State officials examining how to restructure the Long Island Power Authority in the wake of superstorm Sandy are considering options that include selling the local electric grid to a private company and greatly reducing LIPA's role, knowledgeable sources said.
Members of the administration of Gov. Andrew M. Cuomo have been huddling with advisers from the global investment bank Lazard Ltd to examine options including privatization, according to people familiar with LIPA. The advisers include George Bilicic, chairman of Lazard's Power, Energy and Infrastructure group.
"Lazard is doing analytical work," a Cuomo administration source confirmed Wednesday. "It's a complement to the Moreland Commission review."
Cuomo, who two weeks ago declared that LIPA "can't be fixed," ordered the Moreland Commission to examine LIPA and Con Edison's performance during Sandy. On Tuesday, the commission at a public hearing said it would prepare a report by month's end -- in time for Cuomo's state of the state address in January.
But one state source said that, while administration officials are taking privatization of LIPA "very seriously," it is one of several options, including making LIPA a fully public utility.
A Lazard spokeswoman didn't immediately respond to a request for comment.
Options studied in 2010
Lazard conducted a review of LIPA's strategic options as recently as 2010 under former LIPA chief Kevin Law. That review advised a more serious study of three options for LIPA's structure, including privatization. That would return the authority to a status similar to its pre-1998 days as the shareholder-owned Long Island Lighting Co.
Lazard in the 2010 report said privatizing LIPA would first involve a "pre-transaction separation" of the Long Island electric grid from LIPA's debt. The electrical system then would be sold to a third party, with proceeds going to pay down a portion of LIPA's debt, currently about $6.9 billion.
"LIPA would continue to exist, with its role reduced to servicing of its remaining debt and administration of any remaining asset interests," including its partial ownership of the Nine Mile Point Nuclear Station near Oswego, Lazard said.
The administration source stressed that the 2010 review isn't necessarily a relevant model for current options for LIPA. "Options are being reviewed but pure privatization is off the table," the source said.
Some longtime LIPA watchers said privatization, if pursued, would face legal, financial and operational hurdles.
Most immediately, LIPA already has a contract with PSEG of New Jersey to take over the electric grid in 2014. PSEG is working on a transition plan and has taken up offices at LIPA's Uniondale headquarters.
PSEG spokeswoman Karen Johnson said it was "not appropriate for us to comment on what may or may not happen with LIPA at this time." She added that, "We will, of course, follow any developments and consider our options if things change."
Privatization has been discussed for the past decade.
Following the Lazard report, LIPA in 2010 commissioned the financial consulting firm The Brattle Group to determine if customers would benefit from taking the utility private.
That analysis found privatization could raise rates by 10 percent to 20 percent due to the buyer's "profit margin coupled with the higher financing costs of the new owner who would not have the benefit of LIPA's low cost tax-exempt financing."
Stephen Liss, who helped write the LIPA statute, said privatization wouldn't be easy.
"They'd have to raise rates," said Liss, a senior aide to Assemb. Robert Sweeney (D-Lindenhurst).Matthew Cordaro, chairman of the Suffolk County Legislature's LIPA Oversight Committee and a former LILCO executive, said that while he'd prefer to see LIPA owned by a private company, he doesn't believe it would work.
"Private utility companies have to pay income taxes and they have to produce a profit for shareholders," he said. "It's almost impossible. The only way to do it is by creating huge amounts of efficiencies by cutting employees."
Mixed views on privatization
Several sources with knowledge of LIPA operations offered differing views on privatization's chances.
One said it probably would require a change in the LIPA statute, as well as approval by LIPA trustees, the state legislature, the Internal Revenue Service, the state attorney general and possibly the Federal Energy Regulatory Commission. LIPA trustees also would vote on such a proposal.
Another person familiar with LIPA said privatization addresses several crucial problems at LIPA -- the lack of oversight and difficulty in recruiting experienced executives. It would allow LIPA to pay "industry-standard salaries," and subject LIPA to oversight by the state Public Service Commission and address the internal politics that some say has hampered LIPA's effectiveness.
"You'll be able to run it on a businesslike basis," this person said.
Departing LIPA chief Michael Hervey said privatization should be considered.
"If anybody has any other suggestions" about LIPA's structure, including privatization, "we need to listen to that," Hervey said last week.
But he noted the most recent study of privatization found that LIPA's debt burden and other factors could lead to a rate hike of 20 percent if an outside firm were to buy LIPA.
"We liked the idea of privatization but the math around it didn't benefit our customers," Hervey said.
LIPA's eligibility for federal reimbursements for storm damage also may be an issue.
Because LIPA is a government entity under Federal Emergency Management Agency rules, damage to its infrastructure LIPA is covered from 75 percent to 100 percent. In Sandy's aftermath, that iscrucial, as the storm bill topped $930 million. PSEG, which had a storm restoration bill of up to $300 million, must rely on its own finances, and perhaps ultimately rates, to recoup those costs.Brattle, Cordaro and others noted that privatization also could force the purchaser to cut jobs to help fund the transaction.
Don Daley, business manager of Local 1049 of the International Brotherhood of Electrical Workers, said there's no room to cut. He represents 2,600 unionized utility workers -- about half the force at the utility 20 years ago.
"I don't know how you are going to improve service with fewer employees," Daley said.