Canadian Underwriter


February 1, 2001   by Sean van Zyl, Editor

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In an eleventh-hour deadline imposed by Quebec law, at least seven insurers and one reinsurer have filed lawsuits totaling over a quarter of a billion dollars against the province’s state-owned utility company, Hydro-Quebec. The actions have been taken to recover commercial and personal lines losses incurred in claim payments arising from the infamous January 1998 ice storm. The insurers have alleged “gross negligence” on the part of the utility company with regard to the maintenance and appropriate security design of its power grid infrastructure.

It is suggested in several lawsuits recently filed by insurers against Hydro-Quebec (HQ) that a lack of responsibility in the manner the company conducted its operations may have partly contributed to the travesty that befell Quebec citizens during and in the aftermath of the January 1998 ice storm. Although the same storm delivered a heavy blow to Eastern Ontario and large sections of the North Eastern U.S., the social and economic impact was significantly greater in Quebec largely as a result of a power blackout that in some areas lasted up to nearly a full month. The question now being asked is why HQ’s power grid was so severely crippled while neighboring networks also subjected to the storm (which in some cases showed higher ice-accretion on lines and support structures) did not show anywhere close to the same damage.

The answer prompted eight insurance companies to take litigation against HQ. The insurers in question are (including representation by operating subsidiaries in Quebec) Factory Mutual Insurance Co. with a $75 million action, Axa Canada Inc. for $62.5 million, CGU Group Canada for $56.2 million, Allstate Insurance Co. of Canada for $25 million, Royal & SunAlliance of Canada Insurance Co. for $16.9 million, ING Group for $14.2 million, Zurich Insurance Co. of Canada for $3.5 million, and Employers Reinsurance Corp. for $3.6 million.

In addition to the lawsuits brought forward by insurers, the recent filing deadline for taking legal action against Quebec’s beleaguered power utility company for the ice storm’s losses also drew a string of subrogated commercial claims relating to losses in excess of insurance cover – of which many of the companies involved are among the top ranking “Who’s Who” of corporate North America.

Accountability at stake

Readers may be wondering why such a fuss is being made three years after the event of the ice storm. In addition to the obvious financial recovery benefits the insurance companies in question would achieve if successful in their legal bids against HQ, many insurers who felt the financial “frost bite” of 1998’s ice storm have long held the view that the heavy losses suffered from electricity outages could have been avoided but for negligence by HQ in maintaining and investing appropriately in the power grid serving its domestic market. The argument stands that the prolonged blackouts that struck every major urban center within Quebec – and in total affected an estimated three million people and produced near anarchy and physical risk to Montreal due to shut down of the water supply and therefore enhanced fire hazards – would not have occurred if HQ did not enjoy state protection and would therefore otherwise have to compete at the highest standard of quality.

In the claim statements against the utility company, the insurers point out that HQ’s power grid is “unique” in that it consists of unusually high-voltage transmission lines spread out over long distances with the two main power sources being Manic/Churchill Falls and James Bay which are located thousands of kilometers apart and away from the consumer centers receiving the electricity. The current is carried by two main 735kV transmission line corridors. This setup has produced past problems which are peculiar to this particular grid configuration, the insurers say.

Adding to this is an imbalance in the expenditure /investment made by HQ toward infrastructure serving its ability to export power versus that of its domestic market. In simplistic terms, HQ’s power grid consists of a “transmission grid”, “sub-transmission grid” and “distribution grid”. In their allegations, the insurers observe that, in order to satisfy standards of a cross-border electricity body known as the Northeast Power Coordinating Council (NPCC), the utility company has in past years invested massive amounts of capital into its transmission grid while neglecting its sub-transmission and distribution grids (serving local markets). Between 1984 and 1988, HQ invested nearly $3 billion in its production and transmission systems. In contrast, only $602 million was allocated over the same time period for sub-transmission and distribution network improvements.

Furthermore, the insurer actions point out that Quebec’s massive investment in hydro-electric projects has created an “over dependency” on electricity as a source of energy, with electricity accounting for 94% of all energy produced within the province. About 71% of all homes and more than 90% of new homes are now reliant on electricity for heat. In that respect, an Institute for Catastrophic Loss Reduction (ICLR) report titled “Ice Storm ’98” observes, “reinforcing the dependency issue is the fact that Quebecers used electricity for 41% of their energy consumption in 1996 compared with a national average of 23.8%”.

Key weaknesses

All of the alleged charges presented by the insurers point to “gross negligence” of conduct by HQ. Some of the more pertinent allegations and supporting comments are outlined below:

HQ only saw fit to adopt an emergency restoration plan and did not develop a preventive plan.

