COMPARISON OF KEY TERMS AND PROVISIONS for OPERATIONS SERVICES AGREEMENT between LONG ISLAND LIGHTING COMPANY (d/b/a LIPA) and PSEG LONG ISLAND LLC

Transcription

1 COMPARISON OF KEY TERMS AND PROVISIONS for OPERATIONS SERVICES AGREEMENT between LONG ISLAND LIGHTING COMPANY (d/b/a LIPA) and PSEG LONG ISLAND LLC The following table sets forth a summary of relevant provisions of the Operation Services Agreement (as amended by Amendments No. 1 and No. 2 there to, dated as of December 28, 2011 (the Existing OSA ) by and between the Long Island Lighting Company d/b/a LIPA ( LIPA ) and PSEG Long Island LLC ( PSEG and, together with LIPA, the Parties ), and a comparison against proposed amendments to such provisions as contemplated by the June 2013 ( ) for Amendments to the Operations Services Agreement (the Amendment to the Operations Services Agreement to be entered by the Parties at a later date, the Amended OSA ) and the Act, enacted on July 29, Capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to such terms in the Amended OSA. Authority/ Responsibility LIPA has significant control and oversight authority over the T&D System and the setting of related plans, policies, procedures and programs. Service Provider assumes responsibility to operate and maintain the T&D System and set related plans, policies, procedures and programs (subject to LIPA s bond and other financing agreement covenants). Service Provider also participates as a party in rate cases before the DPS. LIPA retains responsibility over managing financial, debt, PILOTs, tax, legal and other contractual obligations, and setting rates (described further below). LIPA Board retains right to ultimately approve the agreed upon Budget, contracts and, as provided in LIPA Act and required by bond and financial covenants, Act

2 has sole authority to set rates. Scope of Services Service Provider provides a broad range of services related to the T&D System and its customers, including operations, maintenance and construction activities, customer service functions and other administrative functions. No change in basic services provided by Service Provider, but scope is expanded to give Service Provider (or its Affiliate) the right to assume power supply, fuel procurement and other related services when current LIPA contracts for such services expire at the end of December 2014 (compensation associated with Service Provider s assumption of such contracts to be approximately $17.0 million). LIPA will establish a separate trade name under which its wholesale power markets operations will be conducted. No later than December 31, 2014, LIAP will transfer to Service Provider the functions and responsibilities of the LIPA Power Supply Group, including the electric planning function, except to the extent such transfer would subject Service Provider to FERC jurisdiction. LIPA will retain only power markets policy and decision-making authority consistent with FERC requirements. Service Provider agrees to establish, in conjunction with LIPA, an Energy Efficiency and Renewables advisory committee comprised of external stakeholders, which will hold public meetings and provide input related to demand reduction goals, renewable programs and similar matters. Act/Amended OSA Optional Capital Additions No provision included. Under the Utility 2.0 Program, Service Provider will prepare, on an annual basis, long

3 range capital and operating plans, and propose capital investments, funded by Service Provider, to improve the T&D System and provide greater energy efficiency and improve customer services and values. Such capital investments would allow Service Provider the opportunity to earn a reasonable rate of return thereon, consistent with standards for New York transmission and distribution electric utilities. Conflict of Interest No provision included. If unresolved conflicts arise related to Service Provider s representation of LIPA before regulatory or industry bodies, LIPA will obtain substitute representation. Performance Metrics Staffing and Labor Issues Service Provider is evaluated based on target and minimum performance metrics related to incentive compensation or penalties with respect to budget compliance, reliability, operational and customer satisfaction goals. The metrics are arranged in tiers 1-3, and can be adjusted over time to address improvement and/or maintenance performance goals. Service Provider must make offers of employment to LIPA-designated NGES union employees and to non-union NGES employees necessary to perform Operations Services and Service Provider shall assume the existing collective bargaining agreement. Performance Metrics are essentially the same but are streamlined to include fewer metrics (21 vs. 27 tier 1 metrics), while still providing more focus and accountability on the JD Power results for residential and business customers. The penalty metrics are streamlined to adjust and reduce the customer survey goal by 10%, with no change to the reliability metric. The performance metrics tiers can still be adjusted over time to address improvement and maintainance goals. As required by the Act, during 2014, LIPA employment levels will be reduced to levels only necessary to ensure that LIPA can satisfy its bond and financial covenants, statutory and contract obligations and oversee Service Provider s activities. Act

