Who will discipline the Long Island Power Authority?
The Long Island Power Authority (LIPA) has done a dismal job of restoring power for its customers after Hurricane Sandy. According to the New York Times, “[t]he bungling of the storm has called into question the Authority’s very future.”
There are three powerful forces descending on LIPA now, the credit raters, bond investors and New York Governor Andrew Cuomo. It seems like discipline is long overdue. The Albany Times-Union blog Capitol Confidential dug around in its archives about previous attempts of the Cuomo administration to audit what is happening at LIPA:
While the audit is directed at LIPA’s costs to customers, the quality of its performance comes up in the accompanying press release. From the list of concerns to be addressed:
- Questionable charges, including passing on approximately $33 million in charges to ratepayers for recovery from a storm that never happened
- The American Consumer Satisfaction Index gave LIPA the lowest customer satisfaction rating among municipal-owned utilities in the nation, underscoring an overall dissatisfaction with the power utility
Muniland seems to smell that something isn’t right with the disaster that is LIPA, and it seems like a big sell-off of LIPA bonds is starting to happen. Today the Municipal Securities Rulemaking Board reported on their EMMA site that LIPA bonds had traded 425 times on Wednesday, up from 407 trades on Tuesday, 133 trades last Friday and 119 trades last Thursday. Dan Berger, of Thomson Reuters Municipal Market Data, said that spreads on LIPA bonds have widened 5-10 basis points over the MMD AAA benchmark, while most municipal securities have narrowed.
In plain English: Investors are selling LIPA bonds at an accelerating pace, while demand for the rest of muniland strengthens. In muniland, LIPA is not very electric.
The credit rating agencies are not too thrilled with LIPA either. Fitch issued a report today titled “Most Fitch-Rated Public Entities Unfazed by Sandy” (emphasis mine):
In our view, the effect on the public power sector will also be minimal, with the exception of the Long Island Power Authority (Rating Outlook revised to Negative from Stable on Nov. 12, 2012). In the short run, we expect most issuers to utilize cash reserves and short-term borrowing to fund initial storm costs until FEMA funds and insurance payments are received. Over the longer term, gaps in external funding may result in a need to increase electricity rates. Should rate increases prove to be politically untenable, negative rating actions could result.
Standing over in the third corner, New York Governor Andrew Cuomo, who seems to bear some responsibility for LIPA’s weak management, also seems really unhappy according to the New York Times:
Senior officials, including Gov. Andrew M. Cuomo, have excoriated the authority [LIPA], but in the past, they have paid little attention to its management.
The authority has not had a permanent chief executive for two years. Five spots on the 15-member board are vacant, 3 of which are Mr. Cuomo’s to fill.
The authority’s chairman, Howard E. Steinberg, has stayed on past an expired term. He was originally appointed by Gov. George E. Pataki, who left office almost six years ago.
Trying to fend off attacks on his oversight of the Long Island Power Authority, Mr. Cuomo on Tuesday established a high-level panel, called a Moreland Commission, to investigate how utilities across New York, including the authority, handled Hurricane Sandy and other storms.
He also revived a proposal that he made in his 2010 campaign to combine the authority with other state energy agencies, but has not ruled out privatizing the authority. “I don’t believe you can fix it,” he said. “I believe it has to be overhauled and you need a new system.”
The bond markets and state government are executing their proper roles, although a bit late. Weak public institutions are often resistant to change, but someone must force reform on LIPA. If not, another Sandy might just shut down LIPA for good.