Friday, 16 November 2012 00:00
The Long Island Power Authority (LIPA) suffers from a significant handicap relative to other large municipal utilities in the nation, and this handicap is a major contributing factor in its inadequate preparedness and response to Hurricane Sandy. Unlike the vast majority of municipal electric systems in the nation, since its creation in 1985, LIPA’s CEOs have been political appointees, not seasoned utility veterans who understand the fundamental complexities, dynamics and nuances of the industry that are needed to turn LIPA into a well-run provider of electric service.
Although LIPA has a first rate staff and was fortunate that several of its former leaders were exceptional managers, none of them head the industry expertise and long-term vision needed (utilities’ strategic plans typically have a 10 – 20 year horizon) to turn the system into a first-class electric provider. Instead, LIPA has been lead by a revolving door of CEO’s who, despite their impressive skill sets, dedication and access to Albany, had little or no utility experience (intervening against or for specific power projects does not qualify someone to operate a utility). Consequently, their first allegiance was to the governors office rather than LIPA’s customers.
The managers’ of the nation’s other large municipal electric systems such as Los Angeles, San Antonio, Orlando and several others, were selected because of their deep understanding, abilities and knowledge of what is required to effectively run a large municipal utility system. Most of those systems enjoy “AA” ratings from the rating agencies; have very low borrowing costs and electric rates considerably lower than LIPA’s. Despite being a natural geographic monopoly, having one of the premier service areas in the nation in terms of wealth and other demographic metrics, access to tax-exempt financing and the benefit of not having to generate a profit for its investors, LIPA has had to fight to maintain it considerably lower “A” rating.
The damage done by Sandy and the subsequent snowstorm would have been difficult for any utility to manage. But LIPA’s painfully slow response and poor communications was sub-standard by any measure and demands that the root causes be addressed, particularly after it was explicitly warned in a 2006 study that it was inadequately prepared for a major storm.
Putting most of Long Island’s grid underground may prove to be impractical. It would be exceptional expensive ($30 billion) and difficult because many of its customers will object to having the heavy machinery needed to bury wires in their backyards. Nonetheless, a portion of LIPA’s infrastructure, major transmission corridors and substations could be significantly upgraded and/or placed underground to improve their reliability, and this option needs to be implemented.
It’s unconscionable that 27 years after Shoreham’s closing, billions of dollars in debt for that nuclear plant has still not been paid down and a significant portion of LIPA customers’ bills are used to pay interest costs on Shoreham’s debt instead of principal. And LIPA has consistently under spent on needed infrastructure upgrades to gain the political benefits of a very marginally lower rate only to pay a far greater price in the long-term.
The Governor can and should change the selection process for choosing LIPA’s CEO and require a qualified non-political utility executive. Revamping a large utility system is a long and complicated undertaking, but unless it starts now, Long Islander will be destined to have sub-par utility service, along with the attendant threats that creates for health and safety and its implications for the area’s economy.
(The author is a former managing director in J. P. Morgan’s energy and environment group and was ranked as the top municipal utility analyst in the nation in the polls conducted by Institutional Investor Magazine (11 consecutive years), the Bond Buyer, and Smith’s Research and Ratings Review.)