Costs balloon in a heavily regulated space
While climate change renders utility service maintenance more difficult, especially in the vulnerable wildland-urban interface (WUI), capital expenditures in the power and utilities sector also climb higher than ever. Expenditures are set to reach USD 133.8 billion for just the 50 electric and gas utilities S&P Global tracks annually, according to Deloitte.
It’s easy to see why. In addition to managing the effects of climate change, utilities must also keep up with changes in the market – from the very nature of supply procurement and management as generation sources shift towards greener sources, to consumers demanding more digital engagement and innovation from their utility providers.
And that’s not the half of it. Utilities already operate in one of the most stringent regulatory environments in the wider economy. Take North America, for instance: more than 600 state and federal regulatory proceedings were initiated in the past five years; often those proceedings specified timely reporting requirements utilities had to comply with – sometimes to the hour.
In the U.S., states require utilities to report incidents to their respective state regulator and the Department of Transportation (DOT) that involve fatalities or personal injuries, media attention, or damage to property over USD 50,000. Utilities may also have to follow up with updated reports (final, quarterly, or annual). For gas and water pipeline operators, Parts 191 and 195 of DOT regulations include requirements to submit reporting within one hour of incidents involving the release of hazardous materials.
Here, the U.S. represents the norm. Most other advanced economies have stringent reporting requirements, as well. In Australia, for example, Electrical Safety (Installations) Regulations (2009), Gas Safety Act (1997), and Pipelines Regulations (2007) specify requirements for incident reporting for events that result in actual or potential injury, damage, or risk to public safety. In the U.K., utilities adhere to Control of Major Accident Hazards Regulations (COMAH), specifications for reporting major incidents or gas releases.
What’s more, most regulatory frameworks also employ additional regulations and management procedures for major accident prevention, safety reports, emergency plans, investigations, and enforcement that specify the parameters of utilities’ emergency preparedness, asset management, and resilience through plans and procedures. Those frameworks include ISO 55001 (covering asset management) and ISO 22398:2013 (covering crisis exercises).
And though these compliance requirements represent additional costs for utilities, those costs pale in comparison to the oft-stratospheric costs of non-compliance. For instance, PG&E Corp., in what was widely hailed as the first climate change bankruptcy, said it planned to seek bankruptcy protection from the potential liabilities of USD 30 billion or more that it faces as a result of its role in the deadly California wildfires.
PG&E isn’t alone. The monetary recoveries imposed on public utilities and regulated energy actors as a result of audits and recommendations for corrective actions by the U.S. federal regulatory agency (FERC) increased an average of nearly 20 percent per year between 2010 and 2017, with 2018 setting grim new records.
Specific actions often required utilities to enhance their compliance programs and periodically report back. Auditors also mandated improvements to “internal processes and procedures, financial reporting for accuracy and transparency, and efficiency of operations,” according to FERC.
In other words, when utilities weren’t forced by courts to pay financial penalties, they were forced by regulators to pay in time and effort. Unfortunately, with the accelerating pace of extreme weather incidents exacerbating compliance risk, it’s safe to say utilities will continue to incur those (monetary and non-monetary) costs unless they invest wisely in technologies to mitigate risk. What would those solutions look like?
Download a utilities guide to expediting timely incident reporting and managing compliance risk.
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