NEW YORK ATTORNEY GENERAL DENNIS C. VACCO IS investigating a $42-million severance package given to former LILCO Chairman William Catacosinos, complicating the takeover of troubled Long Island Lighting Co. by state-run Long Island Power Authority.
orney General Vacco on June 8 announced he had issued formal subpoenas concerning "secret" payments made to utility executives. "The revelation of these payments ratifies Governor Pataki's actions in dismantling LILCO's power monopoly on Long Island," Vacco said. "But let's be clear: The governor's plan did not absolve LILCO executives from their obligation to be accountable to Long Island ratepayers and LILCO shareholders."
Vacco said the payments add "insult to the injury that Long Islanders suffered at the greedy hands of the utility's managers."
Gov. George Pataki (R) has sided with LIPA. Pataki has called the payments "outrageous" and "disgraceful," while demanding that Catacosinos return the money and leave his position. Yet some say this move is little more than election-year politics.
Pataki's term expires at the end of the year.
Many observers defended Catacosinos and the deal he arranged with LIPA. The takeover resulted in a 20 percent rate cut for all Long Island ratepayers; refund checks will arrive in September, just in time for the New York elections. No employees were laid off as the result of the merger. Under Catacosinos' leadership, LILCO's stock value rose dramatically.
LIPA Fights Back
Catacosinos has taken over as chairman of MarketSpan, created May 29 by the merger of LILCO and Keyspan Energy Corp. MarketSpan owns LILCO's common plant, non-nuclear electric generation assets and the regulated natural gas businesses of both LILCO and KeySpan subsidiary Brooklyn Union Gas. LIPA controls transmission and distribution of electric service on Long Island and purchases power from MarketSpan.
On June 16, the LIPA board of directors denounced 26 former LILCO officials who received $67 million, including the $42 million that went to Catacosinos, in extra compensation. All 26 now work at MarketSpan. The LIPA board called for their resignations and voted to withhold MarketSpan's $1.04 million monthly management fee. It presently pays about $37 million a month to MarketSpan for electricity and services.
The LIPA board also called for the resignation of Catacosinos and two other top executives, Joseph McDonnell and Leonard Novello. The board banned the three from working on the LIPA account. It hired a consultant to investigate whether former LILCO executives had violated civil and criminal laws and plans to ask for reimbursement of the cost of the investigation. The board said it may consider banning MarketSpan from bidding on future LIPA projects. Finally, it's investigating whether the purchase price for LILCO's assets should be adjusted to reflect the costs of the payments to the executives.
Mired in Legal Actions
A group of MarketSpan shareholders has filed a class action lawsuit against the company, Catacosinos and other former senior officials of LILCO. The complaint alleges the defendants breached fiduciary duties by the $67 million payout in retirement benefits and other compensation upon the merger of certain LILCO assets and Brooklyn Union, and the merger of other LILCO assets with LIPA on May 28. The lawsuit notes the remaining 8,000 LILCO and Brooklyn Union employees received no payments.
The fact that no Brooklyn Union employees received extra compensation stands out. When LIPA Chairman Richard M. Kessel notified MarketSpan of the LIPA board's actions, he told MarketSpan's president, Robert Catell, the former chairman of Brooklyn Union; he did not inform Catacosinos. Since no Brooklyn Union executives received extra compensation, there have been calls for Catell to take over from Catacosinos.
But the story only gets more complex. The takeover was financed by what is believed to be the nation's largest municipal bond issuance -- $7 billion. At the end of May, the U.S. attorney for the Eastern District of New York launched an investigation into how LIPA chose the underwriters for the sale. Subpoenas were sent to LIPA, Bear Stearns & Co., Salomon Smith Barney, Lehman Brothers Holdings Inc., and Morgan Stanley Dean Witter & Co. Inc. According to The Washington Post, federal and state records show that those companies contributed to political committees and funds that support the reelection of Pataki and Sen. Alphonse D'Amato (R).
This uproar really began in the 1980s. That was when debt from the building of the Shoreham nuclear power plant burdened Long Island ratepayers with some of the highest rates in the United States and yet never operated at full power. The LILCO managers who decided to build Shoreham were ousted in 1984.
Catacosinos, 68, does not plan to quit and plans to complete his six-year term as chairman.
Lori A. Burkhart is a contributing legal editor at Public Utilities Fortnightly.
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