Author:
Dogan Yiginer; Elizabeth Kim; Miro Mo; Irakli Urushadze
When the Superstorm Sandy battered New York City in the fall of 2012, Downtown Manhattan went dark below 39th Street leaving the Wall Street without power, gas or steam. The high tide combined with the 100-year storm (the second one since Hurricane Irene of 2011) created a 14-feet (4.2 meters) high storm surge pounding on the 12 feet flood walls of Consolidated Edison’s facilities in New York City, surpassing a reported historical record set in 1821 by nearly three feet.[1] A bright fireball lit up the sky at the 14th Street plant of Consolidated Edison, a 180 year-old energy company, as the company’s transformers burst into fire with the flood water short-circuiting the electrical equipment. Luckily no one was directly injured, but thousands of gallons of potentially PCB-containing dielectric-fluid either burnt or leaked to the East River.
Manhattanites were not alone in dark. 650,000 people living in the coastal areas of five New York City boroughs were without power or heat. Consolidated Edison dispatched its 14,000 employees, including the office desk-jockeys in the management ranks on the streets. The company arranged for 5,700 members of mutual-aid crews from other utilities, some from as far away as California, to join in the restoration effort.[2] US Air Force airlifted equipment and utility trucks from the West Coast.[3] Power was restored for most of Consolidated Edison service territory within weeks.
New York Times estimated the restoration effort costed $450 million for New York City adding 3 percent to New Yorker’s utility bills for three years. Kevin Burke, the CEO of Consolidated Edison in 2012, quoted the company needed another $40 billion of investment to stormproof the system tripling the electric bills for at a least a decade.[4] Utilities earn a regulated rate of return on their assets, so the costs are born by all New Yorkers. Fearing rate-hikes, the state regulators allowed the public utility to spend only $1billion to upgrade its system over four years, so that fewer homes lose power if the city faces another 100-year storm.
In fact, a company report in 2013 to the New York Public Service Commission put the recovery cost to $322 million for the company. A collaborative stakeholder panel was formed among regulators, state and local officials, academics and NGO’s including the local utilities. The final recommendation, among many others, was to increase the height of the flood walls by a foot to 14 feet despite the projections of the academic members of the working group forecasting 15 feet surges for 2020 within the same report.[5]
For John McAvoy, the current CEO, climate change is not a hoax. He was in a situation room as he watched his company’s assets burst into flames and sink under the flood waters. He spent weeks in the same room monitoring the recovery effort. Unlike President Trump, McAvoy was determined to make impactful changes within the energy sector when he took over Consolidated Edison in early 2013. Even though, he had no choice but to accept his fate if events like Sandy were to repeat itself more frequently due to climate change, he decided to do his part to combat climate change through strengthening his predecessor’s sustainability agenda. Over the next year, McAvoy’s focus on sustainability efforts put Consolidated Edison as the top US utility in Newsweek’s Green Rankings making it the 16th greenest US company overall in 2014[6].
Climate change poses an important business risk for Consolidated Edison as it was discussed in detail at its 2016 annual SEC filing. Not only its assets are in risk of weather-driven catastrophic events as was the case in 2012, there is growing regulatory risk related to federal and state-mandated greenhouse gas emissions targets. Despite the unlikely federal risks under the Trump administration, New York governor Cuomo’s strong commitment to 50 percent greenhouse gas reduction target by 2030 is a major risk for an energy company whose primary fuel is natural gas. The 2016 annual report highlighted mainly how the company is managing risk when it comes to climate change:
- Consolidated Edison has reduced direct GHG emissions 48 percent since 2005 from 6.0 million metric tons to 3.1 million tons of CO2 equivalent.
- Customers reduced their annual energy use through the company’s energy-efficiency programs, resulting in the release of approximately 650,000 tons of GHG into the atmosphere every year since the program’s inception in 2009 through 2015
- Investing heavily in renewable energy projects quadrupling output capacity from 2013 to 2015 reaching 1,500 MW capacity equal to roughly 10% of New York City’s summer peak demand with additional $1.2 billion investments planned through 2019.
As can be seen from Consolidated Edison’s experience, energy companies are not only prone to regulatory risk or negative public perception when it comes to climate change. They are also prone to flood risk of their assets as most energy companies are located on coastal areas for ease of shipping. Will energy companies follow Consolidated Edison’s lead in diversification and future-proofing their existing assets? Regardless of the debate, it will be final customer that will foot the bill whatever the cost will be.
References:
[1] Consolidated Edison’s testimony as quoted by the regulatory-body, North American Electric Reliability Corporation (NERC); http://www.nerc.com/pa/rrm/ea/Oct2012HurricanSandyEvntAnlyssRprtDL/Hurricane_Sandy_EAR_20140312_Final.pdf; accessed on June 15, 2017.
[2] Consolidated Edison Sustainability Report 2012; https://www.conedison.com/ehs/2012-sustainability-report/engaging-stakeholders/reliability/superstorm-sandy/index.html#gsc.tab=0
[3] http://www.nationalguard.mil/News/Article/574875/airlift-ferries-utility-experts-and-equipment-to-darkened-new-york ; accessed on June 15, 2017.
[4] http://www.nytimes.com/2012/12/29/business/hurricane-sandy-alters-utilities-calculus-on-upgrades.html; accessed on June 15, 2017.
[5] https://s3.amazonaws.com/nyclimatescience.org/Storm%20Hardening%20and%20Resiliency.pdf; accessed on June 15, 2017.
[6] http://www.marketwired.com/press-release/con-edison-named-top-us-utility-in-newsweek-green-rankings-nyse-ed-1921953.htm; accessed on June 15, 2017.