New EEI Study: Utilities Must Develop Cost Recovery Mechanisms Before Catastrophic Storms Hit
Washington, DC - In the wake of one of the most punishing hurricane seasons on record, a new Edison Electric Institute report detailing the catastrophic damage says recovery from storms must be speedy and controlled, and that utilities must work with regulators in the future to ensure that cost recovery mechanisms are in place before storms hit.
The new study, "After the Disaster: Utility Restoration Cost Recovery," outlines steps it encourages electric utilities and state regulators to consider in establishing concrete, stable mechanisms to plan for and mitigate the massive cost of rebuilding electric systems following a major weather event.
Released during the winter meeting of the National Association of Regulatory Utility Commissioners here, the report also shows that the economic toll of going without electricity for extended periods far outweighs even the tremendous price of storm recovery.
Because of this, the report notes, electric utilities' current practice of mobilizing outside restoration crews from near and far to rebuild damaged electric power systems as quickly as possible following a natural disaster is just good business.
The study identified 81 storms between 1994 and 2004 that caused approximately $2.5 billion in damage to electric power systems. It was conducted, at EEI's request, by Bradley W. Johnson, an energy consultant with more than 20 years experience in electric utility issues.
After a powerful hurricane, ice storm or other severe weather event damages their electric systems, utilities launch massive, round-the-clock restoration efforts to restore power as quickly as possible. The logistics associated with these restoration efforts can be daunting. In addition to deploying their own crews, utility crews from around the country are called in with the "host utility" picking up the tab for wages, equipment rental, transportation, hotel rooms, meals and even laundry.
Couple that with the equipment costs: miles of new wire, thousands of new poles, new transformers, the list goes on and on and the tab keeps rising. In more severe cases, the cost to repair and rebuild the system can surpass a company's total earnings for a year.
"While utilities certainly allocate their resources in the most cost-effective manner when restoring electric service, they do so with the knowledge that, in many cases, their customers'
businesses and livelihoods are on the line," said Mike McGrath, executive director, energy services, EEI. "Getting the power back on as soon as possible is a first step to getting a community on the road to recovery after a natural disaster."
To help defray such costs, many companies employ self-insurance mechanisms or "storm reserves" to reduce the burden shouldered by customers and shareholders alike.
However, in some cases these restoration funds are quickly exhausted as was the case for many of the utilities serving areas impacted by last year's series of hurricanes.
Compounding matters further, if there is no established process in place to pay the massive bills resulting from a storm or disaster and when the affected parties do sit down to discuss storm restoration costs, the process can become highly politicized. It is not uncommon for utilities in such situations to receive ratings downgrades from Wall Street, which simply exacerbates the situation.
"Catastrophic storms cause tremendous hardship and economic loss," McGrath said. "Additionally, as the economic impact of not having electricity far outweighs the cost of restoring power, recovery needs to be speedy and controlled."
The new study is available on EEI's website, www.eei.org.
Source: EEI