LIPA seeks major 'reset' of PSEG contract, explores fully public utility option

LIPA is demanding a "drastically reformed" contract with PSEG that gives the state authority considerably more control over how the region's power grid is managed, even as it explores the "financially attractive" prospect of dumping PSEG and becoming a fully public utility by 2022, according to a new report.

A fully public LIPA could save customers up to $815 million between 2022 and 2032, and pay for itself in under a year and a half, says the study, which was shown to Newsday.

In the wake of PSEG Long Island's reported failures during Tropical Storm Isaias, LIPA wants a "reset" of the existing $77 million-plus annual management contract with PSEG that would put the New Jersey-based company under greater scrutiny and a broader set of performance standards, while allowing LIPA to subcontract out work that it feels PSEG has mishandled.

LIPA has set a March deadline for renegotiating the PSEG contract, and reporting back to its board on whether to move forward with PSEG or explore full municipalization, according to the report. The report also examined privatizing LIPA — essentially selling the system to the highest bidder — but suggested not pursuing that option now because of its high cost to customers.

The 25-page "Options Analysis" report, prepared by LIPA staff and outside consultants, will be discussed publicly at a LIPA board meeting Wednesday, with PSEG officials expected to be present. LIPA is also expecting PSEG to provide an action plan to address a list of 100 recommendations it says are necessary to address problems with PSEG's storm response, among other issues.

PSEG spokeswoman Ashley Chauvin in a statement, said the company believes "that a public-private partnership is the best option for Long Island customers." PSEG is working with LIPA and the state Department of Public Service to address the recommendations in LIPA’s 90-day report and to "regain the trust and confidence of LIPA." The company, she said, "is committed to continuous improvement, transparency and accountability."

"We know that real action is needed and needed now," Chauvin said, adding PSEG has been "hard at work" on systems, process and organizational improvements, "some of which have been completed with many more in progress."

The report follows investigations by LIPA and the state that found PSEG’s failures during Isaias were tied to "mismanagement" that left 535,000 customers in the dark for up to eight days. Computer and communication systems failed, and many still are not properly operating, despite PSEG’s representations to the contrary, according to a LIPA task force. LIPA last week in an unprecedented move sued PSEG Long Island for at least $70 million in compensatory and other costs tied to the failures, which it wants fixed expeditiously.

"We have real options," LIPA chief Tom Falcone said of the report's conclusions. "We'll see what they [PSEG] are willing to do. I wouldn't rule out their best offer may not be good enough."

Any new agreement with PSEG would put LIPA in the driver’s seat, allowing for "independent procurement of various management and corporate services," from computer systems to legal services.

It would also give LIPA stronger "triggers" to fire PSEG for poor performance, make it easier to switch service providers, and give the LIPA board more discretion to order PSEG compliance to directives and more control over compensation. It would require PSEG to become "fully transparent," while requiring that LIPA take on a greater role to "ensure adequate staff and technical expertise," including at LIPA, to oversee PSEG’s work.

If PSEG won't agree to the terms, LIPA would already have begun exploration of becoming a fully public municipal utility, shifting operations to a new LIPA subsidiary with more than 2,500 employees moving over, and up to 37 new staffers, including 13 top-level staff to replace PSEG's 18 officials.

If implemented by 2022, the switch to fully public power could save customers up to $215 million through 2025, when the PSEG contract is set to expire, and offer 10-year savings as high as $815 million by 2032, LIPA found.

The public power model would require support from key local, regional and state stakeholders, including Gov. Andrew M. Cuomo, the state Legislature and employee labor unions, the report found.

State Sen. Jim Gaughran (D-Northport), who was briefed on the report Monday, said the state Legislature will be a driving force in LIPA's future options. "I'm not interested in passing legislation that will just change whose name and logo are on the trucks," he said, saying he wants to "fix the lack of transparency, oversight and excessive cost" at LIPA as well. "Nobody should be rubber-stamping what LIPA wants to do."

LIPA estimated there could be one-time costs of $85 million to $105 million for the transition to a fully public utility, including a $61 million contract termination fee with PSEG.

Observers say the prospect of a fully public LIPA makes sense.

"I find it greatly encouraging," said state Assemb. Steve Englebright (D-Setauket). "It brings us to a milestone in the history of energy on Long Island, in the direction that some of us have been arguing for for years — public power — for the savings, the accountability and predictability of service."

LIPA vice chairman Mark Fischl said, "I would probably vote for full municipalization at the end of the day, but I can also see the merits of a renegotiated contract that really had some teeth in it" to keep PSEG in check. "Clearly, change is in order," he said.

LIPA trustee Matthew Cordaro was unequivocal. "I have no doubt municipalization is the way to go," he said. "It's as clear as the tip of your nose. We can get a hell of a good staff for what we pay those 18 PSEG managers."

The report asserts that the "greatest risk" for LIPA and its 1.1 million ratepayers is to leave things as they are, given the PSEG operation and contract’s "known weaknesses."

And it notes that negotiating a new contract with PSEG still involves "some risks of performance failures that would need to be closely monitored." While LIPA could look for a new service provider other than PSEG, it would also have to consider "whether a suitable partner is readily available," along with a lengthy procurement process and the "complexity" of a handoff from PSEG.

The greatest risk of fully municipalizing LIPA, the report found, is the authority’s ability to recruit high-quality managers quickly enough, while shifting all the employees, call centers, computer and telecom systems to a new LIPA-controlled subsidiary.

"Time is of the essence because the risk to Long Island customers still prevails," the report concludes, noting that LIPA will negotiate with PSEG to come up with a new contract by March that can be compared to the "best alternative plan," including becoming a fully public utility.

"The question facing the board of trustees is one of quality, price and risk," the report asserts. "Will a reformed [existing] contract [with PSEG] deliver sufficient value to merit the $675 million to $815 million to be paid as a premium for PSEG Long Island management through 2032?

"Or would these funds be better deployed in customer-facing improvements to the electric grid to enhance service quality, reliability and clean energy?"

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

Mark Harrington, a Newsday reporter since 1999, covers energy, wineries, Indian affairs and fisheries.