A prescription for Long Island: fixing the sins of privately owned utility operators with more privatization
How then should LIPA meet these goals?
For Tyson Slocum at Public Citizen, achieving a balance between affordability, sustainability, and reliability requires wrestling with “the primary issue with any utility[:] governance. Is it run in a manner that is accountable ultimately to consumers?”
Slocum concluded that though “it is clear that LIPA has not been well run and it has not been well managed,” privatization is “not an automatic solution” for establishing an accountable utility operation. The question is whether it failed “because it is publicly run or is it because public institutions have done a bad job ensuring that it is an accountable entity?”
The Moreland Commission’s solution for LIPA — its full privatization and regulation by the PSC — pointed to one answer for such a transformation. It suggested that the “synergy benefits” of shared staff and equipment resulting from the sale of LIPA to an existing electric utility company constitute an efficiency gain that would “keep rates after a sale in line with currently projected rates.” Additionally, removing LIPA and National Grid’s dual management structures would help ensure that “plans are in place for storm response and other contingencies.” Still, they acknowledged, “There would be several costs that would increase due to a privatization.”
According to Matthew Cordaro, however, privatization for the Moreland Commission amounts to more of a “declaration” than a well-argued position. “The benefits of privatization are not definitely supported [in the Commission’s report].” Indeed, beyond the bare assertions that privatization would yield “synergies” and improved accountability, the Interim Report’s five-paragraph privatization section focused on claiming that a complex “securitization” deal could allow LIPA’s outstanding bonds to continue to be serviced efficiently while still making it attractive for potential private owners.
Also key to the Moreland Commission’s plan for LIPA is a beefed up PSC, currently seen by the Commission as understaffed and without either the necessary oversight authority to ensure that utilities are prepared for storms or the ability to charge fines that could meaningfully affect utility behavior. (Right now, for example, fines for failing “to provide safe and adequate service” are capped at $100,000 per day and there is a high burden of proof to impose them. The Commission recommended increasing this cap and making it easier to impose these fines, so that a utility would pay based on a percentage of its revenues. For a LIPA-sized utility this would mean some $750,000 per day.)
“As long as [a] corporate utility has very effective and accountable regulators overseeing its operations,” Tyson Slocum explained, “it can do a good job. But it comes down to whether there are regulators ensuring that.”
lipa’s special problems
If the adequate regulation of private utilities generally is far from assured, the privatization of LIPA comes with some specific problems, as well. As the result of the Shoreham debt, LIPA’s assets ($3.5 billion) are worth only about half of its debts ($7 billion), making it potentially unattractive to a buyer.
Additionally, should it be privatized, it would likely face higher borrowing costs than with its current bond arrangement, requiring rate increases (a 2011 report commissioned by LIPA suggested that privatization could increase rates by 12 percent).
Gov. Cuomo has said that it would be possible to “do a sale and a rate freeze for a number of years” but observers such as Crain’s New York Business have responded skeptically: “The next time you hear officials saying [privatization] won’t result in any rate increases, remember that what they really mean is ‘not right away.’”
In New York, Gerald Norlander said, “basically the PSC has wanted to work things out with the utilities. And the problem is that in some of their models for regulation, they depend on setting performance criteria and ‘dinging’ the utility when they don’t hit it, and all of that has been done by agreement” with the utility.
Finally, though the Moreland Commission acknowledged the “challenge” of privatizing LIPA in a way that “minimizes” increases in rates (see “LIPA’s special problem”), it never grappled with another central pressure on rates: the need for an investor-owned utility to turn a profit.
“With a corporate-run utility,” Tyson Slocum told Remapping Debate, “there is this constant schizophrenic relationship you have between your legal duties to customers and your financial duties to shareholders…In an ideal world, you would want to merge your shareholders and your customers and that is what municipal power and public power entities do.”
Sharon Beder provided an illustration of what she saw as a conflict of interests: what investor-owned utilities describe as gains in “efficiency” actually means for customers “less maintenance, less staff, [and] less replacing equipment before it breaks down.” She added, “The extra profits [often] made from that have not lowered rates but actually gone into the pockets of shareholders.”
Remapping Debate requested interviews with the co-chairs of the Moreland Commission, Benjamin Lawsky and Robert Abrams, but neither returned calls or replied to emailed questions, including, whether a privately owned utility’s need for profit had an impact on its ability to balance affordability, reliability, and sustainability.