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Cost of security improvements passed on to consumers
By Matthew French
Staff Writer
When someone turns on a water tap or flips a light switch, little thought is given to the water or electricity flowing through the infrastructure. It is taken for granted that the water will flow and the electricity will continue to make the world run.
But Congress has mandated that regional and local utilities and waterworks undertake steps to ensure that the vital elements of public works are protected from terrorist attacks. The cost of such protection is generally not inexpensive. And, as with any business, much of the cost is inevitably passed on to the consumer. But in the case of public works, the cost is often hidden from the end users.
Utility companies must get approval from the Office of Regulatory Staff at the state level before they can implement rate changes. Prior to Jan.1 of this year, however, approval came from the state’s Public Service Commission.
Public works companies and commissions often implement periodic rate hikes to offset the increased cost of doing business: higher labor costs, increased cost of power, and capital investments. Over the past several years, however, the added cost of security is often included in the rate hikes.
“If a company implements new security measures and expenditures, the company first incurs the cost itself, then, when they want to adjust their rates, we audit them to see if the additional costs were reasonably incurred,” says Dan Arnett, chief of staff at the Office of Regulatory Staff. “We verify the expense the company incurred and then ensure that the expense is known and measurable, used and useful.”
While large cities that would seem to be obvious targets of terrorists, such as New York and Washington, D.C., may receive the lion’s share of the national focus, local utility companies have also taken the required steps to beef up security measures, albeit much more quietly.
Symbolic target
Most would agree that the Charleston area is a relatively low-risk region in terms of being a terrorist target. It isn’t one of the 50 largest cities in the country, is not the center for finance, government or a major business sector, and doesn’t boast the large military presence it once did. However, says Clay Duffie, general manager of the Mount Pleasant Waterworks, it is the small American city that could be a symbolic target.
“I don’t think Mount Pleasant Waterworks is high on a terrorist’s priority list,” Duffie says. “But if a terrorist were to strike in Middle America, poison the water supply, and wipe out the inhabitants of a town, the fear that would spread from that would be the real problem.”
When Congress passed the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, public works departments were required to conduct vulnerability assessments to determine how safe the drinking water supply was and what measures needed to be taken to increase security.
The act specifically states that any community water system serving a population of greater than 3,300 people must undergo the assessment to determine the threats against a safe and reliable supply of drinking water.
Duffie says Mount Pleasant Waterworks hasn’t done a specific study to determine how much of rate increases can account for the additional cost of security, but did say the company, which is independent from the town of Mount Pleasant and doesn’t rely on taxes or town money for funding, will end up spending between $400,000 and $500,000 on security measures.
“We have spent about $200,000 to date in equipment, training and capital improvements, and have $170,000 in the budget over the next two years,” Duffie says. “There are more important things for us to be spending our money on. A well-trained terrorist with a mind to perform a deliberate malicious act will be hard to stop, regardless of how much money is spent on security.”
The Charleston Commissioners of Public Works have also implemented new and costly security improvements to enhance protection of the water supply to about 400,000 users throughout the region, according to John Cook, assistant general manager of the CPW.
“We are spending around $3 million in calendar year 2005 for waste and drinking water security enhancements,” says Cook. “Most of that consists of hard security at our plants, such as barriers and fencing, pan-tilt-zoom cameras, and motion sensors.”
In October 2003, the CPW board voted to raise water and sewer rates by an average of 5.5% for 2004 through 2006. This increase will result in a total compound increase of 10.2% for water and 17.4% for sewer by 2006. The increase is necessary to repay debt incurred by a 2003 bond issue to fund CPW’s Sewer Tunnel Replacement Project and homeland security improvements.
The increased security costs are not likely to disappear any time soon. CPW is paying for the security measures with borrowed money, so the principle and interest must be paid back. In addition, ongoing training, new staff and maintenance and upkeep of the new security measures all add to the bottom line.
The electric slide
The nation’s electric infrastructure is widely regarded as the most important, and most vulnerable, part of American business life. Banking institutions, hospitals, businesses and defense facilities would grind to an abrupt halt if electricity were to fail.
SCANA Corp., the parent company for South Carolina Electric and Gas Co., would not speak to specifics about what security enhancements the company’s facilities have seen, nor about the cost of those enhancements.
The company’s year-end 2003 Securities and Exchange Commission report stated simply: “In today’s environment, there is a heightened risk of terrorist attack on the nation’s nuclear facilities, which has resulted in increased security costs at our nuclear plant.”
“We do have, and have had, an extensive security programs in place, but I will not go into details about what those enhancements have been, for obvious reasons,” says Robin Montgomery, a spokesman for SCE&G. “We have always had a thorough program, but after Sept. 11, additional steps were taken to further our security.”
Matthew French is a staff writer for the Business Journal. E-mail him at mfrench@crbj.com.
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