September 1998

Y2K: BEAST FROM THE CYBER DEEP

by Roger Feldman  --   Bingham, Dana and Gould, P.C.
(originally published by PMA OnLine Magazine: 08/98)

Beach reading, - like summer movies about errant asteroids, hulking monsters, malicious aliens or giant sharks - is supposed to titillate with tales of big bad threats that are thwarted through a mixture of American virtue, know how and technological innovation. In my line of work, (where hot news is that Bill Gates has joint ventured an entity (MSFDC) to offer utilities, among others, the opportunity to outsource and automate their billing functions), beach reading this year was Rick Cowles, Electric Utilities and Y2K, regarding the potential impact of the Year 2000 computer problem on the industry. We highly knowledgeable Washington people of course don’t worry much about Y2K, since recent Congressional Hearings heard utility spokesmen assuage legislators’ fears, and a few calls to private power trade associations produced similar soothing words. No surprise here, since the utility industry, after all, has, it would like to believe, consistently been way ahead of the rest of U.S. industry and government, in the infotech field and the U.S. General Accounting Office thinks only one out of three critical government computer systems will crash in the Year 2000 (Deutsche Morgan Grenfell’s normally very conservative chief economist puts the chance of Y2K induced global recession at 60%).

You probably have read somewhere the "short form" Y2K alert, i.e. that the problem arises because programmers used a kind of shorthand to save finite computer memory space, entering dates in double digits, e.g. reflecting the year 1943 as "43". Hence, many computers are run by programs which won’t know how to interpret a date like "00", and may return to 1900. For come computers "99" command means "end of file", "throw away". [For a good general discussion, see The American Spectator (August ’98), with the modestly titled article, "The Crash of 2000".]

But, you say, no problem for electric companies, since they can contribute to produce and distribute product even if none of their own or other business systems (e.g. billing), are operational. Moreover, in a production crunch, an electric company has the ability to purchase power that is generated by one of its competitors and send it out over the wires. They do it all the time to compensate for the peaks and valleys in electric usage and production capacity.

So, as the heat wave price spikes emphasized this summer, the key link in the electric company is T&D. If the automatic remote control of substations and switchyards becomes unavailable, electricity can’t be routed to the powerlines. The less centralized the generation and distribution networks, the more reliant these systems become on automatic controls - and the greater the potential Y2K problem. The myriad layers of jurisdictional oversight of a typical distribution system - notably, now, the ISOs in charge of much bulk power distribution, can further adversely affect power system stability, since they are beset by many of the same Y2K issues as electric companies, and electric companies have little direct operational control over ISO operations and maintenance.

(Note to script editor for SKG Dreamworks: Consider Bill Hogan of the Harvard Deregulation Project as "The Manchurian Candidate" for the movie version of "Y2K Power Outage - Beast From the Cyber Deep".)

Moreover, utility operating destiny is dependent on industry suppliers and vendors for spare parts and for fuel and fuel transportation. In other words, supply chain problems can take down even an otherwise operating utility grid.

(Note to music editor for "Cyber Deep": Background music as the plot thickens: "The Convergence Blues"; Note to tie-in "Cyber Deep" product manager: produce as many "Son of Spike" Cyber Deep dolls before ’00 as possible.)

Is this just beach blanket bingo stuff? Cowles points out in his book that for every utility there is a need to check the human resources, financial control (as a cash intensive business, their bond ratings are at stake); plant maintenance, purchasing and inventory control and warehousing systems (including contingencies if supplier system crashes instead of their own). He goes on to point out that even a fully Y2K advance prepared utility is still subject to embedded logic and control problems: the chips that have been pre-programmed to perform a certain function, sometimes on a pre-determined time schedule. Within a typical electric utility, embedded-logic control (e.g., Programmable Logic Controllers (PLCs), input devices that can change the state or required response of a logic control loop) is prevalent in every facet of operation. Cowles refers to it as the "hidden" Y2K problem within all production facilities, with the greatest potential to bring companies to their knees - the wild card in the deck of Y2K issues.

The final chapter of Cowles’ book, "The Future History of Y2K", intersperses his conclusions into the more general prognostications as to the impact of Y2K of another analyst, Jim Rivera. It is a conservative, multi-indexed analysis, unfolding over the next 12 quarters. For private power developers - even assuming, as they do, that they will be compliant with Y2K requirements, here are the prognostications that matter:

- 1998 Q4: Regulators and legislators in key States are petitioned to roll back deregulation so utilities may concentrate on Y2K issues; deregulation is put on the back burner in most States. FERC begins hearings on potential impact of Y2K on national power infrastructure.

- 1999 Q4: The NRC orders the shutdown of all nuclear plants that have not demonstrated Y2K compliance: only 30% of the plants have done so.

- 2000 Q1: Isolated immediate impacts, until hidden Y2K glitch leads NRC to order all nukes off-line. Rotating brownouts and blacks then become norm in Northeast.

- 2000 Q3: Deregulation is a dead issue. Several power companies damaged by Y2K events are absorbed.

- 2001 Q1: "We will have a tough time for awhile and pull through. For example, we could lose a couple of cities to riots and disorder for a few months."

So power privateers, assume some of this is true. Is this a great opportunity for new merchant generation and aggressive power trading, or what? Blackouts as a context for a power black market. Perhaps. But I would suggest we must consider the ancient real estate adage updated for our industry. What’s the key to success? Transmission, transmission, transmission... If it isn’t there, because of Y2K directly or because of its impact on the wire owners, you may be (to coin a phrase) the Stranded Generation. Particularly so, if Y2K tsunami-spike leads back to the road to regulatory serfdom: no deregulation; greater consolidation; greater centralized reliability management.

It is good to be back at work now, away from scary beach reading utility industry upbeat concerns, to pick a few EW current article titles are "Outsourcing Nuclear Operations: Pros and Cons" and "The Promises and Perils of Outsourcing". No more worrying about beasts from the cyber-deep; let somebody else do it. On the other hand, based on beach reading, it is time to put away deregulation toys - and to begin to retool for the Y2K wrench which may well mark the energy industry’s entry into the millennium, and enter the gears of private power. The Y2K cyber beast is the problem of private power as well as the traditional electric power industry.

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.