The Long Island Power Authority will make a last-minute change to its pending contract with new utility operator PSEG to eliminate the New Jersey utility's ability to make tax-free purchases on LIPA's behalf, a move that would cost the agency a potential $9 million to $11 million in annual savings.
People involved in the discussions said LIPA and PSEG are working to expedite a review of the $3.23 billion, 10-year contract, which takes effect in January 2014, to make sure the last-minute change won't have effects beyond the loss of tax-free status.
LIPA trustees voted last year to change its contract with current system operator National Grid so that the company could become LIPA's "agent" in purchasing equipment such as poles and office supplies while enjoying LIPA's tax-exempt status. At the time, LIPA said the change could save ratepayers $9 million to $11 million a year. LIPA assumed that PSEG would have the same status.
But since then, the state Department of Taxation and Finance and the state comptroller have weighed in on the matter. Both ruled that if LIPA's contractor acted as a tax-exempt purchasing agent, the company would be subject to the same contract-approval constraints that LIPA is. Those include approval by the state comptroller for purchases over $15,000 and competitive bidding.
For PSEG and LIPA, the perceived delay in getting contract approvals during events such as storm outages could be problematic, said a person close to the LIPA who requested anonymity. The utilities decided they needed the flexibility of avoiding the long list of procurement requirements.
But the change also led PSEG to review the contract further to make sure it was not taking on unforeseen liabilities in not acting as LIPA's agent. That review is ongoing, said people familiar with the matter, but it could be concluded this week.
"We're redrawing the contract so they [PSEG] do not have agent status," the source said. "We're parsing through it to see if there needs to be other changes in the contract."
Spokespeople for LIPA, PSEG, the parent corporation of the Public Service Electric and Gas Company, and the comptroller's office declined to comment.
Matthew Cordaro, chairman of the Suffolk legislature's LIPA Oversight Committee, said the change "underscores the disadvantages of this public-private model: a lot of the oversight is lost [and] you're giving up the nonprofit benefits."
LIPA said the contract and a new business model it calls "servco" actually gives it greater oversight of the utility operator and more ability to control functions such as budgeting.
When LIPA announced in December the awarding of the PSEG contract, it said PSEG's bid was $100 million lower than the two others, Con Edison and National Grid. LIPA in making the comparison had assumed all three bidders would have the tax-exempt status.