KeySpan Corp. last Tuesday said that the company made an error in calculating the Long Island Power Authority’s (LIPA) electric system requirements from newly installed peaking units, leading to a systems requirement overestimate of approximately $55 million to $65 million.

In response, LIPA has directed an independent review of the matter by its external auditor and is conducting a “full legal review” of all KeySpan/LIPA contracts.

KeySpan on Nov. 5 notified LIPA of the error in the calculation of system requirements and revenues. The error resulted in a double counting of the output of certain peaking units. In the process of revising the calculation KeySpan also discovered a double count had occurred of two smaller units in that year. However, the impact for that year was insignificant, according to the company.

Under a management services agreement, KeySpan manages LIPA’s transmission and distribution system and provides power generation. This summer, KeySpan built two peaking units on Long Island, one in Glenwood Landing and one in Port Jefferson. “There were two areas in our company that tracked the performance of those units and, in essence, made an honest mistake and double counted,” said Keyspan spokesperson Bonnie Habyan.

The corrected requirement and revenues for 2002 through September 30 were in the range of 500 GWh, or approximately $55 million to $65 million or 2.5% of LIPA’s annual revenues, lower than initially reported to LIPA’s board of trustees.

“KeySpan accepts responsibility for miscalculating the electric system requirements,” said Bob Catell, chairman of KeySpan. “This was our error, and although it did not have any impact on KeySpan’s earnings or financial statements, or on LIPA or its customers because the estimated revenues were not billed, we realize the importance of accurate and timely information,” he said.

KeySpan has a “long track record in providing LIPA with impeccable service and we take pride in managing the success of this unique and ongoing relationship. I give my personal assurance we have implemented steps so there is no recurrence of this situation.” Habyan said that Keyspan has “done an internal audit [and] we’re doing an external audit.”

For its part, LIPA said that KeySpan’s double counting of electric sales revenues reported by one of its affiliate companies to LIPA resulted in an overstatement of LIPA revenues by $56.5 million in 2002. This admission came after LIPA questioned KeySpan’s electric sales revenues for this past summer and sought a clarification of the numbers, LIPA said.

“This is an extremely disappointing situation,” said LIPA Chairman Richard Kessel in a prepared statement. “KeySpan has admitted its errors. As a result, LIPA is going to re-double its efforts to confirm the accuracy of other operational and financial information that KeySpan reports to LIPA. This includes all of the charges we receive on a daily basis for the operation and maintenance of LIPA’s electric transmission and distribution system.”

Kessel said that LIPA is taking several actions to “find out whether this double counting was an isolated mistake, and we intend to seek additional safeguards to prevent such errors from occurring again in the future.”

Beginning in September, LIPA said that it began to question KeySpan on the accuracy of the summer 2002 electric sales figures that LIPA received from KeySpan. LIPA said that KeySpan initially indicated that its revenue figures were correct.

LIPA continued to question the figures and after weeks of discussions between LIPA and KeySpan, the company notified LIPA that due to its double counting of certain sales reported by its energy trading affiliate, KeySpan Energy Trading Services (KETS), the financial information furnished to LIPA by KeySpan included an overstatement of LIPA’s electric system revenues for summer 2002.

While reviewing this new information from KeySpan, LIPA said that it continued to question the numbers and press for more detailed information about the summer 2002 error and other potential reporting errors. KeySpan subsequently informed LIPA that some electric sales revenues were also misstated for periods dating back to the fourth quarter of 2001, according to LIPA.

KeySpan’s explanation of these events is outlined in two letters from KeySpan to LIPA dated Nov. 22. One letter was sent by Catell to Kessel, while the second letter was sent by Gerald Luterman, chief financial officer of KeySpan, to Anastasia Song, chief financial officer of LIPA.

In these letters, KeySpan indicated that LIPA’s 2002 revenues from the sales of electricity as originally reported by KeySpan to LIPA, were overstated by $56.5 million. Of that amount, $14.2 million was for the period through June 30, 2002. Subsequent probing by LIPA determined that KeySpan had double counted some electricity sales in 2001 and overstated revenues by $5.6 million, the authority said.

In light of KeySpan’s errors, LIPA said that it has undertaken the following actions:

LIPA intends to complete its investigation as soon as possible. LIPA will then consult with its external auditors to evaluate the results of these inquiries and to assess the potential impact of KeySpan’s error on LIPA.

Based on the revisions provided by KeySpan for 2002 and 2001, LIPA has concluded that such revisions would not affect compliance with LIPA’s rate covenant for either year. Further, notwithstanding any revenue adjustments that LIPA may be required to make for the current year, LIPA expects to close 2002 with a positive net income.

In addition, the authority said that there is no impact to LIPA’s cash position or cash flows previously as reported, and LIPA’s current financial condition continues to be strong. LIPA indicated that KeySpan’s error would not impact either future electric rates and/or service.

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