Most of the initial news coverage about America’s largest power outage focused on the human interest angle, stories of individuals stepping in to direct traffic, walking home across bridges and up dozens of flights of stairs, sleeping on sidewalks because their hotel keycards no longer functioned.
But it didn’t take long before reporters started asking more serious questions about the blackout that plunged eight states and two countries into darkness, leaving cities from New York to Toronto without power, shutting down 100 power plants and leaving 50 million consumers without electricity, some for more than a day.
Where did the blackout start? What was the cause? What could have been done to prevent it? What guarantee is there that it won’t happen again?
There are as yet no definitive answers to any of those questions, but there has been no shortage of theorizing and speculation, as ideologues at both ends of the political spectrum sought to score points—the left blaming deregulation, the right blaming environmentalists—and journalists looked for someone to play the role of the villain.
“The blackout itself was not a crisis,” says Al Geduldig, principal of New York-based consulting firm Geduldig & Ferguson. “It was an incident—on a grand scale, to be sure, but still an incident. It will no doubt become a crisis for some companies and officials as soon as the media and lawyers and politicians find someone to blame. Because crisis always involves the media and always involves blame. It’s no crisis unless the media can find someone in high places to blame.
“The media is now playing its usual game of looking for culpability. Enter the whistleblowers. No doubt we will soon see old memos warning of the potential dangers that were ignored by an indifferent or irresponsible management.”
While no one has yet brought forward that kind of smoking gun, plenty of evidence is emerging to suggest the blackout could have been avoided.
For years, the nation’s electrical engineers have warned that the U.S. system for transmitting electricity was in need of a major upgrade. Five years ago, for example, a federal taskforce warned the Department of Energy that the reliability of the electrical system was based on a patchwork quilt of voluntary standards, and that Washington needed to impose mandatory rules on the electric industry. That 1998 taskforce recommended that the Federal Energy Regulatory Commission be given legal authority to impose rules on the industry and urged the adoption of several new technologies that would prevent single failures from expanding into widespread blackouts.
But Congress was reluctant to impose new rules on the industry, and left to their own devices few utilities made significant investments in their transmission systems.
“This outage will cost consumers millions of dollars, and it would have been far less expensive if we had just made the system robust enough to meet their needs,” said Peggy Welsh, senior vice president of the Consumer Energy Council of America, a research group that represents residential and business consumers of power. “We have a system built 50 years ago for an analog society, and it can’t handle the demands of a digital society.”
Governor Bill Richardson of New Mexico, an energy secretary under Clinton, offered a more succinct assessment: “We are a major superpower with a third-world electrical grid.”
Says Dick Hyde, who leads the crisis management function at Hill & Knowlton, “The deregulated electric energy industry, which now comprises various types of companies that generate power or distribute it or do both, faced a mighty test on August 14—and failed. The assurances issued by the industry after the massive blackout of 1977—that it could never happen again—are no longer acceptable. The blackout demonstrated that the electricity supply system is vulnerable. The system also exposed itself as a target, possibly an easy one, for terrorists.”
And if reporters are looking for someone to play the lead villain, they may not have to look much further than FirstEnergy. After initially blaming the blackout onproblems at Niagara Mohawk in Canada, experts eventually arrived at a consensus that the most likely cause was the failure of electric power transmission lines owned by Akron-based FirstEnergy, and while it may be weeks before investigators know for certain what happened last Thursday, the company was immediately forced on the defensive by a barrage of criticism.
“FirstEnergy Has a Trail of Various Troubles,” said ABC News, a reference to a list of operational and public relations woes that includes consumer and shareholder lawsuits, strained relations with unions, safety issues at a nuclear power plant, and claims that the company wields undue influence at the state and federal levels due to campaign donations and high-powered lobbying.
Previously known as Ohio Edison, FirstEnergy became one of the largest U.S. utility holding companies in 2001 with its $4.5 billion purchase of GPU, and it now serves about 4.3 million customers in Ohio, Pennsylvania and New Jersey, and runs power through 14,700 miles of transmission lines. But the company has been burdened with debt since the GPU acquisition, carrying about $12.6 billion in long-term debt and posting a net loss of $57.9 million in the second quarter.
