New York Gov. Andrew Cuomo signed legislation on July 29 that gradually gives Public Service Enterprise Group (NYSE:PEG) full authority over the Long Island Power Authority’s (LIPA) day-to-day operations including budgeting, storm preparedness and response, and infrastructure improvements.
“The legislation … ends the LIPA as we know it, and creates a new utility system that puts Long Island ratepayers first,” Cuomo said in a statement.“LIPA has offered lackluster service for too long and after its failure to perform during Superstorm Sandy it was clear we needed a change.”
LIPA will be reduced to a holding company with a smaller staff, set at levels necessary only to ensure that LIPA is able to meet its core obligations, and with a new board reduced to nine members, according to the statement.
The board will be responsible for rate decisions based on the record that is established by the state Department of Public Service (DPS), the statement noted, adding that if the board amends or modifies the DPS recommendation, it must hold a public hearing to explain its actions.
During his company’s 2Q13 earnings call on July 30, PSEG Chairman, President and CEO Ralph Izzo said PSEG is discussing the final terms of a renegotiated contract to operate LIPA’s distribution system at the beginning of 2014.
Following LIPA’s response during and after the October 2012 Superstorm Sandy, Cuomo convened a Moreland Commission to investigate the utility company’s response, preparation and management, among other utility companies, Cuomo’s statement noted.
As reported, in its June 22 final report to Cuomo, the Moreland Commission on Utility Storm Preparation and Response said the current LIPA management structure is broken. 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.
According to the June 23 statement, a second commission would 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.”
A LIPA spokesperson could not be immediately reached for comment on Aug. 1.
According to Cuomo’s July 29 statement, the legislation privatizes utility operations on Long Island, improves customer service, including stabilizing rates and enhancing emergency response and preparation; reduces the cost of LIPA debt; and implements tough state oversight for the new utility company.
Since the late 1990s, LIPA’s debt has not decreased and represents nearly 10% of ratepayer bills, according to the statement. The legislation reduces the cost of LIPA’s debt by refinancing up to half of the $6.7bn debt at a lower interest rate. Additionally, a 2% annual property tax cap is established for the transmission and distribution system. As a result of those and other anticipated savings, LIPA and PSEG Long Island are seeking a rate freeze for this year, next year and 2015.
The statement also noted that under the new system, utility performance and rates will be subject to tougher state oversight under a new Long Island office of the DPS, which has authority to review PSEG Long Island’s operations and issue recommendations to the LIPA board for implementation.
Proposed rates will undergo an independent review by the DPS, which also performs independent reviews of PSEG Long Island’s storm preparedness and performance. Capital planning is also subject to DPS review on an annual basis and the state comptroller retains the auditing powers that were held before Cuomo signed the legislation, the statement added.
The new utility is also required to produce a new capital and operating plan, which includes recommendations for energy efficiency, smart grid solutions and distributed generation.
The new system will remain under public ownership. The statement further noted that the utility will maintain eligibility for FEMA and tax benefits.