The Long Island Power Authority (LIPA) Board of Trustees on Oct. 3 approved the amended and restated operations services agreement (amended OSA) between LIPA and PSEG Long Island for PSEG Long Island to provide the day-to-day management and operation of LIPA’s electrical transmission and distribution system in the New York counties of Nassau, Suffolk and the Rockaways portion of Queens.
“We are pleased that [a] new operating service agreement has been approved by the LIPA board,” LIPA COO John McMahon said in a statement provided to TransmissionHub on Oct. 3. “This is another major milestone in the transition to our new service provider, PSEG. The new OSA is consistent with the LIPA Reform Act and state energy policies.”
As reported, New York Gov. Andrew Cuomo signed legislation in July that gradually gives Public Service Enterprise Group (NYSE:PEG) full authority over LIPA’s day-to-day operations including budgeting, storm preparedness and response, and infrastructure improvements.
The New York Department of Public Service (DPS) submitted to the board a recommendation to approve the amended contract with PSEG Long Island to take over utility operations beginning on Jan. 1, 2014, the state Public Service Commission (PSC) said on Sept. 27.
In discussing key provisions in the amended OSA, filed with the PSC on Sept. 16, LIPA noted that the primary change in the term of the amended OSA is an extension of the existing OSA term from 10 to 12 years. Additionally, the amended OSA includes a provision that in the event that PSEG Long Island achieves certain levels of performance during the initial term, the parties will negotiate in good faith an eight-year extension of the term of the amended OSA on substantially similar terms and conditions.
The amended OSA increases the annual fixed component of the management services fee after the 2015 contract year from $36.3m to $58m and increases the annual incentive compensation pool after the 2015 contract year from $5.44m to $8.7m, consistent with PSEG Long Island assuming additional responsibilities and the obligation to use the PSEG brand related to the provision of electric service on Long Island.
LIPA also noted that the amended OSA adds a provision that if an event or condition, other than a storm event, that is beyond PSEG Long Island’s reasonable control, occurs and if PSEG Long Island determines that certain non-budgeted expenditures are required in order for it to provide operations services in accordance with the contract standards or repair, replace or restore damaged components of the T&D systems, PSEG Long Island is to make such expenditures and elect, in its sole discretion, to treat the expenditures as either reallocations between different budget items, excess expenditures or “non-storm emergency expenditures.”
Among other things, LIPA noted that the amended OSA provides that PSEG Long Island will prepare a preliminary “three year rate plan” with information supplied by LIPA, designed to ensure that LIPA and PSEG Long Island are able to provide safe and adequate transmission and distribution service at rates that are at the lowest level consistent with sound fiscal operating practices, and sufficient to generate revenues necessary to satisfy LIPA’s obligations to its bondholders, lenders and other creditors and contract counterparties including PSEG Long Island.
The PSC said in its statement that the DPS also issued its first comprehensive management and operations audit of LIPA and its current management services agreement with National Grid plc subsidiary National Grid USA.
Currently, LIPA contracts with National Grid to perform the day-to-day operations and maintenance of the transmission and distribution system, the PSC said, noting that that agreement expires on Dec. 31, and LIPA’s board competitively selected PSEG Long Island to take over operations in 2014.
After the start of the management and operations audit, the state legislature passed the LIPA Reform Act of 2013, which provided greater operational control of the utility to PSEG Long Island, and expanded oversight of the utility by the DPS. Under the LIPA Reform Act, the DPS was charged with reviewing amendments to the PSEG Long Island contract governing service, formally called the OSA, and making a recommendation to the LIPA board.
The PSC also noted that the DPS found that the amended OSA already reflected some of the audit recommendations and provided the appropriate tools and incentives for PSEG Long Island to implement the rest of the recommendations.
In addition to its 83 recommendations, the management and operations audit report includes various themes that emerged from the analysis, including that as the entity ultimately responsible for electric service on Long Island, LIPA has to keep its contractors accountable for results. Furthermore, the PSC added, LIPA’s customers deserve to be treated with maturity and respect, to receive accurate and timely information about system operations, rates and performances, and to have appropriate levels of service.
