The New York legislature last year created a legislative commission tasked with justifying and crafting a plan for full municipalization of the Long Island Power Authority. While the Commission claims to have “confirmed” the Legislature’s conclusion that fully municipalizing LIPA “represents the best alternative for LIPA’s ratepayers” it has failed at the bottom-line task: to demonstrate that a fully municipalized LIPA will improve reliability, substantially reduce ratepayer costs, or ensure improved response to major storms.
That being so, what is the point of municipalization?
Some background on this issue is useful. LIPA is unique in the country in being a public power authority that owns its poles and wires but contracts out management of that grid to a third-party private firm. Every other utility in the country is either fully municipalized, both owning and managing its own grid, or a private investor-owned utility. Because this public ownership/private management model is so unusual in the power industry, it is an easy target for people to blame whenever Long Island has problems.
And Long Island certainly has a sad history of problems with the power industry. LIPA was first established to buy out the ill-fated Shoreham nuclear power plant built by the Long Island Lighting Company (LILCO), and eventually bought LILCO out completely. The multi-billion debt from the never-opened Shoreham (roughly $13 billion, adjusted for inflation) plus additional debt taken on since, has caused Long Islanders to pay electricity prices above both the state and national averages (although new Time-of-Day rates may reduce many ratepayer’s costs considerably).
Perhaps even more troubling have been the days-long power outages after major storms like Hurricane Sandy and Tropical Storm Isais, as crews struggled to repair damage to the grid. After Sandy, Governor Cuomo created the Moreland Commission to study the failures of then third-party manager National Grid’s storm response and the Legislature passed the LIPA Reform Act. Now, the current effort to municipalize LIPA is a response to current third-party manager PSEG’s struggles after Isais.
There are three possible options the state could try with LIPA. One is privatization. A recent report by consulting firm Lazard argues that this is a feasible option that could reduce ratepayer costs by streamlining the overall management structure of the Long Island power system. But privatization has two forces allied against it. One is the memory of the poor overall performance of LILCO. The other is public power advocates, to whom the concept of for-profit utilities is anathema.
The ultimate test of the privatization approach would be for the Legislature to set ground rules for any investor-owned utility, both on performance and electricity rates, and see if anyone bids. Unfortunately, the Legislature has already determined against exploring privatization at all, foreclosing the alternative without any analysis or consideration.
The second possible future is to continue the status quo. As noted, this has the drawback in many people’s minds of being unique in the power sector, even weird. But third-party management in other publicly provided services is not uncommon. For example, toll roads have been leased to third-party managers in Illinois and Indiana to the benefit of each state, and many hotels and campgrounds in the national parks are owned by the National Park Service but operated by private concessionaires who get their contracts through competitive bidding.
Third-party management is a proven practice, and the Commission has made no attempt to demonstrate why it can’t work well in the power sector. Instead, the Commission’s report dismisses this option, noting that third-party management “results in payment of ratepayer dollars to an entity that is seeking to make a profit,” as though profit is somehow illicit rather than being a marker of value created for customers.
Finally, the third option is full municipalization, getting rid of third-party management and making LIPA responsible for managing its own transmission and distribution system. This is the path the Legislature chose without bothering to consider either of the other options.
But is full municipalization actually necessary? On each the three issues crucial to Long Islanders—reliability, rates, and storm response—the Commission fails to make their case for municipalization.
On reliability the Commission says, “Given LIPA and PSEG’s demonstrated reliability, it is difficult to expect higher goals for reliability” under full municipalization. That is, reliability is good under third-party management and won’t get better under full municipalization.
On rates, the Commission predicts only the slimmest of potential savings, noting that “After payback of the one-time transaction costs, the impact to rates should be . . . an estimated 1-2% reduction in costs…” That is an exceptionally slim margin, and it depends on LIPA management being as efficient as PSEG management; any slippage and overall costs remain the same or even increase.
Unfortunately, there is reason to doubt whether LIPA management would be as efficient. LIPA almost invested in the unneeded Caithness II power plant, until a PSEG analysis showed it was unnecessary, an analysis that saved LIPA more than $2 billion—roughly 25 years’ worth of the management fees LIPA pays PSEG. Further, despite having paid off most of the Shoreham debt, LIPA has taken on further debt that has left it having one of the highest debt-equity ratios among large public utilities. Finally, the Commission notes—somewhat critically—that LIPA believes it can replace the current PSEG managers with fewer managers at lower salaries. While superficially this sounds like an efficiency gain, it presumes that LIPA could get high quality managers—in a high-demand field—while offering them more work at lower pay. None of these elements suggests LIPA is prepared to manage with the efficiency and effectiveness that a private partner brings to the table.
The one way in which LIPA has an advantage over an investor-owned utility is in public utilities’ ability to borrow money at lower interest rates, which can translate directly into lower costs for ratepayers. But LIPA has this ability whether it is fully municipalized or remains in its current public ownership/private management structure, so full municipalization provides no gains here.
That leaves the issue of storm response, and here the Commission dares not even hint that a fully municipalized LIPA could have done, or will do, better than third-party managers at quickly restoring power in the aftermath of a major storm.
There is one immutable factor that any manager of the Long Island grid must face—the island’s vulnerability to major storms. Because it sticks out like a thumb into the ocean, it is uniquely susceptible to tropical and hurricane force storms that grind their way up the Atlantic Coast. Municipalization can’t circumvent this basic fact of geography.
The only long-term solution to this problem is “hardening” of the grid. This requires protecting electrical substations from storm surges and burying power lines underground, or at least replacing power poles with ones more resistant to hurricane force winds. This is possible, but it takes time and money.
A fully municipalized LIPA can’t do it any cheaper or faster than LIPA in its current form can. Capital costs won’t be any lower because—as noted above—LIPA is already able to borrow money at lower rates than investor-owned utilities. It is also already able to access Federal Emergency Management Agency funds for repair of storm damage that is not available to private utilities. Absent more money to invest in the task—to hire more labor, buy more equipment more quickly, and so on—LIPA will not gain any ability to move the process forward faster than it can at present.
It’s hard to discern what’s the real point in the municipalization proposal. Perhaps it’s just a gimmick, making a show of responding to Long Islanders’ legitimate frustrations without doing anything concrete to address them. Or maybe the project is driven by people who mistakenly think “municipal” and “public” are magical incantations that automatically bestow greater functionality and benevolence on an organization. It’s certainly not serious policy work. At most it is simply a rearranging of the furniture, a pretense of making important changes with no substantive benefits to show for all the effort.