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Long Island's Power Problems Mean Big Paydays for Wall Street

Wednesday, February 27, 2013

WNYC
Long Island Power Authority customers are still paying off debt for a nuclear plant in Shoreham. The plant, which never opened, cost more than $6 billion by the time it was abandoned in 1989. (Robert Lewis/WNYC)

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.’

Editors:

Karen Frillmann

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Comments [8]

D

I year and a half late but... all the calculations of P&L made here make the assumption that this is the only deal these bankers are working on. A $.95m fee is low by Wall Street standards, but the fixed costs are not just being funded by this one deal.
As for Shoreham, the decision to not allow it to go live was the right one public opinion or not. A full scale evacuation of Long Island and it's current 3 million plus residents nearly 7 million if you include Queens and Brooklyn is not only impossible but probably the most vulnerable region in the country (in terms of population density vs. ability to move people) and was never appropriate for a nuclear power plant and the thought of it is ludicrous now. The mistake of the planners who pushed ahead for the plant should not be pushed on the practical response of HELL NO!

Jul. 17 2014 01:41 PM
Peter Schlussler from Mount Sinai

The reality with privatizing LIPA is that no matter how the governor polish’s it with wall street vernacular the ratepayer will pay more. There were two independent reports written by highly regarded energy consulting firms that proved that rates would go up 20% if LIPA were to privatize. Additionally, over the course of the last three years $1.2 billion in storm restoration costs were incurred, these costs would not have been eligible for FEMA reimbursement, without this, rates would have gone up over 25%. The benefits of low cost bonds and financing would no longer be available in a privatized structure and there will be the added cost of shareholders that the utility would be beholden to in which there is a guaranteed profit of approximately 10% added to the rates.

LIPA as a unique quasi-public utility that has failed…miserably…..and it must be re-structured. Rate payers cannot possibly afford privatization regardless of the wall street spin. A full service public utility has proven itself in over 2000 utilities throughout the united states with lower rates and higher customer satisfaction with the added bonus of possibly enjoying the benefits of cheap hydro power…….why re-invent the wheel, just do it for the ratepayer, we cannot afford not to….

Mar. 05 2013 10:39 AM
Georgej from Setauket, NY

Thanks WNYC for providing this important look back on how LIPA became LIPA. Long Islanders actually bought Shoreham twice and each time Wall Street analysts and brokers made fortunes: in deal 1 in 1989 Long Islanders bought the Shoreham plant for $1 in exchange for 10 years of rate hikes and allowing Lilco to access to tax exempt bonds to refinance its debt. In deal 2, in 1999, under Governor Pataki, LILCO executives and stockholders were once again bailed out and Long Island ratepayers were saddled with over $7 billion dollars in debt and a weak and inept quasi public authority that was politically controlled by Albany. But in the last two years , with much pressure in the LIPA, its board has restructured its management oversight with PSEG starting in January 2014 and it has re authorized its power supply contract with National Grid that will, for the first time, give the authority control over the modernization and repowering of Nat Grids ancient power plants. Hopefully Governor' Cuomo and his team, after studying the issue, will see that LIPA has been restructured and with the right leadership can fulfill its mission of providing reliable, epaffordable and environmentally friendly electrical power.

Mar. 01 2013 09:11 AM
Rich

I use a computer 8 hours/day for solid modeling and engineering analysis, my same$8,000 computer has served me well in a 3d design capacity for 4 years now.

Why then, Chris, would Lazard be taking on a project which results in a profit loss for the company? Makes no sense.

Feb. 28 2013 09:05 PM
Chris from New York

@ Rich

Simply "assuming the law firm already has offices and computers" ignores basic economics. You have that in common with the cub reporter who did this piece.

Even though the costs may be sunk and fixed, they still have to be pay rent each month and replace computers when they wear out.

Operating expenses for any business are ongoing and typically include rent, electricity, heat, air conditioning, security, property taxes, labor taxes, health insurance, etc., all of which are incredibly expensive in NYC (relative to everwhere else in the USA, except for San Fran).

WNYC has to do this too - that's why they have the guilt-raising drives every 3 months.

Lazard's offices are in Rockefeller Center, where I also happen to work. I know what we pay for rent for a smaller place (I sign the rent checks), and I assure you that this project is a loss-making endeavor for Lazard.

Wall Street didn't force Long Island residents to abandon a $6 billion nuclear plant moments before it was ready to be turned on. It was the public's CHOICE to have higher electricity costs because they feared nuclear power.

So when Wall Street is asked to do a low-fee project to help the insolvent public utility, WNYC's reaction is to blame Wall Street.

Again, MSNBC yellow journalism.

Feb. 28 2013 10:15 AM
Rich

@ Chris from New York:
Is 180,000 in expenses actually reasonable for a 6-month operation? Assuming the law firm already hopefully has an office and computers:
Those 4 lawyers would spend $45,000 ea. over 6 months or roughly 7,500/month, 1,875/week - on what? Hotel & "entertainment" fees? *That* alone, is a true NY 'middle' class pre-tax salary.

Feb. 28 2013 12:31 AM
Chris from New York

@drwikboz

That's one of the most well-reasoned posts I've seen on this website. Keep 'em coming!

This is like an MSNBC piece of yellow journalism. Blame Wall Street for choices the public made. Long Island citizens chose to reject the Shoreham nuclear plant and have to pay for their decisions through higher electricity rates.

Here's some simple math. The fee on this project is $950,000. Assume the project takes 6 months and 4 full-time bankers and 2 support staff. Revenue per employee is ~$150,000. Now subtract overhead and expenses, like computers, rent, etc... maybe $30,000 per employee. So, profit, BEFORE taxes of 40%+, is maybe $120,000 per employee. How is this a "big payday" for Wall Street?!?!

I suppose if you work for WNYC it might be but in reality it's a middle class wage in NYC.

Feb. 27 2013 07:12 PM

So at the end of the day, the government got involved in pushing its own agenda, the cost of that agenda was and continues to be a burden on the public. Yet, the article's main focus is on Wall Street.

Odd.

Sure, a deal could have been structured back in the day to provide lower rates. The problem is the company is run by a bunch of government appointees who are given handouts yet have no real idea how to run a business of the type in question. Of course rates are going to go up in that case. That's what mismanagement at a monopoly does. They just pass through the results of their own stupidity.

So today, more than two decades later, yep, that's right, it is possible that privatization will lower rates. And you know what, it probably will. But they too will get to raise rates almost indiscriminately. Cuomo wants to regulate the private company so there you go with more bogus appointments and mismanagement. Then the government will get a new agenda and somehow a public utility might look attractive again.

Come one, we live in a world of BS. The government and big companies are all a bunch of crooks and the people are too ignorant to realize and/or do anything about it. If you accept getting screwed, the screw is just going to be pushed deeper!

Now, about wall street, they could always get a fairness opinion or second thought. If their idea is that refinancing would lower rates, why not refinance now? Who knows what the terms of the notes afford them as far as callability, but there are always costs associated with such transactions.

Feb. 27 2013 02:36 PM

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