The audit showed numerous areas where National Grid’s Long Island operations were not treated with the same level of management attention as that shown in National Grid’s electric operations in other parts of the state, the PSC said, adding that a recommendation in the audit was that LIPA should not allow itself to become subordinated to its service provider.
According to NorthStar Consulting Group’s Sept. 13 “Comprehensive management and operations audit of Long Island Power Authority” final report, the lack of focus and attention on LIPA’s operations can be attributed to a number of factors, from contractual to corporate culture.
“For LIPA services and operations to improve on a continuous basis, LIPA operations and LIPA customers must remain as important to PSEG executive management at the corporate and board level as its New Jersey operations and customers,” NorthStar said in the report.
The group said the audit findings and conclusions include that the existing LIPA management team has done an acceptable job in running LIPA through difficult times, but has need of additional “utility management IQ” to be successful given its foreseeable challenges.
“LIPA’s current structure with its focus on contract management and administration seems to have resulted in a gap in understanding by the leadership of the Authority of the depth and breadth of its … responsibility for providing electric service to Long Island,” the report said.
NorthStar said three major areas where the current processes and operations are performing well include system maintenance and reliability, noting that LIPA’s system reliability performance ranks high among New York electric utilities with mostly above-ground facilities.
Also, LIPA does a good job of planning for system growth and stability and its current systems for load forecasting and planning, procuring and managing its energy and capacity supply are very good.
Among its recommendations, NorthStar called on LIPA to actively recruit and retain personnel with a strong understanding of all aspects of utility operations; develop a formal process for evaluating the performance of LIPA executive management including defined goals and performance targets; develop performance measures for emergency response; and designate or add a senior/executive-level position with oversight responsibility for, and experience in, customer operations and communication.
LIPA, in its Sept. 20 comments on the report, said that overall, it believes that NorthStar’s audit process was thorough and constructive.
“Notwithstanding the challenging environment in which LIPA exists, LIPA is committed to achieving excellent electric utility service for customers,” LIPA said, adding that it will refer to the report’s six overarching themes as it is restructured under the LIPA Reform Act and as it transitions to and implements the proposed revised OSA.
One of the themes notes that the success of a fully contracted utility depends on its “utility management IQ.” LIPA noted that while it is difficult for it to attract and retain seasoned utility employees given various constraints, it has made significant strides.
Those include the addition of numerous, seasoned utility professionals to the management team, LIPA said, adding that it will continue to build on its recent success in attracting and retaining experienced professionals in the future.
National Grid said in its Sept. 20 comments on the report that overall, it found the audit process to be collaborative and constructive, identifying performance areas of strength as well as opportunities for improvement that should benefit LIPA’s customers in the future.
While the audit is comprehensive, there are several areas where National Grid believes additional information would help to further clarify the audit findings, the company said.
A National Grid spokesperson told TransmissionHub on Oct. 3 that during the past 15 years, National Grid and its predecessor companies have and continue to support the management services agreement (MSA) with LIPA, providing a high degree of management oversight and a dedicated workforce solely focused on serving LIPA and its customers.
Throughout the contract, National Grid was focused on continuous improvement of the business, the spokesperson said, adding: “However, the Long Island electric business did not always benefit from the tools and processes used in other parts of National Grid’s electric operations. In many cases, LIPA’s desire to remain independent from National Grid operations often precluded us from adopting of or such initiatives on Long Island.”
The spokesperson also noted that National Grid has always welcomed and participated in ongoing audits to improve the operations of its contracted services to LIPA. It cooperated fully in the current NorthStar audit and, at LIPA’s request, has engaged its own internal audit team to perform about 20 independent audits on its business operations since 2010 for LIPA. Results from those audits were shared with LIPA and provided the basis for many National Grid service enhancement initiatives aimed at improving the business operations on behalf of LIPA’s customers, she added.