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The Costs of Climate Change Risk Disclosures for Utilities

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I am a New York-based freelance journalist interested in energy markets. I write about energy policy, trading markets, and energy management topics. You can see more of my writing...

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Along with taxes and death, climate change is fast becoming another one of life’s certainties. For some electric utilities, it may soon become a business certainty. The New York Public Service Commission is considering whether to mandate annual climate change risks disclosures for investor-owned utilities operating in its jurisdiction. While eleven investor-owned utilities have already incorporated disclosures into their investor documentation, other utilities are “holding out” according to the commission. In California, utilities are required to file climate vulnerability assessments every four years, as of August 2020. A recent report released by researchers at the Columbia University Law School makes the case for legally obligating all publicly-owned utilities to study and disclose climate-related risks to their operations.

These developments are promising to climate change advocates hankering for a green approach to operations at utilities. But they also raise an important question: Who will foot the cost of developing climate change resiliency at electric utilities?

Forcing utilities to make such disclosures comes with added expenses for PSCs and could entail significant rate case revisions. After all, an assessment of utility operations could result in discovery of vulnerabilities that might be expensive to fix. Not only that, the strict nature of utility regulation means that they must, at first, be compensated to conduct such vulnerability studies.

Despite the urgency of rhetoric around climate change, public service commissions have been hesitant to allow utilities to recover these costs.  For example, New York’s Consolidated Edison released a climate change resilience study only last year to measure and analyze the impact of Superstorm Sandy in 2013. According to the Columbia study, the delay occurred because it was uncertain whether NYPSC would allow the utility to recover associated costs for the study. Exempting utilities from conducting an analysis of the suitability of their operations to manage climate change is not an option. PG&E’s travails in the last couple of years have amply demonstrated the problem with that approach.

There’s also the question of costs to make operational changes at utilities. Identifying vulnerabilities is not enough; utilities should be able to make changes to their infrastructure and processes after identifying those vulnerabilities. Should customers bear the final cost? Regulation requires utilities to charge “just and reasonable” rates from customers. The problem with that definition is that it does not prescribe exact just and reasonable rates. How can one calculate such rates by modeling tradeoffs for a future event whose severity and impact are difficult to guess? The larger question, of course, is whether it is fair to charge consumers for such changes.

Capital markets might offer an alternative to utilities. This strange year, they have served their intended function, acting as a failsafe alternative for utilities facing an impending wave of unpaid electric bills. But investors have begun attaching conditions, such as ESG initiatives. But I have already written about the problems with ESG metrics, which are a voluntary and non-standardized disclosure resulting in an array of methodologies and measurements to signify progress.

It seems climate resilience planning advocates will also need to practice some patience and resilience until the utility industry figures this one out.

Discussions
Katherine Johnson's picture
Katherine Johnson on Dec 22, 2020

This is just the tip of the iceberg. What about policies and requirements that force utilities to develop carbon pricing in markets where carbon trading is not yet occurring. Public utility commissions are right to be careful as we all venture into these uncharted waters.

Daniel Burillo's picture
Daniel Burillo on Dec 22, 2020

If not ratepayers, then who? Taxpayers?

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