Albany, NY - June 23, 2013 - Governor Andrew M. Cuomo today announced the release of the final report from the Moreland Commission on Utility Storm Preparation and Response. The Commission was charged by Governor Cuomo in November 2012 to investigate and study New York’s power utility companies’ response to recent storms impacting the State and the adequacy of regulatory oversight of the utilities, as well as review the State’s energy agency and authority functions. The report released today reflects the findings of Governor Cuomo's first Moreland Commission, as he prepares to empanel a second to investigate corruption and the influence of money and politics in state government.
The Commission made a series of startling discoveries regarding the Long Island Power Authority’s (LIPA’s) use of consultants. Between 2008 and 2011, LIPA paid over $64.8 million for outside consultant contracts, $28 million of which was paid to Navigant Consulting, Inc. The Commission's review of invoices between 2007- 2013 illustrated Navigant's deep involvement with almost every aspect of LIPA’s business – and Navigant's extraordinary cost to ratepayers. The Commission's report revealed highly questionable billing issues, reimbursements for exorbitant and non-work related expenses, and a disturbing revolving door practice between Navigant and LIPA staff that could breach state ethics law. The Commission’s findings regarding the relationship between LIPA and Navigant have been referred to federal prosecutors for their further investigation and potential prosecution if deemed appropriate.
The Commission’s report builds on its Interim Report preliminary review of the State’s energy efficiency programs and activities, and examines the challenges associated with managing the costs of infrastructure investments. Additionally, the report identifies regulatory deficiencies and provides suggested measures for strengthening the State’s representation of consumer interests through a formal advocacy office.
The Moreland Commission’s investigation into New York’s investor-owned utilities uncovered systemic problems within the industry, including inefficiencies, disorganization, and lack of planning. The report outlines a series of industry-wide and utility specific recommendations aimed at ameliorating the problems identified. The final report is available here.
"Hurricane Sandy exposed the incompetent and unacceptable response of power utility companies throughout downstate New York during one of our state's most vulnerable periods. I empaneled a Moreland Commission to investigate and reform these utilities to restore trust in the system for ratepayers, and reform utility storm response and preparedness moving forward," Governor Cuomo said. "The Commission did extraordinary work, conducting a thorough investigation of every aspect of the utilities operations and management. The findings released today raise a series of questions regarding LIPA's management of a consulting contract that passed unexplainable costs to ratepayers and involved exorbitant expenditures that appear to have nothing to do with providing power to Long Island residents. I second the Commission's call for a full and thorough investigation by a prosecutorial body. I thank the distinguished members of the Commission, Executive Director Regina Calcaterra and the Commission’s staff for their dedication and commitment."
Robert Abrams, Co-Chair of the Moreland Commission, said, "The implementation of the Commission's recommendations will create the opportunity for a stronger safety net for New Yorkers in the event of future storms, provide for more consumer protection for utility customers who historically have been disadvantaged by lack of a level playing field and will bring to justice those who transgressed by violating New York's ethics laws."
Benjamin Lawsky, Co-Chair of the Moreland Commission, said, “The problems the Commission found at LIPA are extremely troubling and some of them need to be further investigated by criminal prosecutors. Our extensive investigation uncovered breathtaking waste and inefficiency at LIPA that helped jack up rates for Long Island families. A revolving door culture and lack of oversight stuck ratepayers with the bill for lavish, questionable expenses that should be reviewed by prosecutors. The Commission took the mandate Governor Cuomo gave us incredibly seriously. The Final Report lays out in great detail the many deficiencies we found in the utilities' responses to New York's recent storms. The Report and its recommendations are designed to help ensure that utilities are better prepared for future extreme weather so that New York's families are better protected.”
The Commission members include:
Co-Chair Robert Abrams, former Attorney General of New York State
Co-Chair Benjamin Lawsky, Superintendent of the Department of Financial Services
Peter Bradford, former Chair of the Public Service Commission
Tony Collins, President of Clarkson University
John Dyson, former Chairman of the New York Power Authority
Rev. Floyd Flake, Senior Pastor of Greater Allen African Methodist Episcopal Cathedral
Mark Green, former New York City Public Advocate
Joanie Mahoney, Onondaga County Executive
Kathleen Rice, Nassau County District Attorney
Dan Tishman, Vice Chairman at AECOM Technology Corporation, and Chairman and CEO of Tishman Construction Corporation
Summary of LIPA Findings
1. Navigant Consultant Billing Issues
Unusually High Hourly Rates and Billable Hours: As most of the 52-64 Navigant consultants servicing LIPA are senior in rank, hourly rates billed to LIPA ranged from $300 to $500, exclusive of expenses. The high billable rate combined with five of Navigant’s consultants billing in excess of 1,800 hours per year with one billing as high as 3500 hours in a single year resulted in astronomical expenses for LIPA.
