A year ago, the Long Island Power Authority signed a 10-year contract with Public Service Enterprise Group to take over its electric utility beginning in 2014.
The deal was seen as a milestone for the Newark-based company, but in the aftermath of Hurricane Sandy, it also could prove to be a monumental challenge.
Sandy knocked out power to virtually all of LIPA's 1.1 million customers, and the agency's slow restoration effort led to the resignation of its CEO, Michael Hervey. Now, even as PSE&G and other utilities face tough questions from New Jersey regulators, the company also finds itself with a major challenge ahead — restoring trust and operational efficiency in the unfamiliar territory of Long Island.
The British firm National Grid currently operates LIPA's electric and gas utilities, and thus will be responsible for the immediate aftermath of the storm. Whether those efforts extend into PSE&G's tenure depends a lot on LIPA, said Ralph LaRossa, president and chief operating officer at PSE&G.
He said LIPA, which is under an oversight role similar to the Board of Public Utilities here, will have to make cost-benefit decisions about what kind of system improvements they want to make, and how much they want to charge ratepayers to pay for them. But LaRossa said the main issue isn't infrastructure per se, but the need for a smarter, more resilient system.
"It's a lot of the same issues you have here in New Jersey: You need additional redundancy. I think they're maybe a little bit behind on that front, but we're still taking a look at it."
LaRossa said tree trimming also is likely needed in Long Island.
Ironically, PSEG's decision to move into New York was part of a large strategy aimed at decreasing risk and volatility, according to Travis Miller, director of utilities at Morningstar Securities Research.
"PSEG has been on a strategy of reducing its exposure to the commodity energy prices as the markets have fallen," Miller said. "So this fits squarely in that bucket of reducing its commodity market risk."
But while Sandy presents new hurdles for PSEG, Miller said the storm doesn't make the contract a bad deal.
"I think the challenges from Sandy go to the strength, and operational strength, that PSEG has demonstrated over the last few years," he said. "As the system builds back from Sandy, we think PSEG is a good utility to mange that recovery effort."
In fact, PSE&G in November was named the nation's most reliable electric utility by PA Consulting Group. The same firm has named PSE&G the mid-Atlantic's most reliable utility for 11 straight years.
Still, Long Island officials have raised concerns, both about LIPA's track record and about the feasibility of contracting out utility operations.
Nassau County Comptroller George Maragos said the outsourcing model isn't a good fit for Long Island customers, because it means LIPA has to rely on PSE&G utility crews, instead of having its own, directly employed personnel.
"My business background says if my primary market and customer base is New Jersey, and let's say LIPA represents a significantly smaller market segment, I would be more inclined to put my resources — and give priority — to my primary customer base ... to the detriment of Long Island," Maragos said.
PSE&G has 2.2 million electric customers in New Jersey, double the amount it will have on Long Island, but it outperformed LIPA and National Grid in Sandy's wake. PSE&G reported 99 percent of its customers had service restored by Nov. 9, four days before LIPA reached that benchmark — even though PSE&G had 1.7 million outages, about 600,000 more than LIPA.
Maragos said PSE&G has "obviously done better" than National Grid in the wake of Sandy, but said that doesn't change the underlying issue — that the firm still has a greater financial interest in New Jersey.
PSE&G spokeswoman Karen Johnson responded to Maragos' concerns by noting the company is still in the transition period, as the deal doesn't take effect for another year.
"On Jan. 1, 2014, we will have a dedicated management team on Long Island devoted exclusively to serving LIPA's customers," she said in an e-mail. "We intend to share best practices to ensure that LIPA customers have safe, highly reliable service."
Maragos sent a letter to New York Gov. Andrew Cuomo in November, making a series of recommendations, including the proposal that LIPA "insource" its utility operations, rather than contracting them out. Maragos has yet to hear from Cuomo, though he said he's hopeful the issue will be addressed.
Even if LIPA were to change its operational model, however, Maragos acknowledged they wouldn't be able to fully implement the change by 2014.
If the contract doesn't change, PSE&G will face a customer base eager for improvement. Miller said PSE&G has a strong financial interest to please those customers.
"It's always a good idea for a utility to keep customers happy," he said. "Typically, happy customers mean happy regulators, which means a better chance for utilities to earn sufficient returns for shareholders."
LaRossa said there are challenges ahead, but he shows no signs of backing down. Asked if he had any second thoughts about the LIPA deal, the storm-weary executive quipped, "I have second thoughts about being in the industry."
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