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Volume 31, Issue 4

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What would you do if your business lost electrical power? How would you operate your production lines, heating and/or air conditioning systems, lighting, telecommunications, control systems, and computers? Five years ago, in most parts of the world, you didn’t have to worry about these problems - electricity was taken for granted. But recent events in California - a result of problems stemming from its electric power deregulation program - demonstrate the need to be prepared in case your electrical service is interrupted. If you have a major manufacturing facility, you could suffer millions of dollars in losses due to a prolonged production interruption. Your readiness for lack of electricity could mean the difference between business survival and disastrous loss.

What is Deregulation?

At one time, a single company in a certain geographical region would generate electricity, transmit it to cities and towns, and distribute the power to its consumers - industries, businesses, and residences. This company would be regulated by a public utilities commission or, in the case of the United Kingdom, the government. They would decide if activities such as changes in service, raising electricity rates, or increasing output were warranted. Traditionally, power companies that owned the wires and pipes that carried power into homes and businesses also would sell the consumer electricity and natural gas.

Deregulation separates these services into individual businesses, so you are now buying these services from more than one company. Utilities will now have ownership and control of only transmission and/or distribution (T&D) facilities. This was the case in the United Kingdom, too, immediately after deregulation.

Since then, however, there has been some “vertical integration,” so that some generating companies are now in the transmission and distribution business and vice versa. Power plants, formerly owned by public utilities, will be owned and controlled by private enterprise generating companies. Out-of-area generating companies, independent energy producers, and others will compete to be your energy service provider.

The T&D utility will generally contract with local generating companies for blocks of power to support its service area. These blocks are considered “default” providers. The utilities, by regulation, can charge a carrying fee for the power a user in its service area purchases from an outside, non-default, generating company.

In the United States, though electricity itself will be competitively bought and sold, the means of moving it will remain regulated in part to avoid costly new T&D infrastructure. Utilities will continue to own power lines, poles, and switching stations that route it to customers. However, regulators want to ensure that new producers can get their supplies to the market. For that reason, a central state agency will assume the responsibility of receiving and transmitting this power. This agency, known as the independent system operator, will take over the responsibility of the electrical grid system to ensure that power is being directed to where it is supposed to go. Once producers put power on the grid, it moves on long-distance lines, under transmission rates subject to review by federal regulators, and on lower-voltage local lines, regulated by the states, that carry power directly to customers.


Deregulation in the United States came about as a result of public pressure on government in the early 90s to lower the cost of electricity. More than 20 states have embraced the idea of deregulation in one form or another, opening the door to competition for the generation of electricity.

Obviously, California’s system of deregulation points out some of the pitfalls. Among them:


- Failure to recognize the reality of supply and demand (e.g., industrial growth without growth in electric power infrastructure to support it)
- Overreliance on power generated from “renewable” sources, such as hydropower from the north in spite of a period of severe drought
- Promotion of power purchased from the “spot” market instead of having long-term service agreements

If you’ve read newspapers and watched television recently, you know that California has been experiencing brownouts and scheduled, rolling blackouts in northern areas of the state. Over the last few years, power failures and disturbances have been cited in New York, New Jersey, Delaware, Maryland, Virginia, Mississippi, Arkansas, Texas, Louisiana, and Illinois, as well as the mid-Atlantic and New England states. While these problems were not associated with deregulation, they do point out how vulnerable we are to the loss of electricity.

According to Doug Gowdy, senior engineering specialist, what’s happening in California is unique because, even before deregulation, its rates were higher than the nation’s average due to commitments to more expensive, environmentally friendly power and cost overruns for nuclear power plant construction. “Large users of electricity saw that independent power producers were offering power much more cheaply, so they insisted on change,” said Doug. Deregulation took effect on April 1, 1998, and, within a year, there were warnings of impending shortfalls. Demand was skyrocketing, while supply was diminishing. No power plants have been built in California in the past 10 years, existing plants were forced to shut down because they exceeded regulated emission limits, and out-of-state purchased power (normally 25% of consumption) was not available because of natural causes and increased demand in those areas. Clearly, the supply infrastructure must exceed the demand, and include adequate reserve margins to compensate for abnormal conditions and unscheduled plant outages.

