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Insight: For Long Island utility in flux, warnings preceded Sandy

Homes that are devastated by fire and the effects of Hurricane Sandy are seen at the Breezy Point section of the Queens borough of New York
Homes that are devastated by fire and the effects of Hurricane Sandy are seen at the Breezy Point section of the Queens borough of New York

By Scott DiSavino and Cezary Podkul

NEW YORK (Reuters) - The people in the coastal communities of Long Island and Queens in New York were among the hardest hit by Superstorm Sandy. Now they are suffering new blows because of the inability of their power utility to restore electricity quickly.

A Reuters analysis of power outage data shows the Long Island Power Authority (LIPA) has the biggest share of affected customers still without power among New York utilities.

The 200,000 LIPA customers still without electricity accounted for more than half of the 370,000 New York utility customers still without power as of Tuesday morning, Reuters found.

With a largely above-ground power network exposed to the full fury of Sandy's fierce winds and 14-foot storm surge, more than 90 percent of LIPA's 1.1 million customers lost their power, the biggest impact on any area power company.

But the recovery has been so slow that New York Governor Andrew Cuomo has criticized the performance of all of the power companies affected by Sandy, especially LIPA, whose management he has threatened to replace.

But the performance of state-run LIPA was already under fire from local legislators long before Cuomo threatened to sweep aside management.

In March of last year, an oversight committee in New York's Suffolk County raised warnings about the utility's preparedness and operating structure - a unique model under which LIPA is essentially just a shell, outsourcing its grid operations to commercial companies.

In particular, the committee members feared that LIPA's emergency preparedness manuals were outdated and that the outsourced structure made accountability difficult.

These concerns, voiced by the county's LIPA Legislative Oversight Committee, now lie at the heart of the utility's ability to carry on with business as usual.

Sheldon Sackstein, co-chair of the Suffolk County committee and a former trustee of LIPA, asked at least twice last year to view the utility's emergency preparedness manuals to make sure they were up to date. Eighteen months later, he has yet to receive a response. He fears what he would find.

"They weren't ready," he said in an interview on Monday.

The bad news piled up. Moody's Investors Service warned on Monday that LIPA could come dangerously close to running out of cash in coming weeks if it does not shore up its balance sheet. It has yet to receive the full $100 million reimbursement it is expecting from FEMA for last year's Hurricane Irene, Moody's noted, with Sandy restoration costs now mounting.

The turmoil comes at a delicate moment for LIPA, one of the country's largest government-owned utilities but with a staff of just around 100 employees.

UK-based National Grid PLC, which has been running LIPA's transmission and distribution system since buying original operator Keystone in 2007, is set to hand operations over to a unit of New Jersey power company Public Service Enterprise Group Inc in 2014.

National Grid spokesman Steve Brady said in a statement to Reuters that "the emergency (preparedness) plans are LIPA's; we implement them. We believe the plan is solid, and we are implementing it to the fullest."

LIPA did not respond to repeated requests for comment.

PSEG declined to comment on the effects of Sandy on the handover of operations but said it is "still on track" to take over LIPA's system in 2014. Transition planning is well under way, PSEG said.

It is not clear what impact, if any, the storm and its aftermath will have on the switch. But it is likely that PSEG will have some work to do to win back the support and trust of local residents and state, county and village leaders.

OUTSOURCED OPERATOR

A week after Hurricane Sandy made landfall, about 20 percent of LIPA's affected customers are still without power, according to the Reuters review.

By comparison, Consolidated Edison Inc, which serves most of New York City and Westchester County, has restored power to all but 12 percent of the roughly 1 million customers that were affected.

Only FirstEnergy Corp's JCP&L utility in New Jersey had a higher share of customers without power as of Tuesday, at 26 percent. Of the 21 states affected by Sandy, New Jersey suffered the most damage.

LIPA's operator, National Grid, also owns and operates electric utilities in upstate New York, Massachusetts and Rhode Island, where it restored power to almost all customers within a week. Those areas were hit primarily by Hurricane Sandy's high wind and rain, not the storm surge that pummeled Long Island.

