News Analysis

 

 

With power markets now regional, the Pacific Northwest ponders responsibility for blackouts and outages.

The Limited Liability Agreement ensures that the RTO West cannot sue the [RTO West utilities] for their ordinary negligence, limits damages for gross negligence and willful conduct, and prevents the RTO West from recouping damages for its own willful or negligent conduct," say the Industrial Customers of Northwest Utilities and Direct Service Industries in their joint filing in the RTO West proceedings at the Federal Energy Regulatory Commission (FERC).

"RTO West should not be permitted to become the liability sugar-daddy for those Transmission Owners executing the [transmission operating agreement] and the Liability Agreement," says Deseret Generation and Transmission Cooperative Inc., which owns transmission assets within the contemplated RTO West system but was kept out of the negotiations leading up to the "Stage 1" proposal.

As electric retail choice gained steam until last year, power outage-related settlements seemed to do so, as well. Consider a few events of 1999, such as when Pacific Gas & Electric willingly forked out $8.3 million to settle some 6,600 claims following a power outage, or when Commonwealth Edison paid out $2.5 million to compensate customers for such losses as spoiled food. Today, as many transmission issues migrate from utilities to the developing regional transmission organizations, it's no wonder that liability is receiving attention in the debate over how to design the regional transmission organizations (RTOs) that will control the electric grid, dispatch generation resources, and order blackouts or brownouts if so required.

Such is the case with RTO West and the saga of its formation and pending approval. The Washington Utilities and Transportation Commission, in its comments on that RTO's proposal before the FERC (), underscored the importance of the issue, albeit without officially taking a stand:

"[W]e believe [liability and insurance issues] affect the willingness of transmission owners to agree to participate in the RTO and, consequently, we believe it is important for the Commission to clarify its view of whether these provisions are appropriate and acceptable in the formation of an RTO."

Considering the sometimes tepid "willingness" of utilities to participate in RTOs, does that mean that the FERC should go easy on an RTO and its transmission owners with respect to liability? In fact, notes one protester in the case, when ordering the formation of RTOs, FERC did not even address liability limitations agreements. Nevertheless, the issue has arisen, for example, in the RTO West proceeding, in which two groups representing large end-users have expressed concern over the proposed RTO's liability provisions as they are currently written.

A $150 Million Liability Cap?

Under the RTO West proposal and its accompanying "Agreement Limiting Liability Among RTO West Participants," transmission, generation, and distribution owners would not be liable to the RTO for end-use customer claims except in cases of gross negligence or intentional misconduct, "in which case the Owner shall not be liable for any special, indirect, incidental, consequential, punitive or exemplary damages." The agreement also protects the owner from liability for damages, such as lost revenues.

While limiting the liability of transmission owners, the agreement does require the RTO to carry at least $150 million in "general liability" insurance and another $150 million for "separate errors and omissions coverage."

But the two end-user groups, the Industrial Customers of Northwest Utilities (ICNU) and the Direct Service Industries (DSI), do not seem to like that sort of language. In fact, they say that they were left out of the debate in the first place. "[U]nlike the majority of the RTO West filing ... the Liability Limitation Agreement was not reviewed by, nor does it reflect the concerns of, regional non-transmission owning parties, including end-use customers," the groups said in their joint protest, filed at the FERC Nov. 21. (The utilities on Dec. 5 responded that, "On the contrary, the Filing Utilities' proposal reflects a broad regional consensus, including transmission owners, state utility commissions, and most market participants... .")

Calling the liability protections "overbroad," ICNU and DSI are concerned that industrial customers' ability to file for damages will be severely hampered, or at least that no matter where it looks, assets will be protected from such suits. "FERC should not permit the filing utilities to completely insulate their assets, shifting potential liability away from themselves and on to end-use customers," it said in its protest.

But what about the $300 million in insurance that RTO West would be required to maintain? That's not enough, say ICNU and DSI. That's essentially putting a cap on liability. "Since the RTO will have limited assets, and be unable to receive indemnification from the [RTO West filing utilities], this liability insurance will provide a de facto cap on RTO West liability. Therefore, under the RTO West filing, end use customers claims will be capped at $150 million, regardless of their actual losses. ... "

Any damages that end-use customers will be unable to recover from either the RTO West or the Filing Utilities will be unrecoverable. These damages do not disappear but will have to be borne by end-use customers and increase their cost of doing business."

The filing utilities for RTO West, however, say they are only attempting to maintain the status quo, pointing out in their Dec. 5 response that the agreement adopts the essential terms of the Western Interconnected Systems Agreement, which has been in place for some 30 years. Responding to the critics, the utilities also point to the $300 million in liability insurance they would be required to maintain. But is that enough? The filing utilities concede that "the adequacy of such insurance, together with its cost to ratepayers, and potentially its availability, is dependent upon acceptance of the limitations on liability sought within this agreement." And accepting those limitations, the filing utilities say, is only to preserve "the status quo and price stability of the region."

Meanwhile, the Nevada Public Utilities Commission, which has intervened in the FERC docket, said in its Nov. 20 filing that RTO West should submit information demonstrating why the $150 million limitation is adequate. The PUC also asked for clarification on how the liability limitation would affect the ratepayer, as well as TransConnect LLC, the independent transmission company that would operate within the RTO.

Lincoln Wolverton, consultant to ICNU, calls the agreement a "blanket prohibition against liability." The agreement, Wolverton says, seems to clear RTO West and the utilities of liability in cases of negligence. "The language was too restrictive," he says.

But again, the utilities argue that they are just trying to maintain the status quo. Tariff limitations of liability, they say, have generally shielded utilities from liability to customers for service interruptions, except in cases of willful misconduct or gross negligence, and that's a good thing—even for the end-user, because it keeps rates low. Furthermore, the courts have recognized that "the customers most vulnerable to interruptions are in the best position to protect themselves through back-up generation." In other words, the industrial users for whom ICNU advocates should be somewhat responsible for their own power quality.

According to the utilities, in today's litigious environment, not limiting liability, in fact, could spell disaster: "[G]iven the imagination and resourcefulness of today's litigants and absent tariff protection damages resulting from a single interruption of service event could result in plaintiffs owning the utility or the imposition of astronomical rates to recoup liability payments."

Finally, say the utilities, imposing the bulk of liability on electric providers not only will increase the cost of electric service, but "may well render insurance unavailable at any cost." A Jan. 16 response by ICUN states that RTO West's later filing contains no "substantive changes to the four main documents," including the agreement limiting liability.

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