In addition to unprecedented demands for electricity, there are other issues at play in California. “Consumer prices for electricity are fixed by regulators, while the price utilities pay for it is allowed to fluctuate with the market, resulting in tremendous financial losses because the cost for power has exceeded all expectations. Natural gas is in short supply in California, creating an additional supply-and-demand situation that’s increased prices even more,” said Doug. “And, because two of the major utilities are facing bankruptcy and unable to pay their bills, gas transmission companies are reluctant to sell natural gas to the generating companies still controlled by those utilities.”

How Power Interruption Can Affect your Company
The present situation in California has business owners concerned about the loss of electricity through brownouts or blackouts. If you lose your power for an extended period of time, you could be without your production lines, boilers or other important processes. Business interruption could mean your customers have to go elsewhere for products or services, while you try to get your production back in service. Remember - the longer the downtime, the shorter the profits.

It’s crucial that you understand the types of interruptions you could face. In preparing for business interruption, you face two major issues. The first is quantitative - you estimate the cost of your financial losses if a disaster strikes. Analyze each business unit - what is each department’s budget and how would that be impacted in a major loss? What are the critical functions? How much will it cost you to get them operational? The second is qualitative - for each business unit, estimate the impact on quality of products and delivery of service to customers in the event of a disaster. Don’t forget to analyze your facilities worldwide. While certain hazardous situations are specific to certain geographical areas, loss of electricity could happen anywhere and could change the nature of your exposures.

Look at each step of your business interruption - everything from procurement of raw stock to distribution of goods - and develop a flow chart that reflects the interdependence of internal and external suppliers and vendors. How, too, would you be affected if you had power, but your supplier and/or vendor didn’t? If they couldn’t ship products to you, what would that do to your processes?

Look at all your systems and processes, and focus on those areas you consider a priority.

Remember, loss of electricity could affect several things including loss of heat, air conditioning, refrigeration, and air-supported systems; support systems such as compressed air, waste treatment, telecommunications, in-house power generation, uninterruptible power supplies, conveyance systems, and dust collectors; production systems such as safety controls, programmable logic controllers, personal computers, furnaces, ovens, and boilers; and loss of protection and security systems including sprinklers, pump controllers, water supplies, alarm systems, intrusion protection, and passive security systems.

After a thorough review of your systems and processes, develop a business interruption plan, which contains objectives, procedures, responsibilities, and accountabilities for preventing or controlling unplanned business interruptions. Make sure your written plan is easy to read and accessible, using charts, diagrams, and checklists where possible. Include building and electrical layouts; fire protection, electrical, and piping locations; and other utility locations.

Have duplicates - paper and electronic - of your plan, and update and distribute it regularly, preferably at six-month intervals.

Assign a team to implement the policy. Outline chains of command, preferably using organizational charts. Your goal - all employees should be able to react effectively to any emergencies they may encounter.

Well thought out business interruption strategies can decrease downtime and preserve your market share - without planning, you risk it all.

Minimize Your Property Loss

- Create contingency plans for all critical services and processes. Analyze your potential exposures and develop a list of possible scenarios that could adversely impact your facility, then develop response methods and a plan. Include written procedures for processing emergency calls, activating warning/alarm systems, defining actions for employees, and alerting your emergency response team (ERT) and senior management. Assign responsibilities and test your response plan so that you can identify areas that need improvement.
- Enhance employee awareness. Employees are your greatest resource. Prepare key employees for potential exposures, and make sure they know what to do. However, remember that employees may not be available or willing to be at your facility to perform their functions should there be a widespread emergency in your area. Remember to reorganize personnel to take care of essential emergency and production activities.
- Check fire protection systems. When electrical power is interrupted, all or a portion of your fire protection may be out of service. Know which control valves control which sprinkler system and be sure valves are open, fire pump fuel tanks are full, and reservoirs are full. Test the system. If automatic sprinkler systems must be drained, be sure everyone on site is aware that an impairment of fire protection is in effect, and take all precautions associated with FM Global’s Red Tag Permit System. Post around-the-clock fire patrols, with extra emphasis given to idle and storage areas. Have fire hose and fully charged portable extinguishers ready to use. Inform FM Global and your local fire service of the impairment. Once power is restored, verify that all fire protection systems are operational.

