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ENERGY AVAILABILITY:
CURRENT REALITY OR FOND MEMORY?

Understanding our new energy paradigm

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.

We have evolved from a position of world-class energy availability to one where availability is becoming unpredictable and pricing volatile.

The advent of deregulation has distributed the responsibility and accountability of energy supply. Separate and independent entities (non-regulated self-interests) now perform supply, transmission, distribution, and delivery, where previously a single proprietor managed this 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, couldn't have said it better (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).

Comforting (but misleading) press reports derive from disconnected assurances from the separate entities. Each of the assurances is conditioned on assumptions about the actions of other parties in the supply chain. However, overall performance depends on total system resources and their coordination which are both suspect. Also, some 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 published some sobering comments in the same report cited above. Reflecting worry about transmission facilities, for example, the report states: "...a reliable level of operation will be highly dependent upon continually increasing coordination with surrounding systems and proper transmission system operator actions. 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 have the following negative results:

a. Lost production

b. Customer dissatisfaction & defection

c. Lost revenues/profits

d. Increased product and operating costs

e. Regulatory non-compliance

f. Damage to computer and other equipment

g. Loss of data/intellectual property

h. Workers compensation claims

i. Litigation

j. Directors & Officers liability claims by stockholders

Due diligence should be exercised to minimize vulnerability to D&O claims. An effective risk management program would involve a formal process for risk identification and evaluation. Remediation would include some or all of the following:

a. Infrastructure configuration improvements

b. Continuity strategic design plans

c. Event response plans

d. Quality verification and improvement measures

e. Risk financing methods (insurance, etc.)

f. Contractual risk transfer methods

g. Protection from exceptional energy price increases in the future (hedging)

Given the inevitability of losses, you'll be judged not by whether you were the victim of an event, but by how well you planned for it.

Contact us for risk management strategy and implementation.

Licata Kelleher is a risk management and insurance advisory firm. The firm does not sell insurance, but does counsel clients on the effectiveness of insurance, on reducing the cost of insurance and on the risk management process.

The above is intended to be general information, and should not be construed as specific recommendations.

For more information, contact Debora Wu, at DWU@LicataRisk.com

News & Reports Archives

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Reports

Fall 2005 INTERNATIONAL RISK MANAGEMENT
 
Spring 2004 EMPLOYMENT LAW MORPHS INTO A MONSTER

Fall 2004 INSURANCE BROKER SUED BY NEW YORK ATTORNEY GENERAL

Summer 2004 UNDERSTANDING THE DYNAMICS OF THE INSURANCE MARKET

Winter 2004 WORLD TRADE CASE UNVEILS INNER WORKINGS OF INSURANCE BROKER

 Fall 2003 A RISK MANAGEMENT APPROACH CFOs (AND THEIR ACCOUNTANTS) CAN LOVE

Summer 2003 PRESERVING COVERAGE FOR INNOCENT INSUREDS

Spring 2003 LEAVING TERRORISM COVERAGE ON THE TABLE

Winter 2003 COMPUTER SECURITY IS NOT A BLACK HOLE

Fall 2002 "LET'S BE CAREFUL OUT THERE

Spring/Summer 2002 WHAT WARREN BUFFET KNOWS ABOUT INSURANCE COMPANY FINANCIALS

Spring 2002 OPPORTUNITIES ABOUND IN DEVELOPMENT OF CONTAMINATED PROPERTIES

Winter 2001 "YOU CAN'T PAY US THIS MONTH? WHAT DO YOU MEAN 'NEW DEVELOPMENTS?"

Fall 2001 WORLD TRADE TERRORISM -- REPERCUSSIONS FOR INSURANCE MARKET

Summer 2001 ENERGY AVAILABILITY: CURRENT REALITY OR FOND MEMORY?

Spring 2001 "HOLD THAT BALLOT UP TO THE LIGHT"