Utility Cooperative Forum: Managing Risk at Your Electric Cooperative – Where Do We Go From COVID-19

Editor & Guest Writer Peggy Maranan, Ph.D Manager, Financial Accounting LCEC (Lee County Electric Cooperative, Inc.) PO Box 3455 North Fort Myers, FL 33918-3455 Phone (239) 656-2117 peggy.maranan@lcec.net

Introduction

The year of 2020 will go down in history, one that will be discussed by future generations. Notably, the Coronavirus (COVID-19) pandemic experienced worldwide will be remembered, with historical comparisons made to the devastation brought on by the 1918 Spanish flu pandemic. While the flu of 1918 was devastating to worldwide populations also, the risk of experiencing another pandemic of that magnitude was far from most people’s minds when COVID-19 became a reality. Most organizations and individuals were not fully prepared for the impacts that COVID-19 has had. Even with the most robust and matured planning programs and risk management models that were in place, most organizations were left not ideally prepared to deal the consequences of COVID-19. While many organizations did have some form of pandemic disaster plan, the realities of the COVID-19 experience proved that many of these plans were not sufficiently designed to deal with the magnitude nor duration of the COVID-19 impacts. Collins (2020) of CommercialRiskOnline, contends that “Covid-19 will be a game-changer for the risk management profession, rewriting the rulebook and changing the way organisations perceive and prepare for mega risks, according to risk management associations” (para. 1). The electric cooperative industry, while typically more focused on disaster planning than many other industries, also found themselves in a position of needing to reevaluate and update existing pandemic plans to address the realities presented by COVID-19. This article will address some of these impacts to the electric cooperative industry in hopes of providing greater insight and understanding of how to better lead going forward in more effective risk management.

Industry Risks

The Congressional Research Service (2020) recently prepared a report for the members and committees of Congress titled “COVID-19: Potential Impacts on the Electric Power Sector”. In this report, it was noted:

The Coronavirus Disease 2019 (COVID-19) pandemic is impacting the electric power sector directly (e.g., illness and fatalities among workers) and indirectly (e.g., reduced electricity sales). Most indirect impacts to date have been caused by the economic effects of the pandemic. Long-term impacts are highly uncertain and likely depend on the pandemic’s ultimate toll on U.S. public health and the economy. (p. 1)

The report goes on to further identify four key impact areas, already experienced and expected to continue for coming months: ● Reduced electricity demand – while the electric industry has historically been impacted by weather patterns, COVID-19 has introduced economic risk into the picture. Economic activity has slowed substantially, taking the country into a recession very quickly. Starting in March 2020, many electric companies saw

demand drop significantly from historical trends as businesses shut down when people went into quarantine to prevent the spread of the virus. With the phased re-opening of businesses throughout the country, there has been a rebound of electricity demand, but in many areas of the country electricity demand has not returned to pre-pandemic levels. Electricity prices for consumers in some areas did decline. The decline in some instances was due to lower wholesale electricity prices. But, if this decline continues and is prolonged, this could result in higher wholesale prices if power plants become unprofitable due to the decreased demand. It could also cause power generators to delay or cancel construction of new power plants. Since customer rates are set by regulators by geographic location, the impacts of demand and subsequently electricity rates will depend upon the circumstances of each electric utility. Electric reliability – The North American Electric Reliability Corporation (NERC), which has oversight of electric reliability in the US, noted that there were increased risks to potential workforce disruptions due to illness and quarantine. Additional risks due to the virus included possible supply chain disruption and increased cybersecurity risk due to more teleworking employees. NERC noted that these risks are likely to continue during this pandemic event, and new risks could emerge along the way. Additional reliability risks could include delayed maintenance activities due to pandemic impacts. And, very importantly, an electric company’s ability to respond to emergencies such as severe weather (i.e. hurricanes) and wildfires may also be impeded by the pandemic. Reduced bill payments – Many utilities had stopped service disconnections as the pandemic hit, knowing that there would be some customers unable to pay their monthly bills due to job loss. As phased re-openings of businesses are occurring, the decision regarding the best time to start disconnecting customers service for non-payment has been weighed. In many instances, this decision has been governed by regulatory agencies and the electric company has not had the choice in how long this temporary delay in disconnections lasts. In other instances, the decision has been with the electric company and each has attempted to strike the right policy balance. In the near term, many electric companies have had lost revenues and may continue to see this as we work our way out of the pandemic. It is still not clear about the impacts of how lost revenues may be addressed when “normal” conditions return. If revenues lost are significant, regulators could require rate increases in the future to make up for expected revenue shortfalls. While Congress did not directly address lost revenues or delayed service disconnections, they did pass legislation intended to provide some temporary relief to enable some customers to pay their utility bills which could offset revenue losses in the near term.

