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Cuomo, legislature will have a big say in whether LIPA dumps PSEG

LIPA board vice chairman Mark Fischl, seen here

LIPA board vice chairman Mark Fischl, seen here at a committee meeting in 2018, is among trustees who have indicated dissatisfaction with PSEG's progress and contract terms. Credit: Barry Sloan

With a crucial recommendation on the fate of the Island's electric utility just weeks away, state officials say the decision won't be made by LIPA alone, but instead will involve state regulators, the legislature and perhaps most prominently the governor's office.

In recent interviews, state regulatory and elected officials say they expect to play prominent roles in the decision of whether to dump PSEG Long Island, the company that operates the Island’s electric grid under contract to LIPA, and move ahead with a fully public, "municipalized" model in which LIPA would operate the grid itself. It's a decision, they say, that likely will require new or amended state legislation, approval from regulators and ultimately the blessing of Gov. Andrew M. Cuomo before any decision by the LIPA board of trustees is finalized.

Long Island ratepayers also will get a say. At a State Senate committee hearing Wednesday, LIPA chief Tom Falcone said the recommendations of a LIPA task force due by month's end will be "laying out the facts."

"We'll be laying out the options and we'll be waiting to hear from the legislature, the governor and the public about which one you want us to take," he said.

Falcone called PSEG's missteps after Tropical Storm Isaias "a large failure," and noted that the company, after promising top-level performance in a national customer satisfaction ranking, still remains 124th of 140 national utilities. PSEG "either needs to put together [a new contract] we can depend on, not just promises and sorries but something in black and white that this problem is fixed going forward, or we will look at other alternatives" including "managing it ourselves."

Doing so would involve adding 13 management employees to LIPA's current staff of 60, taking over control of a 2,500-employee subsidiary company that includes unionized and other workers now operated by PSEG, and hiring 25 to 30 staff level employees for that subsidiary, Falcone said.

The LIPA task force has been studying options after widely reported failures of PSEG during the August storm exposed technical and management problems, and led the utility to consider terminating its contract with the New Jersey-based company.

LIPA says the fully public model would save hundreds of millions of dollars in fees that would otherwise be paid to PSEG over the next decade. It also would address findings in a previous LIPA task-force report that found PSEG is largely beholden to its New Jersey corporate parent, to the detriment of Long Island ratepayers. PSEG, while admitting missteps, says the current public-private model works best, and that it's working hard to address LIPA's gripes. LIPA has filed a $70 million breach-of-contract lawsuit against PSEG, alleging that it knew of computer and communications problems in advance of the storm, which knocked out power to more than a half-million homes.

The state Department of Public Service — the administrative arm of the Public Service Commission, which regulates the state's utilities — has been closely following developments in the case and, as the division of the Cuomo administration with unique "review and recommend" authority over LIPA, is expected to have a key voice in whether LIPA fully municipalizes or finds a way to work with PSEG. In a filing last year, DPS first broached the idea that LIPA consider terminating PSEG on or before its contract expires in 2025.

DPS’ 'review and recommend' role

Cuomo's LIPA Reform Act of 2013 contemplated downsizing LIPA and giving PSEG an even greater role than LIPA had envisioned when, dissatisfied with the previous system operator National Grid, it awarded PSEG the contract to operate the Island's electric grid in 2012. The act also gave DPS a "review and recommend" role at LIPA to monitor operations and offer solutions to address issues, with LIPA's board being the ultimate authority. LIPA, while not formally under PSC jurisdiction like most other state utilities, almost always follows DPS recommendations. The state settled on review and recommend authority rather than formal PSC jurisdiction because the latter would have required changes to LIPA's bond rules and potentially hiked borrowing costs — claims some legislators who want full PSC jurisdiction reject.

"To protect the interests of Long Island ratepayers, the LIPA Reform Act provides the Department of Public Service with a statutory obligation to review LIPA and PSEG management and operations and provide recommendations to the LIPA board as appropriate, an obligation that DPS takes seriously," the department said in response to Newsday questions. DPS and LIPA are "unified in their interest to ensure responsive, competent and reliable utility service for Long Islanders, and DPS has been providing support to LIPA throughout this process."

But a top state regulatory official, who requested anonymity to speak openly on the subject, put it more bluntly.

"LIPA is not an island unto itself," the official said, even though it is a state authority and has its own governing board. "The realpolitik is that LIPA cannot become a direct service provider," severing its ties to PSEG, "without a change in state legislation."

The DPS "is not merely an interested observer" in the process, the official said.

"We have authority and responsibilities under the law," the official said. "It’s not a decision practically or legally that LIPA’s board can make on its own. LIPA is intertwined with the Department of Public Service, and there is legislative authority that the government retains." In addition, the official said, "LIPA is subject to Public Authorities law."

The official was referring to a set of rules put in place at the time of LIPA's creation that govern how it conducts its operations.

Legislature 'going to have to take a deep dive'

Those same rules also open an opportunity for elected officials closely watching the situation to play a role in LIPA’s future.

"It's got to be the legislature and the governor making that decision," said State Sen. Jim Gaughran (D-Northport). "It's not going to be anybody rubber-stamping a request made by LIPA or DPS. The legislature is going to have to take a deep dive and fix this independently."

Gaughran said his main priority is that oversight of LIPA be increased to give Long Islanders "the same protections as consumers have in the rest of the state ... Just taking PSEG off the trucks and putting on another name is not going to fix this."

Cuomo may ultimately have the final say in LIPA's future through the LIPA board itself. Five of the current eight trustees were appointed by him, including Elkan Abramowitz, who is serving as attorney for Cuomo’s executive chamber in the Justice Department probe of state nursing home deaths.

Cuomo appointees have been among the most outspoken critics of PSEG, most notably in the months after the storm. A Cuomo directive to continue with a PSEG contract that’s not acceptable to board members could complicate the Albany-Long Island relationship. Most trustees at recent board meetings have indicated dissatisfaction with PSEG’s progress and contract terms.

"As far as I’m concerned what they’ve put before us is completely unacceptable, and I have no interest in proceeding along those lines," board vice chairman Mark Fischl, a Cuomo appointee, said in an interview.

PSEG in a recent statement said it is "working with LIPA in good faith to address LIPA’s proposed changes to our contract," and that its "goal has always been to provide the most value" for customers.

LIPA weighing its options

LIPA’s options, if it decides to terminate PSEG, also include hiring another company to run the grid, which officials said didn’t appear feasible. Talks to renegotiate the PSEG contract have been strained and Falcone, during a contentious board meeting last month, described the two sides as very far apart.

LIPA board members have taken issue with PSEG’s responsiveness to proposed fixes to its management and technology problems, including problems outside the scope of the storm. Some members also have taken issue with PSEG’s transparency, noting an email that showed top company officials were aware of computer problems weeks in advance of the storm.

PSEG has said it is working to address LIPA’s requests.

Newsday reported the company is seeking a pay increase of nearly 20% as part of its new contract terms.

LIPA's Falcone, during Wednesday's legislative session, said the notion of a pay increase for PSEG was "totally unacceptable and would never happen."

"Nobody thinks that 650,000 customers lost power and PSEG should just get a raise," he told senators. "That's just totally bonkers."

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