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Energy Risks

7 Critical Risks Facing the Utilities Industry

Decentralization of power generation and a rapidly shrinking talent pool are risks that utility companies will continue to grapple with for years to come.
By: | July 20, 2018 • 6 min read

Change is constant in the utilities industry, but the pace of that change has accelerated in recent years and will continue to do so. Utilities must navigate a complex path while serving customers and create value for stakeholders. Here are seven critical risks facing the utilities industry.

1) Distributed Generation

Centralized power generation has been the order of business for more than a century. But new technologies have emerged to challenge that model and create options (such as rooftop solar) for distributed generation and storage of energy.

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A distributed power model makes risk-management sense in terms of regional resilience in the event of weather events, cyber attacks, etc. Legislators have largely supported this shift, often favoring tax incentives for consumers investing in resources such as solar panels.

Now, utilities are being asked to accommodate power flowing in both directions, to and from consumers, without compromising safety and reliability. These distributed resources include not just rooftop solar, but wind power, batteries and more, profoundly altering the performance of the grid.

The imbalance for utilities is that while some customers are producing all or a portion of their own power, the centralized utility is still required to support the entire infrastructure for all sources of production.

“This is a critical risk, but it’s like a glacier, it’s moving slowly,” said Dan McGarvey, managing director with Marsh’s U.S. Power & Utility Practice.

Advances in distributed generation technologies may reduce the cost of alternative power, making it more attractive to consumers and lower demand for power produced at central power stations.

Other new technologies are suppressing demand in other ways. Smart meters, smart water heaters, smart thermostats, smart appliances, etc. are increasing in popularity among both residential and commercial customers seeking to manage costs and reduce their carbon footprint.

Batteries that allow for the storage of energy rather than sending it back to the grid will also impact the amount of energy that consumers rely on utilities for.

2) Community Choice Aggregation

In a Community Choice Aggregation (CCA), or municipal aggregation, structure, individual cities, towns or communities pool the purchasing power of their residents to make independent decisions about their energy purchasing decisions. Power magazine referred to CCAs as a buying club – the “Costco of energy.”

CCAs “peel off from the regulated grid structure and purchase energy from whomever they want,” explained McGarvey. Those that remain have to bear the brunt of the cost of infrastructure investment, and maintenance, he said.

“They put billions into nuclear and coal plants with the idea that there will be long-term recovery of those assets over time. So when they go to shut down an asset with plenty of life left, there are big issues with the regulators about how they recover those stranded assets.” — Dan McGarvey, managing director, U.S. Power & Utility Practice, Marsh

CCAs are currently in practice in seven states: Massachusetts, Ohio, California, Illinois, New Jersey, New York, and Rhode Island. Typically, the goals of CCAs are to lower costs for consumers and to control the energy mix, offering a greener generation portfolio than the local utility.

Investor-owned utilities have serious concerns about the impact of customer defection. In 2107, California utilities projected that CCA programs could result in the departure of up to 80 percent of their retail customers and load.

3) Stranded Assets

There’s an ongoing push to rotate out of coal and nuclear and into natural gas, with utilities voluntarily shutting down coal plants, building natural gas plants, converting coal plants to natural gas, as well as developing their own solar and wind resources. But stranded assets pose a vexing problem for companies.

“They put billions into nuclear and coal plants with the idea that there will be long-term recovery of those assets over time,” said McGarvey. “So when they go to shut down an asset with plenty of life left, there are big issues with the regulators about how they recover those stranded assets.”

Dan McGarvey,
managing director of the U.S. power and utility practice, Marsh.

Regulators are also incented to help companies become greener, so they want to support rotation. But at the same time, they’re not going to allow a lot of the stranded asset recovery costs to be passed along to rate payers.

Decommissioning costs deepen the pain of stranded assets, said McGarvey.

“It’s bad enough that your shutting down an asset that would have 20 or 30 years of life left … you can’t just walk away from the plant, you have to treat the impact to the environment that’s been created over many years. Decommissioning is a major expense.”

4) Cyber Resilience

Utilities and other infrastructure have become increasingly attractive targets for bad actors, whether for financial or political gain. Attempts to breach systems grow, especially for systems that control critical infrastructure such as the electric grid.

