After Sandy plunged most Long Island residents into a prolonged darkness, Governor Andrew Cuomo’s office began meeting with a global investment bank, Lazard Frères and Co., to figure out a way to restructure the Long Island Power Authority.
Just last month at his State of the State speech, Cuomo announced he had a solution.
“The time has come to abolish LIPA period,” Cuomo said. “We want to privatize the Long Island service.”
But it wasn’t too long ago that another Cuomo stood up to give the same speech. Mario Cuomo announced the exact opposite 25 years ago.
“On Long Island, I will pursue vigorously the transition to public power. I do this to provide reliable, affordable electricity to ratepayers,” Mario Cuomo pledged in his 1988 State of the State speech.
And like today, in the background was the same company: Lazard. In the late 1980’s the firm provided a rate analysis that made the case for public power on Long Island.
No one has accused the firm – which has a $950,000 contract through March -- of any wrongdoing or even of providing anything less than expert financial advice then and now. However, the company’s role in the initial push for public power and their current role working on privatization, highlights a frustrating fact: officials have tried a number of complex financial deals over the years to lower rates on Long Island. But while these deals have made Wall Street a lot of money, they have so far failed to lower electric bills that are among the highest in the country.
“Wall Street makes money from investments and deals,” said Matthew Cordaro, who was recently appointed to LIPA’s board and opposes privatization. “They’re interested in seeing something happen. The fact of whether it’s economic or not or the best thing for the ratepayer is sort of secondary. I mean, they are a profit making entity.”
Problems go back decades
Long Island’s quest for cheap power goes back a half-century, to a very different time.
In the 1960’s, the investor-owned Long Island Lighting Company joined the nationwide rush to build nuclear plants. The company started work on a nuclear plant in Shoreham, along the north shore of Long Island, in 1973.
But a partial meltdown in 1979 at the Three Mile Island nuclear plant in Pennsylvania scared people.
Irving Like, one of the earliest opponents of a nuclear plant on Long Island, says that helped turn public opinion.
“When Chernobyl occurred, that was like the finishing blow,” Like said referring to a 1986 nuclear accident in the former Soviet Union.
Despite the opposition, the Long Island Lighting Company steadily moved forward with its plans to open Shoreham.
In order to stop the plant from opening, Governor Mario Cuomo and state politicians in 1986 formed the Long Island Power Authority. They gave LIPA the power to take over the investor owned utility. That takeover didn't happen until 1998, under Governor George Pataki's administration, when LIPA sold $7 billion in bonds to buy the Lighting Company's transmission and distribution system.
The Shoreham nuclear plant cost more than $6 billion but never officially opened. It’s still there because the thick concrete walls would be too expensive to tear down, said Matthew Cordaro, a former Lighting Company executive who helped license the plant.
Cordaro was asked to join the LIPA board earlier this month. He lives a mile away from the plant and stopped recently near the shore of Wading River to watch the sun set behind the hulking sarcophagus.
“It’s always an emotional experience. I live here and whenever I stand in this location or see the plant or drive by the gate, the main gate, it stirs emotions and feeling about what a waste it was, how Long Islanders have suffered to such an extent for no good reason,” Cordaro said.
Long Island residents are still paying for the Shoreham plant, which is why their rates are among the highest in the country.
Governors including Cuomo, and Pataki, and now another Cuomo have tried to do something about that fact. And in the background offering complex financial cures have been Wall Street firms.
Wall Street to the rescue
After Sandy, Andrew Cuomo’s people started working with Lazard, a global investment bank, to figure out a way to restructure LIPA. Lazard says it can privatize the utility without rates going up.
But Lazard told state officials in the late 1980’s that a public takeover would save ratepayers money.
That apparent switch is confusing to Irving Like, an original LIPA board member turned critic who wonders what Lazard is thinking.
“I was hoping that they would go back and look at some of their own files and some of the analysis that they’ve done in the past,” Like said.
Lazard, which declined to comment for this article, is just one of many financial firms that officials have hired over the years to consult on lowering the cost of power on Long Island. Records show this advice has stood to make these companies a lot of money.
In the 1980’s and 90’s, these firms told LIPA and local officials that the best way to lower rates and provide reliable power for Long Island was to do a public takeover of the Lighting Company. But at the same time these companies hoped to make millions underwriting the bonds necessary to finance such a deal.
In its 1987 proposal to act as LIPA's financial adviser, Lazard indicated it would determine if a public takeover would save ratepayers money. The firm also asked to "be considered by LIPA for the possible rendering of underwriting services either for this project or others," records show. At the time, another financial firm working for Suffolk County actually waived its consulting fees in order to win favorable consideration as an underwriter should its advice lead to a bond sale.
Bear Stearns was LIPA’s consultant in 1998 when the authority decided to sell $7 billion in bonds to buy the Lighting Company’s transmission and distribution system.
Bear Stearns earned more than $2 million for its consulting work leading up to the takeover, according to news reports from the time. Just before the bond sale, the company quit its consulting gig to become the lead underwriter – making Bear Stearns eligible for the biggest chunk of an estimated $40 million in underwriting fees.
The motives of bankers advising LIPA have long been a concern, said Larry Shapiro, who ran the New York Public Interest Research Group’s environmental programs in the 1990’s.
“When the advice that you’re getting is ‘Please do what I tell you and, oh yeah, I’m going to make many, many millions of dollars if you just happen to do exactly what I tell you.’ It’s possible that’s good advice but it’s also possible that the rationale for providing that advice is just for that adviser to make a lot of money,” Shapiro said.
The push to privatize
A 2011 consultant’s report to LIPA found privatization could mean $50 million in fees for banks, attorneys and other firms. That report also found privatization would raise rates for Long Island customers. The authority’s system is only worth about $4 billion while LIPA still owes $7 billion on bonds.
But Lazard has identified a way to get the state out of the power business on Long Island without raising rates, Cuomo aide Larry Schwartz said.
“One solution would be if you sold it and you get $4 billion. That lowers the debt to about $3.5 billion. And with the low interest rates out there one thought is you would go out there and refinance the debt at the lower rate,” he said.
The cost of paying off that securitized debt would be added to customers’ bills.
The New York Power authority could also help. That state authority could take over LIPA’s capital leases, Schwartz said. These leases are largely power purchase agreements LIPA has with electric plants.
The New York Power Authority is working closely with the governor’s office. It’s NYPA that actually hired Lazard for $950,000 through March, according to a copy of the contract WNYC obtained through a Freedom of Information Law request.
The agreement shows Lazard is looking at all options and not just privatization.
Earlier this week Cuomo reiterated his support for the state getting out of the power business on Long Island.
“Well, you could have government come in and run everything and run a utility company and run the wires and run the poles. I think that would be a mistake. This is not what government does well,” said Cuomo, answering reporters’ questions after a speech on Staten Island. “Or you can privatize it and let a private company come in and provide the power and you regulate it. I think that’s the modality that makes the most sense.”
Schwartz says Lazard, which doesn’t underwrite bonds, was only hired to work on this initial analysis. The company has no guarantee of work in the event of privatization.
“They wouldn’t be any more eligible than anybody else would be under an RFP or a competitive bidding process," Schwartz said. “It wasn’t like they came to us pitching us with this idea because they were looking to make money on a deal. We retained them to do an analysis for us.’