LIPA, PSEG reach terms on new contract

LIPA and PSEG Long Island have reached a tentative contract settlement that would keep the New Jersey-based power service provider in place until at least 2025 while instituting new controls and accountability measures to address PSEG’s failures during Tropical Storm Isaias, Newsday has learned.

The agreement, reached early Sunday morning, also would settle LIPA’s $70 million breach-of-contract lawsuit against PSEG by providing LIPA with $30 million in cash and credits, a sum that includes the $6.6 million already paid to cover food and medicine reimbursements.

The agreement would "eliminate" PSEG’s ability to automatically extend the contract for another eight years beyond 2025, LIPA said.

LIPA, PSEG and the state must still work out new contract language, which then must be voted on by the LIPA board of trustees and approved by the state.

The settlement terms were reached by officials at the highest levels of Gov. Andrew M. Cuomo’s Department of Public Service, including DPS chief executive John Howard and executive deputy Tom Congdon, along with PSEG officials and LIPA chief executive Tom Falcone.

In an interview Sunday, Falcone, who has been a critic of PSEG and its officials in the wake of the storm, said the tentative new pact with PSEG provides LIPA with new levels of pay-for-performance, accountability and service improvements that were worthy of LIPA's reconsideration after previously attempting to terminate the contract. He said LIPA will suspend its efforts to seek another provider after months of marketing the contract to providers across the country.

Falcone said the terms tentatively agreed to by PSEG meet LIPA's and trustees' demands.

"If we’re going to give PSEG another chance, we need more than just promises, but something we can take to the bank that would give us faith" that past failures "won’t happen again," said Falcone. He added, "I believe this is by far the best contract LIPA has ever had."

Howard said: "This historic agreement ensures that PSEG Long Island customers receive the protections that they so strongly need, and Governor Cuomo has long made it clear that Long Island customers needed better protections. The Department of Public Service will ensure PSEG Long Island meets all of the new rigorous requirements, and we will diligently ensure PSEG Long Island is held accountable to meet this new regulatory standard."

With storm season already underway, the big focus is not so much on the contract, but PSEG's ability to fix problems quickly should another storm hit the region. Just last week, LIPA noted while PSEG has made "progress," it's still using an "outdated" computer system to manage and respond to storms, and a new one is not expected to be ready to install until after the season this fall.

LIPA since its inception has relied on outside providers to manage the grid under long-term contracts, starting with KeySpan/MarketSpan in 1998, even while LIPA, a state authority, owns the grid, including wires, transmission towers, substations and equipment. National Grid took over the contract when it acquired KeySpan in 2007. National Grid, which owns most of the local power plants, was replaced by PSEG in 2014.

The decision is sure to rile the hundreds of customers and activist groups who have flooded public meetings and comment forums demanding that LIPA terminate its contract with PSEG immediately and become a fully public authority, with LIPA managing and operating the system by itself. Some of those advocates lost patience with even LIPA’s attempt to gauge interest in hiring new service providers.

But the state has been a constant, if little-noticed, advocate for LIPA to try to work out its differences with PSEG, and it’s had the backing of some local business groups and PSEG employees.

It was Cuomo’s LIPA Reform Act of 2012 that gave PSEG a greater management role than one LIPA had previously negotiated after failures by National Grid during Superstorm Sandy. PSEG officially took over from National Grid in 2014, and had been gradually increasing customer satisfaction scores.

Cuomo at a Long Island ceremony symbolically removed the LIPA name from a service truck and replaced it with PSEG Long Island’s logo, and service improved somewhat steadily in the ensuing years, although PSEG never reached its promised top-25% ranking among big utilities for customer satisfaction by JD Power.

Then came Isaias, which resulted in 645,000 outages impacting 535,000 customers and, worse, a "fog of war," according to Falcone, that left customers unable to communicate with PSEG via phone or text, or get accurate restoration times for days.

Falcone said the new contract will keep PSEG "on a short leash," and called the agreement the business equivalent of a prenuptial agreement, with LIPA having extensively greater rights to performance demands, accountability, budgeting and compensation than ever before. "It's a real pay-for-performance deal," Falcone said.

Under new terms of the agreement, most of PSEG’s $78 million in annual compensation would be "at risk" if PSEG doesn’t meet the terms, compared with an annual $10 million now.

The new contract would trigger automatic reductions if PSEG failed to meet minimum standards for storm response, customer satisfaction and system reliability measures. The state would also have the right to institute a new investigative process that could result in further compensation reductions, LIPA said.

In comparison to 24 annual service metrics that Falcone has criticized as outdated, PSEG would now be subject to considerably more detailed and rigorous performance standards, LIPA said.

PSEG would also be required to provide greater transparency into its use of contractors to perform services, and to strengthen its Long Island management team, with the PSEG Long Island president having the "full and operational" decision-making authority for the company, with all employees reporting to him, and their compensation linked to performance here. Currently, about 40 PSEG computer staff also report back to its headquarters in New Jersey.

For LIPA’s complaints about misstatements by PSEG officials during its months of investigation following Isaias, the new agreement requires "timely, affirmative disclosure" to LIPA and the state on issues that "significantly impair" PSEG’s ability to provide reliable service. These include issues such as service, cybersecurity, financial impairment, noncompliance with laws or "circumstances that may endanger public health, safety and welfare," according to a LIPA term sheet.

PSEG is also required to fix "known" operational problems identified by LIPA or the state in a "timely manner."

The deal would require PSEG Long Island to separate its computer systems from those of its New Jersey parent, and give LIPA new rights to test and validate their performance.

Of the $30 million to settle the LIPA breach of contract suit, $3.9 million would come in the form of contributions to Long Island charities, $6.6 million includes the amount already reimbursed to customers for food and medicine lost after the storm, and $19.5 million, including cash or credits, to LIPA to pay for the cost of computer system upgrades since the storm. It includes the roughly $3 million LIPA would have paid in incentive pay for 2020 for PSEG reaching certain performance metrics.

Falcone said LIPA retains "all our rights" if the new contract doesn't work out and LIPA decides to become a fully public utility in the future. He said the contract has "ironclad" terms that PSEG must meet or "we've retained our rights to consider our other options."

"Either they're going to perform or at some point we have to say this isn't working," Falcone said.

By Mark Harrington

mark.harrington@newsday.comMHarringtonNews

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