Rising projections, with few expenditures to date, paint an uncertain picture.
"In almost all cases, companies will have material events and changes requiring updated year 2000 disclosure in each quarterly and annual report filed with us."
That was the general mandate suggested by the Securities and Exchange Commission last summer in its interpretive release on the disclosure requirements for the Y2K issue. In other words, the "Management Discussion and Analysis" section of Forms 10-K and 10-Q (annual and quarterly reports filed with the SEC by all publicly held companies) should include detailed and specific information. But have utilities responded as requested? And more importantly, what are they reporting?
The SEC release calls for the companies to address four categories of information in their MD&A: (1) their state of readiness, including information on both information technology as well as embedded systems issues; (2) the costs of addressing the Y2K issue; (3) risks involved, including a description of possible worst-case scenarios; and (4) their contingency plans to be implemented in the event of worst-case scenarios coming to fruition.
A survey of Forms 10-Q filed by electric utilities show different degrees of readiness and cost projections.
In spite of the hefty price tags, many of the companies state that their Y2K projects should have no material impact on operating results or cash flows. In fact, while many companies began their the Y2K projects a few years ago, they still have spent a relatively small proportion of their total estimated expenditures. Of the large public utilities surveyed, only one gave an explanation for this. PECO Energy Co., which estimates a $75.4 million Y2K price tag but had spent only $7.4 million, stated in its third-quarter 10-Q that the majority of the cost would be spent in the testing phase.
Detroit Edison estimates that addressing the Y2K problem will cost between $50 million and $75 million, $13 million of which was spent between Jan. 1 and Sept. 30. Many of the larger utilities studied, in fact, give estimates somewhere in that range, although Carolina Power & Light Co. expects to spend only $18 million. FPL Group and Florida Power & Light, which gave Y2K barely a mention in their June 30 10-Q, responded to the SEC release in their third-quarter report. They expect Y2K costs to total about $50 million, 20 percent of which had been spent as of Sept. 30.
There also remains the possibility that estimates may balloon as 2000 draws nearer. In its second-quarter 10-Q, Southern California Edison Co. estimated a Y2K price tag of anywhere between $55 million and $80 million. Its third-quarter report, however, gets more specific, simply putting the cost estimate at the ceiling of the previous range, $80 million.
Pacific Gas & Electric Co., already one of the top spenders for Y2K adjustments, is raising its projected costs. In its second-quarter 10-Q, the company stated that it expected to spend $100 million during the remainder of 1998 and 1999 on the matter. However, in its third-quarter report, future cost estimates jumped to $180 million, not including the $80 million that it has already spent.
According to the SEC release, a company is to disclose some form of timetable for each phase of its plan and where it is on that timetable.
Virginia Electric & Power Co., which had spent only $7.8 million of an estimated $40 million to $50 million, reported in its third-quarter 10-Q that approximately 83 percent of its systems identified as critical were "year 2000-ready" by Sept. 30. "We anticipate that 99 percent of such systems will be year 2000-ready in July 1999 with 100-percent completion scheduled for October 1999," the report reads.
Detroit Edison says that the conversion of its embedded technology-crucial devices used in the operation of equipment, machinery and the plant itself-was approximately 61 percent complete by the end of the third quarter, with the remainder of the work to be completed by June 1, 1999.
By contrast, the New York Public Service Commission recently set July 1, 1999 as the target date for Y2K readiness for all utility mission-critical systems, including contingency plans. It required any company unable to meet that date to file an explanation no later than Dec. 31. Case 93-M-1432, Oct. 30 (N.Y.P.S.C.).
Third-party Risk Cited
The effect that the readiness of third-party vendors and service suppliers will have on utilities is another concern. Heeding the SEC's advice to report on this matter, Houston Industries states that it is seeking written assurances from such third parties as to their state of readiness. One of the components of Southern California Edison's Y2K readiness program is to identify and assess vendor products and business partners for their own Y2K readiness.
Some companies state that they are developing contingency plans not only in the event that their own Y2K adjustments fail, but also in case third parties are not Y2K ready-something over which they have less control. As Unicom Corp., which files jointly with Commonwealth Edison, warns, "The failure of such parties to resolve year 2000 issues could result in significant disruptions."
Carl J. Levesque is an editorial assistant with Public Utilities Fortnightly.
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