Industry investment activity – Over the last decade, the electric industry has been transforming in its use of energy sources and increasing investments in distributed generation technologies. The focus has been on energy efficiency and conservation. Along with that trend, there have been significant investments made in new technologies and improvements to existing infrastructure. In the near term, the pandemic may slow the continuation of these plans as companies are forced to address the more immediate impacts of the pandemic. If industry investment becomes slowed, Congress may need to reconsider existing tax incentive and grant policies, as many had expiration dates that may become difficult for companies to achieve as they are distracted with addressing more immediate pandemic impacts.

The list is not meant to be inclusive of all risks, but the report published by the Congressional Research Service is meant to call out impacts or concerns related to the electric industry in terms of items it found of note.

PWC (n.d.) recently published an article “COVID-19: What it means for the power and utilities industry”, in which they offered potential issues and steps to consider in the advent of COVID-19. These are listed below: 1. Possible issues - Crisis management and response: Companies may need to build added flexibility into the already robust businesscontinuity capabilities they have demonstrated during past emergencies (to address pandemicrelated impacts). Steps to consider:

A. Draw on the long tradition of resource sharing and mutual assistance during emergencies.

Depending on the severity of the COVID-19 spread, utilities may have to ramp up coordination efforts to accommodate numerous and simultaneous health emergencies impacting their workforce, especially field workers.

B. Coordinate, as necessary, with the CEO-led Electricity Subsector Coordinating Council (ESCC), which works with federal agencies during emergencies that affect the nation’s electricity grids. Recently NERC and several Regional Transmission Organizations Independent System Operators provided preparedness guidance to their members. 2. Possible issues – Workforce: While some functions can be done remotely or outsourced, the industry faces a unique challenge that many others don’t. A large portion of the workforce is critical to the continued operation of the business and the safe, reliable delivery of power.

The industry is accustomed to relying on mutual aid assistance when resources are needed.

However, there is the possibility that typical partners may not have available capacity to help. While cybersecurity is always a top priority for industry firms, we note that there could be additional threats and vulnerabilities now. This is because workers will have significantly higher levels of remote access to core systems, and because employees and management could be more susceptible to social engineering efforts in the midst of a crisis. Steps to consider:

A. Evaluate staffing for functions identified as critical to the business. Put risk mitigation programs in place for employees who need to work in large gatherings at a common worksite (e.g., both existing and enlisted field and construction crews).

B. Build flexible work arrangements, where viable, for non-essential staff.

C. Consider ways to increase automation and use emerging technology to minimize personto-person contact but still get the work done.

D. Remind employees about being suspicious of emails from unfamiliar sources to prevent successful phishing and business email compromise.

E. Conduct a phishing exercise now to reveal gaps in your defenses.

F. Strengthen your perimeter, using security tools to identify and deflect threats before bad actors can intrude.

G. Strengthen your remote access management policy and procedures. Make sure work-athome does not mean work-without-security; it’s now possible to transition to rapid, secure, remote work models within days rather than months. 3. Possible issues - Supply chain and operations:

While regulated utilities are mandated to have access to adequate supplies of critical parts, components, equipment and materials for emergencies, utilities might encounter shortages due to constrained production of supplies produced in countries highly affected by COVID-19. Developers of renewable energy projects could potentially experience difficulties in getting critical components (e.g., photovoltaic cells, turbines) from suppliers in affected countries, especially those in Asia. Additionally, we expect some utilities to experience load reductions due to dampened demand for power from the commercial and industrial sectors.

They also may find that some customers are struggling to pay their bills. Steps to consider:

A. Get a clear picture from foreign suppliers about any current or expected production declines that may cause delays in order fulfillment of critical infrastructure supplies such as transformers and other restoration materials. Firms may need to explore other sourcing options as a contingency plan.

B. Drawing on the culture of mutual assistance, companies should set plans for sharing physical resources (parts, components, wires, etc.) that might be in short supply due to supply chain disruption.

C. Companies should lift their business continuity plans and emergency-response playbooks to a higher level to maintain normal operations. That could involve enabling employees to work remotely, resolving supply chain sourcing issues, quarantining personnel, or restricting travel. 4. Possible issues - Financial reporting: Utilities may experience continued supply-chain disruptions surrounding parts for grid-wide maintenance and repairs — as well as necessary components for renewable energy projects (e.g., solar cells and wind-turbine components).

