LIPA's power decisions fueled by 'incompetence or political agendas,' experts say

Transmission towers carry power lines through Suffolk County Transmission towers carry power lines through Suffolk County on Monday, Aug. 18, 2014. Photo Credit: Newsday / John Paraskevas

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The Long Island Power Authority's decadelong spending spree on a portfolio of long-term, high-priced power sources locked out competition, enriched a handful of politically connected developers, and left ratepayers on the hook for decades of exorbitant contracts, utility officials, energy experts and lawmakers say.

A sometimes withering analysis of LIPA's power decisions since 2005 was undertaken by PSEG Long Island at LIPA's request after PSEG took over management of the electrical grid. It laid out what many had been alleging since the authority began its aggressive pursuit of power: that a utility with among the highest rates in the nation couldn't afford and didn't need much of that new power.

In fact, as Newsday reported in 2010, LIPA in 2008 was replete with so much new power from the recently constructed undersea Neptune Cable that it paid Caithness Long Island Energy $102 million to delay completion of its Yaphank power plant project for a year. LIPA has said the move ultimately saved ratepayers money.

PSEG's analysis found the problem went back much further than that. For each of the past nine years, LIPA had an average 528 megawatts more capacity than the state required -- the equivalent of a power plant and a half. In 2011 alone, the excess above state requirements hit 972 megawatts, PSEG found, with an estimated cost that year of $131.2 million. The nine-year total cost was $641 million, according to PSEG.

LIPA's justification for the capacity was based on a formula to reduce the likelihood of a one-day outage of the system to once in 1,000 years, compared with the statewide standard of once in 10 years.

"It was either incompetence or political agendas being played out that benefited very select parts of the public," said Assemb. Steve Englebright (D-Setauket), a co-sponsor of the LIPA Reform Act, which restructured the agency. PSEG's findings "confirm what many analysts from the outside have been concerned about, which is that the driver for more and more power plants was something other than need."

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Rick Shansky, managing director of LIPA's Power Supply Long Island division, defended the practices. "LIPA's planning standards resulted in a high standard of reliability of power over the past years to ensure that we have not been short of capacity and energy . . . even during abnormally hot summers and increasingly stringent" state planning requirements, he said.

Nevertheless, he said LIPA "welcomes" PSEG's "new perspective."

 

Costly contracts

The excess capacity was a direct result of LIPA's decision to enter long-term contracts with developers of undersea cables, power plants and renewable energy during the past decade. The costs have been huge: $5 billion for a 20-year pact with National Grid, $1.75 billion for the Neptune cable, $924 million for a renewable power producer known as Bear Swamp, $913.9 million for a limited-use agreement with NextEra's Marcus Hook plant in Pennsylvania and $607 million for the Covanta waste-to-energy plant in Hempstead.

LIPA's current financials show about $2.5 billion in long-term liabilities, called capital lease agreements, tied to these capacity agreements.

"What happens is when you lock in [contract prices] for a long period of time, that becomes an artificial price," said Jay L. Kooper, former director of regulatory affairs for a division of Hess Corp. that had sought a way into Long Island's retail energy services market. "We needed to see what the correct market signal was. When that's being distorted, it makes the ability for a competitor to come in and price a product virtually impossible."

The PSEG report said LIPA's practices had a "significant dampening effect on Long Island capacity prices," a trend that artificially influenced energy markets and "hindered" activity by power producers without contracts, also known as merchant plants.

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One former LIPA official who requested that his name not be used noted that the buildup was based in part on electrical emergencies in the early 2000s that led to the installation of about a dozen small plants around the Island to handle high-demand times. "What was put in was needed to keep the lights on," said the former official.

PSEG, which will take over the power-supply function in January, initially did its analysis to determine whether the proposed Caithness II plant was necessary. PSEG officials declined further comment and Julia Bovey, director of the Department of Public Service's Long Island branch, said, "We will review every [LIPA] contract thoroughly."

