Hurricane Modeling Supports the Decision Not to Insure Hurricane Risks Rules the Maryland Court of Special Appeals

March 31, 2011 20:32
by J. Wylie Donald
"Catastrophic risk is different." So concludes an important opinion out of the Maryland Court of Special Appeals filed earlier this month.  In the case of first impression, People's Insurance Counsel Division v. Allstate Insurance Company, the court affirmed the primacy of models and business judgment in the writing of insurance, and further recognized that there is a "gaping difference between ordinary insurance risk and catastrophe risk." The case stems from the decision way back in 2006 by Allstate to advise the Maryland Insurance Administration (MIA) that it did not intend to write any new property policies in certain Maryland counties subject to heightened hurricane risk. As distilled by the court: "certain coastal areas bordering the Atlantic Ocean and the Chesapeake Bay presented an unusually high risk of loss in the event of a catastrophic hurricane. As a result, [Allstate] decided that it was no longer in Allstate's best economic interest to continue to write new property insurance policies in those areas." The MIA concluded that Allstate' business decision was properly made on "an obective basis and [was] neither arbitrary nor unreasonable." However, the state's public advocate, in the guise of the People's Insurance Counsel Division, concluded differently. Following a trip to Maryland's highest court, which confirmed the Division had standing to challenge the MIA's decision, the Division argued that Allstate's determination not to write property policies in certain geographic areas was arbitrary and unreasonable in contravention of Maryland Insurance Article § 19-107. Further, the Division argued that because Allstate had not shown that a hurricane would strike Maryland and that its rates were insufficient to carry that loss, the decision violated § 27-501. Section 19-107 To determine whether it wanted to undertake the risk of hurricanes along the Eastern Seaboard, Allstate retained Applied Insurance Research (AIR) to model the areas of the state and region that were catastrophe-prone, and those that were not.  It concluded that some or all of certain Maryland counties were at a substantially heightened risk of higher levels of hurricane damage than other areas. The model was explained:  "What it did, in order to get down to the zip codes, statistical level, generated the next year 100,000 times. That is, it's doing simulations of the next year, 100,000 times. And what they do in order to do that is they look at the last 100 years of meteorological data to try to come up with a probability of various hurricane strikes." In those 100,000 simulations AIR concluded that there would be eight hurricane strikes that would cause half a billion dollars in damage in Maryland alone. Because Allstate insured a substantial number of properties in these risky areas, it made the "business judgment that further growth at this time could jeopardize [its] anticipated long-term strength." The court quoted the Commissioner in holding that Allstate complied with the law:  "I conclude that Allstate's geographic designation of Hurricane Bands 4-6 had adequate factual support and, therefore, was not arbitrary or unreasonable. Allstate's hurricane bands were developed based on objective and reasonable factors, including modeled hurricane loss data, proximity to water and geographic contiguity. Through its use of the hurricane models, Allstate developed [Average Damage Ratios] ADRs at a zip code level. The higher the ADR, the higher the potential damage the area in the band is likely to sustain in the event of a catastrophic storm." Section 27-501 This section of the Insurance Article forbids an insurer from refusing a "particular insurance risk or class of risk" for "any arbitrary, capricious or unfairly discriminatory reason." The court first held that a decision to stop doing business did not address a particular individual or group of individuals; therefore, because Allstate's decision was "broad-based", section 27-501 simply did not apply. But even if it did, the modeling demonstrated that the decision was not unfairly discriminatory, arbitrary or capricious. The Division asserted that ""Allstate was legally required to show the probability of a catastrophic hurricane striking Maryland in order to justify its no-write decision."  The court was dismissive and characterized the Division's contention as "unreal". The issue faced by Allstate was very plain, syllogistic in fact:  THE ENTIRE EASTERN SEABOARD OF THE UNITED STATES IS AT RISK FROM HURRICANES.MARYLAND IS PART OF THE EASTERN SEABOARD OF THE UNITED STATES.THEREFORE, MARYLAND IS AT RISK FROM HURRICANES (capitals in original).  The court then went on to enumerate the details that the model considered such as historical hurricane reports, weather databases, and property values.  It came down firmly on the value of the model:  "Allstate's use of the AIR Hurricane Model V7.0 cranked out, zip code by zip code, predictive statistical data for 100,000 model years.  We are hard-pressed to understand exactly what more the Division could want." As to the Division's last argument (that prior Court of Special Appeals precedent required Allstate to demonstrate that its rate plan was insufficient to cover catastrophe losses) the court was scathing. Referring to the Division's argument as "fantasy analysis," it demonstrated that the precedent on which the Division relied suffered from a fundamental error in its understanding of the source materials and, as it "was wrong in 1987, ..., as it most assuredly was, it is still wrong 24 years later." The court concluded its analysis with a discussion of catastrophe risk.  It pointed out that for the usual risk, say fire or car accidents, insurers diversify their risk by taking on more insureds.  Where a catastrophic risk is present, however, taking on more insureds increases the risk to the insurer, rather than decreases the risk, because if the catastrophe strikes, all of the insureds will make a claim.  It concluded that catastrophic risk was "unique" and that case law that focused on individual insureds was completely irrelevant. People's Insurance Counsel is significant at a number of levels for those following climate change insurance issues.  First, the modeling data and results were unchallenged.  There are three dominant modeling companies (AIR, EqeCat and Risk Management Solutions) so the Division was not stymied here because Allstate's modeler had a lock on the market. More likely, it was recognized that while a different model might preserve coverage for a few zip codes, the models would not reach fundamentally different outcomes.  If the goal was to ensure that Allstate (and by extension all other insurance companies) could not abandon the front lines of hurricane risk, no model would show that Worcester County (on the ocean) would have a similar risk as Garrett County (at the headwaters of the Potomac). Businesses should take note.  In most businesses, profit is made at the margins.  Employing models to ascertain where the weather-related risks change their character could yield real monetary benefit - as Allstate demonstrated by giving up underwriting in only parts of some counties.   Second, AIR looked at historical weather records. It made no predictions about the future more severe weather called for in climate change models. This reluctance to face the future is not unique to insurance companies.  The Federal Emergency Management Agency takes the same approach in its analysis of flood plains.  We have written elsewhere concerning the head-in-the-sand mentality that afflicts many that are subject to altered climate change risks.  Catastrophe modeling is no different.  We await the case that tests the insurer's ability to rely not on what has happened in the past, but on what is predicted for the future. Third, there is (at the moment anyway) a great belief in the efficiency of the market in identifying the appropriate path for society.  The insurance markets are taking steps to halt the migration to the shore by determining not to insure it.  It remains to be seen whether governments will abide by those business decisions or force dislocations onto the market in order to preserve continued growth in hurricane-prone areas.  Maryland, for the moment, appears to be one state that is allowing the insurance market to shape the future of the shore.  As we have blogged before, other states (notably Florida), are not so laissez-faire.

