A prescription for Long Island: fixing the sins of privately owned utility operators with more privatization

Original Reporting | ByKevin C. Brown | Energy, Infrastructure

February 13, 2013 — Hurricane Sandy, which blew through the New York metropolitan area late last October, left millions of households and businesses in the region in the dark. Few places were unplugged for as long as the service territory of the Long Island Power Authority (LIPA), the state owned electric power distribution company where 1 million of its 1.1 million customers on Long Island lost power as a result of the storm.

A brief explanation of the main
elements of a utility

There are three parts to modern electric systems: generation (power plants), transmission (high voltage lines connecting power plants with local utilities), and distribution (local poles and wires connecting businesses and residences). In New York State, like many places in the United States, those three phases in electric production and distribution are frequently (but not always) owned by different entities (which can be public or private).

In electricity distribution — the segment of the market in which LIPA predominantly operates — roughly 70 percent of Americans are served by investor-owned utilities. 15 percent, meanwhile, are served by publicly owned and operated systems, frequently referred to as “public power” or “munis” because many are owned by an individual municipality, though they can encompass much larger areas as well (especially in the west). This sub-segment includes LIPA, the city of Los Angeles and Austin, Texas, as well as three villages on Long Island itself (Rockville Centre, Freeport, and Greenport).

The final segment of power distribution in the U.S. is provided by rural electric cooperatives, nonprofit member-owned and governed utilities set up primarily in the 1930s and 1940s and which serve rural and exurban areas that investor-owned utilities deemed uneconomical to provide with electricity.

In response to inadequate performance by LIPA and other utilities, New York Governor Andrew Cuomo created a commission to investigate the preparation and response of utilities to Sandy and other recent weather events. This “Moreland Commission,” co-chaired by Robert Abrams, former New York State attorney general, and Benjamin Lawsky, the head of the state’s Department of Financial Services, released its interim report in early January. It called the state’s Public Service Commission (PSC), which regulates most utilities in the state, a “toothless tiger” and suggested strengthening its powers.

For LIPA — which currently goes unsupervised by the PSC or any other state regulator — the commission recommended privatization. Gov. Cuomo echoed the Moreland Commission’s advice two days later in his State of the State address, saying the authority “has never worked, it never will…we want to privatize the Long Island service.”

These calls for privatization are curious — in part because of Long Island’s miserable history with investor-owned electric utilities. The Long Island Lighting Company (LILCO), a private company, served the Island until 1998, when its poor performance, high rates, and deep indebtedness (partially due to its Shoreham nuclear plant debacle) culminated in the state’s purchase, through LIPA, of LILCO’s electric transmission and distribution infrastructure, as well as its sizable debt. (See box on the next page titled, “LILCO and LIPA.”)

Moreover, though LIPA is publicly owned, it outsources virtually all of the operation of the electric grid — the line work, customer service, etc. — to National Grid. As an aide to Gov. Cuomo told the New York Daily News shortly after Sandy, “The facts are the utility is National Grid…They are contracted with LIPA.” National Grid is a privately owned British utility.

In Massachusetts, where National Grid operates fully on its own as an electric utility, the company was recently fined $18.7 million by the state’s Department of Public Utilities for “systematic failures” related to its slow restoration times in the wake of Hurricane Irene and an October snow storm in 2011.

Thus, the Moreland Commission’s privatization recommendation is really better described as a re-privatization plan (viewed from the perspective of what had existed in LILCO days) or a full-privatization plan (viewed from the perspective of the largely private operation of National Grid today).

If that proposal itself is ironic given the history of electric power provision on Long Island, most startling is what the commission left out — what exactly a utility, whether private or public, should do. What are the values it should hold? How should it balance them? And what are the best ways to realize those values?

Such an omission, Matthew Cordaro, a former utility executive and current co-chair of Suffolk County’s LIPA Oversight Committee (established by the county in 2010), told Remapping Debate, “doesn’t surprise me…The Moreland Commission’s job was to justify the governor’s conclusions” that LIPA should be privatized.

 

The value(s) of electricity

“Utilities always say that ‘our job is to provide affordable, reliable electricity,’” said John Farrell, a senior researcher with the Institute for Local Self-Reliance and director of its work on “democratic energy.” They say this, Farrell added, because “that is pretty much what they have been told to do” by regulators and legislators.

Other energy watchdogs and industry representatives Remapping Debate spoke with concurred with Farrell: the basic values that electric utilities should be pursuing are affordability, reliability, and sustainability, though the latter, many agreed, only recently became important and has not been made an equal to the others.

In recent decades, “affordable” power has meant for most utilities a commitment to some “social equity” goals, notably providing power to low income households at a lower rate, said Sharon Beder, a professor in Australia and author of “Power Play,” a book on global energy deregulation. Gerald Norlander, the executive director of a consumer utility watchdog in New York State called the Public Utility Law Project, said that low-income customers of many utilities in New York State are entitled to a cut on their base charge (a discount paid for by a slightly higher charge on other consumers).

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