What Will Happen: Electric power and energy
Take a moment to understand the way power is generated and delivered before reading on, because there are several layers of questions to deal with when examining the delivery of power. Nevertheless, the Y2K performance of the U.S. and Canadian power industries has been mostly exemplary. According to a recent survey by the North American Electric Reliability Council (see chart 1), only 37 of 287 utilities still have work to do on their Y2K projects. Among those still waiting for complete readiness, NERC reports that only 67 systems at these 37 utilities remain unremediated as of Oct. 13, 1999 (see chart 2).
Reasons for the remaining unremediated systems range from the most troubling, a lack of available components or products from vendors (45 percent of unremediated systems) to the need to wait for a regularly scheduled maintenance outage to perform repairs (31 percent of unremediated systems). Five systems are waiting final testing (seven percent), one is pending final certification and one is awaiting decommissioning. Work was in progress on two systems, while one system is awaiting the vendor's scheduling repairs. Only one new utility system, a supervisory control and data acquisition system (SCADA) used to monitor electrical grid performance, needs to be repaired, belying the predicted failure of replacement systems.
For the most part, the repairs described by the NERC report are not related to power generation and deliver capability, but to the utilities' ability to monitor deliveries and bill accurately. This presents concerns for investors, but because utilities will continue to heat homes and power appliances in the absence of accurate billing systems, consumers shouldn't worry. In the worst case scenario, the utility would likely use average consumption as the basis for billing, just as they do in many areas already (if you get a bill based on average monthly consumption, you'd likely never know if your utility has a Y2K problem).
The power industry's ability to build out new generation capacity has far exceeded actual increases in electrical demand in the U.S. and Canada. During the 60s and 70s, utilities struggled to keep up with seven-percent growth in consumer demand. In recent years, demand has grown by only 1.1 percent, on average, and that trend is expected to continue until 2020. The Department of Energy's Energy Information Administration (EIA) estimates that electricity demand will increase by only 1.2 percent in 1999 over the previous year. Last winter was very mild and, although more cold days are expected in 1999, the increased demand will not exceed 3.4 percent.
Nevertheless, many consumers can expect to see substantially higher electric and energy prices by the end of the year, especially if they rely on power producers that use fossil fuels. This is not due to Y2K, but because the oil producing countries have rallied to the OPEC cartel to limit production.
According to the EIA, the cost of fuel oil will have increased dramatically compared to 1998. Crude oil in December of 1998 cost $9.39 a barrel; the same barrel cost $24.50 in October, 1999, and is projected to sell for $23.83 in the first quarter of 2000. Supplies are near record lows for recent years. Typically, the global excess oil supply is between 200 million and 400 million barrels, and the EIA expects that this supply will be drawn down by 350 million barrels.
The issue for consumers is, will Y2K actually affect the flow of oil, further increasing the cost of oil. Information about the preparedness of these countries remains unclear, at best. The U.S. government has consistently overestimated the lack of preparations around the world, having repeatedly been corrected by governments wielding more recent statistics than those used by U.S. spokespeople.
According to the Central Intelligence Agency's Lawrence Gershwin, national intelligence officer for science and technology, the "oil companies, banking sector, and large multinational companies [in the Middle East] are best informed and are conducting remediation and testing." Based on this assessment, Gershwin told the U.S. Senate Y2K committee that the CIA expects "disruptions will likely be random, temporary and of localized impact."
Specifically, the CIA says "the United States is unlikely to experience a significant disruption in oil deliveries because our key suppliers appear to be Y2K ready. Major multinational firms have been in the forefront remediation and testing efforts, and operators of oil terminals and tankers have been similarly active in correcting Y2K vulnerabilities."
So, while there will be higher prices for oil and power, this is unrelated to the Y2K problem. Any additional impact on pricing will likely be negligible, since the cost of oil has already more than doubled over the past year.
Coal, however, accounts for the vast majority of U.S. and Canadian electric production. Because the transportation systems coal deliveries rely on - railways, for the most part - is Y2K ready, there is little or no chance of interruptions of supply. And the price of coal has stayed steady, around $1.25/Btu, for several years.
Natural gas deliveries, except in Eastern Europe, will continue reliably. Moreover, the cost of natural gas is expected to increase significantly this winter because prices at the wellhead have increased by about 40 percent since 1998, according to the EIA. The supply of natural gas is approximately the same as last year, prices having risen in sympathy to oil prices - if it costs more to heat with oil, gas producers can jack up prices, too.
Ample anxiety revolves around Russia's Gazprom natural gas monopoly, which supplies much of Eastern Europe with gas. The CIA expects interruptions in the gas supply to Russia, Ukraine and other Eastern European countries. However, many European nations are increasing domestic production to offset shortages from Gazprom.
As consumers head into the New Year, then, they should expect higher prices, but not Y2K problems. The utilities industry has been diligent in its Y2K efforts, with ample preparedness to show for it. Eighty-seven percent of NERC-surveyed utilities are completely prepared for Y2K, and those companies with repairs left to perform have provided complete documentation.
Get ready for a typical New Year. Noisy, cold and comfortable.