Two thousand eleven witnessed some unusual weather problems that affected electric utilities. In May of that year, a tornado devastated Joplin, Missouri, which is the heart of Empire District Electric’s (EDE) service territory. In August, Hurricane Irene hit some northeastern states that usually aren’t affected significantly by hurricanes. And in October, a rare mid-autumn snowstorm blanketed some of the same northeastern states that were hit by Hurricane Irene. This caused numerous outages due to down power lines that were hit by trees and branches weighed down by leaves and snow from the unseasonable weather. Millions of customers were without power (many for several days) after the weather events in August and October.
When an electric utility is affected by severe weather that causes outages for thousands of customers, it often needs help from other utilities, which send crews of linemen to assist in restoring power. Because its neighbors are usually dealing with outages themselves, it is common for a utility to get help from companies that are several states away. For instance, FirstEnergy (FE) had outages in New Jersey and Pennsylvania, and benefited from crews sent by its sister utilities in Ohio, western Pennsylvania, and West Virginia. Madison Gas and Electric, the main subsidiary of MGE Energy (MGEE), sent crews from Wisconsin to Connecticut in August to help restore power for the electric customers of United Illuminating, a subsidiary of UIL Holdings (UIL). Of course, utilities that send crews are reimbursed by the companies that they helped.
Once power is restored to all customers, a utility must account for the outage costs, which are capitalized or treated as an operating expense, depending on the specific kind of cost. An electric utility always has some outage expenses built into its operating budget, but a severe weather event will sometimes force the company to incur costs that are well above what is reserved in its accounting. (There is usually little, if any, insurance for outage costs affecting a utility’s electric distribution system.) Sometimes, this immediately hurts earnings. Other times, a utility can ask the state regulatory commission for an accounting order that allows it to defer its restoration expenses for future recovery. Empire District is allowed to defer and amortize its tornado-related expenses over a 10-year period. Another means of recovery is through the issuance of bonds that are securitized by payments on customers’ bills. Legislation enacted in Texas in 2009 enabled CenterPoint Energy (CNP) to issue such securities (called “system restoration bonds”) following damage in its electric service area in Houston that occurred from a hurricane the previous year. Note, however, that electric utilities normally do not get any compensation for the revenues that were lost during an outage.
Sometimes, following the restoration and accounting, the next step is the finger-pointing. Electric companies are used to being criticized after lengthy power outages, whether or not the criticism is justified. Lately, the most vehement complaints have been aimed at Northeast Utilities (NU) in Connecticut, where some customers were without power for 12 days following the October snowstorm. In fact, the president of its Connecticut Light & Power subsidiary resigned less than a month after the storm. Subsequently, the company established a fund of up to $30 million to assist its residential customers and provide contributions to certain charities in the state. It remains to be seen whether the criticism will derail NU’s pending merger with NSTAR (NST), which requires regulatory approval.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
