The Long Island Power Authority should be converted into an investor-owned utility to end poor management practices that exacerbated slow and halting repairs of blackouts from October’s Hurricane Sandy, a New York state investigative panel said today.

Privatization would make management of the state-owned electrical system answerable to the New York Public Service Commission, which should be empowered by the legislature with stronger sanctions including the ability to revoke a utility franchise, the panel told Governor Andrew Cuomo today in a preliminary briefing.

Cuomo, a Democrat, convened the so-called Moreland Commission in November with the power to subpoena witnesses, after more than two million homes and businesses lost electricity from the storm, some for as long as 21 days. Some of the panel’s recommendations will need legislation and Cuomo said he’s waiting for its final report. No date was given for its release.

“The key to problems at LIPA was a fundamentally dysfunctional management structure,” Benjamin Lawsky, the commission co-chairman and superintendent of the New York Department of Financial Services, said at a meeting in Albany that was broadcast on the Internet. “The commission found that the only solution is for fundamental change at LIPA and how power is delivered on Long Island.”

Outsourced Operations

The state-controlled authority owns Long Island’s electrical lines and contracted with National Grid Plc (NG/) to operate them. Under such divided and “dysfunctional” management, LIPA let consultants, rather than the utility operator, guide its spending and failed to properly replace aging poles or trim away overhanging trees as recommended in state studies, Lawsky said.

Bringing day to day operations into LIPA may not improve management and would add 2,000 employees to the state pension system, Lawsky said.

LIPA was formed in 1985 by state lawmakers because of a “lack of confidence” in Long Island Lighting Co.’s ability to supply power reliably and economically after its investment in the ill-fated Shoreham nuclear plant. Shoreham, the most expensive U.S. nuclear power project, never operated commercially after the state raised questions about the ability to evacuate Long Island in the event of a radioactive release.

LIPA bought the lighting company’s remaining assets in 1998, including its power lines and power plants.

The authority has about $7 billion in debt and $4 billion of assets, Lawsky said.

New Contract

National Grid operates, maintains and repairs LIPA’s power lines through Dec. 31, 2013. The authority picked in 2011 Public Service Enterprise Group Inc. (PEG), owner of New Jersey’s largest utility, to take over the contract in 2014. The management structure is unique to LIPA.

Public Service is preparing to manage LIPA’s lines and intends to work with Cuomo and legislators as needed, Karen Johnson, a spokeswoman, said today in an e-mail.

LIPA is “reviewing the report and will continue to cooperate with the state and the Moreland Commission to do what is in the best interest of Long Island’s ratepayers,” Mark Gross, an authority spokesman, said in an e-mail.

The New York Public Service Commission, which regulates investor-owned utilities, needs the authority to impose stronger sanctions to compel better performance, said Robert Abrams, the other commission co-chairman and a former state attorney general.

Maximum Penalty

The maximum penalty for violating the commission’s orders is $100,000 a day, Abrams said. A more effective sanction would be 0.02 percent of gross revenue, or about $2 million a day for Consolidated Edison Inc. (ED), the state’s largest utility owner, he said.

Storm response plans should be subject to commission approval and compliance enforced by more staff, Abrams said.

“Superstorm Sandy devastated our region,” Chris Olert, a Con Edison spokesman, said in an e-mail. “All of us must participate in the discussions on infrastructure investments and new policies.”

Higher Costs

An October 2011 strategic review of LIPA by the Brattle Group concluded that privatization may raise costs by $438 million a year because an investor-owned utility can’t issue tax-exempt bonds. Cost of capital for the privatized utility would be 10.73 percent compared to LIPA’s current cost of capital of about 5 percent, it concluded.

A 10-year LIPA bond backed by bill payments traded Dec. 31 with an average yield of 2.27 percent, 0.58 percentage point above an index of benchmark municipals with similar maturity, data compiled by Bloomberg show. That yield difference has narrowed from when the bonds first priced in June with a spread of 0.81 percentage point.

Privatizing the Long Island authority “is just not realistic and practical,” said Matthew Cordaro, a former chief operating officer of Long Island Lighting. Refinancing LIPA’s tax-exempt bonds would raise power rates that are already among the highest in the country, he said today in a telephone interview.

Converting the authority into a full-service municipal utility that employs professional managers is a better option, he said.