By Frank Licata
Licata Kelleher &
Company
Press reports about a potential energy availability and reliability problem have been confusing and contradictory. They alternate between alarming and reassuring.
It would be wise to think of the warnings as fact peaking up above the whir of competing agendas, economic and political. Professionals inside the energy industry are absolutely concerned about areas outside of California, including New England.
The advent of deregulation has distributed the responsibility and accountability of energy supply. Separate and independent entities now perform supply, transmission, distribution, and delivery, where previously a single proprietor managed an integrated network. Resources are now subject to economic forces that will dictate where, region by region, energy supply will be allocated. The North American Electric Reliability Council, a utility consortium, summed it up in their October 2000 Reliability Assessment: "The users and operators of the system who used to cooperate voluntarily on reliability matters are now competitors without the same incentives to cooperate with each other or comply with voluntary reliability rules. Little or no effective recourse exists today under the current voluntary model to correct such behavior."
Other factors contributing to this reduced availability and reliability condition include aging energy facilities, constrained supply growth, and a growing dependence on a single fuel (natural gas).
Some recent reports are little more than damage control pieces. Documents previously issued without political intent give insight into the reality. Case in point: the North American Electric Reliability Council, again, reflecting worry about transmission facilities, stated in late 2000: "...a reliable level of operation will be highly dependent upon continually increasing coordination with surrounding systems… Transmission congestion will worsen and as a result, transactions will continue to be curtailed until other appropriate congestion relief methods are implemented."
Potential Loss Exposures
Power shortages, manifested by black-outs, surges, brown-outs and spikes in energy costs, could result in lost production, loss of data and computer equipment, litigation, and ultimately lost profits. Due diligence should be exercised to minimize vulnerability to D&O claims by stockholders.
An effective risk management program would involve a formal process for risk identification and evaluation. Remediation would include some or all of the following:
Summer 2001 - Volume 11, Number 3