Part of that loss was attributable to costs incurred at its Davis-Besse nuclear power station, which shut down about 17 months ago after inspectors found that a slow acid leak had eaten a hole in the vessel head on top of the reactor. And recently the company said it would restate results going back to 2002 because of changes in how it accounts for costs related to Ohio’s move toward a competitive power market.
As a result, FirstEnergy has become a target for lawyers representing both shareholders and consumers.
“The mentality of the FirstEnergy senior management [is that] they place a higher regard for profit and power production than the safety of the public,” says consumer lawyer Howard Whitcomb, a former FirstEnergy senior manager and a longtime of critic of the utility.
“It’s going to skimp on expenses to make profitability look better than it really is,” adds lawyer Mel Weiss, who represents shareholders suing the company for allegedly deceiving the public by “cooking the books” to impress Wall Street. “And that, of course, ultimately hurts the consumer and in this case, maybe 50 million people.”
Unionized employees, meanwhile, complain the company cut back on workers who maintain its transmission lines in order to improve profits.
But one area where the company clearly does not skimp is public affairs. In 2002, FirstEnergy gave $1,044,807 to political parties — 70 percent to Republicans and 29 percent to Democrats — the 10th-largest amount contributed by an energy and natural resources company and the sixth-largest amount contributed by an electric utility, according to the Center for Responsive Politics. That year, FirstEnergy spent another $2,259,975 on lobbying.
Over the past year its lobbyists have included Joshua Rokach, a former Federal Energy Regulatory Commission lawyer who was involved in electrical transmission restructuring; Donald Elliott, general counsel of the Environmental Protection Agency under former President Bush; and Russell Smith, former Republican counsel to the House Energy and Commerce Committee. The latter two work for Willkie Farr & Gallagher, which is helping FirstEnergy with “legislation relating to air pollution.”
The company’s biggest legislative success came three years ago in Ohio, when the bill designed to bring competition to the electricity market was passed along with a provision allowing FirstEnergy to bill its customers for past investments, mainly in its nuclear power plants. Consumer groups say customers will be forced to pay $9 billion. The company says that number is exaggerated, but has not produced records showing the actual price.
In the wake of the blackout, U.S. Representative and Democratic presidential hopeful Dennis Kucinich asked the state commission “to revoke FirstEnergy’s right to do business in Ohio.” Kucinich says the company has consistently put profits ahead of the public interest. Kucinich is a longtime critic of First Energy. In February, he filed a petition to have the company’s operating license at its Davis-Besse nuclear plant revoked, after the company admitted safety problems to the Nuclear Regulatory Commission.
Ralph DiNicola, FirstEnergy’s public relations director, responded to Kucinich’s statement with a reminder that the investigation into the cause of the blackout is in the very early stages: “We believe that responsible individuals will allow the U.S.-Canadian task force to proceed with the enormous effort of gathering and analyzing information from the entire region to determine the circumstances that led to the event before jumping to conclusions.”
But some damage is already done. The company’s stock dipped $2.86 or almost 10 percent to $27.75 at the close of New York Stock Exchange trading on Monday.
Merrill Lynch analyst Steven Fleishman cut his rating on the company to “neutral” from “buy,” citing the risk that FirstEnergy’s “already strained” credibility “with investors, regulators and government officials could suffer.” And Goldman Sachs analyst Jonathan Raleigh provided some insight into how strained the company’s management credibility is when he told reporters, “We believe this incremental event may facilitate some level of positive change in management ranks. A change in FE’s management should be positive for many reasons, the least of which is credibility.”
Credibility is an issue for the entire industry, which needs to act swiftly to restore its reputation, experts say. The first steps are likely to be operational.
“Many of the initial steps that the industry and individual companies must take now fall under operations and security,” says Hyde, who counsels: “Start by assuring there is adequate capacity and failsafe grid systems for distribution, on the one hand, and build strong safeguards to protect the systems against foul play on the other.”
But communications has a role to play also. “Certainly basic communication among the electric energy companies must be made foolproof to avoid any possibility that failure to pass along vital information about overloads or system failures will contribute to any future blackouts. It sounds simple to expect that a control panel operator who detects a problem would pick up the phone or send an email down the line to warn others in the grid, but things are not as simple as they might appear.”
