We are the world's experts on contingencies," boasted Michehl Ghent, president of the North American Electric Reliability Council, appearing in Houston on Sept. 17 at the Sixth Annual DOE/NARUC Electricity Forum. It was the very day day that NERC released its first comprehensive report on readiness in the electric utility industry in correcting computer software problems associated with the dawning the next century, which for the first time will require computers, software programs and embedded chips to the use four digits to identify the year beginning with turnover from 1999 to 2000.
Ghent's comments set the tone for what could promise to be an aggressive effort by NERC in leading the Electric Sector Working Group in its voluntary effort toward Y2K compliance, well befitting the reputation of NERC engineers as a no-nonsense bunch.
"NERC has 30 years' experience in getting people to participate voluntarily," added Gerry Cauley, NERC's Year 2000 coordinator. "We're not bashful. In further reports we will disclose the names of those who participate in the Y2K process. You'll be able to see who is not participating by a process of elimination."
The contrast could not have been more obvious when on the very next day, at a technical conference held in Washington, D.C., the Federal Energy Regulatory Commission appeared to treat its advisory role as leader of the Oil and Gas Sector Working Group in much softer terms. There it was FERC chairman James Hoecker who chose to leave the three-hour conference after delivering a only fifteen-minute talk. He turned the podium to John Koskenin, chairman of the President's Council on Year 2000 Conversion, and to Katie Hirning, the FERC's chief information officer.
During the question-and-answer session that followed, when a reporter noted that NERC intended to apply peer pressure to win the cooperation of electric utilities, and asked whether the Oil and Gas group would do the same, Skip Horvath, executive vice president and chief operating officer at the Interstate Natural Gas Association of America, took two steps back. "We've received a handful of letters from attorneys. The most important thing is to get legislation passed to offer protection against potential legal liability for those oil and gas companies that choose to participate and respond to the surveys on Y2K compliance."
Horvath was alluding to the so-called "good Samaritan" legislation, H.R. 4355, the Year 2000 Information Disclosure Act, introduced on July 30. The bill, which appeared headed for quick consideration by the full House in early October, would shield a respondent from liability under federal or state law for any allegedly false, inaccurate or misleading statement concerning Y2K compliance.
Nevertheless, the question of legal liability for damaging disclosures was but one of several issues facing the electricity and the oil and gas sectors on Year 2000 compliance. One important question concerned the point that both groups were planning to receive the results of their final surveys on industry progress as late as the fall of 1999.
Out in Houston, that prospect prompted Deputy Energy Secretary Elizabeth Moler to interject: "You would be getting an 'F' from Congress for your completion schedule, which now calls for much work to be done in the last quarter of 1999. What are you doing to move your schedule up to an earlier completion date of May 31, 1999?"
No direct answer was forthcoming. However, Ghent assured Moler that NERC indeed was treating the Millennium Bug as something very special: "It's almost like going to war. We have some drills scheduled [actual simulations] for Sept. 9, 1999. We've never done that before for a contingency."
Progress So Far
For the oil and gas sector, Skip Horvath noted that about two-thirds of the industry, measured in terms of volume, had responded to the group's Y2K survey. About 70 percent of all respondents represented "small" companies with annual revenues under $50 million. Twenty-one percent of responses came from "medium-sized companies (between $50 million and $1 billion in revenues), and 8 percent from billion-dollar-plus firms.
Horvath added that 31 percent of the oil and gas sector respondents reported that they would have a contingency plan ready by December, followed by 73 percent in June 1999 and 100 percent of all responses by December 1999.
The Y2K conversion process can be viewed as occurring in five sequential stages: (1) formulation of a plan, (2) taking an inventory, (3) assessing the scope of needed corrections, (4) remediation, and (5) validation (testing) of remediation efforts. For the oil and gas sector, the FERC report (released Sept. 18, the day of the conference) noted that 45 percent of respondents had completed the assessment stage for business and administrative systems, while a full 60 percent had done so for embedded systems.
The FERC was to publish its next Y2K survey for the oil and gas sector in February 1999. Horvath concluded that the gas and oil industries were now focusing on Y2K problems in operations functions, with most efforts currently in assessment and remediation, but moving toward validation. Added Ron Quiggins, of Shell Oil Co.; "I get a warm and comfy feeling looking at the survey results." But Scott Espenshade, vice president for economics at the Independent Petroleum Association of America, offered a discrete warning: "Our real concern is the smaller companies. They rely on third-party suppliers for their software."
On the electric side, the NERC report recommend an accelerated timetable. NERC asked the industry as a whole to complete its initial inventory and assessment phases by Oct. 31, 1998. It recommended completion of the remediation and testing phases by May 31, 1999.
"Mission critical systems and components are to be made Y2K ready by June 30, 1999, said NERC. These dates are tied to maintenance periods during off-peak seasons in the fall of 1998 and spring of 1999, allowing adequate time for contingency planning and preparations. [But] while many organizations are on track to meet these targets, many others need to accelerate project plans and resources."
At the Houston meeting, NERC's Gerry Cauley, repeated the importance of scheduling work around demand peaks: "The spring of 1999, when plants will be down for scheduled maintenance, will be the critical period."
Overall, the farther upstream the component, the more serious the problem, according to NERC. As the report notes, "there are approximately 200 bulk electric control centers in North America. Computer systems within these control centers use complex algorithms to manage the operations of transmission facilities and to dispatch generating units. At any moment in time, a percentage of generating units may be on automatic control for ¼ following load and regulating interconnection frequency."
