They see utilities responding, but fear outlying areas are overlooked.

Despite reports of year 2000-readiness from virtually all electric utilities, and a promise from the U.S. Department of Energy to pressure the laggards, some customers still fear being left in the dark on Jan. 1, 2000. That view may surprise some, but it emerged clearly from the conference held in Chicago August 5-6 by the North American Electric Reliability Council, to update utilities and their customers on electric industry progress in Y2K problem mitigation.

"The small mom-and-pop shops are worried," said Susie Boardman, senior vice president and general manager at Bank of America's Year 2000 BAC Project Office. Boardman told workshop attendees that she is concerned that small utilities will not be Y2K-ready before the end of the year.

The Y2K problem concerns the possible malfunction of older computer software due to interpretation of the year code "00" as 1900 instead of 2000. The worry is that such malfunctions may lead to power failures.

"Bank of America has provided backup generators to critical systems at 5,000 of our bank branches, but there are bank branches located in areas where utilities have not responded to bank inquiries about their Y2K status," Boardman said

John Sulek, national energy manager in the facility management division at Kmart Corp., also attended the meeting. He said he is especially concerned that Kmart stores in rural areas will not receive power because small utilities may lack resources to address Y2K problems.

NERC and DOE: The Company Line

An August report from NERC found that of the 268 bulk electric organizations reporting monthly to the council, 17 (6.3 percent) indicated they are neither fully Y2K-ready nor Y2K-ready with limited exception. Of these 17 entities, eight expect to be Y2K-ready by the end of July, three by the end of August, five by the end of September and the last one in October.

The American Public Power Association reported similar results in its August survey of 2,012 public power entities. APPA found that 90 percent were Y2K-ready, while 8 percent were not and the condition of another 2 percent was unknown.

In addition, the National Rural Electric Cooperative Association in its August report found that 13 percent of 858 co-ops were not Y2K-ready, while the status of the last 1 percent was unknown.

In an effort to put pressure on those utilities that are not 100 percent ready for the Y2K rollover, the DOE in late September will publish a list of utilities that have not yet reported on Y2K readiness, according to Deputy Secretary T.J. Glauthier. In late summer the DOE concluded its own "spot check" audits on a small number of utilities to confirm information reported to the agency.

Terry Devaney, project leader of the NERC/DOE "spot check" audits, found that system upgrades for field monitoring and control were behind schedule. Small utilities, in particular, were working hard to become Y2K-ready, he said.

Devaney noted that small utilities depend on power from wholesalers and will not be able to operate if power is interrupted during the rollover. Only a few small utilities, he said, have local generation to cover the demand forecasted for New Year's Eve 2000.

Glauthier said that a second round of "spot check" audits might be conducted in the fall if funding is available. But because Y2K-readiness information is so dispersed and there are so many small utilities, some NERC workshop attendees were pessimistic that the DOE can compile an accurate list of non-compliant utilities before the end of the year.

"There are some commercial utility databases that do not contain the names of all utilities in the United States," said one energy executive, describing the DOE's formidable task.

"It is a challenge to get all these systems identified," Glauthier admitted. "We will be working with organizations such as NERC and their members, who are the largest systems. In the case of municipals, we will be dealing with associations such as the American Public Power Association. We are not, at this point, going out to each state to identify each utility in each state. We rather focus on the compliance issues themselves."

In addition, the DOE will work with the U.S. Department of Agriculture and NRECA to identify cooperatives that are not Y2K-ready.

Intel: At First Wary, But Now At Ease

Beyond verification of utilities' preparedness for Y2K, many electricity customers at the conference wanted to know what power restrictions and contingency plans utilities will use in the event of a systems accident at rollover time. Other customers were concerned about nuclear power plants that had reported being "Y2K-ready with limited exception."

"What does it mean to have a limited exception?" asked one Pepsi representative.

NERC responded that the Y2K exceptions to nuclear power plants pose no risk to safety and will not affect critical systems.

A spokesman for computer chip manufacturer Intel Corp. said that the utilities' willingness to provide information on their readiness for Y2K bolstered Intel's confidence in the power industry's ability to prevent potential interruptions. Yet Intel only recently became confident in the industry, he said.

Indeed, Intel's Y2K disclosure on Form 10-Q, filed Aug. 2, 1999, revealed that the company's greatest Y2K concerns relate to third-party systems problems, rather than internal systems or its products.

"Because we have less control over assessing and remediating the year 2000 problems of third parties, we believe the risks are greatest with infrastructure (e.g., electricity supply and water and sewer service), telecommunications, transportation supply channels and critical suppliers of materials and services," said the Y2K disclosure form.

But the Intel spokesman said the company's fears have been allayed. "Several months ago, utilities weren't even interested in meeting with us. If they would have maintained the same attitude, we would have gone out shopping for generators until utilities came back to the table," he said.

Intel remains concerned about the power supply outside of the United States, he said. The company now feels comfortable that its manufacturing plants in U.S. locations including New Mexico, California, Oregon and Massachusetts will be provided uninterrupted electricity through the rollover, however.

