Lack of terror insurance may hit home PUC advocate says utilities would raise rates to pay for attack damage

AUGUSTA – With nearly all insurers refusing to cover acts of terrorism, Maine ratepayers would likely end up paying the tab for any terrorist attacks on utility facilities in the state, say state officials.

“This is a serious issue for utilities and for ratepayers,” said Public Advocate Stephen Ward, who is charged with representing ratepayer interests before the Public Utilities Commission. “The world has changed since Sept. 11, and what people thought was the unthinkable is something we now have to think about.”

Ward said the costs from any damage to a utility, from power lines to phone switching stations, caused by a terrorist attack would most likely be passed on to ratepayers. He said there would have to be approval by the Public Utilities Commission and stockholders could be forced to pay part of the tab.

“Any sort of attack could be very costly to everyone, including utilities,” he said. “I think we only have to look at the ice storm to see what might happen.”

PUC Chairman Tom Welch agreed. He said the January 1998 ice storm wreaked havoc on electric transmission grids and telephone lines in some parts of the state.

“The best analogy I can think of is the ice storm,” he said. “We had what was by anyone’s definition a catastrophic failure of a very significant portion of the infrastructure of two of our largest utilities. And the short answer to the question of who pays is the people who get the service over the long run.”

Welch said the PUC approved a process that allowed Central Maine Power Co. and Bangor Hydro-Electric Co. to recover from increased rates the costs of rebuilding the transmission lines and infrastructure damaged by the ice storm.

“I expect that with or without insurance, the costs of rebuilding following a catastrophic event however caused, but certainly one caused by a terrorist attack, will be borne by the people getting the service,” he said.

Welch said he could not discuss the details, but the PUC is pleased with the additional security measures Maine utilities have taken since the terrorist attacks last September.

“I think they have done what they could, and I think the plans they have are good,” said Welch.

Last January, Maine Insurance Superintendent Alessandro Iuppa joined fellow regulators in nearly every state and allowed insurers to exclude terrorism acts from coverage. He did that because nearly all companies writing policies in the state said they could no longer get reinsurance to cover the expected huge losses from a terrorist attack.

“I had to weigh the pros and cons,” he said, “and I decided it was best to try and preserve a market in the state.”

Nearly all insurance companies rely on reinsurance to spread their risk in some policy areas. Reinsurance essentially is insurance that insurers buy from such companies as Lloyd’s of London to protect themselves from extraordinary losses. Because of the huge losses from the terrorist attacks last September, however, nearly all reinsurance companies on Jan. 1, 2002, stopped writing coverage that included losses from terrorist activities.

“Until Congress acts and establishes a federal backstop, it really is going to be a market response,” said Iuppa. “We periodically hear of some companies beginning to offer some limited terrorism coverage, but as a practical matter it is still very difficult to obtain and even if you can obtain it, the pricing is astronomical.”

Iuppa said he is encouraged that both the U.S. House and Senate have approved legislation that would provide federal assistance to insurers in the case of terrorist attacks, but he also acknowledged the two branches have adopted different approaches.

“We hear encouraging words coming from Washington that the conference committee will reach an agreement in September,” he said.

All four members of Maine’s congressional delegation have supported the concept of federal legislation to provide some help to the insurance industry if another terrorist attack occurs. But there are differing proposals in a conference committee.

The Senate passed a measure that would provide federal cash after the costs of a terrorist attack exceeded a certain level. That money would be a subsidy from the Treasury. But the House-approved bill would require any federal funds be repaid by the insurers and policyholders over a period of years.

There will be great pressure on lawmakers to achieve some sort of compromise.

A study by the Mortgage Bankers Association estimates that the lack of terrorism coverage has squashed $3.7 billion worth of real estate deals this year, and delayed another $4.5 billion in transactions.