Moreland Commission asks prosecutors to probe LIPA

The L.I. Power Authority’s relationship with a Chicago-based consulting firm, which LIPA paid $28 million in fees between 2008 and 2011, has been referred to federal prosecutors by the state commission investigating the utility, Gov. Andrew Cuomo announced today.

Navigant Consulting, Inc., which had a “deep involvement with almost every aspect of LIPA’s business” since 2007, was reimbursed for “exorbitant and non-work related expenses,” including travel to N.Y. by out-of-state consultants and excessive lodging costs at NYC hotels, according to the final report of the Moreland Commission, which was charged by the governor in November with investigating the response of New York’s power utility industry to Hurricane Sandy.

The commission found:

One 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 also paid a $325 fee for an airline club membership.

Navigant’s consultants billed LIPA at “unusually high hourly rates” of $300 to $500 per hour, the report says. Its invoices sometimes did not contain a clear description of services rendered, making it impossible for department heads to review whether the hours billed correspond properly to the deliverables, according to the report.

LIPA incurred significant travel-related expenses, because many of Navigant’s consultants servicing LIPA live out of state.

“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,” according to the commission.

The commission also found “a disturbing revolving door practice between Navigant and LIPA staff that could breach state ethics law,” the governor’s office said in a press release.

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, the commission found.

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 after 12 years at LIPA and joined Navigant in January, according to a press release issued by the governor’s office today.

“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 percent 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 five years,” according to the release.

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.

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, the governor’s press release said. “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,” according to the release.

The commission also cited “financial irregularities” at the utility:

LIPA’s 2011 delivery charge increase was improperly calculated to obscure the fact that the increase was not 1.9 percent but in reality, approximately 4.3 percent.

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 $231 million 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,” the release said.

Between 2008 and 2011, LIPA paid more than $64.8 million for outside consultant contracts — $28 million of which was paid to Navigant.

“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,” the governor said in the press release. “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,” 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,” the governor said.

The final report is available here.