the lower number of kicked-back invoices from LIPA following Tropical Storm Irene -- "far less than one half of 1 percent" of the more than $170 million in costs, he said.
"Sandy far outpaces Irene in size and cost but we expect the steps we have in place will continue to help ensure proper charging," he said.