Security systems also are likely to be out of service. During periods of sustained power outages, the likelihood of vandalism increases, so conduct security patrols in all areas, especially those susceptible to intruders. Pay special attention to arson-prone areas.

- Eliminate ignition sources. Consider shutting down hazardous processes in case protection systems become impaired. Also, if you lose building heat and portable heaters are needed, keep heaters at least 35 ft. (10.7 m) away from combustible storage or construction.
- Obtain backup heat and power. Have alternate power generating capability available. Establish dependable sources for renting generators. If there is widespread power loss, it may be impossible to rent or lease this critical backup equipment. Or, have your own emergency power generating equipment on the premises. Maintain and test backup equipment periodically to make sure it starts, runs, and has full fuel tanks. Concentrate on maintaining an adequate level of building heat to avoid freeze-up of wet-pipe sprinkler systems, fire-pump rooms, and water-based portable extinguishers, as well as supplying key production and service systems. Also consider shutting off areas that do not need heat.
- Evaluate the possibility of shutting down processes. Consider shutting down processes or minimizing operation levels. Know how to properly shut down equipment (according to manufacturer’s recommendations), including those containing water or other materials subject to low-temperature problems. Loss of electricity causes changes in temperature, including freeze-up in some areas of the world. Provide thermometers in areas with vulnerable equipment and check them frequently. Low-temperature alarm systems monitored at a central location are another possibility. Shutdown of computers should be orderly, ensuring that software and data are backed up and stored in a safe location. They should be available, if needed, during startup.
- Operate temporary systems safely. Temporary lighting and heat, such as propane heaters and rental boilers, should be safely operated. Avoid open flames such as torches and candles. Check for, and correct, any conditions that allow careless loss of heat from buildings.

- Prevent power surge. Open main electrical breakers (i.e., interrupt the circuit) to avoid damaging surges when electrical power is restored. Each circuit breaker should be checked manually and turned off, if necessary. When electrical equipment is turned on, it draws a huge in-rush current, which can be as high as six or seven times the full-load current. Once the equipment starts running, the in-rush current drops quickly down to maximum full-load current or lower. Power may be restored in a choppy on-off pattern initially, resulting in multiple surges until the incoming flow is stabilized. Also, if the circuit breakers are not put in the “off” position during a blackout, too many pieces of equipment may start up simultaneously when power is restored. The cumulative in-rush current may be enough to cause serious damage to electrical equipment and conductors due to overheating.
- Develop recovery strategies. If you’ve taken precautions of shutting down hazardous or otherwise vulnerable systems and processes in case of a brownout or blackout, consider what you need to do for startup and how long it will take. In some cases, startup could take several weeks. And, if a controlled shutdown wasn’t possible, equipment should be isolated prior to the restoration of power and startup testing should be done according to the manufacturer’s recommendations.
- Do not increase your hazard. If you build excess inventory in an effort to offset the potential impact of unplanned shutdowns or loss of services, be careful not to increase your hazard. Do not impair your building protection system by storing stock inventories in aisles. This will only increase losses if a disaster strikes. Identify stock or in-process goods that are susceptible to spoilage or contamination due to a lack of refrigeration or heat, and take measures to mitigate the extent of the damage, including renting refrigerated trailers, if necessary.
- Manual vs. automated control. Plan for the possibility of manual operation, particularly with hazardous operations.

©2001 Factory Mutual Insurance Company. Condensed and reprinted with permission from Record - The Magazine of Property Conservation. Volume 78, Volume 1; First Quarter 2001. www.fmglobal.com.