Insurance | Regulation | Weather

Legislative Initiatives to Reduce Stormwater Runoff, Part 3

March 17, 2011 15:37
It appears that the sponsors of the legislation recognized that behavioral change is more likely to occur successfully when positive reinforcement is provided rather than simply mandating compliance with change.  To that end the proposed legislation seeks to create positive financial incentives to spur private development projects that would reduce stormwater runoff through the use of Green or Blue roofs.A3682:  Would provide low interest loans to private parties to build green or blue roofsMany jurisdictions provide financial incentives for “Green” or sustainable design and construction.  This bill would amend the law known as the “Regional Greenhouse Gas Initiative” to allow funds from the “Global Warming Solutions Fund” to be used to extend low interest loans to private parties, including homeowners and owners of commercial, industrial, and institutional entities.Material terms of the loans would require: a) that they be made for no more than 85% of the cost of the Green or Blue roof; b) that the term not exceed 20 years; c) that the interest rate be low, and not to exceed 4%; and d) that loans be secured by a promissory note that requires the loan to be repaid if the property is sold or transferred or that requires the purchaser to assume the loan.In addition to specifying which agencies would be responsible for the financial aspects, broad powers are being given to the Department of Environmental Protection and the Department of Community Affairs to oversee and review construction to ensure compliance with the standards that are established.This incentive is no doubt socially desirable.  However, given the fiscal crisis that is faced by New Jersey, and many other states, it is questionable whether financial resources will be available to fund this program at any meaningful level.  There have already been efforts to erode the Global Warming Solutions Fund and such efforts are likely to continue until the economic climate changes significantly.   A3678:  Requires preferential ranking for projects that seek funding from an environmental infrastructure programThe least sexy of the companion bills, this would require the Department of Environmental Protection to provide a preferential ranking to projects that seek funding from an Environmental Infrastructure Financing Program to those projects that include Green or Blue roofs.  Hardly anything controversial in this bill.  For other states it provides an example of positive incentives that can be offered to developers of construction projects.As set forth in this series of posts collectively these bills seek to address a serious problem that many are facing with respect to stormwater management.  These efforts have been noticed by environmental groups.  Jeff Tittel, the director of the New Jersey Chapter of the Sierra Club observed: “It actually helps deal with something called combined sewer overflow which is very much a problem in urban older communities where a lot of rainwater comes off of roofs, gets into the sewer systems, and then the sewer systems cannot handle the higher flow.  So what happens is when you get heavy rainstorms, you get partially treated sewage and sometimes raw sewage going out into our rivers”.Results of a study completed in 2009 by the Penn State Green Roof Center of Pennsylvania State University at University Park, PA indicated that, “green roofs are capable of removing 50% of the annual rainfall volume from a roof through retention and evapotranspiration”.  Accordingly, the effectiveness of Green roofs in combating excessive stormwater runoff cannot be denied.  [Green Roofs for Stormwater Runoff Control, National Risk Management Research Laboratory, Publication EPA/600/R-09/026, February, 2009]The extent to which these new measures, if the legislation passes, will assist in stormwater management and controlling water quality remains to be seen.  Two things are certain: 1) the stormwater problem and associated flooding is increasing; and 2)  New Jersey and other states are likely to require a change in design and construction in order to confront the problem.  Think about that the next time that flooding harms your neighbors or inconveniences you.  I know that I will.

