ACE Power Products, a specialized
underwriting team within ACE USA, specializes in electric power risk management.
ACE USA is part of the ACE Group of Companies (NYSE: ACE), which has consolidated
assets of $40 billion and operates in nearly 50 countries. Ms. Goudarzi
worked for DOE and LG&E before joining ACE USA. She holds an MBA in
Managment Science from VPI.
W-G: Why and
when did ACE USA enter the market with replacement power insurance?
PG: In the mid-90s we created
replacement power insurance in response to the extreme market volatility
in the Midwestern United States. We started with insuring one customer
in 1998 and grew to over 70,000 megawatts concurrently by the summer of
2000. As volatility and price swells have spread to other regions of the
country and world, our product has followed, offering protection to customers
in the U.S., United Kingdom, Australia and Canada. Our coverage has been
used by any size customer from 2 megawatt cogeneration facilities to 12,000
megawatt and up power systems.
In short, ACE PowerBackersm
Replacement Power Insurance was designed to bridge physical exposures
of Unplanned Outages and the financial exposures of volatile electricity
spot markets. The product has been compared to a contingent call option,
with loss measurement starting immediately. There is no waiting period
as in a standard property insurance policy.
W-G: Summer
demand is significantly higher than winter demand; can PowerBacker be
purchased for peak months only?
PG: Yes. Many of our policies
are written to cover only the peak months; however, a few have benefited
from full-year coverage, in particular those looking to protect power
sales or power purchase agreements. We also offer coverage in the U.K.
and Australia, which complements our U.S. book of business as their peak
occurs during our winter months.
W-G: Must
there be physical damage to the unit for the PowerBacker policy to cover
the loss?
PG: No. PowerBacker responds
to Unplanned Outages as defined by the Institute of Electrical and Electronic
Engineers (IEEE). All classes of outage, except maintenance outages, are
covered by PowerBacker, even starting failures.
W-G: Can Unplanned
Derates be covered under a PowerBacker?
PG: Yes. We will insure derates
greater than normally expected.
W-G: Are there
any restrictions on the generation assets insured?
PG: Our coverage varies depending
on which products our customers purchase. There are not specific fleet
restrictions for our short-term product, although we may refuse to insure
a particular unit due to poor performance or maintenance. For our Long
Term Outage product, ACE Power Products will consider coverage for most
technologies with the exception of the very latest combustion turbine
designs that are still considered prototypes, nuclear and hydroelectric
facilities and some renewable technologies.
W-G: ACE launched
a new product in 2002 for CFO's and risk managers. Our readers would like
to hear what the products are and what markets do they serve?
PG: ACE USA successfully launched
a new product for risk managers and CFOs who are responsible for earnings
stabilization. PowerBackersm LTO is a new product that protects organizations
from catastrophic, long-term power outage events.
Our original PowerBacker policy
protects customers from short-term outage events, (generally the first
15 to 30 days of each outage) and caps the price for replacement power
at a pre-determined price. PowerBacker Long Term Outage ("PowerBacker
LTO") program complements this coverage by protecting customers after
the first 30 to 60 days of an event, with a pre-determined payment per
day.
With limits of up to $100 million,
PowerBacker LTO protects generation owners against adverse financial consequences
that result when one or more generating units are out of commercial operation
for long periods.
This coverage has been particularly
successful in deregulated states where the utilities no longer have the
capability to pass these costs to their franchised customer base.
W-G Can you
give us some examples of the more creative uses of the PowerBacker products?
Some companies feel their exposure
to 'any' outage at their facility is not catastrophic since they have
considerable excess supply. But an outage at an inexpensive generating
plant such as a coal or nuclear station could cause them to rely on either
the market or their more costly, gas- or oil-fired generation, and could
result in significant increases in power expenses.
ACE implemented a PowerBacker
solution that covered extensive unplanned outages at a customer's coal-fired
generating stations, and capped the indemnification at their marginal
cost of generation at their gas-fired facilities. This coverage allowed
the customer to go to market when the price for electricity was below
their cost to generate at their gas-fired stations and paid for the incremental
cost of generation at their gas-fired station when the market price exceeded
the operating and fuel costs at these units. The customer budgeted for
the most likely events, over $5 million, and ACE paid for 90 percent of
the additional cost for replacement power after the $5 million was exhausted.
As outages occurred during the coverage term, the customer was relieved,
as they knew the extent of the potential financial consequences was contained.
ACE USA added natural gas coverage
into its existing PowerBacker offering by providing "Spark Spread" coverage.
W-G: Could
you provide us with an example of how the "Spark Spread" works?
PG: For example, one ACE USA
program provides a $20/megawatt hour spread between the cost to replace
the electricity and the net revenue received from reselling the gas used.
When the net loss between the two markets exceeds $20/megawatt hour, ACE
USA is responsible for 90 percent of the incremental income loss. A pre-specified
conversion rate based on the efficiency of the unit is used to determine
the relative volumes.
This coverage is available
for up to the first 30 days of any outage event, with policy limits available
up to $100 million.
This policy can also be structured
to complement our PowerBacker LTO product for coverage after 30 days.
W-G: What
has been the impact of the Enron bankruptcy and financial distress in
the power markets on your business? Is ACE pulling out of the market?
PG: The current state of the
electric power industry has further surfaced the need for financially
strong counterparties in this market. The risks are large and strong balance
sheets are needed to provide risk management products and services. Our
"A" rated capacity has been greatly valued in today's market conditions.
ACE is not pulling out of the
market. Since we receive our payment up-front, the credit-worthiness of
our counterparty is not an issue for us. It is our credit and balance
sheet on the line. Our concern is the maintenance and performance of the
unit when a counterparty is not financially stable and that is part of
our standard assessment of the risk.
W-G. In November
of last year, Congress enacted the Terrorism Risk Insurance Act of 2002
("The Act"). How is ACE addressing this new legislation in your product
offering?
PG: On November 26, 2002,
Congress passed the Act, giving many the right to purchase insurance coverage
for losses arising out of acts of terrorism, as defined in Section 102(1)
of the Act: According to the Act, the term "act of terrorism" means any
act that is certified by the Secretary of the Treasury, in concurrence
with the Secretary of State, and the Attorney General of the United States-to
be an act of terrorism; to be a violent act or an act that is dangerous
to human life, property, or infrastructure; to have resulted in damage
within the United States, or outside the United States in the case of
an air carrier or vessel or the premises of a United States mission; and
to have been committed by an individual or individuals acting on behalf
of any foreign person or foreign interest, as part of an effort to coerce
the civilian population of the United States or to influence the policy
or affect the conduct of the United States Government by coercion.
ACE is offering its customers
the right to include these terrorist acts as defined in the Act if they
are responsible for an otherwise covered event as defined in the policy.
To date the response to our offering has been favorable with insureds
electing to purchase this additional coverage. ACE also has a stand alone
Property Terrorism coverage, specializing in underwriting for the electric
utility industry. This coverage protects against other potential events
not covered under the Act, such as actions by an individual who is a U.S.
citizen, as well as other differences in conditions that a client may
have with other property policies.
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