HQ did not consistently apply the same line design security as carried out on “transmission lines” serving export markets to its “sub-transmission grids” serving its domestic market.

Around 90% of the distribution lines located in the ice storm region were built to standards ranging to 25 years past. As such, HQ had not reinforced or upgraded older lines to meet current standards. Notably, 1996 design standards recommend a line span of 60 meters between poles in rural areas, and it is alleged that HQ did not carry out revisions to lines built according to 1994 standards allowing for 92 meter spans. Lines erected under the latter set of standards suffered extreme damage during the ice storm.

None of the “Montreal Ring” 735kV lines, which suffered multiple pylon collapse leading to the city’s blackout, had “anti cascade” pylons installed.

HQ did not heed the warnings of numerous technical studies on the impact of freezing rain, and take preventive and protective measures commonly used by European, American and Canadian power utility operators to minimize damages.

HQ did not adopt proven “thermal de-icing” techniques which have been used on lines by numerous utility companies for decades. Specifically, Manitoba Hydro has used such technology on some of their lines for more than 25 years.

HQ did not implement an adequate transmission line inspection and maintenance program, which the “wear and tear” of components contributed to the system’s failure during the ice storm.

The utility company’s emergency response during the ice storm was inefficient and poorly coordinated, and thereby failed to integrate effectively with other agencies. It was also observed that more than 1,000 HQ technical staff remained at home during key stages of the storm.

Outside critics

It is ironic that HQ’s largest export partner, the Vermont Joint Owners (JVO) which is a group of 15 Vermont electric utilities, is also engaged in a legal action against the company. The JVO entered into a contract with HQ in 1991 to buy electricity at a set rate over a period of 30 years for $4 billion. Subsequently, electricity rates fell well below the level the JVO had locked into, and its members have long been in dispute over the contract conditions.

The January 1998 ice storm therefore came as a mixed blessing for the JVO in that HQ was unable to maintain its end of the contract by keeping the electricity flowing – hence the latest l
egal action to have the contract nullified. A key witness to the case is Brian White, a consulting engineer well known for his designs of large transmission structures. Due to the legal proceedings, White has been restricted from discussing case material, however, prior to that happening and going back to the ice storm, he embarked on an investigation of his own to try unravel why some structures or towers had remained standing while others collapsed – in some cases the standing structures were of a lighter design. In an article published in The Hudson Gazette of February 25, 1998, White is quoted contesting HQ’s statement that the ice storm was a “10,000 year return period storm” which no transmission line structure could possibly have withstood. In fact, White is reported to having said that the icing he had seen on structures was not even equal to what he had encountered in the last 30 years of working on HQ’s transmission network. He is also quoted as saying that the trigger that seemed to cause much of the “cascading” effect of falling adjacent towers seemed to be the result of deterioration or erosion.

Other critics of HQ include the Quebec government appointed Nicolet Commission and the Warren Committee (consisting of experts appointed by HQ) which were established after the ice storm cleanup to investigate why the power grid had failed. Both bodies criticized HQ for its poor ice accumulation measurement methodology, while the Nicolet Commission went further to comment on the utility company’s lack of ice measurements during the storm. The commission also voiced disapproval over “sketchy information” supplied to it by HQ with regard to hardware failures as well as distribution network maintenance.

Mitigation needed

Overall, the claims leveled against Quebec’s utility operator emphasizes a growing public concern to the role government institutions play in many of the socio-economic links that hold our society together. Can “quality” and “responsibility” be upheld by state monopolies controlling critical components affecting society? Insurers would seem to be inclined toward a definite NO in response.

The ICLR also notes in its “Ice Storm ’98” report, “the savings derived from new energy codes, practices and materials could be particularly meaningful when consideration is given to society’s dependency on electricity”. The report points out that the ice storm brought down in total more than 1,000 high-tension wire pylons, 25,000 to 35,000 wooden utility poles, and 120,000 kilometers of transmission and distribution lines – enough to circle the globe three times.

And, the report notes, “experts concur that freezing losses similar to those which devastated Montreal in 1998 could impact Toronto, Boston, New York, Buffalo, Detroit, Cleveland, Chicago, Minneapolis and St. Paul. It is acknowledged that at present the ability to predict such occurrences is, for all intents and purposes, non-existent. This fact places an added urgency and importance on setting in motion meaningful and effective mitigation strategies and programs.” The ICLR’s managing director Alan Pang adds, “ice storms don’t recognize geographic or political borders, and greater research needs to be done to establish frequency and exposure. What’s important is that we don’t forget what happened in January 1998.”

Transmission towers collapsed:

Hydro-Quebec – 595

Hydro-Quebec – 56

Ontario Hydro – 130

New York – 48

Maritimes – 0

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