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Decentralization of energy resources, and the interconnection with smart technologies is exploding the volume of potential entry points for attackers.

As the cyber threat to the grid becomes more persistent, regulators are working to ensure its security. On July 19, the Federal Energy Regulatory Commission ordered the North American Electric Reliability Corp. to broaden its Critical Infrastructure Protection reliability standards to include mandatory reporting of cybersecurity incidents that could harm the bulk electric system.

“It would be foolish to underestimate the level of sophistication of our adversaries when it comes to cyber,” said McGarvey. “We have to continue to stay a step ahead.”

5) Environmental Citizenship

Across all industries, environmental responsibility is going to become a significant investment issue, said McGarvey. Unfortunately gas and electric utilities are likely to be a disadvantage, at least at first.

The 10K of the future will include environmental impact statements, he said.

“[Investors are] going to want to see more about what’s my impact to the greater climate? What am I doing to reduce my carbon footprint and my impact on the environment? Investors are going to increasingly make that a factor in decisions about where to invest their money,” he said. “Companies with a good story will be more attractive investments.”

6) Customer Expectations

In the “traditional” customer-utility relationship, customers rarely had cause to interact with a utility unless there was a service issue or billing problem. The lack of alternatives left little urgency for utilities to focus on or invest in the customer experience.

But while power generation alternatives have been developing, retailers, financial services and other industries have been busy raising the bar on the customer experience, and changing expectations and demands.

Technology has dramatically changed what customers expect in terms of customer service applications, self-service capability, mobile engagement and even social media.

Utilities must engage customers and understand as well as meet their expectations, or customer loyalty will begin to erode.

7) Growing Talent Gap

More college students are hitching themselves to the technology train, which is shrinking the pool of graduates for other industries, including energy and utilities. According to a 2015 survey by the U.S. Department of Energy, 72 percent of energy employers reported having difficulty finding talent.

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This problem is exacerbated greatly by the aging out of the current workforce. According to the Department of Labor, as much as 50 percent of the nation’s utility workforce will retire in the next five to 10 years.

The era of the loyal worker who stays at a utility for decades, the era where workers brought their sons and grandsons into the industry, is waning, said McGarvey.

“Every kid I know who’s 17 years old wants to design video games, wants to be a coder,” he said. “They want a popcorn machine and a pool table – they want to be on the Google campus.”

Some utilities are partnering with community colleges to offer placement for students that complete related programs. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Workers' Comp

Do You Have Employees or Gig Workers?

The number of gig economy workers is growing in the U.S. But their classification as contractors leaves many without workers’ comp, unemployment protection or other benefits.
By: and | July 30, 2018 • 5 min read

A growing number of Americans earn their living in the gig economy without employer-provided benefits and protections such as workers’ compensation.

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With the proliferation of on-demand services powered by digital platforms, questions surrounding who does and does not actually work in the gig economy continue to vex stakeholders. Courts and legislators are being asked to decide what constitutes an employee and what constitutes an independent contractor, or gig worker.

The issues are how the worker is paid and who controls the work process, said Bobby Bollinger, a North Carolina attorney specializing in workers’ compensation law with a client roster in the trucking industry.

The common law test, he said, the same one the IRS uses, considers “whose tools and whose materials are used. Whether the employer is telling the worker how to do the job on a minute-to-minute basis. Whether the worker is paid by the hour or by the job. Whether he’s free to work for someone else.”

Legal challenges have occurred, starting with lawsuits against transportation network companies (TNCs) like Uber and Lyft. Several court cases in recent years have come down on the side of allowing such companies to continue classifying drivers as independent contractors.

Those decisions are significant for TNCs, because the gig model relies on the lower labor cost of independent contractors. Classification as an employee adds at least 30 percent to labor costs.

The issues lie with how a worker is paid and who controls the work process. — Bobby Bollinger, a North Carolina attorney

However, a March 2018 California Supreme Court ruling in a case involving delivery drivers for Dynamex went the other way. The Dynamex decision places heavy emphasis on whether the worker is performing a core function of the business.