As a show of its faith, Intel has not added any backup generation in preparation of Y2K, the spokesman said.

Phillip Schultz, director of information systems at the Chicago Board of Trade, said he has confidence in Commonwealth Edison's preparedness for Y2K. The utility would need to have a catastrophic failure for the exchange to be affected, he said.

"Our facilities are designed so that [we] can receive power from multiple substations located throughout the region," Schultz explained.

Like Intel, the CBOT's confidence came with its local utility's willingness to share its Y2K program, said Schultz.

The Commonwealth Edison power outage that forced the CBOT to close its trading floor Aug. 12 - a week after Schultz spoke to the Fortnightly - however, heightened the CBOT's concerns about the utility's preparedness to deliver reliable power. The exchange will continue to work closely with the utility on its Y2K efforts, according to a CBOT spokesperson.

Futures Trading: Harbinger of Disaster?

"I would be very disturbed if utilities went out and purchased futures contracts to hedge against a loss of generation because of a Y2K incident," said Colin Fitzgerald, product manager in the Financial Markets Group-market and product development at the Chicago Board of Trade.

"If electric utilities were not Y2K-ready by Sept. 15, it would worry me," he added.

Yet, Fitzgerald said, buying futures is not such a far-out strategy for a utility that is Y2K-compliant.

"If a firm is looking to hedge a generation shortfall because of a Y2K incident, it would make sense to hedge that exposure," he said. "Conversely, if you have high confidence in generating capacity in the new year, it might make sense to sell excess capacity."

Furthermore, industrials could create a financial hedge by buying and selling futures contracts, as well.

As of early August, futures contracts prices to hedge for the Y2K rollover, both at the New York Mercantile Exchange and the CBOT, had not made any significant increases in price or volume as compared to 1998.

While most utilities are not expected to purchase futures contracts to hedge against Y2K incidents, some support state legislation to eliminate frivolous lawsuits.

Kerry Fisher, associate general council-litigation and claims at Baltimore Gas & Electric, said BG&E has worked on the Y2K problem since 1996 and spent almost $46 million in the process. He supports state legislation that would set specific standards that utilities need to meet to be considered Y2K-ready. Fisher explains that if a Y2K cure were defined specifically, every utility would know whether it met the standard.

The Maryland Year 2000 Commerce Protection Act or House Bill 8, which is supported by BG&E, would establish remedies for damages caused by information technology failure. H.B. 8 also would provide an affirmative defense in a Y2K-related action that the defendant implemented good faith actions necessary to become compliant.

But Gov. Parris N. Glendening vetoed H.B. 8, based on his strong concerns that businesses could escape responsibility if their actions lead to the injury or death of Maryland residents as a result of Y2K failures.

"The final version of House Bill 8, however, although somewhat modified from its original form, is still a radical bill," the governor was quoted in press materials as saying. "We have not been able to find a bill passed by another state that goes so far."

Yet energy companies may not need to worry about being sued frivolously. On July 20 President Bill Clinton signed into law H.R. 775. The "Y2K Act," as it is known, limits lawsuits in cases resulting from the Y2K problem.

"Responsible companies fear that they will spend millions or more defending Y2K suits, even if they bear little or no responsibility for the harm alleged," said the president in a press statement. "Frivolous litigation could burden our courts and delay relief for those with legitimate claims. Firms whose productivity is central to our economy could be distracted by the defense of unwarranted lawsuits."

The president continued, "In addition, the Y2K Act expressly exempts Y2K actions involving private securities claims arising under the Securities Act of 1933 and other federal securities laws that do not involve actual or constructive awareness as an element of the claim."

US WEST: Nagging Concerns

Bill Riddle, senior practice director at Oracle, who has worked on-site and seen utilities' Y2K efforts firsthand, said executives at the largest utilities should sleep well. Utilities early on recognized the great financial risks of Y2K problems, he said.

"Utilities moved much quicker than I am used to utilities moving," said Riddle. "Most of Southern Co.'s subsidiaries use Oracle. Southern must have been working on updating its systems for a period of two to four years."

Notwithstanding Riddle's confidence in utilities' Y2K-readiness, utility executives at the NERC conference expressed concern about issues both within and out of their control. The executives discussed with customers their contingency plans and the last series of Y2K drills-both issues well within their control. But they also spoke of hiring security forces to protect against possible sabotage by New Year's Eve crazies.

Their biggest concern, said executives, was the possibility of losing telecommunications.

Satellite phones, cellular phones and walkie-talkies are being tested, checked and rechecked by utilities, according to a NERC official. But the utility executives were skeptical that the phones would be working on New Year's day. They said downed phones could force plant shutdowns due to the lack of information on the status of the transmission grid.

A representative of US WEST at the conference argued that telecom companies can't guarantee phone service for the same reasons electric utilities can't guarantee power today or during the Y2K rollover. But he pledged that his company was doing everything possible to make sure the telephones work come 2000.

The last dress rehearsal for the utility industry is scheduled for Sept. 8 and 9. By that time, the industry will have practiced using backup communications and organized itself for the real event.

Richard Stavros is senior editor at Public Utilities Fortnightly.

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