TransActions - November 2002 (Vol 602)

How to be an Environmental Good Guy

The electric distribution system is uniquely meshed with the environment. Overhead and underground power lines traverse the United States providing electricity to enrich human lives. Pole-lines cross mountains, prairies, pine forests, sandy coastlines, and deserts. Trees are cleared; pole holes are dug; and underground trenches are excavated. Line trucks and tractors roll across the terrain. Unlike factories or offices whose plants are established on small acreage, the utility reaches out with a network of conductors that encompass the whole community. A moderate size rural electric cooperative can have approximately 2,500 miles of line. Assuming a standard 30-ft right-of-way, this translates to 9, 091 acres of land. The operation of the utility will affect this large ecological community.

Today, many laws govern activities on the land. Stiff penalties result when these laws go unheeded. The Fish and Wildlife Service may seek civil penalties of $25,000 for unlawful takings of fish and wildlife and destruction of listed plants, and the federal government may bring criminal action in district court and seek penalties of $50,000 and one year in jail for each violation. Harming includes habitat modification or degradation where it actually kills or injures wildlife by significantly impairing essential behavioral patterns. In other words, cutting a red cockaded woodpecker den tree to clear new power line right-of-way could send the utility manager or line superintendent to jail.

The question is, can utilities effectively conduct their business and still live in harmony with the soil, plants, and animals that compose the system environment? The answer is yes, but only through education and vigilance. Utility managers and operating staffs will have to become knowledgeable about the environmental laws affecting the eco-system of their specific areas. Some activities such as proper application of herbicides on right-of-ways will actually enhance the wildlife habitat and establish a perpetual meadow while keeping the conductors clear of trees and brush. Good publicity of environmental enhancement can establish excellent relations between the environmentally-aware public and the utility. In addition, costs are reduced for right-of-way maintenance, so it is a win-win situation.

Environmental Assessment
The first step in establishing a good environmental plan for the utility is to conduct an assessment. A professional who is educated and experienced in forestry, arboriculture, and the wildlife sciences should do this. He or she will ride through the system and gather data on:

1. Species and density of trees and brush
2. Locations and species of endangered animals and plants
3. Streams, watersheds, and wetlands
4. Special geologic formations and soil types
5. High density residential and low density agricultural areas.

The assessment can be used to pinpoint areas where care must be taken to construct and operate distribution lines. It will address special concerns for endangered species such as eagle nests on power poles or gopher tortoise dens on sand hill right-of-ways. Sensitive areas can be transferred to the system detail maps using GPS and GIS technology.

Wetlands, Streams, and Rivers
Wetlands are governed by the US Army Corps of Engineers. A wetland is defined by the species of plants and the soil type on the land. The area does not necessarily have to be inundated or have standing water. Regulations prohibit operation of equipment in the wetland that will significantly disturb the soil. Poles can be set and underground cables buried if special care is taken to preserve the wetland by hand digging pole holes or directional boring the cables. Before any activity can take place, a permit must be obtained from the Corps of Engineers. They will require specific information such as the line route through the wetland, the amount of soil to be displaced by the construction, and a description of the construction activity. The same holds true for crossing rivers and other navigable waterways. The Corps of Engineers will require assurance that the power crossing not only meets the requirements for clearance above water, but that no adverse effects will be caused to the flora and fauna on each side of the waterway. To place a submarine cable across a bay, for instance, divers must examine the grasses growing on the sea floor. The report, to be included with the permit, must address the effects that the jetting of the cable into the sea floor will have on the marine vegetation.

Endangered Species
Before extending lines to new customers, the area must be checked for existence of any endangered species. Examples in the Southeast include the red cockaded woodpecker, eastern indigo snake, Pine Barrens tree frog, Red Hills salamander, black pine snake, gopher tortoise, southeastern pocket gopher, panhandle lily, and the parrot pitcher plant. Each state has a list of federally designated endangered species with many more than those listed above. Alabama alone has over 70 plants and animals. Some are very small and hard to spot such as the Perdido Key beach mouse whose habitat is located on the Alabama Gulf Coast where development and power line construction is a daily occurrence. 

Destroying dens or altering the habitat to construct power facilities can constitute a "taking" of the species so it is important to know where the endangered species are located and take steps to protect them. Measures as simple as placing poles at locations that will avoid damaging a den or nest can serve the public with electricity and still protect the species. The utility should work with the Department of Natural Resources to find ways of blending construction and operation with preservation of endangered species. Due to television, magazines, and movies, the public has a "bad guy" attitude about companies that harm defenseless animals and destroy plants to construct more facilities to increase profits. To the public, a utility that finds ways to protect endangered species while constructing new facilities is a “good guy”. And guess what? The public is right.