Under the Dynamex court’s standard, an electrician called to fix a wiring problem at an Uber office would be considered a general contractor. But a driver providing rides to customers would be part of the company’s central mission and therefore an employee.

Despite the California ruling, a Philadelphia court a month later declined to follow suit, ruling that Uber’s limousine drivers are independent contractors, not employees. So a definitive answer remains elusive.

A Legislative Movement

Misclassification of workers as independent contractors introduces risks to both employers and workers, said Matt Zender, vice president, workers’ compensation product manager, AmTrust.

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered.”

Misclassifying workers opens a “Pandora’s box” for employers, said Richard R. Meneghello, partner, Fisher Phillips.

Issues include tax liabilities, claims for minimum wage and overtime violations, workers’ comp benefits, civil labor law rights and wrongful termination suits.

The motive for companies seeking the contractor definition is clear: They don’t have to pay for benefits, said Meneghello. “But from a legal perspective, it’s not so easy to turn the workforce into contractors.”

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered in the eyes of the state.” — Matt Zender, vice president, workers’ compensation product manager, AmTrust

It’s about to get easier, however. In 2016, Handy — which is being sued in five states for misclassification of workers — drafted a N.Y. bill to establish a program where gig-economy companies would pay 2.5 percent of workers’ income into individual health savings accounts, yet would classify them as independent contractors.

Unions and worker advocacy groups argue the program would rob workers of rights and protections. So Handy moved on to eight other states where it would be more likely to win.

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So far, the Handy bills have passed one house of the legislature in Georgia and Colorado; passed both houses in Iowa and Tennessee; and been signed into law in Kentucky, Utah and Indiana. A similar bill was also introduced in Alabama.

The bills’ language says all workers who find jobs through a website or mobile app are independent contractors, as long as the company running the digital platform does not control schedules, prohibit them from working elsewhere and meets other criteria. Two bills exclude transportation network companies such as Uber.

These laws could have far-reaching consequences. Traditional service companies will struggle to compete with start-ups paying minimal labor costs.

Opponents warn that the Handy bills are so broad that a service company need only launch an app for customers to contract services, and they’d be free to re-classify their employees as independent contractors — leaving workers without social security, health insurance or the protections of unemployment insurance or workers’ comp.

That could destabilize social safety nets as well as shrink available workers’ comp premiums.

A New Classification

Independent contractors need to buy their own insurance, including workers’ compensation. But many don’t, said Hart Brown, executive vice president, COO, Firestorm. They may not realize that in the case of an accident, their personal car and health insurance won’t engage, Brown said.

Matt Zender, vice president, workers’ compensation product manager, AmTrust

Workers’ compensation for gig workers can be hard to find. Some state-sponsored funds provide self-employed contractors’ coverage.  Policies can be expensive though in some high-risk occupations, such as roofing, said Bollinger.

The gig system, where a worker does several different jobs for several different companies, breaks down without portable benefits, said Brown. Portable benefits would follow workers from one workplace engagement to another.

What a portable benefits program would look like is unclear, he said, but some combination of employers, independent contractors and intermediaries (such as a digital platform business or staffing agency) would contribute to the program based on a percentage of each transaction.

There is movement toward portable benefits legislation. The Aspen Institute proposed portable benefits where companies contribute to workers’ benefits based on how much an employee works for them. Uber and SEI together proposed a portable benefits bill to the Washington State Legislature.

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Senator Mark Warner (D. VA) introduced the Portable Benefits for Independent Workers Pilot Program Act for the study of portable benefits, and Congresswoman Suzan DelBene (D. WA) introduced a House companion bill.

Meneghello is skeptical of portable benefits as a long-term solution. “They’re a good first step,” he said, “but they paper over the problem. We need a new category of workers.”

A portable benefits model would open opportunities for the growing Insurtech market. Brad Smith, CEO, Intuit, estimates the gig economy to be about 34 percent of the workforce in 2018, growing to 43 percent by 2020.

The insurance industry reinvented itself from a risk transfer mechanism to a risk management mechanism, Brown said, and now it’s reinventing itself again as risk educator to a new hybrid market. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected] Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]