Did Your Utility Save for Sandy?

Let the blame games begin. As New York continues to recover from the disastrous effects of Hurricane Sandy, Governor Andrew Cuomo has announced a special commission to investigate utilities' preparedness and response to the superstorm. Here's what you need to know.

It's official
More than 100 years after its creation, Gov. Cuomo is dusting off the Moreland Act of 1907 to give him the authority "to examine and investigate the management and affairs of any department, board, bureau or commission of the state." Utilities' public-private tango dance puts them squarely under the watchful eye of the New York government. 

It's no secret that the governor has been less than impressed with utility companies' responses to Hurricane Sandy. In a press conference announcing his decision, Cuomo asserted that "this situation painfully exposed the failings" of the utilities. "Hopefully, we now have the political will to actually bring about change. I don't want to lose that moment." 

The commission will examine utilities' "response, preparation, and management" in an effort to make sure Sandy's missteps and mistakes don't happen again. "As we adjust to the reality of more frequent major weather incidents, we must study and learn from these past experiences to prepare for the future," said Cuomo. 

Who's in timeout?
Although the commission will operate under the uplifting onus of reforming utilities' "overlapping responsibilities," there's still a fair amount of finger pointing. On the front line are Consolidated Edison (ED 1.05%) and National Grid's (NGG 0.72%) Long Island Power Authority (LIPA). Tens of thousands of LIPA customers are currently without power, and Con Ed reported Sunday that around 25,000 of its customers are still in the dark.

Con Ed currently estimates its total Sandy and nor'easter costs at $350 million-$450 million, while the hurricane's overall costs have exploded from an original $15 billion estimate to around $50 billion. 

The real culprits
But storms aren't surprises, even if no one expected what Sandy had in store. There are two main methods that utilities use to cover the financial burden of a superstorm:

1. Self-insure: Whether a storm's a-brewin' or not, utilities squirrel away funds into "storm reserve accounts," ready to bankroll the next disaster. It's not a heavy burden, either. The Edison Electric Institute estimates (link opens to PDF) this costs NextEra Energy's (NEE 1.57%) Florida Power & Light customers around $0.20 per month.
2. Cost defer: Rather than prepare ahead of time, some utilities prefer to weather the storm for two to three years after it hits. With permission from regulatory commissions, utilities can defer costs into the future, a clever accounting tool considering some storms cost more than a company's annual net income. In certain cases, the utility ultimately carries the burden, while other times a "special surcharge" can offload costs to customers. 

Here's how some utilities currently stand on storm preparation:

Source: Edison Electric Institute and Company Annual Reports 

Severe weather isn't a fluke, and blind dates with the likes of Katrina, Irene, and Sandy are far from over. For utilities that defer costs, there's no guarantee that regulators will allow them to tack costs on to customers at a later date. National Grid's recent creation of a $29 million storm reserve isn't going to stop Sandy from hitting, but it does provide a safety net of financials to allow the company to recover quickly and effectively.

It's gonna get bumpy
Sandy's decimation was shocking, but Gov. Cuomo's new commission will undoubtedly shed further light on the fact that it should've been expected. Utilities that hold storm reserves are one step ahead of their competitors, freeing up funds for immediate action. For those that bury storms' increasingly common and costly impacts in their books – don't expect to see sunshine on the next pages of your portfolio.