Vegetation Management
The greatest impact the utility has on the environment is the management of vegetation on the power line right-of-way. It is acutely visible to the driving public and ever present to the landowner. Improper treatment of the vegetation can result in erosion, dead trees, disease, damage to streamside management zones, and elimination of wildlife food plants. In addition to the aforementioned wetlands and endangered species, the vegetation manager should also analyze the distribution system to catalog the brush and tree species, streams, and general topography of the land. This is best done using GPS and GIS technology. A map can be developed to show sensitive areas that can be described in a clearing and trimming contract. GPS coordinates will delineate the areas to less than three-meter accuracy. Contractors or in-house crews can then locate a den tree, wetland, or special tree using a hand held GPS unit.

Use a GPS inventory of the trees and brush to develop a clearing and trimming contract or plan that specifies the treatment and location of the work in units. Demand that approved clearing and trimming procedures be used. The International Society of Arboriculture publishes very good materials dealing with environmentally acceptable pruning and clearing techniques that can be used to train the crews and prepare specifications. Good pruning and clearing will keep the remaining trees healthy. Remove, chip, or mulch pruned limbs and felled trees for aesthetics and to prevent harmful insect invasion. Establish a program to replace tall growing trees with low growing species in areas needing a vegetation buffer or in residential yards where the landowner wants shade, shelter, or aesthetics.

Use herbicides to establish a perpetual meadow on the right-of-way that supplies food and cover to wildlife. This meadow keeps the conductors clear of trees and brush, and provides good access for maintenance of the structures. Mowing alone will not produce the meadow. Sprouts from cut stumps can grow back into the lines within three years and shade out the few established wildlife food plants. Re-mowing will only start the process over and the forbs and grasses that are integral to the wildlife habitat will never flourish. An effective herbicide program managed by trained professionals can enhance the environment by establishing a flourishing population of wildlife food plants and ground cover. The treatment is best applied within one year of mowing the right-of-way. Low volume backpack spraying provides excellent coverage, is easy on the terrain, and has less chance of causing off-site damage. The herbicides will curtail sprout growth and encourage wildlife food plants and ground cover to populate the open area. A touchup herbicide application in three to five years will maintain the meadow and no more mowing will be necessary. Having the short growth plants established on the right-of-way also prevents erosion.

Streamside vegetation can be maintained according to good environmental practice by specifying herbicides with appropriate labels for use near watercourses. Having a GPS map of the area can provide the spraying crew with the exact location of where to start and stop the streamside application. By effectively and safely applying herbicides, the utility creates an area that benefits wildlife, prevents erosion, keeps the conductors clear of trees, and provides access to the facilities. All this is accomplished for less money than re-clearing on a regular cycle.

Summary
The utility plant is highly visible and interfaced with the environment. Managers can operate the system in harmony with the environment by using knowledge and technology. 
Trained professionals and consultants should be used to survey the system and prepare a sound environmental management plan. Design and construction personnel should be encouraged to recognize wetlands and areas inhabited by endangered species and to conduct their activities accordingly. Utilities must work with governmental agencies to comply with environmental laws, establish relationships with key authorities, manage rights-of-ways to enhance wildlife and to establish long term control of high growing trees. Most of all, utilities should publicize their good works! Let people know that the utility is operating its system on sound environmental principles to preserve the quality of life while it provides good electric service to its customers.

GDS Can Help
GreenLine Environmental, a subsidiary of GDS Associates, has registered foresters, ISA certified arborists, and certified pesticide applicators on staff. GreenLine has full GPS/GIS capability and can perform environmental assessments, prepare environmental management plans, and manage vegetation on rights-of-ways. 

For more information contact Richard Lovelace at: 
GreenLine Environmental (334)887-3297
e-mail: richard.lovelace@hi-line.gdsassociates.com 



We’re being bombarded with credit rating downgrades!

It seems as if every publication related to the energy industry is writing about energy company downgrades or possible downgrades in the near future. What does it mean when a company is downgraded? What do "Ba1" or "BB+" or “Caa” really mean? What's the significance of an investment grade rating? What does it mean to wholesale customers who deal with these companies? We’ll try to provide some of the answers right here.

History of Rating Agencies
Rating agencies, of one type or another, have been providing ratings to investors since the early 1900's. In the mid-1930's, the government decreed that banks could hold only investment-grade securities. This action initiated the delegation of risk assessment from regulators to rating agencies. Since then, increased regulatory requirements have forced banks, insurance companies, mutual funds, and other financial institutions to pay considerable attention to bond ratings. In 1975, to prevent just any company from selling investment-grade ratings to the highest bidder, the Securities & Exchange Commission designated Moody's, S&P, and Fitch as the only rating agencies that may be used to satisfy creditworthiness regulations. Companies pay these agencies to rate them so that the companies can access the capital markets for debt and equity. 

