The impending expiration on December 31, 2013 of the Management Services Agreement with National Grid prompted LIPA to assess its strategic organizational alternatives. As a result, on October 27, 2011, the Long Island Power Authority (LIPA) Board of Trustees approved plans to restructure the way LIPA contracts for services to operate its electric utility business. Beginning in 2014, LIPA will change to an improved business model that includes a dedicated business unit providing services exclusively to LIPA. The new business model is designed to enhance the quality of customer service, provide long-term workforce stability and allow LIPA to more effectively manage costs.

In 2010, LIPA retained an independent consulting firm, The Brattle Group, of Cambridge, MA, (Brattle), to conduct a study that considered three primary strategic alternatives:

• Transferring the National Grid workforce required for LIPA into LIPA’s organization (“municipalization”);
• Continuing to contract for the operation of LIPA’s electric utility business, but under an improved business model (“ServCo”); and
• Selling the assets and business to a private entity, with the buyer becoming the new electric utility for Long Island (“privatization”).

Brattle’s approach was to estimate the cost structure for each of the options and determine the impact that implementation of each would have upon retail electricity rates. The study also sought to rank the options based upon the quantitative analysis as well as qualitative consideration of risk and option values.

Brattle concluded that privatization would be significantly more costly than the other two alternatives, and therefore, did not recommend that option.

Estimated cost differences between the remaining alternatives, municipalization and ServCo, are not material and both would continue LIPA’s not-for-profit status. However, Brattle recommended adopting the ServCo option because it retains the efficient operations achieved by private utilities, while taking advantage of LIPA’s tax-exempt financing. The ServCo structure also has less transition risk compared to municipalization and preserves LIPA’s opportunity to adopt the municipalization or privatization alternatives later if conditions warrant.

Why did LIPA undertake a study of its strategic options at this time?
This was the right time to study the organizational alternatives. The existing contract with National Grid will expire at the end of 2013.  LIPA wanted to make sure that it fully considered viable alternatives to the current business model before committing to a particular course of action to ensure the best value for our customers.

What organizational alternatives were considered?
The Brattle Group, a leading consulting group with industry expertise providing rigorous analysis in complex economic strategies, considered three primary alternatives:

• selling its system (privatization);
• bringing all workers into LIPA’s own organization (municipalization);
• continuing to contract for services, but with an improved business model.

Why is the new business model that LIPA has selected better than LIPA’s current business model?
The improved business model provides for: 

• more direct oversight of utility operations;
• direct control and transparency over costs and staffing levels;
• continuity for a consistent and loyal workforce dedicated to providing superior services to Long Islanders. 

These capabilities will better enable LIPA to manage rates going forward and provide rate stability for our customers

What other benefits does the enhanced business model bring to LIPA customers? 
The improved business model also provides for the flexibility to move fully to municipalization or privatization, should either option become desirable in the future.

How is LIPA organized now?
LIPA owns the principal electric system assets and contracts with National Grid to operate the utility.  Under this unique arrangement, many business functions are geographically and organizationally dispersed within National Grid.

Why did LIPA choose that organization in the first place?
LIPA’s acquisition of the assets in 1998 took advantage of LIPA’s low cost of capital.  At the same time, contracting with National Grid (and its predecessor KeySpan Energy) allowed LIPA to get started quickly with minimal disruption to LIPA’s customers and the utility employees.  By this combination approach, LIPA was able to reduce electricity rates by 20% as early as possible.

Did LIPA get input from the public about the strategic options?
Yes.  LIPA proactively solicited comments by conducting three public input workshops, two public trustee workshops, two briefings to the State delegation and posted presentations and supporting data on its website.

Wouldn’t selling the system allow LIPA to get out of debt and lower electricity rates?
No.  Selling the system, called “privatization,” would likely cause rates to increase 10% to 20% due to the new owner’s profit margin coupled with the higher financing costs of the new owner who would not have the benefit of LIPA’s low cost tax-exempt financing.

Why not integrate the National Grid employees into LIPA’s own organization (full municipalization)?
Bringing the employees into LIPA, called “full municipalization,” was considered in detail.  Full municipalization would require new laws; possibly require changes to the existing union contracts; likely impact compensation of non-union employees.