4 Governance and Oversight Service Provider shall establish new employee benefit plans providing benefits as required by the collective bargaining agreement or as are competitive with similarly situated companies, as the case may be. Transferred NGES employees shall receive prior service credit for purposes of eligibility, participation and vesting, and certain other matters. Governance conducted through the Joint Operating Committee, composed of equal representation by LIPA and Service Provider. LIPA s rights to approve certain Service Provider benefit plan changes are reduced to reflect Service Provider s increased autonomy. Joint Operating Committee is eliminated. The Parties will establish a Management Review Board to provide a forum for the Parties to review and consider each Party s recommendations with respect to Service Provider s performance and the overall administration of the agreement. LIPA staff provides contract oversight in conjunction with the staff of the Long Island office of the Department of Public Service. LIPA retains authority over certain policies and decision-making (including those related to wholesale power markets) and the establishment of all rates and charges for service. Act/ Naming/Branding Specific naming and branding, customer and public communications policies are to be determined by LIPA. PSEG Long Island name and service to replace LIPA s name and logo on utility-related matters, and thereby becomes the face of the T&D Service Area in the Service Area. PSEG Long Island accorded full authority to determine policies and procedures with respect to use of its name and service mark in all media and public

5 communications on utility-related matters. Rate Freeze No provision. No provision. (Rate freeze stated as a goal for period in ). Budget Process, Although the Budget is initially developed and For 2014 and 2015 Budgets: Budget Approval and proposed by Service Provider, LIPA has Service Provider prepares its proposed Budget Rate Setting significant participation in Budget matters and (operating and capital), LIPA prepares its final approval authority. operating Budget (including provisions for its debt service, depreciation and amortization LIPA has right to determine all T&D System expenses and taxes), both of which are subject to rates and charges. review and approval by the LIPA Board. For 2016 Budget and thereafter: Service Provider and LIPA prepare their respective 3-Year Budget Portions, which are subject to DPS review and recommendation, and final approval by the LIPA Board. Act/ LIPA Board retains right to ultimately approve Budget and, as provided in LIPA Act and required by bond and financial covenants, set rates. Effect of Budgets- DPS Review LIPA s Budget and rates are not subject to review by DPS and exempt from regulation under the Public Service Law. Amendments to Public Service Law provide for DPS review and recommendation, following fully litigated rate case. 3-Year Budget and rate plan to be submitted by Service Provider. The Parties agree to limit voluntary rate filings before the Three Year Rate Plan is approved. Act Effect of Budgets- Default Budgets No provision; Budget for a given Contract Year must be approved on an annual basis. If Parties cannot agree and Budget is not approved by the beginning of a Contract Year,

6 preceding Contract Year s Budget, as adjusted for inflation(default Budget), remains in effect until Budget for that Contract Year is approved. Effect of Budgets- Flexibility to Reallocate Effect of Budgets- Flexibility to Overrun Effect of Budgets- Non-Storm Emergency Events Service Provider may propose amendments or adjustments to Budget components as a result of Force Majeure, LIPA Fault or other reasonably unanticipated events as necessary are generally permitted. Except for Excess Expenditures (discussed below), Service Provider may not withdraw funds for Pass-Through Expenditures not included in the Budget, without LIPA s prior written approval. Excess Expenditure cap of 2%. Costs resulting from Force Majeure, LIPA Fault or other reasonably unanticipated events leading to schedule delays or increased work scope or costs require amendments or adjustments to the Budget. Service Provider has complete flexibility (without need for LIPA approval) to reallocate or postpone expenditures within each Budget component, or between Budget components. Excess Expenditure cap remains at 2%, and treated as if initially budgeted in all respects. Service Provider has right to make expenditures that do not result from Storm Events and elect to treat them, in its sole discretion, as (i) reallocations between different Budget items, (ii) Excess Expenditures or (iii) Non-Storm Emergency Expenditures 1. Expenditures treated as Non-Storm Emergency Expenditures require Budget amendment and LIPA approval. 1 Non-Storm Emergency Expenditures are expenditures that were required to be made by the Service Provider to provide Operations Services in emergency situations that are not Storm Events but that were otherwise beyond the reasonable control of the Service Provider. LIPA must agree that such expenditures were required.