As for public relations concerns, “Any electric energy supplier in U.S. today that isn’t re-examining programs in this area as a result of the blackout is courting disaster,” says Hyde. “Companies in the Northeast have the immediate need to establish confidence by explaining what happened, how it happened and what’s being done to prevent a recurrence.”
The first thing utility companies affected by the blackout have to do is “tell every one of their audiences, and I mean every one of them, how they are solving the problem,” says Gary Wells, director of media relations at Dix & Eaton in Cleveland. “People can forgive and forget almost anything, if they know you’re doing something about the problem at hand.”
But all electric companies—not only those who lost power on August 14—now need to recognize that they are operating in a condition of heightened concern as a result of the blackout, says Hyde. That means applying the principles of risk communication. “Start by recognizing that perceptions must be dealt with as if they’re real. Give credit to the great importance of trust; grant those affected by your operations a voice in the process, and recognize that nothing can be accomplished unless those who are touched by your actions understand the benefit they will receive.
“Keep in mind that you as an electric energy company might not be the most trusted source of information in the present environment. Consider determining those who rank higher in credibility among those you want to reach and enlist their involvement in the communication process. In other words, tap third parties that support your position to speak out
Says Wells, “For those utilities in other parts of the country, it is important for them not to opine that it couldn’t happen to them, but rather to explain what they’ve done over time to guard against such an
Meanwhile, the entire industry is likely to face questions about whether deregulation played a contributing role in the blackout.
“Energy experts have long warned that deregulation would lead to neglect of the grid,” wrote economist Paul Krugman in The New York Times. “Under the old regulatory system, power companies had strong incentives to ensure the integrity of power transmission—they would catch the flak if something went wrong. But those incentives went away with deregulation: because effective competition in transmission wasn’t possible, the companies providing transmission still had to be regulated. But because regulation limited their profits, they had little financial incentive to invest in maintaining and upgrading the system. And because of deregulation elsewhere, responsibility was diffused: nobody had a strong stake in keeping the system reliable. The result was a failure not just to add capacity, but to maintain and upgrade capacity that already existed.”
In the days of regulation, a company would recoup its investment through rates set by a state commission, but critics say deregulation eliminated incentives for companies to invest in new transmission lines. Only a national regulator can force states to accept transmission lines that may not be in their interest, says Richard Rudden, chief executive of a consulting firm that specializes in energy issues. But the Federal Energy Regulatory Commission lacks that power and the North American Electric Reliability Council NERC), a coalition of public and private groups that sets industry standards, has no mandatory standards and can’t enforce reliability.
(It’s hard to read the introductory blurb at NERC’s website without an ironic smile: “NERC’s mission is to ensure that the bulk electric system in North America is reliable, adequate and secure. Since its formation in 1968, NERC has operated successfully as a voluntary organization, relying on reciprocity, peer pressure and the mutual self-interest of all those involved. Through this voluntary approach, NERC has helped to make the North American bulk electric system the most reliable in the world.”)
“While I’m not sure what the impact of the blackout will be on deregulation, I do believe that utility companies should use the opportunity presented by the blackout to present their case and plan for
the update of the grid system that clearly is antiquated,” says Wells. “Otherwise, they’ll get blamed for that system—and I don’t believe it’s their fault.
“But if they don’t seize this opportunity to push for modernization of the system, they’ll get blamed for it. At that point, it will become hard actually to solve the problem.”
Ultimately, the crisis provides—as crises often do, the opportunity to some company to step up and show leadership.
Says Al Tortorella, who heads the corporate practice at Ogilvy Public Relations Worldwide, “There is a chance for a real leader to emerge from the pack to explain why deregulation didn’t cause the blackout and that the public must understand the solution lies in how all companies in the industry, as well as government and the environmental movement interact going forward.
“Somewhere out there in the affected states is an electric utility CEO affected by the blackout who could emerge as the Rudy Giuliani of the Blackout of 03. The strategy to do so is easy: Be the first industry leader to head straight for the Detroit (perhaps the most affected city in the U.S.) Economic Club with the Five Point Promise outlining how his or her utility will restructure as a result of the episode and then promising to form the coalition that will lead the industry and its trade groups in a unified program to influence Congress to pass the necessary legislation to get the grid modernized.”