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<title>Y2K: Beast From The Cyber Deep</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<td width="75%" valign="top"><img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" WIDTH="375" HEIGHT="75"><p><b><u>September 1998</u><br>
</b></p>
<p><b><font FACE="Palatino" SIZE="5"> </p>
<p></font><font face="Arial" size="6">Y2K: BEAST FROM THE CYBER DEEP</font></b></p>
<p><strong>by Roger Feldman -- Bingham, Dana and Gould, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
08/98</em>)</font></p>
<p><b> </p>
</b><p><font FACE="Palatino" SIZE="2"> </p>
</font><p> <font FACE="Palatino" SIZE="2"></p>
<p ALIGN="JUSTIFY"> </p>
<p ALIGN="JUSTIFY"></font><font face="Arial">Beach reading, - like summer movies about
errant asteroids, hulking monsters, malicious aliens or giant sharks - is supposed to
titillate with tales of big bad threats that are thwarted through a mixture of American
virtue, know how and technological innovation. In my line of work, (where hot news is that
Bill Gates has joint ventured an entity (MSFDC) to offer utilities, among others, the
opportunity to outsource and automate their billing functions), beach reading this year
was Rick Cowles, <u>Electric Utilities and Y2K</u>, regarding the potential impact of the
Year 2000 computer problem on the industry. We highly knowledgeable Washington people of
course don’t worry much about Y2K, since recent Congressional Hearings heard utility
spokesmen assuage legislators’ fears, and a few calls to private power trade
associations produced similar soothing words. No surprise here, since the utility
industry, after all, has, it would like to believe, consistently been way ahead of the
rest of U.S. industry and government, in the infotech field and the U.S. General
Accounting Office thinks <u>only</u> one out of three critical government computer systems
will crash in the Year 2000 (Deutsche Morgan Grenfell’s normally very conservative
chief economist puts the chance of Y2K induced global recession at 60%).</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">You probably have read somewhere the "short
form" Y2K alert, i.e. that the problem arises because programmers used a kind of
shorthand to save finite computer memory space, entering dates in double digits, e.g.
reflecting the year 1943 as "43". Hence, many computers are run by programs
which won’t know how to interpret a date like "00", and may return to 1900.
For come computers "99" command means "end of file", "throw
away". [For a good general discussion, see The American Spectator (August ’98),
with the modestly titled article, "The Crash of 2000".]</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">But, you say, no problem for electric companies,
since they can contribute to produce and distribute product even if none of their own or
other business systems (e.g. billing), are operational. Moreover, in a production crunch,
an electric company has the ability to purchase power that is generated by one of its
competitors and send it out over the wires. They do it all the time to compensate for the
peaks and valleys in electric usage and production capacity.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">So, as the heat wave price spikes emphasized this
summer, the key link in the electric company is T&D. If the automatic remote control
of substations and switchyards becomes unavailable, electricity can’t be routed to
the powerlines. The less centralized the generation and distribution networks, the more
reliant these systems become on automatic controls - and the greater the potential Y2K
problem. The myriad layers of jurisdictional oversight of a typical distribution system -
notably, now, the ISOs in charge of much bulk power distribution, can further adversely
affect power system stability, since they are beset by many of the same Y2K issues as
electric companies, and electric companies have little direct operational control over ISO
operations and maintenance.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">(Note to script editor for SKG Dreamworks: Consider
Bill Hogan of the Harvard Deregulation Project as "The Manchurian Candidate" for
the movie version of "Y2K Power Outage - Beast From the Cyber Deep".)</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Moreover, utility operating destiny is dependent on
industry suppliers and vendors for spare parts and for fuel and fuel transportation. In
other words, supply chain problems can take down even an otherwise operating utility grid.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">(Note to music editor for "Cyber Deep":
Background music as the plot thickens: "The Convergence Blues"; Note to tie-in
"Cyber Deep" product manager: produce as many "Son of Spike" Cyber
Deep dolls before ’00 as possible.)</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Is this just beach blanket bingo stuff? Cowles
points out in his book that for every utility there is a need to check the human
resources, financial control (as a cash intensive business, their bond ratings are at
stake); plant maintenance, purchasing and inventory control and warehousing systems
(including contingencies if supplier system crashes instead of their own). He goes on to
point out that even a fully Y2K advance prepared utility is still subject to embedded
logic and control problems: the chips that have been pre-programmed to perform a certain
function, sometimes on a pre-determined time schedule. Within a typical electric utility,
embedded-logic control (e.g., Programmable Logic Controllers (PLCs), input devices that
can change the state or required response of a logic control loop) is prevalent in every
facet of operation. Cowles refers to it as the "hidden" Y2K problem within all
production facilities, with the greatest potential to bring companies to their knees - the
wild card in the deck of Y2K issues.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The final chapter of Cowles’ book, "The
Future History of Y2K", intersperses his conclusions into the more general
prognostications as to the impact of Y2K of another analyst, Jim Rivera. It is a
conservative, multi-indexed analysis, unfolding over the next 12 quarters. For private
power developers - even assuming, as they do, that they will be compliant with Y2K
requirements, here are the prognostications that matter:</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">- 1998 Q4: Regulators and legislators in key States
are petitioned to roll back deregulation so utilities may concentrate on Y2K issues;
deregulation is put on the back burner in most States. FERC begins hearings on potential
impact of Y2K on national power infrastructure.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">- 1999 Q4: The NRC orders the shutdown of all
nuclear plants that have not demonstrated Y2K compliance: only 30% of the plants have done
so.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">- 2000 Q1: Isolated immediate impacts, until hidden
Y2K glitch leads NRC to order <u>all</u> nukes off-line. Rotating brownouts and blacks
then become norm in Northeast.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">- 2000 Q3: Deregulation is a dead issue. Several
power companies damaged by Y2K events are absorbed.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">- 2001 Q1: "We will have a tough time for
awhile and pull through. For example, we could lose a couple of cities to riots and
disorder for a few months."</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">So power privateers, assume some of this is true. Is
this a great opportunity for new merchant generation and aggressive power trading, or
what? Blackouts as a context for a power black market. Perhaps. But I would suggest we
must consider the ancient real estate adage updated for our industry. What’s the key
to success? Transmission, transmission, transmission... If it isn’t there, because of
Y2K directly or because of its impact on the wire owners, you may be (to coin a phrase)
the Stranded Generation. Particularly so, if Y2K tsunami-spike leads back to the road to
regulatory serfdom: no deregulation; greater consolidation; greater centralized
reliability management.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">It is good to be back at work now, away from scary
beach reading utility industry upbeat concerns, to pick a few <u>EW</u> current article
titles are "Outsourcing Nuclear Operations: Pros and Cons" and "The
Promises and Perils of Outsourcing". No more worrying about beasts from the
cyber-deep; let somebody else do it. On the other hand, based on beach reading, it is time
to put away deregulation toys - and to begin to retool for the Y2K wrench which may well
mark the energy industry’s entry into the millennium, and enter the gears of private
power. The Y2K cyber beast is the problem of private power as well as the traditional
electric power industry.</font></p>
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<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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