LIPA finds deeper problems with PSEG, seeks new contract demands
LIPA chief executive Tom Falcone. LIPA has sent its proposed new contract-term demands to PSEG on Jan. 21, with a plan to decide its future operational direction. Credit: James Carbone
The Long Island Power Authority has sent PSEG Long Island a new list of contract demands to address even more problems with the company's management of the electric grid, as the prospect of a fully public LIPA-run utility looms.
It's the latest salvo in a highly public dispute between the once-closely tied entities in the wake of more than 645,000 outages and other problems following Tropical Storm Isaias.
An interim report from a LIPA task force set for release this week found that storm-based problems were the tip of the iceberg, and outlined new problems with PSEG's handling of the utility's strategic planning, risk management, budgeting and real estate matters.
LIPA sent its proposed new contract-term demands to PSEG on Jan. 21, with a plan to decide its future operational direction by the end of March. PSEG is scheduled to make a presentation to the LIPA board on Wednesday.
"If we’re going to do business with PSEG we need to have in writing a contract structure that addresses the problems we’ve identified," said LIPA chief executive Tom Falcone, in an interview Monday, along with verifiable assurances that PSEG will comply.
"We’re not asking them to do anything here that every other good utility doesn’t do," he said. "This isn’t a moonshot."
PSEG said it's received LIPA's proposed contract changes and is "reviewing them with an open mind."
In the report, investigators point to the negative impacts of PSEG’s "inattentive and unaccountable" management, and listed more than a dozen reforms the authority seeks to address. The problems go beyond just PSEG’s storm failures, which saw the more than 645,000 outages and largely unresponsive communications. LIPA’s current contract with PSEG expires in 2025, but the state has recommended LIPA consider terminating it.
The report notes that 53 PSEG managers charged with maintaining and operating the Long Island grid, report to bosses in New Jersey, while chief operating officer, Dan Eichhorn, has "little discretion to make decisions." PSEG Long Island "needs qualified, capable management whose priority is servicing Long Island customers," the report says.
It found fault with the original PSEG contract negotiated in 2011, giving PSEG the ability to receive bonus payments based on a "balanced score card" of more than 20 specific service targets. That score card, LIPA found, is "simply too narrow to judge the performance of a complex business," while other essential services such as computer systems and backup business plans are "out of sight, out of mind."
To fix the charge that PSEG is "not candid with LIPA" about its problems, the task force recommends new contract wording that gives LIPA direct access to information systems to verify PSEG’s reports and performance. .
"If they want to be on Long Island and serve Long Island customers, they should have no problem with accountability and transparency," Falcone said.
The new terms demand that all PSEG Long Island management would be based on Long Island, and report directly to the chief operating officer, also based here. PSEG’s managers' pay would be "transparent and tied to Long Island operations," and they could be removed for "inadequate or unresponsive" performance.
No PSEG manager would have responsibilities other than on Long Island, the new terms demand. Previously, even Eichhorn had dual Long Island and New Jersey roles, as did former PSEG Long Island chairman, Dave Daly.
A new contract also would obligate PSEG to act on LIPA’s recommendations, and it would replace the current metrics score card with contractual agreements. It also would eliminate the current ratio of 80% fixed compensation for PSEG managers, increasing the amount of pay that is "at risk" when PSEG fails to meet the broader level of performance requirements. The current contract pays PSEG around $77 million annually in a management fee, and around $10 million in incentive pay based on the metrics.
LIPA also would be able to force PSEG to subcontract services it deems haven't met standards, and transition PSEG employees to the subcontractor.
Under the new contract, PSEG would file budgets for approval by LIPA tied to historic costs and annual work plans, and they would be tracked to justify significant changes.
PSEG would be required to establish computer systems exclusively for the LIPA territory, and give LIPA managers the ability to verify the contractor’s claims.
LIPA said if PSEG doesn’t agree to the contract terms, it could terminate the contract, replace PSEG Long Island’s top 18 managers or take over day-to-day operations. It predicts savings of up to $815 million by managing the grid with its own team, and foresees hiring the 2,500 nonmanagement PSEG employees.
Falcone expressed disappointment with PSEG's responses to LIPA's pressing concerns thus far. "We get a lot of pushback and we don’t get information from them on a timely basis," he said. The two parties meet five times a week, and there’s "a lot of [information] suppression and gamesmanship."
Mark Harrington, a Newsday reporter since 1999, covers energy, wineries, Indian affairs and fisheries.
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