The Y2K Files: Municipal Utilities Power Up to Deal With Millennium Bug
The Bond Buyer
Tue, Apr 15 1998
As municipal electric utilities prepare to compete in a deregulated market, they are also faced with another challenge: getting their computer systems ready for the year 2000.
Because public power providers rely so heavily on computer technology to carry out their day-to-day operations, some industry observers see them as a market sector vulnerable to the troublesome glitch. The year 2000, or Y2K, problem stems from date-sensitive computer systems and software that were designed to only recognize the last two digits of a year, making it impossible for them to distinguish the year 2000 from 1900.
And while many municipal utilities believe that they will have their systems ready in time, credit analysts are somewhat divided as to how they will fare meeting the task within a fixed budget.
"Clearly, it is a problem, but it's one that we're starting to come to grips with," said Dan Aschenbach, a senior vice president at Moody's Investors Service.
Because most municipal utilities are strictly power dealers - not getting involved in power generation and transmission - tremendous attention has been placed upon financial management systems, according to Aschenbach. And when it comes to such systems, he said, utilities have already been on the case as they prepare for deregulation.
Standard & Poor's also recognizes the challenge and has incorporated compliance efforts into surveillance, as well its analysis of new deals, said David Bodek, a director with the agency.
"We would expect utilities to be exploring the issue now, so they have systems in place at least several months prior to Jan. 1, 2000," Bodek said. He added that it's essential for utilities to adequately test their systems to ensure proper operation, continued services, revenue collection, and "very importantly," no disruption in debt service payments to bondholders.
Whoops
Washington Public Power Supply System - routinely referred to as "Whoops" following its $2.25 billion bond default in 1983 - is currently in the assessment phase of its Y2K readiness project and hopes to have a firm handle on its inventory by June 1, according to Bob Quay, the utility's point man for the project.
"We've almost completed inventory of our software and we're just getting into the inventory of embedded systems," Quay said, referring to devices which rely upon embedded, date-sensitive microprocessing chips to operate.
Because WPPSS operates and maintains the WNP2 nuclear plant, its completion deadline is a bit closer than for conventionally generated power plants. Under a directive from the federal Nuclear Regulatory Commission, all nuclear plants must be year 2000 "ready" by July 1, 1999.
"It's going to be a tight project, a tight deadline, but I think its doable," Quay said. "We've got the resources and so far, based on the progress we've made, I think that is a very achievable date."
To meet its deadline, WPPSS has spent or committed $2.5 million and, based on the industry average, expects to need an additional $2 million to $4 million, he said.
That money has paid for PeopleSoft - a financial management system - and Passport, which handles inventory purchasing, work orders, and access to the plant, Quay said.
And there could be a lot hanging in the balance for the utility hoping to shed the stigma of a phonetically ironic acronym.
"If their costs don't get further under control, it may very well be that (Bonneville Power Administration) will require them to shut down the nuclear plant, and therefore, they'd be an entity with $7 billion of debt with no generation," Moody's Aschenbach said.
Although WPPSS issued debt for three nuclear power plants - at $2 billion each - only WNP2 has been completed.
"They're getting close to where they need to be on their operating costs. The real problem ... is that the major portion of their cost structure is the fixed costs related to the debt," Aschenbach said. "The point is, two of the three plants are not in existence after $2 billion dollars were spent for each one. For them to be able to recover those fixed costs from a competitive market, it's just not possible on their own."
Bonneville, which oversees WPPSS, issued the power generator directives on cents-per-kilowatt operation cost, and while the price has come down, Aschenbach said that they still have a ways to go. And a Washington state cost review board has required WPPSS to continue refinancing debt to reduce debt service, he said.
Both WPPSS and Bonneville are rated Aa1 by Moody's and AA-minus by Standard & Poor's and Fitch IBCA Inc.
But Paul Neuhedel, a director at Fitch, said Y2K doesn't present any insurmountable difficulties for most of the public utilities Fitch rates.
"Nobody is forecasting a disaster on this. Everyone is aware of the problem and should be taking care of it. We're confident that it will be addressed in a reasonable manner," Neuhedel said. "I'm not a Chicken Little. The sky is not falling."
Deeper Pockets
He said that most utilities have reported problems with their billing systems, but say they've been working on it and are in good shape.
While utilities depend on consumers to pay off their debt, power outages - and even missing an entire billing cycle - should not materially affect their ability to make debt service, he said.
