Regulations proposed by the Federal Energy Regulatory Commission to protect the nation's electric grid are mainly prompted by an armed attack last year that knocked out high-voltage transformers in California.
The federal agency's mid-July proposal was developed by the Atlanta-based industry group North American Electric Reliability Corp., but some call the agency's response to the problem inadequate. Meanwhile, a report in June by the Washington-based Congressional Research Service said the nation's electric grid may be vulnerable to a terrorist attack.
Indeed, several utilities are enhancing the physical security of their facilities.
Attention has been focused on the U.S. power grid's vulnerability since an April 2013 armed attack on a substation operated by Pacific Gas & Electric Corp. in Metcalf, California. A number of still-unknown intruders reportedly shot .30-caliber rounds at the San Francisco-based utility's high-voltage transformers, rendering them inoperative and prompting widespread speculation it was a dress rehearsal for a more extensive and coordinated terrorist attack.
There have been several less serious substation incidents, too. As of now, insurance experts say the incidents and potential for more attacks on substations have not boosted insurance rates for power companies.
The insurance industry is monitoring the situation, said Mark Fishbaugh, Charlotte, North Carolina-based national practice leader for power for Aon Risk Solutions.
“The risk has always been there. It's just highlighted now,” he said.
While theories abound on who was behind the substation attack, “I can say whomever did it knew what they were doing,” said Patrick Miller, managing principal at Austin, Texas-based consulting firm The Anfield Group. While he does not believe it was a random attack without motive, we “just don't know what it was.”
The Congressional Research Services' report said there is widespread agreement that high-voltage power transformers are vulnerable to a terrorist attack, which “potentially could have catastrophic consequences.” While attacking multiple transformers would require a certain level of sophistication, “the true vulnerability of the grid to a multitransformer attack remains an open question,” according to the report by the service, which provides policy and legal analysis exclusively for the U.S. Congress.
“The grid was not designed to be fortified against physical attacks,” said Jason Black, a research leader at the Columbus, Ohio-based nonprofit research and development organization Battelle Memorial Institute who has written a report that proposes recommendations for implementing comprehensive security standards.
The California attack was a “wake-up call for the industry” that there is “high probability” of such an attack, said Jasvir Gill, CEO of consultant AlertEnterprise Corp. in Fremont, California. Utilities previously were focused on risks from insiders, including information technology, rather than physical attacks by outsiders, he said.
Jon B. Wellinghoff, a former chairman of the federal agency and now a San Francisco-based partner at law firm Stoel Rives L.L.P., said the Pacific Gas & Electric incident “demonstrated that people have the capability and willingness to try to do things that are very damaging” to the infrastructure.
A spokesman for PG&E said its efforts include building opaque fencing around the perimeter of its highest priority electrical facilities, as well as installing detection and deterrent systems and improved lighting.
Experts say it is unclear how many substations nationwide could be considered critical. But the few that are critical elements of the nation's electric power grid also are the most vulnerable to intentional damage from malicious attacks, the Congressional Research Service said in its report.
Daniel L. Larcamp, a partner at Troutman Sanders L.L.P. in Washington and a former FERC staff member, said “there's been a lot of work that's been done to the grid to modernize it” since a widespread blackout in 2003 in the Northeast so that operators can better protect the grid against “cascading events” that involve numerous substations.
As for the proposed federal rules, “It is somewhat troublesome as to the time that it takes to put these rules into place,” Mr. Wellinghoff said. And when they are in place, more time will be lost to oversight and enforcement. “In the meantime, we're potentially vulnerable,” he said.
The federal agency, FERC, essentially followed NERC's proposal, with two relatively minor changes.
Mr. Miller said he considers the federal agency's proposal to be a “knee-jerk reaction” to the California incident. “The reality is physical improvements to these substations are extremely expensive” and will lead to higher electric rates, he said.
However, Paul McElroy, CEO of Jacksonville, Florida-based electric, water and sewer utility JEA, who said he has worked closely with the Washington-based American Public Power Association to help develop the proposed NERC standard, said, “From our perspective, the standards will consistently and continuously evolve.”
While they would not require substantial changes for utilities already fortifying their physical defenses, “there'll be some investment costs to strengthen the individual systems for the good of the overall grid” for others, he said.
South Boston, Virginia-based Dominion Resources Inc. said it plans to spend up to $500 million over the next five to seven years to protect its transmission substations and other critical infrastructure from man-made physical threats and natural disasters, and stockpile critical equipment for major damage recovery.
David Scott, Radnor, Pennsylvania-based executive vice president and national utility practice leader at Willis North America Inc., said the unsolved California incident has not caused changes in insurance rates.
Utilities generally do not buy business interruption coverage because they pass on the cost of disruptions to their customers, he said. Even if multiple transformers, which cost $3 million to $5 million apiece, were attacked, the insurance industry “could sustain that sort of a loss” under property policies, he said.
“The key issue” for the electric utility risk management community right now is whether physical damage is considered mischief or vandalism, or if it is politically motivated, which could limit utilities' coverage under their conventional property policies, Aon's Mr. Fishbaugh said.