LIPA's capacity contracts are essentially long-term lease agreements to secure the availability of a power plant or cable. The agreements guarantee the availability over a set period of time, and cover all the developer's costs tied to the facility, including construction, taxes, staffing, maintenance, financing and the plant owner's profit. LIPA then pays separately if it needs to purchase energy from the plants. It's similar to a long-term car rental agreement, where LIPA pays the monthly lease agreement for a driver, gas, and a mileage charge.

But PSEG said LIPA's abundance of caution was unneeded and the excess extended beyond Long Island, altering capacity prices in New York City and scaring independent power producers, or merchant plants, from even considering opening plants here because they couldn't compete.

"You'd be crazy to do a merchant plant" on Long Island, said Larry Siegel, a financial adviser to plant developers and a former Con Edison Development finance manager, based in Wantagh. "I don't think you'd get financing. You'd build it and have insufficient revenue stream."

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Potential rivals locked out

PSEG also found the contracts made it nearly impossible for energy service companies, which attempt to compete with utilities for retail customers, to enter the market. "I'm not surprised PSEG came to that conclusion," Kooper said. "It was pretty self-evident to those of us in the energy services industry that it [the LIPA model] wasn't supportive of retail competition."

While potential competitors were locked out, those with long-term LIPA contracts were rewarded. For example, Florida-based FPL Energy, now known as NextEra Energy, was awarded $1.3 billion in contracts. These include $914 million for a plant known as Marcus Hook from which LIPA can buy energy only when emergencies are declared in markets at both ends of LIPA's Neptune cable.

Other 15- to 20-year NextEra contracts with LIPA are the Bayswater Peaking Facility at $182.7 million, and the $190.1 million Jamaica Bay Peaking facility. The facilities are relied on primarily to provide power during high-demand times, such as in the summer.

The company and its subsidiaries have long ties to LIPA. One-time LIPA chairman Frank Zarb was a former board member of FPL parent, FPL Group, from 2002 through 2006. Former U.S. Sen. Alfonse D'Amato's Park Strategies firm has been a consultant to FPL. Former LIPA chief Richard Kessel has worked as a consultant to Florida Power & Light, a subsidiary of NextEra Energy. The company previously has denied those ties played any role in securing contracts.

National Grid, which has a 20-year, $5 billion contract to provide power to LIPA that was signed last year, helped the authority create the road map that foresaw a large capacity gap by 2023.

The former LIPA official noted that all of the contracts, with the exception of the emergency peak-power plants, were the result of competitive bids.

Gary Krellenstein, a municipal utility finance expert from Port Washington, called the PSEG findings "outrageous."

"If they'd saved this money and used it to pay down the Shoreham debt, we'd all see our rates go down," he said, referring to the costs LIPA assumed from the shuttered nuclear plant. "What they did is above and beyond what could be called bad business practices."

Martin Melkonian, an economics professor at Hofstra University, said LIPA never lived up to its early charter to make Long Island "sustainable for electricity usage."

"LIPA behaved very much as LILCO behaved," he said, referring to its predecessor, the Long Island Lighting Co. "As demand increased, they would always keep building supply."

But even as demand was decreasing and peak usage was leveling off, LIPA was proposing a big new plant -- the 752-megawatt Caithness II facility, designed to meet a LIPA-projected shortfall of 1,185 megawatts by 2022. That estimate included a 585-megawatt "allowance for uncertainties" that put the authority more than 400 megawatts above projected state requirements.

PSEG found that assessment not only overly cautious but costly -- enough to raise rates 2.2 percent. "If you are locked into more capacity and somehow you reduce demand, then you are in trouble," Melkonian said.

PSEG has recommended a series of interim measures to help LIPA offset the need for any usual spikes in peak demand, while going back over the older contracts to see if they can be modified.

"I would really welcome PSEG at least attempting to modify the contracts from the past," said LIPA trustee Matthew Cordaro. "I've always said the contracts were overly generous for developers and the terms were not in the best interests of the ratepayers."

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