Some findings cut from final outside audit of LIPA/PSEG

The final version of a ratepayer-funded audit report of LIPA and PSEG Long Island excluded or altered some findings and recommendations from the first draft, including deficiencies relating to customer outages, incorrect customer rate classifications and overall transparency.

For example, the final version of the 2018 management and operations audit by outside firm Northstar Consulting Group eliminated findings from the initial report that found there was “no ‘voice of the customer’ in executive decision making” at LIPA, that LIPA’s interaction with its board “lacks transparency,” and that public speaking at board meetings “did not appear to have any impact on decisions.”

Newsday compared the January draft of the report with the final June 29 version. The audit and report, contracted by the state Department of Public Service, cost customers $1.6 million.

The final report also reduced the number of recommendations to 49 from an initial 53, and eliminated the very first: “To improve transparency, it is imperative that DPS [the state Department of Public Service, which commissioned the report] attend all” meetings of PSEG’s little-known utility review board, a joint management review board and the LIPA board’s executive management budget workshops.

A section on reliability of the local grid noted that PSEG didn’t achieve two key measures of customer outage duration and frequency, but the final version changed that to say PSEG “has maintained high levels of reliability” compared to other state utilities, with the “second lowest number of outages” and the “shortest duration in the state.”

The draft report includes a full-page chart detailing system outages over the three years since PSEG took over management of the LIPA system, noting that the number of customers per outage increased 42 percent from 2014 to 2016 and other detailed findings. The final report eliminates that chart and its extensive data.

The number of customers who lost power because of a tree branch or other vegetative problem increased to 246,999 in 2016 from 188,824 in 2014, according to the draft report, even as PSEG ramped up tree-trimming. Equipment problems had an even bigger impact, knocking out 552,503 customers in 2016 compared to 373,517 in 2014. The average frequency of outages increased 53 percent over that time, the draft report says.

Northstar took exception to PSEG’s oft-stated justifications for the increased outage numbers. In the past, PSEG has said a new safety procedure and a new outage management computer system were chiefly to blame for the higher numbers, suggesting that outages were either intentional for work safety or the result of a more accurate count by the new system.

Northstar disagreed in the draft report. “The increase in the number of customers interrupted is being impacted by factors other than new outage management system,” according to the draft. Northstar also took exception to PSEG’s blaming declining numbers on “intentional” outages, calling the contention “flawed” and noting that is “not an industry-accepted term.” Northstar said it found nothing that would constitute an emergency condition to justify the intentional outages.

Explaining the edits, DPS spokesman James Denn called it “standard operating procedure for DPS to carefully scrutinize audits to ensure that findings are supported by the facts.”

He added, “If there are mistakes, we ask the auditor to make necessary corrections. There are no barriers preventing DPS to access information that’s needed about a utility’s operation.”

PSEG spokeswoman Elizabeth Flagler said the company “never saw a copy” of the January draft report. And while it reviewed the final report in May/June for “factual corrections,” the company “did not have any final say in sections being removed or altered.” Spokesman Jeremy Walsh added PSEG did not make objections to the observations made in the reliability section of the audit report, and noted Northstar “included our perspective in the final version of the report, which also found that “LIPA customers have the second lowest number of outages annually and the shortest outage durations in New York.”

A LIPA spokesman concurred that the January report was “never shared with LIPA/PSEG.” The authority was “offered an opportunity to correct factual inaccuracies, and it was up to the auditor to make final recommendations.”

Doug Bennett, a Northstar executive who oversaw the audit, in an email said his company “is prohibited from speaking to the media, or anyone else for that matter, as agreed to in our contract.”

Alterations and eliminations are widespread throughout the report, and some points that Northstar characterized critically were neutralized or reconstituted.

In the first draft, the finding that LIPA “does not have sufficient resources or defined roles and responsibilities to effectively oversee” PSEG’s capital project follow-through was changed in the final draft to say LIPA’s oversight of those matters is “performed at a high level.”

The changes in the two reports are evident even in the executive summary. Gone were lines noting that LIPA “does not investigate project cost overruns to identify or correct problems,” that “many measures” of PSEG’s performance are “not addressed” by LIPA’s incentive program for PSEG, and that LIPA and PSEG have “no formal follow-up processes” to address deficiencies identified in numerous studies, internal audits and reports.

“LIPA oversees PSEG LI’s spending without sufficient consideration of value received for the investment,” the original report charged, a finding that didn’t make the final cut.

Also gone was the finding that the LIPA board “does not have sufficient relevant functional expertise for an organization of its size, complexity and revenue.” Also, it found the board’s level of activity is “relatively low,” and it may not exercise a “suitable level of authority.”

The initial report noted that LIPA’s operations oversight plan incorporating its mission and values “does not address transparency.” It noted that customers, for instance, don’t have an opportunity to comment on board items moved into a multilayered “consent agenda” during trustee meetings. Even when ratepayers or others are given a chance to speak at board meetings, the original report found, “public speaking at board meetings did not appear to have any impact on decisions.” That line was excised from the final report.

“Based on the board of trustee makeup, LIPA organization and governance processes observed, there is no ‘voice of the customer’ in executive decision making,” Northstar found in the original draft report.

In some cases, the changes eliminated the analysis of Northstar auditors on their findings, turning revelations into findings of fact. In Northstar’s original report, it found that PSEG “does not have sufficient processes to assure customers that they are assigned to the correct rate,” noting the company views that as “the customers’ responsibility,” even though it can lead to over- or under-billing.

But in the final version, the finding became, “LIPA-PSEG LI comply with PSC precedent regarding rate-code assignments.” It provides a determination by the commission to back up its case, even though the agency has no formal jurisdiction over LIPA.

While both reports provide charts showing the “potentially significant costs” an incorrect rate classification can have for customers, with charges for the incorrectly classified increasing by $2,382.25 during the summer months, the final study leaves out the line that “PSEG LI does not actively manage the assignment of general service rate codes,” and that it “places the burden on the customer to see a message on the bill and proactively contact” the company.

The draft noted that PSEG had “completed no studies to verify that residential customers were not billed on a small commercial rate,” for instance, noting that some may end up in that class if they move into a home that formerly had been a business.

“While PSEG LI does not proactively perform studies for customers to determine the proper rate classification, it will, upon customer request, analyze customers’ usage against variable rates,” the report states.

The original draft report recommends that PSEG “assign customers to the rate schedule based on the previous 12 months billing.” The final draft leaves out that recommendation.

In one case, the final report took a somewhat more defined and harsher line than the first draft. The final report took aim at PSEG’s outreach for “high-risk capital projects such as the tall steel poles that replaced shorter wooden ones” in Eastport. It found outreach “may not be adequate,” and PSEG held only a “small number of meetings” in advance of the work. The draft discussed capital projects more generally, though it did note that outreach is “not sufficiently robust.”

Assemb. Fred Thiele (I-Sag Harbor), a frequent LIPA critic, said Newsday’s analysis of the two reports raises the question, “Who changed the report and why?” adding that the original report “more closely comports with my sense of reality of how LIPA operates than the whitewash that ended up being released to the public.”

He said the omissions and alterations in the final report “require further investigation and is something the legislature in its oversight role should be getting involved in.”

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

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