Entire Economy Pays Price
Branko Terzic is a managing director at Berkeley Research Group, and a nonresident senior fellow of Atlantic Council’s Global Energy Center. He served as a commissioner at FERC and on the Wisconsin Public Service Commission. He also served as CEO of Yankee Energy System, Inc.
This past year three hurricanes affected an area which encompassed about eight percent of the U.S. population. According to an article by Joel Achenbach in The Washington Post, dated November 19, 2017, “Disaster claims soar in year of calamities: Federal resources stretched as applications for aid rise tenfold,” these three storms contributed to a year of “record setting disasters.”
4.7 million Americans registered for FEMA aid compared to four hundred eighty thousand in 2016, and an average of a hundred and eighty thousand for the previous three years.
This means that U.S. electric utilities also experienced significant storm-related costs.
These costs are significant and are increasing. This is because the economy continues its decades-long trend of increasing electrification.
Whether there has been an increase due to “climate change” in the frequency of storms or whether storm intensity costs increased as more asset investment is subject to damage, there is no question that disaster restoration costs are increasing.
The U.S. electric utility industry and its regulators use a number of ratemaking techniques to lessen the financial impact of these increasing disaster restoration costs. Cost minimization is not the first goal, however.
Importantly, the electric utility’s first goal after a storm is rapid service restoration. The lack of electric service impedes restoration of all other segments of infrastructure.
These include direct life support services such as water service, communications, medical service, public safety, and so forth. As well as all the services that support the whole economy. Electric utilities incur additional costs in quickly restoring electric service. These costs, while incurred by the utility, reduce economic losses in other sectors of the economy created by electric service interruption.
Generally, regulators apply a regulatory policy which states that prudently incurred restoration costs are recoverable in rates either before or after the event. This is done in a storm reserve account established before the event or in the form of a special surcharge on rates after the event.
While financial impacts of storm damage can be mitigated through the use of storm reserves or deferral of storm costs, neither technique provides cash during the storm restoration period.
That last observation recommends the introduction of greater reliance on insurance for storm cost recovery. Many utilities have already joined in mutual self-insurance mechanisms for some costs, but not all.
Regulators should encourage this trend with approval of the inclusion of reasonable premiums in the utility’s revenue requirement for ratemaking. The reasonableness test should also recognize the secondary economic benefits to the entire economy from the more rapid restoration of service, beyond the direct restoration benefit to the utility.
Obtaining more insurance coverage may indeed prove to make sense now, climate change or no climate change.