But even prior to the hurricane, dissatisfaction with LIPA's outsourced structure was mounting. Last October National Grid lost the operating contract for LIPA to PSEG.

"This deal (with PSEG) will ... improve services and communications with a company right across the river in New Jersey - not with a company headquartered (in Britain) 3,500 miles across the ocean," LIPA Chairman Howard Steinberg said when the utility announced last October that PSEG had won the contract.

The PSEG deal came just a few months after Hurricane Irene left about 523,000 LIPA customers without service, some for as long as a week. LIPA's chief operating officer, Michael Hervey, said last October the pace of restoration during Hurricane Irene did not drive the utility to replace National Grid with PSEG.

Over the past few years, LIPA managers have considered several alternatives to the outsourcing arrangement: operating its electric system itself; selling the operations to another power company, or continuing to contract with another firm.

LIPA decided to stick with using an outside company because it was the most cost effective option for ratepayers.

Sackstein disagreed with the decision.

"It has always been my fondest desire to see (LIPA) staff up with utility people who would then be in a position to direct the labor force without an intermediary," he said.

Cuomo has not said who might replace existing LIPA management. But as recently as September he said the New York Power Authority (NYPA) could play a role in operating the utility.

NYPA is a state-owned generating company that sells power to upstate New York companies to encourage the creation and preservation of jobs. NYPA also sells power to government customers in New York City, including the city's hospitals, schools, subways, government offices and commuter trains serving the metro area.

WHO PAYS?

LIPA itself is a product of disaster.

It was created in 1985 to take over the assets of the Long Island Lighting Co (LILCO), which was harshly criticized for not restoring power quickly after Hurricane Gloria that year and for the construction of the $6 billion Shoreham nuclear power plant - which failed to win state approval.

Shoreham ultimately was sold to LIPA for a dollar in 1989 and later decommissioned, while LILCO's other power plants went to local power provider KeySpan. National Grid acquired the Long Island power plants -- and the contract to operate LIPA's system -- when it bought KeySpan.

The big question now is how much Hurricane Sandy restoration will cost -- and who gets stuck with the bill. For comparison, Hurricane Irene cost LIPA $176 million in restoration costs.

In most U.S. power markets, regulators allow companies to increase power prices to recoup costs stemming from natural disasters or unexpected emergencies.

However, in some cases they may not. Connecticut regulators said in August they would cut Connecticut Light and Power's (CL&P) return on equity -- essentially preventing it from raising rates to recover losses -- after the company, owned by Northeast Utilities, was found "deficient and inadequate" in its recovery from last year's storms.

CL&P's president resigned under pressure just weeks after a nor'easter in October 2011 left more than 800,000 customers without power, some for more than a week.

LIPA has so far not said anything about recovery of restoration costs related to Sandy.

CREWS FROM CALIFORNIA

Although LIPA has brought more crews to help with Hurricane Sandy restoration than it did during Hurricane Irene, the overall pace of restoration still lags.

After Irene made landfall last August, LIPA managed to restore 93 percent of affected customers within a week, according to a press release at the time. That compares with about 77 percent a week after Sandy's landfall.

During Irene, LIPA said it had more than 3,500 off-island crews to help with the restoration process.

LIPA said Tuesday that more than 12,000 workers, including 7,300 linemen from as far away as California, Washington state and Arizona, were working to restore power.

Brady, the National Grid spokesman, pointed to the buildup as a sign of the utility's prompt response to the storm.

"We were ready. We started preparing for this storm long before it arrived, including making all local arrangements and assessing support needs from outside the region. Calls for additional resources began very early," Brady said.

But for local residents and politicians, the buildup doesn't mean much when they're still out of power more than a week after the storm.

"Where are the crews? No one is cutting the trees. There are wires all over the ground and temperatures are dropping and another storm is on the way," said Michael Koblenz, mayor of the Village of East Hills on Long Island's North Shore.

The worries of office holders and those on Long Island still without power are being compounded by a nor'easter heading for the area on Wednesday.

(Reporting By Scott DiSavino, Cezary Podkul, Jillian Mincer and Adam Kerlin in New York; Editing by Steve Orlofsky)

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