7 Effect of Budgets- - Risk Allocations for Certain Costs and Liability for Disallowed Costs Management and Operations Audits Compensation No provision addressing disallowed costs for Major Storm Events or Non-Storm Emergency Expenditures. Service Provider indemnifies LIPA for certain costs that are not Pass-Through Expenditures (e.g., losses arising from Service Provider s negligence or willful misconduct, or Service Provider s breach of representations, warranties and covenants), subject to specific dollar thresholds and limitations, but in the aggregate no more than $2.5M per year for negligence; $15M aggregate for all else. No provision included. Management Services Fee is comprised of: Fixed Compensation Fee, which is $36.3 million, annually, and Incentive Compensation Pool, of which the Service Provider may earn up to $5.44 million each year, based on favorable performance relative to Performance Metrics. If any of Service Provider s costs incurred for Major Storm Events 2 or Non-Storm Emergency Expenditures are disallowed because: (i) they were found to have been incurred unreasonably or imprudently or (ii) FEMA makes a final determination to deny reimbursement of such costs, Service Provider s liability relating to such costs are limited (on an aggregated basis), to: (A) $5 million in Contract Years 2014 and 2015 and (B) $10 million in each Contract Year beginning with Contract Year Indemnity provisions remain the same. Requires Service Provider and LIPA to cooperate with respect to the management and operations audits to be conducted by the DPS starting in 2015, and to work to reach agreement with respect to the implementation of any such audit recommendations. Management Services Fee continues to be comprised of Fixed Compensation Fee and Incentive Compensation component, in the following amounts: Fixed Compensation Fee remains at $36.3 million for Contract Years 2014 and 2015 and is increased to $58.0 million beginning in Contract Year 2016 and beyond; and Act 2 A Major Storm Event is a storm event of significant magnitude such that costs incurred and related thereto would have been subject to DPS review had LIPA been an investor owned utility.

8 Fee amounts are expressed in 2011 dollars and Incentive Compensation Pool remains at adjusted annually based on CPI. $5.44 million for Contract Years 2014 and 2015 and is increased to up to $8.7 million beginning in Contract Year 2016 and beyond, in each case, payable annually and expressed in 2011 dollars, escalated by CPI. Termination and Expiration Termination Rights Each Party has the right to terminate the OSA for specified typical Events of Default (e.g., bankruptcy; termination of TSA; failure to pay or comply with agreement) by the other Party. LIPA has the additional right to terminate upon: (i) a Change of Control of Service Provider or (ii) a Privatization or Municipalization of LIPA. LIPA s termination rights are expanded to include the right to terminate if Service Provider, for two out of three Contract Years fails to meet minimally acceptable performance levels with respect to: (i) Cost Management, Service Reliability and Customer Service, or (ii) Major Storm Performance metrics related to storm monitoring and preparation, damage assessment procedures, outage response and restoration time and external communications. Service Provider s termination rights expanded to include right to terminate in the event of: (i) Privatization 3 or Municipalization of LIPA or (ii) a Change in Regulatory Law 4. 3 Termination right in event of Privatization will not apply if Service Provider or its Affiliate is the counterparty to the Privatization or transaction or enters into a replacement agreement with the successor owner to operate the T&D System or LIPA. 4 Changes in Regulatory Law are defined to include any changes, amendments or modifications to the Public Service Law, or other changes to New York state (or where applicable, federal) laws, regulations or interpretative announcements with the force of law, that: (i) change DPS oversight and review authority such that Service Provider s ability to perform its obligations under the Amended OSA is materially and adversely affected; (ii) render any material provision of the Amended OSA unenforceable or invalid (however, Service Provider s termination right under this clause (ii) will be exercisable only upon the expiration of a reasonable cure period, during which the Parties will negotiate, in good faith, to negotiate a work around or equitable adjustment to the Amended OSA that would keep the Service Provider in the same position as it would have been without the relevant Change in

