New York readies investigation into corruption following LIPA accounting report

The current Long Island Power Authority (LIPA) management structure is broken, the Moreland Commission on Utility Storm Preparation and Response said in its June 22 final report to New York Gov. Andrew Cuomo.

The commission cited LIPA’s pattern of financial irregularities and improper accounting methodologies.

Cuomo directed the commission in November 2012 to investigate the state’s power utility companies’ response to recent storms affecting New York and the adequacy of regulatory oversight of the utilities, as well as to review the state’s energy agency and authority functions, according to a June 23 statement from the governor.

The commission issued an interim report in January that in part recommended possible privatization of LIPA.

“Hurricane Sandy exposed the incompetent and unacceptable response of power utility companies throughout downstate New York during one of our state’s most vulnerable periods,” Cuomo said in the statement, adding, “The findings released today raise a series of questions regarding LIPA’s management of a consulting contract that passed unexplainable costs to ratepayers and involved exorbitant expenditures that appear to have nothing to do with providing power to Long Island residents. I second the commission’s call for a full and thorough investigation by a prosecutorial body.”

According to the statement, Cuomo is preparing to empanel a second commission to investigate corruption and the influence of money and politics in state government.

In a separate June 23 statement, LIPA COO John McMahon said: “LIPA will move expeditiously to address the findings and serious concerns identified by the Moreland Commission. Steps to improve the internal control environment had already been taken and we continue to identify additional opportunities for enhancement of the control environment as well as other needed improvements. We will continue to cooperate fully with governmental authorities.”

According to the report, between 2008 and 2011, LIPA paid more than $64.8m on outside consultant contracts, $43.4m of which went to entities the commission categorized as general consulting and engineering services. The largest portion of the $43.4m, or more than $28m, was paid to Navigant.

As most Navigant consultants servicing LIPA during this time were senior in rank, hourly rates billed to LIPA ranged between $300 and $500, exclusive of expenses, for most of the 54 to 62 Navigant consultants that are contractually permitted to bill LIPA annually, the commission added. Compounding the high billable rate is the fact that a few of Navigant’s top consultants bill to LIPA more than 2,000 hours per year.

The commission also noted that with many of the consultants living out of state, LIPA incurred significant travel-related expenses.

“The vague language of the LIPA/Navigant agreement related to travel expenses imposes no restrictions or limits on spending and it is unclear what, if any, steps LIPA took to curb these types of expenses,” the commission said.

For instance, a Navigant consultant expensed a trip from Washington, D.C., to Culebra, Puerto Rico, including charges for a seaplane flight from San Juan to the remote resort island, and no explanation was provided as to the need to travel to or from this locale.

After the commission discovered the questionable billing and reimbursement practices and was advised by a witness that there was no auditing of the practices, there was a concern that if the practices were connected they may rise to a scheme to defraud. Once that threshold was met, the commission found that further external investigation was warranted to determine if other Navigant consultants followed similar practices. If deemed improper, the commission added, those actions may trigger state and federal law violations and as a result, the commission is referring the matter to prosecutors for further investigation.

The commission further noted that Michael Hervey, former LIPA COO and acting CEO, now serves as energy consultant director for Navigant, and that in 2010, Hervey signed a $23m contract extending Navigant’s utility contracting services with LIPA for five years.

In a statement provided to TransmissionHub on June 24, Navigant said it will cooperate fully with authorities seeking any further information.

“Navigant and our professionals adhere to the highest industry standards of ethics and integrity,” Navigant said. “We were not aware of the claims in the Moreland Commission report until it was publicly released. We take the questions raised by the commission in its report very seriously and are closely reviewing the facts related to each question in detail.”

Other issues that point at financial irregularities include that in 2011, LIPA revealed a $231m line loss ratepayer overcharge, resulting from years of financial missteps, according to the report. LIPA said it would apply $129m of the total $231m directly through customer bill credits over a three-year period, as well as indirectly by putting $72m in its reserves and by terminating an outstanding $30m “Shoreham” acquisition adjustment debt, the commission added.

About Corina Rivera-Linares 2848 Articles
Corina Rivera-Linares, chief editor for TransmissionHub, has covered the U.S. power industry for the past 14 years. Before joining TransmissionHub, Corina covered renewable energy and environmental issues, as well as transmission, generation, regulation, legislation and ISO/RTO matters at SNL Financial. She has also covered such topics as health, politics, and education for weekly newspapers and national magazines. She can be reached at clinares@endeavorb2b.com.