And the deep pockets of some of the larger utilities affords them the ability to "belt and suspender themselves," by simply going out and purchasing new equipment, Neuhedel said.
Having a hefty bankbook is a big plus for Bonneville, which has annual revenues near $2.5 billion, according to Larry Sims, a manager in BPA's information resources department. "We're not panicking. At this point, our risk is fairly minimal," he said.
Although Bonneville's billing and accounting systems have already been brought into Y2K compliance, the utility is currently assessing its massive transmission system and expects to have that information in hand by the end of May, Sims said. Serving much of the Pacific Northwest, Bonneville maintains over 11,000 miles of transmission lines and distributes power from 55 hydroelectric plants. It is also the exclusive purchaser of WPPSS nuclear-generated electricity.
At worst, Sims expects any transmission remediations to cost between $2 million and $3 million.
Key components to transmission system compliance are embedded technology devices called remote terminal units, which contain date- and time-stamping microchips. These units process information from sensors throughout the transmission grid. They are also used to reroute power service in the event of downed or damaged lines, and for communicating back to the master control office.
One crucial aspect of RTUs is their role in load management. Load refers to the amount of power being transmitted between the generation plant and the consumer. In other words, consumption must equal production and when a line goes down or load consumption drops, the utility must reroute the power, or reduce generation. While inconsistent load can strain transmission, Sims said the year 2000 doesn't present any extraordinary problems.
"We have a very robust system. We may have some failures because of the date change, but we have failures everyday," Sims said. In this, he added, Y2K is not much different that a severe storm or an unintended get-together between a car and a power pole.
Serving about one million Californians, the Sacramento Municipal Utility District first started working on the year 2000 problem in 1994, said Winston Ashizawa, chief information officer. The utility operates eight hydro-plants and five thermal plants, monitors and maintains its transmission grid, and handles its own billing, he said.
"The best-case situation for any company is to have finished all its work in 1998 - and have all of 1999 to find things that just kind of come out of the woodwork," Ashizawa said. "We'll still be fixing things and testing things in 1999. We believe we have prioritized our work so that our critical systems will be taken care of first."
Because the process is continually evolving and manufacturer "fixes" aren't always what they should be, Ashizawa said the overall cost is hard to pin down, although SMUD expects to spend $2 million for the effort this year.
Although SMUD replaced its financial management system two weeks ago, it must still contend with "literally thousands" of RTUs, Ashizawa said.
SMUD is rated A3 by Moody's and A by Standard & Poor's and Fitch.
Operating strictly as a wholesale power dealer, South Carolina's Piedmont Municipal Power Agency has focused on its only remaining non- compliant application - its accounting system, said Sandy Boozer, Piedmont's data processing manager. The agency's billing system has been cleared and troublesome meter-reading software is expected to be handled by the vendors, she added.
Although Piedmont holds a 25% undivided interest in the Catawba Nuclear Power Plant, the plant is operated by investor-owned Duke Power, which is responsible for any generation problems that might occur, according to Boozer. Transmission problems that might arise will be addressed by the 10 municipal districts that purchase power from Piedmont, she said.
Piedmont is rated BBB by Fitch and Standard & Poor's, and Baa1 with a negative outlook by Moody's. According to Aschenbach, the negative outlook is due to power costs that are not in line with the rest of the market.
Tom Robertson, manager of information systems at Lincoln Electric System in Nebraska, said they have "generally completed inventory," but the task facing his nine-programmer staff is formidable.
"We're using a combination approach. Some systems are being completely replaced, some systems are being modified in-house, and on some systems, we have vendor upgrades coming," Robertson explained.
Lincoln is planning to replace its financial management system, remediate the systems they designed, and have vendors upgrade the rest. Robertson declined to provide specific cost details, but said his group is working without additional funding.
When asked if the project was a manageable task, Robertson responded: "That's one of those you'll never get anybody to 'fess up on. We're trying. We're probably going to have to bring in some contracted help. It's expensive."
Lincoln is rated Aa2 by Moody's and AA by Standard & Poor's and Fitch.
Despite the expense and headaches, the technological upgrades would have been needed in the interest of competition anyway, according to Robertson. "We'll need new systems to be able to respond to deregulation," he said. "Year 2000 might be forcing us to put in newer enhanced systems a touch earlier than we might have otherwise done."
"Competition is driving some of the technology needs, no doubt. Our systems will be pretty good when we're done."
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