9 Termination and Expiration Termination Fee; When Payable No separate termination fee payable to Service Provider. LIPA to pay Wind-Down and Pass-Through costs; Management Fee and Incentive earned through termination date. Upon termination by LIPA in event of Change of Control of Service Provider, Service Provider to pay to LIPA a fee of $7.0 million (with annual reductions for each Contract Year after 2014). Termination fee is payable to Service Provider if either Party terminates due to Privatization or Municipalization, or Service Provider terminates due to a Change in Regulatory Law (other than changes that result in the assertion of FERC jurisdiction) or Event of Default by LIPA. The termination fee payable by LIPA will equal $66.7 million (escalated by CPI), with annual reductions of 10% beginning in Contract Year No termination fee is payable for a FERC Change in Law termination. This amount is in addition to the other amounts payable by LIPA upon termination (i.e. Wind-Down and Pass-Through costs; Management Fee and Incentive earned through termination) Termination fee in event of Change of Control of Service Provider remains payable to LIPA. Termination Notice Period for Change in Regulatory Law and Extension No provision included. In the event of a Change in Regulatory Law that results in rate or other substantive regulation of Service Provider by DPS, Service Provider may terminate the agreement effective one day prior to such change in law, unless waived by Service Provider. For any other Change in Regulatory Law, Service Provider would provide LIPA with a 12-month notice of termination (or 14 months in the case of an OSA Change or a FERC Regulatory Law); (iii) subject ServCo, PSEG or any of their Affiliates providing services to the T&D System pursuant to the Amended OSA to rate or other substantive regulation by DPS or other state utility commission, or (iv) lead to the assertion of jurisdiction by FERC with respect to the Amended OSA.

10 Regulatory Change to allow for a 2-month period to negotiate a potential resolution). Such periods may be extended, at LIPA s option for up to an additional 6 months; the monthly option exercise price is times the monthly management fee. If the termination date does not occur (due, for example, to an arbitration decision or judicial action) by the scheduled or extended date, Service Provider will continue to provide operations service until termination for additional 1.55 times the monthly management fee each month. In the event of a FERC Regulatory Change, LIPA may institute arbitration to extend the scheduled termination date as necessary, in the public interest, and as fair and equitable between the Parties. Term and Option to Extend Dispute Resolution OSA will expire on December 31, 2023 (10-year term). No option to extend. Any dispute is resolved by a binding arbitration process; expedited arbitration included for certain issues, such as budgets, information access and the termination rights. Term extended by 2 years, until December 31, Parties commit to negotiate in good faith to extend the Term on substantially similar terms and conditions for an additional 8 year period, if, during certain years prior to the end of the term Service Provider has achieved targeted performance levels for at least a majority of the Performance Metrics, including those related to customer satisfaction and operating efficiencies. Essentially the same. Adds DPS rate proceeding and management audit recommendations to the expedited

11 arbitration provisions. For such disputes, LIPA must wait 15 days after a preliminary conference prior to taking any final action. Conditions to Effectiveness - Effectiveness of Current OSA conditioned upon: 1. approval by New York State Attorney General; 2. approval by New York State Comptroller; and 3. LIPA s obtaining a favorable private letter ruling from IRS (regarding the Current OSA as a Qualified Management Contract or that it has no effect on tax exempt nature of its bonds), all of which have been obtained. Effectiveness of Amended OSA conditioned upon: 1. adoption of New York state legislation providing for DPS review authority over LIPA and Service Provider; 2. Service Provider obtaining a disclaimer of jurisdiction from FERC over ServCo, PSEG and Affiliates of Service Provider; 3. LIPA s obtaining a favorable private letter ruling from IRS (regarding the Amended OSA as a Qualified Management Contract or that it has no effect on tax exempt nature of its bonds); and 4. agreement on the 2014 and 2015 Budgets. Outside Date No provision included. If the Effective Date does not occur by June 30, 2014, or such later date as agreed upon by the Parties, the Amended OSA terminates and Service Provider operates under the Existing OSA.

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