Inadequate Descriptions of Services Rendered: Some Navigant consultants billed their hours without a clear description of services rendered. Without such a description, it is impossible for department heads to review whether the hours billed correspond properly to the deliverables.
Unclear Methodology for Allocating Funds: The methodology employed by LIPA in allocating funds under the approved $23 million contract with Navigant is unclear. Navigant routinely submits proposals to assist LIPA with projects falling under varied scopes of work. Navigant’s work has appeared to be growing more routine and non-temporary in nature as a part of LIPA’s business.
2. Questionable Reimbursement of Navigant Consultant Invoices
With many of the consultants servicing LIPA living out of state, LIPA incurred significant travel-related expenses. The vague language of the agreement related to travel expenses imposes no restrictions or limits on spending. Furthermore, it is unclear what, if any, steps LIPA took to curb these types of expenses.
In November 2007, LIPA reimbursed the consulting company $6,815.30 for an 11-day hotel stay by one consultant at a hotel in New York City. This amount includes a daily cost of approximately $542 per day for lodging. Current guidelines used by New York State mandate a cap of $295 per day for lodging in Manhattan and an allowance of $71 per day for meals and other incidentals.
A Navigant consultant expensed a trip from Washington, D.C. to Culebra, Puerto Rico, including charges for a seaplane flight from San Juan to the remote resort island. Navigant’s company website lists this particular consultant as residing in the agency’s Washington, D.C. office and no explanation was provided as to the need to travel to or from this locale. LIPA’s then-Chief Financial Officer personally approved this expense.
LIPA paid a $400 reimbursement for the full renewal fee for a consultant’s engineering license in another state.
LIPA paid a $325 fee for an airline club membership.
After the Commission discovered the questionable billing and reimbursement practices and was advised by a witness that there was no auditing of the practices, there was a concern that if the practices were connected they may rise to a scheme to defraud. Once that threshold was met, the Commission found that further external investigation was warranted to determine if other Navigant consultants followed similar practices. If deemed improper, these actions may trigger both State and federal law violations and for this reason, the Moreland Commission is referring the matter to prosecutors for further investigation.
3. Revolving Door Issues
In the course of the Commission’s review of LIPA’s contract with Navigant, it was discovered that some of LIPA’s employees formerly worked at Navigant on the LIPA contract and some of LIPA’s former employees are now contractors with Navigant. These relationships could violate State law.
Michael Hervey, Former LIPA Chief Operating Officer and Acting Chief Executive Officer, now serves as an Energy Consultant Director for Navigant. Hervey left LIPA in December 2012 after twelve years at LIPA and joined Navigant shortly thereafter in January of 2013. While employed as LIPA’s COO and acting CEO, Hervey reviewed and approved over $15 million billed by Navigant to the Operations Division of LIPA between 2007 and 2012. In 2011 alone, Hervey approved 50% of the $7.2 million in invoices billed to LIPA by Navigant. Furthermore, in 2010, Hervey personally signed a $23 million contract extending Navigant’s utility contracting services for 5 years.
Jim Peterson, former Director of Power Contracts at LIPA from 2001 until July 2008, is now a Director at Navigant and appears on Navigant’s Rate Sheet at a cost of $353 per billable hour for consulting services.
David Clarke, LIPA Director of Power Markets, moved from Navigant to LIPA in September 2010. While at Navigant, Clarke billed work to LIPA’s Power Markets team, the very team where he is now a director. Immediately after joining LIPA, several Navigant invoices involving Power Markets charges were addressed directly to Clarke and approved by his manager, the Vice President of Power Markets.
John Little, LIPA’s Director of Ratemaking, left Navigant in 2009 to join LIPA.
This revolving door is particularly problematic since LIPA lacked any central controls for reviewing consultant/contractor charges and protecting against conflict of interests or appearances of impropriety.
4. Financial Irregularities
LIPA’s 2011 Delivery Charge Increase was improperly calculated to obscure the fact that the increase was not 1.9% but in reality, approximately 4.3%
LIPA’s statements that it will retire $4.2 B in debt by 2013 repeatedly included a representation that does not qualify as debt retirement
Faulty accounting practices lead to LIPA overcharging its customers $231M in erroneous line loss charges, which is now being rectified in accordance with their public statements
In sum, the issues related to consultant billings, travel expenses, $231 million line loss, delivery overcharge increase and the debt retirement description point to a pattern of lack of oversight, improper accounting, lack of transparency and an unorthodox representation of their debt management plan. These raise significant questions about the accuracy and reliability of LIPA’s financial reporting and how it operates independent of extreme weather conditions.