Role of Rating Agencies
Rating agencies determine and rate the creditworthiness of companies that issue public debt, as well as the debt itself. The agencies conduct a fairly extensive analysis of a company to arrive at a rating. This analysis includes, but is not limited to: interviewing company executives regarding finances, operations, and management plans; assessing the business risk and competitive position of the company in relation to its particular industry; and evaluating a company's financial risk by analyzing financial policy and characteristics, profitability, capital structure, cash flow protection, and financial flexibility.

Use of Ratings
How are ratings used? Obviously, ratings are used to determine the creditworthiness of a company or its debt. Ratings also play a role in determining the interest rate at which a company issues debt, as well as the price at which the debt trades. More recently, investors are beginning to view ratings as an important measure of a company's financial health. Ratings are also used in power purchase contracts as benchmarks to insure credit quality between counterparties.

Definition of Ratings
Moody's, S&P, and Fitch, all use letter-based rating systems. Table 1 provides a summary of their rating symbols and definitions for issuers of debt. 

Table 1: Summary of Rating Symbols and Definitions
Source: Financial Markets and Financial Instruments, page 51.

The Significance of an Investment Grade Rating
Maintaining an investment grade rating is important to companies in many aspects. Inherently, it implies that the company in question has the ability to meet its debt obligations. As mentioned earlier, banks are only allowed to hold securities that are investment grade. So having investment grade status enables a company's investor base to be broadened. An investment grade rating also gives investors increased confidence that the company is in good financial condition. 

Not maintaining or achieving investment grade status can significantly affect a company's operations and financial condition. For a company that fails to maintain an investment grade rating, credit "triggers" in contracts can be tripped requiring the company to provide additional credit support. For example, in late 2001 when Mirant Corporation was downgraded by Moody's to Ba1, Mirant had to post approximately $500 million in additional collateral to back existing contracts with counterparties. More recently, Fitch Ratings downgraded Mirant to below investment grade - an action that could possibly require $300 million of additional collateral calls.

Maintaining an investment grade rating potentially enables a company to issue debt at a lower interest rate. Ceteris paribus, investment grade companies can issue debt at a lower rate than non-investment grade companies. As one moves down the scale of ratings from investment grade to speculative, the risk of default is seen to increase. As default risk increases, lenders are compensated for this increased risk in the form of higher interest rates.

Some companies never obtain an investment grade rating and may have no intention of reaching such status. This may be a result of the particular industry the company is in or possibly that management is willing to deal with the effects of not having an investment grade rating. 

What Does This All Mean to Wholesale Customers?
In light of the Enron debacle, the importance of addressing the credit quality of counterparties is evident. This applies to the credit worthiness of parties on both sides of the table. Wholesale power customers need to insure that credit quality language is incorporated into their contracts with power suppliers. For example, material adverse change clauses can be included if a state company is rated and is downgraded by one or more of the rating agencies, then additional credit support must be provided. This additional credit support may take the form of collateral, a parent guaranty, a surety bond, etc. However, do not be surprised if similar language is not imposed upon you.

For more information, contact Brian Lawson at 770-425-8100 or email: info@gdsassociates.com.

New spill prevention plans (SPCC) include electrical equipment.

The Oil Spill Prevention regulation, 40CFR112, more commonly known as Spill Prevention Control and Countermeasures (SPCC), has been reviewed and a final version was published on July 17 of this year. It requires that plans be developed or existing plans reviewed and modified, if necessary, by February 17, 2003 and new operational plans be implemented by August 13, 2003. The numerous changes in this regulation will have an impact on utility organizations since all utilities must perform a formal review of their spill prevention plans. While there may have been some doubt in the older version of the regulation, oil-filled electrical equipment is clearly within the scope of the new SPCC ruling.

The new ruling maintains the 1,320-gallon total facility threshold and the 42,000-gallon underground storage threshold. However, the final ruling eases the automatic requirement for an SPCC plan by eliminating the 660-gallon single container rule. Additionally, only containers with a 55-gallon capacity or greater are now included in the 1,320-gallon threshold. The revised ruling clarifies that a "facility" may be as small as a single piece of equipment. In the revised ruling, the review period has been extended from 3 years to 5 years. While unchanged, an often missed requirement is the definition of what constitutes an "oil". The definition includes any refined petroleum product, including gasoline, diesel fuel, and some petrochemicals.

GDS can perform the required review and development of SPCC plans under the new ruling as well as other operational compliance areas including Confined Space, Lockout/Tagout, Hazardous Communications and Emergency Response and general facility safety programs. Most of these programs requires recordable, periodic review and auditing as well as employee training.

For more information, contact Jim Willcox, 770-425-8100, ext. 127, or jim.willcox@gdsassociates.com.

Please permit us a smile.
Rio Grande Electric Cooperative has won the privatization contract for the electric distribution system at Fort Bliss. It is a $98+million contract. GDS Associates helped prepare the proposal for the distribution system. Which, of course, is why we are smiling over the Rio Grande EC success!