COVID-19 could also impact business continuity. Both scenarios could carry financialreporting implications. Additionally, companies experiencing significant workforce disruptions may struggle to meet required financial reporting, annual FERC and state reporting deadlines. Steps to consider:

A. Evaluate if risk factor disclosures may need to be added or modified to address the risks of coronavirus or other pandemics (e.g., impact on operations, supply chains and business continuity).

B. Consider second-order effects, such as reduced demand due to businesses being shut down.

C. Determine if recent events may impact

current and future judgments and estimates inherent in financial reporting (e.g., receivables collectibility, debt covenants, impairments of investments).

D. Examine the current and potential future impact on operations, liquidity and capital resources (including consideration of trends and uncertainties). 5. Possible issues - Tax and Trade: Due to the COVID-19 outbreak, power and utility companies are reacting to and planning for changes to supply chains and, possibly, workforce mobility. These changes require careful consideration of potential tax implications. In particular, power and utility companies are concerned about the impact that supply-chain disruptions could have on the new construction of wind facilities, some of which may need to be placed in service in 2020 to qualify for maximum production tax credits. IRS guidance to provide extended placed-in-service dates would be a welcome relief. Steps to consider:

A. Plan for the tax implications of any supplychain-related changes due to COVID-19, including changes to the utilization of tax attributes if declining demand and commodity prices continue for an extended period.

B. Developers of new utility-scale renewable energy (wind and solar) facilities need to consider if their projects would be disqualified from maximum production tax credits if they were delayed due to supplychain or other disruptions. These credits stipulate that projects be placed in service in 2020 to meet safe harbor or investment tax credits (based on when construction begins).

While many of these impacts noted above have already been felt and can be measured, uncertainty remains about what the future will bring as we are still in the midst of this pandemic. These are all areas of increased risk that should be monitored, and company strategies should be adjusted as needed to changing conditions and expectations.

The Way Forward

McKinsey & Company (2020) has recently offered guidance on how to navigate a company’s planning around its individual circumstances. This guidance could pertain to any organization, in any industry. They note that:

Even as you assess the best course forward, the one thing you shouldn’t do is rely on what we frequently see in regular strategic-planning processes: ducking uncertainty altogether or relegating it to a risk analysis at the back of the presentation deck. (p. 19)

Instead, they offer this plan of attack in producing strategic plans that are truly focused on addressing real risks, changing risks, and to confront uncertainty head on. These are the five “frames” they recommend using in developing company plans: 1. Gain a realistic view of your starting position. 2. Develop scenarios for multiple versions of your future. 3. Establish your posture and broad direction of travel. 4. Determine actions and strategic moves that are robust across scenarios. 5. Set trigger points that drive your organization to act at the right time. (p. 19)

Additionally, they recommend organizing your pandemic crisis team by adding a new work group to the existing pandemic response group, naming this new work group the “COVID-19” planahead team”. The role of this plan-ahead team is described below:

Your plan-ahead team should be charged with collecting forward-looking intelligence, developing scenarios, and identifying the options and actions needed to act tactically and strategically. Unlike a typical strategy team, it will have to plan across all time horizons (two, four, and seven days; two and four weeks; one and two quarters; one and two years; and the next normal) to enable you to stay on top of escalating issues and the decisions that you need to make in this time of high uncertainty. (p. 18)

McKinsey’s “Exhibit 1: A plan-ahead team is modular…” showing what the pandemic crisis team organization might look like is shown on the next page:

While many electric companies have limited resources or staffing, the risk of not addressing meaningful planning should be weighed against available or needed resource requirements so that the best business case for planning is implemented. Many electric cooperatives operate with staff already stretched thin with operational and tactical duties, leaving limited time available for strategy or planning activities. This results in staff members sometimes “wearing many hats” across many roles within the organization. The recommendation is

for companies to set clear goals, set clear priorities to achieve those goals, and commit the resources needed. Meaningful and effective planning will help in achieving those ends.