Summary of Policy Findings and Recommendations
1. Energy Efficiency Programs
The Commission found that the PSC’s level of oversight of energy efficiency programs ignores best practices, trends, and overall program performance. For instance, the PSC imposes burdensome data reporting requirements, yet lacks a central database to track data collected or program performance. The PSC has also created a situation where there are over 100 competing programs of NYSERDA and the utilities with different rules, applications, and processes for participation that leads to customer confusion and diminishes the overall effectiveness of the programs.
The Commission recommends that the level of PSC/DPS oversight be redirected to focus on tracking the programs’ performance, rather than program minutia. The recommendations suggested in the report include:
Reviewing which of the 100 programs are most effective and consolidating and eliminating overlap between NYSERDA and the utilities’ programs
Developing an IT platform to track and evaluate program effectiveness
2. Utility Infrastructure Investment
The Commission acknowledged the vulnerability of utility infrastructure to extreme weather events and noted that hardening was necessary in light of recent experiences. However, it also recognized the extraordinary cost associated with reinforcing and maintaining New York’s electric system and the tradeoff with utility rate increases. The Commission recommends that infrastructure hardening investments be targeted and funded from existing sources in the first instance, rather than by raising rates. The recommendations suggested in the report include:
Performing an asset health review to determine areas for improvement and to maximize the effectiveness of infrastructure investment plans Lessening rate impacts by:
- Redirecting approximately $500M in annual funding from PSL § 18-a assessment to utilities to support additional infrastructure investment
- Supplement those funds with other existing sources or an “Anti-Hurricane Feebate Program”
3. Representation of Consumer Interests
The Commission determined that ratepayers are not fairly represented before the PSC. For instance, the PSC is exempted from the State agencies’ ex parte rules, allowing utilities and lobbyists unfettered access to PSC decision-makers, while the consumer advocacy function of State related to electric utilities has dwindled in recent years. Thus, the Commission suggested ratepayer representation before the PSC be strengthened, including:
Eliminating the existing statutory exemption of PSC/DPS to ex parte rules and set specific timeframes for their application and sanctions for violations
Creating a Citizens Utility Board to better assure that ratepayer interests will be vigorously represented in regulatory and judicial proceedings
Summary of Investigative Findings and Recommendations
The Commission identified three main issues common to the State’s utilities’ preparedness and response to recent storms. First, most utilities failed to provide timely, localized information to customers and municipalities regarding their estimated time of restoration (ETRs), in part due to limited use of available technology. Second, utilities have an increasing reliance on mutual assistance (utility workers from other states), which, particularly in large events, is not sufficient for obtaining the necessary crews as other utilities are reluctant to send crews until the impact of the storm to their area is known. This creates a highly competitive process for utilities to secure other resources on their own. Finally, the Commission found that the utilities do not have defined procedures in place for responding to large-scale flooding events. The recommendations suggested in the report to address these industry-wide areas for improvement include:
- Utilities should improve the development and issuance of localized and individual ETRs while managing customers’ expectations regarding the reliability of the first mandated ETR
- Identify and cross-train additional utility personnel to assist during storms
Utilities should obtain improved situational awareness by:
- Coordinating with cable providers to take advantage of those systems’ two-way communication abilities
- Collecting damage assessment information electronically (e.g., tablets, PDAs)
- Utilities review existing staffing levels and evaluate the impacts of an aging workforce on their abilities to effectively respond to major storms
- Utilities engage in an industry-wide effort to address deficiencies in the current mutual aid process
- Consider expanding the National Guard’s role in supporting utility restoration efforts
- Amend NYS and NYC Building Codes to codify a uniform inspection and certification procedure relative to customers’ damaged electric equipment that is triggered by a severe weather event
- Communicate procedures with local governments and customers prior to events when there is a predicted risk of flooding
- Formalize the use of licensed electricians or other trained inspectors to assist with the assessment and isolation of affected customers
The Commission also recommended utility-specific improvements, such as:
Con Edison – Formalize in its Corporate Coastal Storm Plan actions taken to resolve resource concerns and coordinate with government to identify critical infrastructure locations
Orange and Rockland – The need for a formalized procedure for allocating resources between Orange and Rockland and its sister company, Con Edison
New York State Electric and Gas – Improve the functionality of storm centers, such as the Brewster service center, and ensure the centers have sufficient communication capabilities
Rochester Gas and Electric – The need to train additional personnel as damage assessors
Central Hudson – Improve pre-storm preparations and planning for flooding
National Grid – Take steps to bolster the oversight of its emergency planning function, including through the possible addition of other staff members to the emergency planning team