From the September 17/24, 2012 issue of National Underwriter Property & Casualty • Subscribe!

Protecting the Grid: Risk Management in Electric Utilities

Karl Zimmel, risk manager at UNS Energy Corp., faces environmental exposures, cyber terrorism—and lots of high-voltage hazards

Electric utilities are highly complex and technical businesses, and their risk managers face a daunting array of threats to employees, customers and physical assets.

Effectively overseeing the exposures entails “understanding the technical operations required for the three segments of our business: power generation, transmission of high-voltage electricity across hundreds of miles, and distribution of low-voltage electricity to our retail customers,” says Karl Zimmel, manager of risk-management services at UNS Energy Corp.

As one might expect at a power company, environmental exposures are a leading concern—and a tough exposure for which to secure coverage.

Asbestos, which in the mid-1990s was excluded from most General Liability policies, still exists in older-generation power facilities and electricity-distribution lines.

In addition, while many power plants have or are in the process of converting to natural gas, many still burn coal, continuously creating fine particles of ash and other airborne waste.

These distinct hazards led the electric-utilities industry to take its insurance needs into its own hands—and mutual-company Energy Insurance Mutual (EIM) was born to extend hard-to-obtain liability coverage to the energy sector.

“When the utility industry couldn’t get coverage for asbestos and other environmental wastes, we developed our own insurance companies,” says Zimmel.

“It was difficult to get broad coverage with adequate policy limits,” he adds. “Now we have the assurance that we can get the limits we need rather than depending upon hard- and soft-market cycles; and our mutual insurance company provides specific loss-control and claims-management tools, specialty expertise and resource support.”

EIM, along with AEGIS, the energy industry’s casualty insurer, defends 94 percent of public electric-utility providers. Each year the mutual insurers return any capital surplus to members.

HIGH-VOLTAGE, HIGH RISK

It probably comes as no shock that another major risk centers around the amazing but deadly properties of UNS’ core product: electricity.

For its hard-hat- and steel-toed-boot-wearing field workers, safety training is obviously a major focus to avoid potential injury and death that lurks when working around high-voltage electric lines.

But no amount of training can prevent downed lines due to weather perils.

Fortunately, Tucson-based UNS is not subject to the winter freezes experienced by northern industries, but Arizona’s muscular summer monsoons can still wreak havoc along the power grid, says Zimmel.

UNS relies upon AEGIS to manage General Liability, Auto Liability and Workers’ Compensation claims that are triggered when company equipment, downed transmission cables and live wires cause bodily harm.

AEGIS also handles some new claim trends that have been plaguing the industry, such as those from the theft of copper from generators and electrically conducive structures. More than half of claims from metal and copper stripping fell on commercial policies from 2008 to 2012, says the National Insurance Crime Bureau. The act poses danger to the thieves themselves, who may be electrocuted during the crime.

The company’s transmission and distribution (T&D) group is responsible for directing generated electricity to substations that supply it to an end-user breakdown of 42 percent residential customers; 34 percent industrial and mining customers; and 21 percent commercial-business owners. The remaining 3 percent goes to the public authority, including the 391-acre University of Arizona campus in Tucson.

T&D employees are the ones who must establish the proper electric-line heights and safety precautions to protect both workers and the public.

For example, the department’s vegetation-management program clears plant life from the path of transmission lines in mountainous areas and national forests. The group’s efforts were crucial during the June 2011 wildfire in Wallow, Ariz.—the state’s biggest on record—when they were tasked with keeping burning flora away from the lines.

The risk-management team, specifically risk analyst and liability-claims expert Patty Tilghman, communicates daily with the T&D department.

Third-party equipment suppliers, transmission-lines technicians and IT vendors often work with the generation facilities and the transmission group, and Zimmel works with UNS’ procurement and legal team to develop risk-transfer programs that ensure contractors are held liable if they cause an accident.

HACKING ATTACKS

The modern power industry is increasingly technology-driven, an advancement that has changed its IT and cyber-risk profile.

“The theme for the energy sector is: ‘This is not your father’s utility company,’” says Zimmel.

For example, UNS has been replacing door-to-door meter-readers with automatic electrical ones that scan energy usage remotely, a relatively new development that saves the company money while eliminating any human error.

A more pressing concern is the risk posed by cyber terrorism and hacking, he notes.

The North American Electric Corp., which at the federal level enforces reliability standards for bulk electrical-grid-transmission systems, lists, in its Cyber Infrastructure Protection plan, protocols to: help safety operators and risk managers assess which cyber assets to protect most closely; learn electronic security-management controls; report sabotage; and train personnel to protect their passwords and personal information. These tasks are handled primarily by UNS’ security and operations team.

UNS understands well the need to have protections in place against cyber threats: In an ironic twist, cyber-security risk-management provider RSA, a company UNS contracts to protect its data assets, was hacked in March 2011.

THE ERM ANGLE

UNS Energy Corp.’s Risk-Management Department serves as the bridge between insurable risks and those that fall under the enterprise risk management program, supervised by Chief Auditor Jim Wright. ERM risks encompass financial, interest rate and economic troubles, along with other intangible risks that may affect the company’s health.

If the liabilities are significant enough to obstruct a department from deploying business strategy or achieving a goal, it is written into UNS’ Risk Assessment Database and handled by the chief auditor.

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