By contrast, said NERC, substations contain most of the transmission and distribution system protection relays ¼ Many devices and relays in a substation are electromechanical (not digitally controlled)."
Questions arose concerning the role that regulators would play, especially since the Y2K efforts are voluntary industry projects, technically outside the jurisdiction of the FERC. One at the FERC meeting asked whether the commission might offer help indirectly, such as delaying its requirement to require natural gas pipelines to install new bulletin boards with standardized EDI communications protocols at least until the end of the Y2K conversion process. No one at the conference answered that question. However, the U.S. Securities and Exchange Commission decided on August 27 to declare a moratorium on the implementation of any new SEC rules requiring major computer reprogramming during the period of June 1, 1999, through March 31, 2000, to free up labor for work on the Y2K problem. (See, www.sec.gov/rules/ concept/33-7568.htm.)
Unseen Obstacles, Benefits
The specter noncompliant microprocessors embedded in digital equipment of all types has emerged as a major obstacle to achieving Y2K compliance.
According to Kendra Martin, manager of electronic commerce and information technology at the American Petroleum Institute, some of the individual companies in her organization started working on Y2K at least three years ago, and have now "migrated to the problem of embedded microprocessors."
The NERC report of September 17 explains the problem with embedded chips:
"Y2K anomalies could lead to the malfunction of software programs on mainframe computers ¼ but of greater concern, both in the electric industry and elsewhere, is the pervasiveness of the Y2K bug in embedded chips.
"In the electric industry, these chips are used in communications and numerous power system device controllers. Electronic chips are generally mass-produced without knowing the ultimate application of the chip. A single circuit board can have 20-50 of these chips from various manufacturers. Because of the diversity of chip suppliers, one vendor may use a different mix of chips even within devices labeled with the same name, model number, and year ¼ The difficulty is in identifying all these devices."
Adds Gary Gardner, chief information technology officer at the American Gas Association: "Embedded processors is the new key issue. Fixing that is vary labor-intensive. It's not rocket science, it's just the magnitude of the problem."
Balancing out the problem of embedded chips is the fact that much of the equipment used by distribution functions or serving transmission substation and transformer functions is not digital, and may need no Y2K fix. As the NERC report explains, "Analog electronic equipment generally monitors voltage, current, or frequency and had little or no need for a date function. Much of the voice communications equipment used by distribution systems is analog electronic. Nearly all of the analog electronic distribution equipment is 'stand-alone' as opposed to digital electronic devices that are essential to EMS [energy management services] and SCADA systems [supervisory control and data acquisition]."
Surprisingly, the fix for the Y2K problem may end up actually doing some good for come companies, especially for small municipal distribution systems, according to Bob Cave, executive director of the American Public Gas Association.
"In our survey," notes Cave, "about 50 percent of the folks who answered said they were ready today. We find a lot of our people have mechanical equipment and never went to digital. That's probably why so many say they are already Y2K-compatible.
"Also," adds Cave, "a lot of the numbers you're seeing are due to buying new equipment. A lot of [municipal gas utilities] are tied in to their city government with outsourcing of information technology. The problem has prompted companies not just to look at Y2K, but to evaluate their equipment overall."
All in all, the Y2K problem may prove to be just a matter of perspective, as NERC pointed out in its report. "It is somewhat ironic that initial contacts with the telecommunications industry indicate that they feel they will be Y2K ready - if the lights stay on. From the electric industry perspective, the feeling is reciprocal."
Bruce W. Radford is editor of Public Utilities Fortnightly magazine.
SEC finds material effect on corporate operations. Firms must divulge risk, readiness, costs and contingency plans.
On July 29 the U.S. Securities and Exchange Commission issued interpretive regulations offering guidance to publicly traded companies on how to determine whether issues surrounding year 2000 computer conversions will have a material effect on business, results of operations or financial condition, and whether they must disclose such effects on financial statements in the so-called "MD&A" section, Management's Discussion and Analysis of Financial Condition and Results of Operations.
WHEN TO DISCLOSE. Any publicly traded company must disclose Y2k information if its assessment of its own exposure is not complete, or if Y2k would have a material financial effect even without taking into account its own remediation efforts. To be considered "complete," any assessment must evaluate third-party risk. "In our view," said the SEC, "a company's Year 2000 assessment is not complete until it ¼ takes reasonable steps to verify the Year 2000 readiness of any third party that could cause a material impact."
WHAT DO DISCLOSE. Once a company confirms its disclosure obligation, it must consider the release of four categories of information: (1) state of readiness, (2) costs to be incurred, (3) anticipated risk, and (4) contingency plans for worst-case scenarios.
"Readiness" assumes a look at embedded microcontrollers (chips) outside of information technology systems. "These types of systems are more difficult to assess and repair than IT systems," explained the SEC. And companies must disclose the replacement cost of a non-compliant IT system as a Y2k expense even if it had already planned to replace the system and merely accelerated the replacement date to achieve Year 2000 compliance. Statement Regarding Disclosure of Year 2000 Issues and Consequences by Public Companies, Investment Advisers, Investment Companies, and Municipal Securities Issuers, Release Nos. 33-7558, July 29, 1998 (S.E.C.).
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