"The cascading nature of this blackout offers an object lesson of how the electricity grid requires regional coordination and planning, a challenge the nation is still striving to meet. It is regional coordination and cooperation that is contributing to the grid restoration now under way. Regional coordination and cooperation, with smart planning and investment, will be needed to prevent any recurrences."
Pat Wood III, FERC Chairman, 8/15/03

Before the power was fully restored, regulators, local, state and federal officials, even the president of the United States, were looking for answers. Over the next weeks, claims for damaged equipment, lost business, and spoilage will begin to mount. In addition, the Blackout of 2003 will be the catalyst for many regulatory and legislative actions.

The parallels between the events of last week and November 1965 are strikingly similar. The 1965 blackout affected 25 million people in seven states and Ontario, Canada. It took several hours to several days to restore the power, depending on the location. Almost 40 years later, the improved responsiveness of the affected utilities is a direct result of extensive reengineering and emergency planning.

Following last week's power outage, utility companies need to not only focus on the claims and damages experienced by their customer base but also on preparing for the pending regulatory inquiries about how they responded to the disruptions.

There are two approaches utility companies may employ to navigate through the "blame game" — 1) the proactive approach or 2) a measured approach. The proactive approach is one in which the utility, Independent System Operator (ISO) or Transco will initiate self-evaluation of their response to the blackout. The measured approach is more reactive and allows for events to unfold. Both approaches have benefits depending on the company's political goodwill, relationship with regulatory bodies (local and state) and the perception that proper decisions were made during the crisis.

If a utility company has political good will, a reasonable working relationship with regulators and a sense that it executed its emergency response plan effectively; Marsh would recommend a proactive approach to dealing with regulators. The ultimate goal is to clearly demonstrate that every electric market participant involved in the blackout, regardless of outcome, acted responsibly overall — especially important to load serving entities. Time and again, the J.D. Power and Associates' Electric Utility Customer Satisfaction Survey indicates that it is the level and quality of customer communication during the outage that drive customer satisfaction — not the actual duration.

"Regardless of whether the problem was related to the transmission operations, we need more transmission capability. If we don't have an upgraded transmission system, we're going to have more problems like this, because there will be inadequate capability to deliver power in the future."
Energy Secretary Spencer Abraham, Fox News, 8/17/03

Each electric-market participant should carefully evaluate its actions during the recent blackout and identify which aspects of planning and execution were adequate or require improvement. Related questions that executives need to be asking themselves include:

• What is my relationship with regulators? Do I know what new regulations are being proposed and how they might impact my business operations?
• Can I expect claims to be filed against me as a result of a power disruption?
• Can I, in turn, file claims? Do I know the proper procedures for filing a claim?
• Do I have adequate processes in place to communicate with employees, customers, regulators, the general public and the media?
• How well did we execute our Emergency Response and/or Crisis Management Plan?
• How have I responded to similar disruptions in the past? Is my performance improving?
• How would I quantify such improvements?
• How should I handle regulatory inquiries about how we responded to the disruptions?
• How can I adequately capture, manage and report incidents, losses and legal notices?

Knowing the answers to these questions will help companies improve their overall ability to respond to the unexpected. In addition, this information will be beneficial in preparing utilities for upcoming legislative and regulatory hearings. At a minimum, this exercise will afford the electric market participant the opportunity to use actual events to highlight areas of improvement for the response plans. For regulated companies, one must recognize that an evaluation of actions will become discoverable in any subsequent proceeding.

To prepare for these issues, there are a number of solutions that power and utility clients can utilize to better plan for, and quickly recover from, the unexpected disruption of normal business operations. These include:

• Facilitated Review: A proactive approach that helps utility and power companies prepare for regulatory inquiries by evaluating current disruption prevention policies, business continuity preparedness, status of preparedness, response times and recovery activities during a blackout. This includes doing a post-event organizational review and a gap analysis of crisis communications plans and emergency response plans.
• Analysis of Regulatory Risks: A proactive approach that uses decision analysis techniques to help regulated and unregulated power companies evaluate the impacts that different positions and regulatory outcomes may have on shareholder value. Since regulatory strategy often involves evaluating options under uncertainty, a decision-based business planning process can help build consensus around a strategy while highlighting potential risks and negotiating trade-offs.
• Claims and Dispute Resolution Services: Establishing the factual basis of a dispute by independently analyzing entitlement and schedule issues, and assisting power and utility clients in capturing and quantifying all monetary damages, including delay and disruption, labor inefficiency, extra work, acceleration, and loss of profit. If an event or dispute goes to trial, Marsh offers litigation support and expert testimony to help achieve favorable resolution. Through the use of information management systems, risk technology services help power and utility clients manage claims administration as well as regulatory and legal inquiries.

If you have any questions or would like additional information, please contact us.