Case Studies

Case Study 3 – Utility with 44 Contaminated MGP Sites

A public utility owns or is responsible for the cleanup of forty-four manufactured gas plants (MGPs).  The remediation expenses in the aggregate are expected to be in excess of $100 million, although the certainty of these costs with regard to individual sites varies greatly.  For a third of the sites, there is detailed environmental information and a well-developed remediation plan.  For another third of the sites, there has been some level of investigation and preliminary cleanup estimates have been prepared.  For the remainder, there is little or no information about the environmental condition of the sites, and the estimates of cleanup costs that are shown in financial statements are based on industry averages.  The cleanup of these sites will take more than twenty years to complete. 

Recently enacted deregulation legislation allows the utility only five years to pass costs from historic operations through to ratepayers.  All costs not incurred and reported in this period will be “stranded.”  Since the sites cannot be cleaned up in the five years allowed, the utility is concerned about not being able to recover these remediation expenses.

Insurance Solution for Case Study No. 3

An insurance policy is written that will transfer the costs of cleanup and third party liability for all of these MGP sites to an insurance company.  The insurer will not only pay for any cost overruns in remediation expenses, but also for the cost of remediation as well.  For the utility, this method of handling its environmental costs will allow it to include them in a time period that is different from when these costs are ultimately incurred.  Cost overruns are written with an aggregate limit of $50 million over the expected $100 million of remediation.  The utility will be allowed to continue the management of the cleanup process.

The insurance coverage also includes protection against the discovery of additional contaminants and against third party claims for bodily injury, property damage and cleanup of materials that have migrated from the insured sites.  The same limit of $50 million is available for these costs, excess of a deductible of $250,000.

The premium for these coverages will be paid over a five-year period.  The utility commission has ruled that it will allow the utility to pass these premium costs to rate since the liability for cleanups and third party claims has been transferred from the utility to the insurer.