Tue 04/06/2021 14:14 PM
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The Long Island Power Authority, or LIPA, is negotiating contract reforms with grid operator PSEG Long Island amid an ongoing analysis of options to improve management of LIPA’s assets that could also entail LIPA retaking control of its transmission and distribution, or T&D, system. The multiphase analysis, launched in the wake of Tropical Storm Isaias in August 2020, stems from an independent review of lapses in PSEG Long Island’s storm response, which has sparked litigation in New York state court in which LIPA seeks $70 million in damages.

LIPA, a municipal subdivision of the State of New York, owns the electric transmission and distribution, or T&D, system serving 1.1 million customers in all of Long Island as well as the Rockaways in Queens County. In 2013, LIPA shifted to a public-private business model with PSEG Long Island managing the T&D system under a 12-year operations service agreement, or OSA. According to LIPA’s website, the shift preserved the cost advantages of public power while reforming LIPA’s governance and business model to prioritize customer satisfaction. The LIPA Reform Act also capped property tax increases and reduced LIPA’s cost of debt, using another entity with higher credit ratings to refinance the majority of LIPA’s bonds.

LIPA’s current model has been cited in efforts Puerto Rico Electric Power Authority, or PREPA, privatization efforts and was discussed in a public hearing held today as part of ongoing commonwealth legislative inquiries into the 15-year operation and maintenance agreement, or OMA, for Luma Energy to take the reins of PREPA’s T&D system, a handover currently targeted for June 1. The privatization committee report on the OMA notes an evolution to “a more traditional operator-manager structure, with a compensation structure including fixed and incentive components comparable” to the LIPA and PSEG T&D management contract, adding that the primary driver of the change away from an earlier concessionaire-model related to tax issues “arising from the desire to maintain the tax-exempt status of PREPA’s debt as a source of funding.”

In enacting Act 120 of 2018, or the Puerto Rico Electric Power System Transformation Act, which is the PREPA assets privatization statute, then-Gov. Ricardo Rosselló stated that a PREPA T&D deal would operate similar to LIPA. The push for PREPA’s operations to be privatized gained traction in the wake of Hurricane Maria in September 2017, which knocked out power across the island and left tens of thousands of customers in the dark for weeks and months. The Puerto Rico government is aiming to select an operator or operators for PREPA’s legacy generation assets by the end of 2021.

In the immediate aftermath of Tropical Storm Isaias, which led to 646,000 customer outages, LIPA’s CEO initiated an independent investigation of the circumstances and root causes that led to lapses in PSEG Long Island’s storm response. The task force was charged with providing actionable recommendations and overseeing PSEG Long Island’s remediation activities. LIPA committed to reporting the task force’s findings and recommendations to the LIPA board of trustees and the public in a series of reports leading up to a final report currently scheduled for submission in May.

An initial full options analysis homed in on three potential models including privatizing LIPA’s assets, reforming/resetting the current single-partner municipal model (either under a renegotiated OSA with PSEG Long Island or with another provider), and a return to LIPA management of utility assets.

A phase one analysis of the three options called for LIPA to forgo pursuit of the privatization alternative on cost, municipal financing and federal funding concerns. “During the period that LIPA studies privatization, it is also unable to make the necessary representations about governmental ownership of facilities to borrow in the tax-exempt bond market on a long-term basis or to take advantage of currently low interest rates to refinance outstanding bonds for savings,” the analysis found, adding that “the choice of private or public ownership is clear – public ownership saves customers considerable money due to lower financing costs, exemption from corporate taxes, and access to federal disaster recovery grants” (emphasis added).

The phase one analysis, which was adopted by the LIPA board, describes reforms to the single-partner municipal model that could be accomplished by amending the OSA with PSEG Long Island or by seeking a new service provider. In looking at the municipal management model, the analysis also examines the cost of replicating the existing structure of ServCo (the service company operated by PSEG Long Island on LIPA’s behalf), instead managed by LIPA. The analysis found that the municipal management model would result in savings of $155 million to $215 million over the remaining five-year term of the OSA contract and up to $815 million if that contract is extended for an additional eight years, per its terms.

In its Dec. 16 resolution adopting the phase one analysis, the LIPA board directed the utility’s CEO to further develop both the single-provider municipal model and municipal management model and report back in a phase two analysis report no later than March 31. However, during the LIPA board’s regular monthly meeting on March 29, the trustees extended the deadline to its next monthly meeting on April 19. The resolution approving the extension notes that LIPA’s work on the phase two analysis, includes “negotiations with PSEG Long Island on contract reforms that would “increase PSEG Long Island management alignment, accountability, and transparency, as well as facilitate greater oversight.” The document states that LIPA staff believes that providing negotiations with additional time “could facilitate” offering the board and public “greater choice.”

During the March 29 meeting, the LIPA board also adopted the utility’s 2020 financial report and annual debt and access to credit markets report.

In reports issued in connection with LIPA’s $250 million electric system general revenue notes, series 2021, Standard & Poor’s, Moody’s and Fitch affirmed their high investment-grade ratings and stable outlooks for the utility and its approximately $3.7 billion senior-lien electric system revenue and refunding bonds. LIPA planned to use the proceeds of the series 2021 medium-term notes to fund repairs related to Tropical Storm Isaias and retire the notes with a combination of reimbursements from the Federal Emergency Management Agency and utility rates and charges.
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