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1998-06-15 09:40:06


Yardeni Reports: The Utilities Aren't Talking



Economist Ed Yardeni told a Senate Banking subcommittee that U.S. energy companies are not saying what their y2k exposure is.

This society hangs on a thread of energy. Break it, and this society collapses.

* * * * * * *

Senate Banking, Housing and Urban Affairs Committee

Subcommittee on Financial Services and Technology

Hearing on Disclosure of Year-2000 Readiness

Prepared Testimony of Dr. Edward Yardeni Chief Economist& Managing Director Deutsche Morgan Grenfell. . . .

Electric Utilities

Niagara Mohawk Power is one of the only companies I found that warned investors about embedded chips. They can be found within generation, transmission, and distribution and gas equipment, and may be date-sensitive. No other utility mentioned the risk of noncompliant embedded chips. There are embedded chips in chemical and steel plants, food and drug processing, aircraft, oil rigs, health care equipment, communications systems, elevators, and security systems. Yet only Niagara Mohawk Power chose to disclose this risk. The company admits that it retained a leading computer services and consulting firm only at the end of 1997 and won't even have a complete "inventory of exposures, including an assessment of priorities, costs and resources" until the third quarter of 1998! No cost estimate was provided, presumably because it is not known.

Gas Transmission & Distribution

Consolidated Natural Gas, in its annual report, blandly noted that "assessment of its exposure is expected to be completed during 1998." So "renovation and replacement of existing programs will continue through 1999." Enron devoted one short paragraph to Y2K in its annual report: The company "continues to assess and modify its computer systems to ensure they will operate properly in the year 2000. Enron management anticipates that these Year 2000 costs, which will be incurred over the next two years, will not have a material impact on Enron's financial position or results of operations." Again, management is limiting its analysis to 1998 and 1999. Peoples Energy and Columbia Energy believe Y2K isn't material.

Coastal Corp. was willing to acknowledge that Y2K could have an adverse material impact if Y2K modifications and conversions are not made, or are not completed on time. "There can also be no assurance that the systems of other companies on which the Company's systems rely will be timely converted, or that any such failure to convert by another company would not have an adverse effect on the Company's systems."

Good point. Kathleen Hirning, the chief information officer of the Federal Energy Commission, testified in Congress on May 14, 1998. Here is her particularly relevant comments about the gas transmission and distribution business:

Both the gas and oil industries use Supervisory Control and Data Acquisition Systems (SCADA) to acquire information from remote sections of pipeline, and to control the flow of fuel at remote locations by using computers linked to satellite and telephone communication systems. SCADA systems allow pipeline operators to obtain timely information, and allow producers to have access to information for purchasing distribution services based on the current volume of gas in a pipeline. Information provided by SCADA systems is accessed by users to purchase transportation service, check on billings, or arrange storage of gas that has been transported through a pipeline. Year 2000 compliance will be critical for SCADA systems.

Clearly, the gas transmission and distribution business depends on the Y2K compliance of telecommunications, satellites, and embedded chips. Investors need to know the status of all these systems.


Mobil "is developing contingency plans to alter business relationships, in the event certain third parties fail to become year 2000 compliant." I wonder if any of them disclosed to their investors that they are at risk of losing the Mobil account? Mobil's Y2K statement reveals that the company spent all of 1997 assessing the problem. Nevertheless, management seems remarkably confident that they will complete the project on time. Exxon admits that "comprehensive plans for achieving Year 2000 compliance were finalized during 1997, and implementation work was under way at year-end." Impressively, the company believes it can completely fix its systems in 1998. However, contingency plans are being prepared to mitigate the "potential disruption to business operations."


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