Ratepayers shouldn't cover costs of bonuses, charitable contributions and pay for workers who were bought out then rehired, auditors say.
The National Grid building is seen Wednesday on West Erie Boulevard. Public Service Commission auditors are urging the commission to investigate National Grids shared corporate services.National Grid is charging its Upstate New York electric customers for computers in New England, software licenses on Long Island and other corporate costs that have nothing to do with Upstate utility operations, auditors at the state Public Service Commission say.
How much that affects Upstate customers is unclear, but PSC staff members are concerned enough that last week they urged their bosses on the commission to launch an investigation into National Grid’s shared corporate services.
The PSC has not acted on the recommendation.
The auditors came across the problem while poring over National Grid’s proposal to boost Upstate electric rates by $369 million a year.
It’s the first time they’ve thoroughly reviewed company expenses since National Grid bought Niagara Mohawk Power Corp. in 2002.
Transactions between the former Niagara Mohawk and other companies owned by National Grid are so loosely documented that Upstate utility customers likely are subsidizing other parts of National Grid’s business, PSC staff auditors said.
For example: Upstate electric customers were assigned 73 percent of a $2,997 bill for computer hardware installed in 2008. But all the equipment went to offices in Rhode Island and Massachusetts.
In addition to questioning the company’s internal transactions, the PSC panel of experts raised many other objections to National Grid’s rate hike request. So many objections, that the panel recommended a $14 million rate decrease.
“We believe the company’s filing raises a number of very serious problems,” they wrote.
Some of the criticisms included:
- National Grid wants to increase rates by $25 million a year to cover employee bonuses. Ratepayers would be outraged if employees earned bonuses without reducing costs to pay for them, PSC staff predicted.
- The utility has allowed some workers to take early retirement incentives and then return as consultants, at a higher cost.
One former Niagara Mohawk employee who earned $76,000 a year took early retirement in 2002, at a cost to the company of $311,000. National Grid then rehired the worker, who had moved out of state, as a contractor, paying between $101,000 and $135,000 a year including hotel rooms and air fare, from 2004 through 2008. The individual remains a contracted employee.
- National Grid spent $434,000 in 2009 on donations to more than 100 chambers of commerce, community organizations and other groups. PSC auditors say the payments were charitable contributions that should be paid by shareholders, not ratepayers.
Among the recipients: the Greater Syracuse Chamber of Commerce, $12,500; Mohawk Valley EDGE, $3,500; Adirondack Phantoms hockey team, $2,240; Canisius College, $1,000; Home Builders Association of CNY, $510; and Boys & Girls Club of Syracuse, $200.
In response to a query from the auditors, National Grid defended the payments as “community relations” expenses, saying they “provide a direct benefit to the company and customers through improved communications and economic development growth.”
National Grid filed its rate request in January, asking for an increase of $391 million a year, its first electric rate overhaul since 2002. Recently, the company lowered its request to $369 million.
Approval would mean more revenue for National Grid — but not higher bills for customers. In tandem with the new rates, the utility seeks to refinance a $557 million debt customers are due to pay in 2011, spreading collection out over four years to soften the impact.
“As a company, we recognized when we filed our case the difficult economic times,” said Steve Brady, speaking for National Grid. “That’s why we worked pretty hard to design a proposal that would have little or no impact for the vast majority of our customers.”
It’s still early in the proceeding. The rates are scheduled to be decided in December by the five-member Public Service Commission. Between now and then, staffers at the Department of Public Service, who report to the PSC, will continue to gather information on Grid’s rates and review them with a view toward protecting the public interest.
National Grid officials this week declined to respond to specific criticisms, saying they will review the extensive comments of PSC staff and respond in written briefs by Aug. 6.
Utility officials often butt heads with the PSC staff during the early stages of a rate case only to negotiate a compromise later in the proceeding. For example, the PSC staff recently negotiated a settlement with New York State Electric & Gas and Rochester Gas & Electric, agreeing to a combined rate increase for the affiliated utilities of about $175 million over three years.
The utilities had originally requested $383 million in the first year. The PSC staff’s initial recommendation was an $8 million decrease.
National Grid is requesting a three-year rate deal. The PSC staff suggested a one-year agreement.
The biggest cut the PSC staff would make is the 11.1 percent return on equity sought by National Grid. The PSC staff recommended setting rates at a level that would yield 9 percent return, a savings of about $100 million a year off what the utility has sought.
National Grid’s current 10-year rate deal is based on a 10.6 percent annual return.
In the past, company executives have said they cannot abide returns of less than 10 percent. Grid officials recently said they will evaluate selling their utility in New Hampshire because that state set rates based on 9.5 percent returns.
The Public Service Commission has not determined whether it will launch an investigation into transactions among National Grid subsidiaries, said Anne Dalton, speaking for the commission. That recommendation likely will be considered later this year when the PSC decides the rate case, Dalton said.
The call for an investigation was made by a team of four PSC staff auditors who said they were concerned about a sharp increase in corporate costs passed onto Upstate electric customers by the leaders of National Grid. The former Niagara Mohawk’s bill for shared services shot up 31 percent from 2008 to 2009, while costs for other National Grid subsidiaries rose an average of 11 percent, the staff reported.
The staff recommended a $25 million cut in National Grid’s rate request to bring the Upstate expenses in line with the corporate average.
Over the past decade, National Grid has won regulatory approval to acquire utilities such as KeySpan Corp. and Narragansett Electric by arguing that the company would save money by consolidating services among its New York and New England holdings.
But the cost of corporate services shared by the utilities — such as accounting, human resources and computing — increased instead, far outpacing the 1.2 percent rate of inflation last year, the PSC staff said.
The services are provided to the regulated utilities by four “service companies” within National Grid’s corporate structure, the largest of which is National Grid USA Service Co. The service companies bill the other subsidiaries based on their share of each invoice.
Utility officials have not provided enough documentation to satisfy PSC staff that the amounts billed to Upstate electric customers are justified.
“Our cursory rate case review uncovered instances where Niagara Mohawk was charged for National Grid USA Service Company services that had nothing to do with Niagara Mohawk and other instances where it appears Niagara Mohawk was allocated too high a percentage of the service company costs,” the auditors wrote.
For example, a $134,024 bill from a human resources contractor in 2008 included $24,500 for work with KeySpan employees, but KeySpan was never billed. Upstate electric customers were apportioned roughly 45 percent of the total bill, or $60,903.
That bill alone has little impact on National Grid’s Upstate delivery charges of roughly $2 billion a year. But the PSC auditors said they have not been able, during just a few months of examining records, to establish the full extent of the overcharges.
Contact Tim Knauss at tknauss@syracuse.com or 470-3023.