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TRANSMISSION
Barbara Hindin is associate general counsel at Edison Electric Institute in Washington, DC.
As more companies join regional transmission organizations (RTOs) and the Federal Energy Regulatory Commission (FERC) proceeds with its standard market design and the creation of large regional markets, the issue of providing transmission owners with liability limitation in cases of outages becomes increasingly important. States historically have protected transmission line owners from potential catastrophic damage awards-commissions and state courts limit the companies' liability for damages caused by downed lines, outages, and the like, generally by including damage limitation provisions in their state-approved tariffs. So, if a transmission line falls and causes a catastrophic fire that destroys a building, the line owner is protected from paying for all the losses due to the outage. (Most business owners are well aware of the limitation and protect themselves from catastrophic losses by insuring themselves.)
According to Richard Pierce, professor of law at George Washington University, states and agencies have cited several reasons for providing such liability limitations: They
- produce lower rates;
- assure fair and reasonable treatment for all customers and avoid the inequity of requiring small customers to subsidize large ones;
- protect transmission owners from potential catastrophic losses and financial distress, thereby making it easier and less expensive for them to attract the large amounts of capital required to invest in transmission expansion;
- put large customers in a better position than transmission line owners to estimate exposure to economic losses attributable to a potential loss of power and to protect their own interests; and
- protect transmission owners who are, after all, regulated monopolies that cannot pick and choose their customers or vary their rates to reflect differential damage exposures.
The potential for large unpredictable damage awards from an outage is huge. Consider, for example, two outages that affected the West in 1996. Both events were caused by cascading outages that resulted from trees coming into contact with powerlines. Estimates of the damages have ranged from $1.3 billion to $1.5 billion.
So a limitation on liability is extremely important for a transmission owner's financial viability, as well as for the owner to attract the capital necessary to expand our nation's transmission infrastructure. In fact, not allowing transmission line owners to have liability protection widens a risk exposure that is difficult to bridge and that increases uncertainty across markets and companies. The creation of RTOs makes the problem even more immediate due to the regional nature of transmission services. One of the goals of FERC's standard market design (SMD) is to facilitate the expansion of the transmission grid—the platform for competitive energy markets. A limitation of liability is necessary to promote much-needed investment in transmission infrastructure—and not providing liability protection will, among other things, discourage investment. With investor confidence in the electric industry already strained, the commission should take actions that will promote stability and attract investment capital.
When FERC required transmission owners to give open access under Order 888, it also made it clear it would no longer authorize such provisions. FERC based its decision, at least in part, on the belief that existing state liability limitation provisions would be adequate. However, FERC has never clearly justified or explained its position. More recently, the commission has expressed willingness to seriously consider including a liability limitation in its SMD tariff it is developing. Although consensus on details differed, participants at a recent technical conference with the commission were in agreement that FERC should indeed provide some type of liability limitation.
A Matter of Federal Energy Policy
"If there were a severe outage, and there were trials and legal cases, the first independent transmission company, faced with hundreds of millions of dollars of potential damages on a relatively small rate base, would find itself in a unique position," said Gary Rygh, vice president of Morgan Stanley, at the technical conference before FERC. "Not only would it cause severe damage to the ability to raise capital and the cost of capital for that particular entity, it would be applied to all new capital coming into the industry and into new companies....This issue would be focused quite large in investor's eyes, as they would think the returns that transmission provides are not great enough to outweigh unlimited risk."
FERC should include a liability limitation provision in the transmission tariff it will adopt as part of its SMD because it is in the best position to balance the many factors involved, including the need to attract investment capital to maintain and expand the transmission grid. Moreover, entities such as independent transmission providers, RTOs, independent system operators, and independent transmission companies do not have state tariffs under which they operate. If the SMD is implemented as outlined in FERC's notice of proposed rulemaking, which includes the commission's assertion of jurisdiction over all transmission, it is questionable whether any state limitations would continue to apply.
"This is energy policy," said Celia David, vice president of transmission policy and strategy at Commonwealth Edison, in her comments at the same FERC conference. "If you want to have an electric grid, you better create a system where people will invest in it and where people reasonably accept the risks of operating it. The states have long recognized the need for limited liability in this circumstance."
According to Pierce, who also participated, "it is unlikely that any jury is going to obtain the expertise that this commission has about the electricity market and the relationship between the potential liability of owners and controllers of transmission facilities and the performance of the newly restructured electricity industry."
Don Stone, an attorney with Paine, Hamblen, Coffin, Brooke & Miller, agreed: "I would submit that even though I've spent my life in a court room, that you [the commission] are much better versed than any court, particularly in a subject matter such as electricity and the supply of electricity transmission, to set an appropriate policy."
Inadequate Insurance
During the conference, FERC raised the issue of whether transmission owners could protect themselves simply by buying insurance. However, the commission should not base its liability limitation provision on the potential availability of insurance coverage for transmission providers for a number of reasons.
Insurance, if available, is likely to be extremely expensive. "Insurance markets are very soft. We don't believe that insurance will always be available. We don't believe it will always be adequate," said Dan Doyle, vice president and CFO of ATC Management, corporate manager for American Transmission Company. Arnold Quint, partner at Hunton & Williams law firm, argued that "insurance for ISOs and RTOs is becoming increasingly expensive. When [the New York ISO] went out for renewal last year, it ended up having to pay twice what it had paid previously for half of the coverage."
The liability limitation also should provide that there is liability only in the event of gross negligence or intentional wrongdoing. In addition, liability should be limited to direct damages, and there should be no liability for negligence and for consequential, indirect, or punitive damages.
Enough Incentive to Perform
Finally, some FERC officials have claimed that exempting transmission owners from liability takes away the incentive to provide reliable service. But that has never been true, even though, for decades now, states have provided owners with the exemption. There are numerous incentives for transmission providers to exercise due care, observe good utility practice, and provide reliable service, including the commitment to provide good customer service, the risk of regulatory scrutiny and actions, the desire to avoid public relations fallout, and the fact that transmission providers do not make money if they do not provide service. There is no reason to expect that it would change if the federal transmission tariff includes a liability limitation.
"The traditional argument against limitation of liability is that there is no incentive for the person who has no liability to act with due care," according to David. "We strongly disagree. We think there are strong regulatory incentives, rate incentives, and frankly, financial incentives, if your lines are not up. If you are not transmitting electricity, you are not making money."
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