How Utilities Cope with Weather-Related Disasters

It’s been a week since the Great Derecho of 2012 cut a swath through 10 Midwest and Mid-Atlantic states–knocking out power to 4.3 million customers, inflicting billions of dollars in property damage and killing at least 27 people. And despite a monumental effort by utilities, as well as state, local and federal personnel, some 416,000 homes and businesses still don’t have electricity.

In stark contrast to hurricanes–which take days to develop before they make landfall–the Derecho’s hurricane-force winds developed literally overnight. Consequently, there was little or no time to prepare a response. Meanwhile, the historic heatwave gripping much of the affected area has complicated the repair effort by making certain work impossible and raising the danger level for line workers.

When you run a power company, dealing with destructive storms comes with the territory. On the East Coast and Gulf Coast, hurricanes are generally the major worry, though occasionally areas are affected by severe winter storms as well, such as the snowstorm that hit New England last fall and triggered multi-day outages.

In the middle of the country, tornados can be a huge threat. In spring 2011, for example, the town of Joplin, Mo., was nearly wiped out by a massive, multi-vortex tornado.

The greatest storm-related disaster to strike a US city was, of course, Hurricane Katrina in August 2005, which laid waste to New Orleans, La., and environs. Hurricane Rita quickly followed on its heels, extending the damaged area to Texas, and the region has arguably yet to fully recover.

Rare Events

Thankfully, really destructive storms like Katrina and the Great Derecho are still rare events. In fact, the vast majority of storm-related power outages are handled quickly and routinely, with minimal disruption to homes and businesses and damages largely handled by insurance. Utilities always suffer some loss of sales. But system damage expenses are covered by insurance or storm reserves as a normal cost of doing business.

As a result, the vast majority of storms cause no lasting impact on utility company earnings. Rather, the main risk for investors is how well individual utilities manage the restoration.

Every passing day, Americans become more dependent on electricity. That’s crystal clear to anyone who has lost power for any length of time, as many of us in Northern Virginia did over the past week. Not only is there no climate control and the threat of food spoilage, but suddenly it’s a mad scramble to find a place to recharge the myriad devices that have become so essential in recent years, such as iPhones, iPads and laptops.

At the peak of the Derecho’s fallout last weekend, wireless communications were disrupted, which made it difficult for those in affected areas to find out what was going on. Traffic lights were out, creating huge snarls of congestion. Stores and restaurants without power had no choice but to shut their doors, and many were forced to throw out huge inventories at steep losses. Bagged ice was nowhere to be found. Lines formed at gas stations, as some were shut due to a lack of power.

Factor in nearly triple-digit temperatures and it’s easy to see why customers’ patience quickly wears thin–and why utilities are always in the crosshairs in the aftermath of storms. Northeast Utilities’ (NYSE: NU) merger with the former NSTAR was put at risk by what many customers considered a less-than-efficient response to last year’s storms. In fact, Connecticut Attorney General George Jepsen is still pushing for financial penalties against the company, including disallowing recovery of up to half of storm restoration costs.

Public opinion of utilities’ performance following the Great Derecho is still forming. The longer large numbers of customers are off the grid, however, the greater the risk a company will face penalties, and quite possibly severe ones.

My area was one of the most heavily affected in Northern Virginia by the storm, and my own power was out from Friday night until the following Wednesday night. Yet I can find little to fault in the performance of my power company, Dominion Resources (NYSE: D).

Immediately following the storm, nearly a million of the company’s 2.4 million customers had lost power in an area stretching from North Carolina to Northern Virginia and from Tidewater Virginia to Appalachia. Management was also unable to quickly enlist services of other utilities’ crews as it usually does following storms, owing to widespread outages as far west as Indiana and Ohio.

As of Friday morning, however, the company had restored power to more than 98 percent of affected customers, and was still on track to restore the remaining customers’ power over the weekend. Equally impressive was Dominion’s web interface, which allowed customers to view details of the restoration effort right down to where the company’s crews were working.

No doubt there will be some who find fault with the response. But it’s hard to imagine any punitive measures will be taken against the company by Virginia regulators, given the fact that management set clear performance targets, executed on them and made so much information available to affected customers under very difficult conditions. In fact, it seems more likely Dominion will be regarded as an example of what power utilities elsewhere should do.

That may or may not prove to be the case for American Electric Power (NYSE: AEP), Exelon (NYSE: EXC), First Energy (NYSE: FE) and PEPCO Holdings (NYSE: POM). All four have set July 9 as a target date to get all affected customers back up and running. And the more customers they restore, the greater the odds of meeting that target, as incremental progress frees more crews and equipment to do the remaining jobs.

The question is whether their efforts will be completed in time to mollify critics. Area politicians, for example, have already started taking digs at PEPCO’s response to the Derecho. Maryland regulators are likely to take a look at Exelon’s performance, given the company’s recently completed merger with the former Constellation Energy and its Baltimore Gas & Electric (BG&E) unit. BG&E reported a second wave of outages this week due to high temperatures and storms. And AEP and First Energy face especially steep challenges reconnecting customers in badly damaged rural areas.

All of these are large and well-capitalized companies that are in their best financial shape in years. Their shareholders, however, will do well to keep tabs on developments, as I intend to in Utility Forecaster.