I saw two references today about utilities stockpiling 6 to 9 months of coal and/or gas. Almost all companies in the electric utility industry claim that there will only be minor problems that may last for 72 hours or so. My question is, if everything will be back to normal in 2 or 3 days, why do they need a 9 month supply of extra fuel? Also, if these people, who are on the inside and know what the real risks are, feel it's necessary to stockpile for 9 months, why are they telling us (hapless consumers) to plan for only 3 days of disruptions? If these accounts of stockpiling are true, nothing could be plainer said that extensive disruptions to the world fuel supply are inevitable. This probably means that knowledgeable people fear the worst possible outcome for fuel processors and the transportaion industry. If the supply of diesel fuel is disrupted, the ripples will cascade through the world economy and hit the electric plants like a tidal wave. Rick, please tell me I'm wrong about this.

-- Anonymous, May 20, 1999

Answers

Wayne, back in January, after reviewing what utilities said in their 10Q Year 2000 statements about the risks they perceived, I wrote:

It may have been worded differently in each case, but the following paraphrase is representative of a unanimous opinion about the vulnerabilities of all: "It is impossible to assess with precision or certainty the compliance of fuel and other suppliers, telecommunications providers, power pool or grid partners, and regional transmission facilities."

At that time, several utilities mentioned that stockpiling coal was a part of their contingency planning. Since that time there has been some pretty grim news about the status of many countries in the world. IF some utilities are choosing to acquire more of a backup fuel supply, then it is likely they are doing so because they now recognize the probability of some global failures, not necessarily because they have certain knowledge they will be affected.

Also notice that the predictions of only potential short term outages address just the individual utility's prognosis for the period right after the rollover. It doesn't apply to what a utility thinks about the possibility of longer-term potential disruptions in infrastructure areas outside of their control but which may affect them. The long term implications of the fuel stockpiling reports (assuming they are true) remind me of something Dick Mills wrote a few months back in one of his Powerful Prognostication columns about the future potential for shortfalls in generation versus demand:

"Last weekend, my wife and I bought an antique wood/coal stove. It will provide us with a second way to cook and to heat our heretofore all electric house. We didn't do it out of fear of blackouts in 2000, but because I fear that we might not be able to afford to use so much electricity."

With the deregulation and merger issues utilities must deal with, they are also well aware that keeping costs down may mean the difference between leading the pack or being swallowed up by it. From this standpoint, I can well imagine corporate managers deciding that buying supplies now might be cheaper than possibly paying a lot more next year if overseas instabilities create problems. Then they would be in a good position to keep their prices more stable in a deregulated market and possibly gain market share.

I think there's going to be a LOT of best-guess positioning going on among corporations between now and 2000. Aren't we, as individuals, all trying to do our own best-guess positioning, too?

-- Anonymous, May 20, 1999

No, not because of probability of any failures. Contingency plans are made because they are required by lawyers, auditors, the internet frequenting public - without regard to probability, only with regard to consequence of failure.

-- Anonymous, May 20, 1999

wayne,

read the eia report to the senate thread. it is rather comprehensive and should give you a good idea about just what we are up against.

there is a very *real* possibility that there is going to be an oil shortage due to interruptions in the supply chain. by that i mean starting at procuring the oil from the ground, pipelines, export terminals, tankers, our own ports and refining. it is all addressed in the report.

this is just one of the many concerns that must be factored in when weighing the odds for non interrupted power in the year 2000.

-- Anonymous, May 21, 1999

I read recently that the Japanese have stated that they are storing 6 months of crude oil to run in their refineries. Let me put that into perspective for a moment. Their daily demand is approx. 5.6 million barrels per day, all of which is imported, mostly by VLCC and Suezmax crude ships. To have stockpiled 6 months of supply, they would need to have purchased and stored successfully 1 billion barrels of oil or roughly 500 VLCC's. I can assure you as a crude oil analyst who tracks prices, that this has not occurred. The price spike would have been enormous. Not to mention the impact in the shipping markets. My point here is that there is much silly secondhand information on "storage" plans.

However, I have seen little concrete information thus far. This is not to say that we won't see inventory tightening in Q4-99. I think it's gonna get real real tight. That means high commodity prices and inflation. Kudo's to you Ed Yardeni. Industrial consumers WILL stockpile raw materials. The questions are, how much and when.

-- Anonymous, May 21, 1999

The short answer as to why Utilities are over-reacting with their contingecy plans: The Y2K hype machine has gathered way to much momentum to allow a few facts to change the course of clueless CEO and Corporate IT Managers year old "Y2K expert" recommended contingency plans...

Regards,

-- Anonymous, May 22, 1999

Wow, I'll say this for you factfinder, you're consistent. Please explain to me why it is a bad idea for a Nuclear Plant, or a Lignite Plant to store extra inventory ahead of this potential problem.

How can you possibly think this is not prudent? Ever stood in a gasoline line? Ever tried to buy bottled water in Miami during a hurricane? I just don't get it, why do you think this is a bad idea?

-- Anonymous, May 22, 1999

Those were some fair questions, Jim, so let me address them. I have no problem with contingency plans that address unforseen problems with Y2K, including limited additional inventory. Preparing for Y2K Armegeddon, however, wastes precious resources that could be better spent on important problems regarding reliability of nuclear plant safety sytems and generation reliability.

Y2K problems in embedded systems, while fairly widespread, are almost always minor in effect. These are the facts based on my actual observations in y2k testing and from numerous utility sources. I have stated this in this forum for many months now, and a number of other industry insiders and industry groups have reached the same conclusion and have publically stated so.

Regards,

-- Anonymous, May 22, 1999