McKinsey also offers 15 emerging themes for boards and executive teams to manage through the pandemic. All of these bring their unique risks and challenges as we navigate through these transitional, pandemic times: 1. Boards must strike the right balance between hope for the future and the realism that organizations need to hear. 2. The unknown portion of the crisis may be beyond anything we’ve seen in our professional lives. 3. Beware of a gulf between executives and the rank and file. 4. Don’t overlook the risks faced by selfemployed professionals, informal workers, and small businesses. 5. Certain industries and sectors are truly struggling and require support. 6. Mid- to long-term implications and scenarios vary considerably. 7. What went wrong? 8. How can we prevent a backlash to globalization? 9. Companies need help with government relations. 10. Where will the equity come from, and with what strings attached? 11. The balance between profits and cash flow is

tricky, and essential to get right. 12. It may be time for responsible acquisitions. 13. Cyber risk is growing. 14. Innovation may never have been so important. 15. The path ahead will surely have ups and downs and will require resilience. (pp. 38-40) Some additional recommendations offered by McKinsey to navigate through this pandemic include taking the time to recognize how the people who depend on the company feel, have aspirations about the post-COVID world and build the resilience to make them a reality, strengthen your capability to engage and work with regulators and the government, watch out for non-COVID risks and make sure to carve out time to dedicate to familiar risks that have never gone away, and find out what went wrong (answer the uncomfortable truths that investigation uncovers). (p. 40)

Summary

Love (2020) offers that:

In 1890, psychologist William James wrote that emotional events have such a huge effect on our minds they “almost leave a scar upon the cerebral tissues.” But for many of us – especially those isolating at home – memory researchers say it is more likely it will become a blur. (para. 5)

Our memories may be impacted differently for how each of us is experiencing the pandemic. For instance, for those that were front-line healthcare workers, their memories may be much different than those that have had the luxury of limited impact due to the virus. McKinsey contends that it is the imperative of our time for us to pull together and work through the challenges of this virus. This is reflected in “Exhibit 1 – The imperative of our time” offered by McKinsey below:

While we have learned much in the last few months since the virus appeared on the scene, we still have much to learn. From a risk perspective, we have had to respond to the immediate threat posed, and will now still need to keep working through the mid-term and longer-term impacts of the pandemic. While the immediate crisis

required immediate action to protect people and businesses, the longer-term challenges will include keeping people safe and responding to economic issues affecting our customers and organizations. We will need to move beyond any helplessness towards action on things that we can positively impact.

There are so many unknown risk factors. The duration of the pandemic is not known. Multiple waves of the pandemic could be possible. We are also unsure of whether re-infection of those previously infected is a possibility. Until there is expanded testing and scientific breakthroughs for proven treatments and vaccines, we wait not knowing the extent or severity of the ultimate health impacts to our population.

Fortunately, for the electric utility industry, our business model seems to be more protected from negative impact than most. While all the negative impacts previously noted in this article are real and significant, the industry is not at risk of folding as are some more vulnerable industries. However, the pandemic is presenting a unique challenge for the electric industry to identify potential risks and be proactive about responding to the risks in order to minimize negative impacts to its customers. Some electric companies may have even experienced greater financial net margins during this pandemic due to lower fuel prices related to the cost of power obtained from generation suppliers. Additionally, some have reported increased electricity demand due to largaqer amounts of employees working at home resulting in increasing residential electricity usage. But, overall, statistics show that net demand has decreased overall throughout the US since the pandemic hit.

For those in finance and accounting roles within our electric cooperatives, please keep in mind that financial planning, budgeting, and forecasting activities should reflect the overall strategic goals of the organization. They are a road map to achieving company goals. So, they should also be adapting to the risks discussed in this article, providing for the financial resources to be available to achieve overall company-wide objectives.

References

Collins, S. (April 9, 2020). Risk management ‘rules changed’ by Covid-19. Retrieved August 29, 2020 from the following website: https://www.commercialriskonline.com/risk-management-rules-changedcovid-19/

Lawson, A. (June 12, 2020). COVID-19: potential impacts on the electric power sector. Congressional Research Service. Retrieved August 29, 2020 from the following website: https://crsreports.congress. gov/product/pdf/IN/IN11300 Love, S. (Aug. 21, 2020). You’ll probably forget what it was like to live through a pandemic. Retrieved August 29, 2020 from the following website: https://www.vice.com/en_us/article/5dmxvn/what-will-weremember-from-the-coronavirus-covid19-pandemic McKinsey & Co. (August 7, 2020). McKinsey on risk: special edition: the COVID-19 crisis. Retrieved August 29, 2020 from the following website: https://www.mckinsey.com/business-functions/ risk/our-insights/mckinsey-on-risk

PWC. (n.d.). COVID-19: What it means for the power and utilities industry. Research and Insights. Retrieved August 29, 2020 from the following website: https://www.pwc.com/us/en/library/covid-19/ how-covid-19-is-impacting-power-and-utilities.html