Climate Change | Green Buildings | Weather

Twentieth Century Reanalysis Project Provides Tool to Assess Extreme Weather - Part II

February 16, 2011 10:52
by J. Wylie Donald
We wrote yesterday concerning the Twentieth Century Reanalysis Project and of the controversy engendered by, and the threat to credibility surrounding, misquotes in the climate change sphere. We should have added "and misquotes also take away from the main story line."  The point of the posting was the potential lack of correlation between extreme weather and climate change.  We obscured that by focusing on the misquote. So let's return to extremes. A view proffered by Dr. Roger Pielke Jr. is that "there's no data-driven answer yet to the question of how human activity has affected extreme weather disasters."   Dr. Pielke has offered research showing that a disaster's increase in loss is more due to the increase in population and infrastructure in areas than due to climate change.  See, e.g., Ryan P. Crompton et al., Influence of Location, Population, and Climate on Building Damage and Fatalities due to Australian Bushfire: 1925–2009, 2 Weather, Climate, and Society 300 (2010). Others differ. In a story in the New York Times this past weekend, Elizabeth Rosenthal offers up how insurers and civil engineers are viewing the weather. Peter Hoeppe, a meteorologist and head of Munich Re’s Corporate Climate Center, has this to say: “Your own perception that there are more storms and more flooding causing damage — that is extremely well documented.”  “There is definitely a plausible link to climate change.”  And D. Wayne Klotz, president of the American Society of Civil Engineers, comments: “As we get more extreme events, that absolutely changes how we design.”  Mr. Klotz pointed to the specifics of his trade, where drainage systems today are designed to carry more water than 20 years ago.  Mr. Klotz concluded:  “We could stick our heads in the ground and say nothing is changing. But it is.” In other words, people with a lot of skin in the game are applying their resources and skills and concluding that they or their clients are at increased risk from extreme weather. This suggests that the Reanalysis Project's data need to be further analyzed, which is consistent with Dr. Pielke's statement and with that of the Reanalysis Project authors, who noted aspirationally in their summary that "the 138-year span of the ... dataset should make it even more useful for ... assessments of ... extreme event variations."   All of which is consistent with's fundamental position:  climate change is occurring and businesses need to act to understand the risks and opportunities that such change is bringing.  If the 100-year flood plain is expanding due to changes in weather patterns, lenders and insurers need to know that. If a half-meter sea level rise by 2050 means a hurricane storm surge will overwhelm the sea wall, emergency response planners and local businesses need to know that. And if hotter weather means more air conditioning needs, then utility regulators need to know that. The extreme view would be that these risks can be ignored, and that there are no opportunities to prosper as climate change unfolds.

Climate Change Effects | Weather

Twentieth Century Reanalysis Project Provides Tool to Assess Extreme Weather - Part I

February 15, 2011 21:07
by J. Wylie Donald
What if we had it all wrong?  What if the weather really wasn't getting more extreme, wasn't getting hotter (or colder, wetter, drier), wasn't changing?  Then  any efforts to rein in carbon dioxide emissions would be misguided and, worse, costly.  Is there any evidence that scientists are getting it all wrong?  The Twentieth Century Reanalysis Project is working on figuring that out.  An international team of climatologists enlisted millions of hours of supercomputing time and plugged in over a century of weather data.  The goal is to permit climate researchers to better address issues such as the range of natural variability of extreme events such as floods, droughts and hurricanes. To quote the study's lead author, Gil Compo of the National Oceanic and Atmospheric Administration, "This reanalysis data will enable climate scientists to rigorously evaluate past climate variations compared to climate model simulations, which is critical for building confidence in model projections of regional changes and high-impact, extreme events." For those of you who remember the moment in the sun (of the popular press) of chaos theory, there was something called the Lorenz Butterfly Effect, that affirmed that the flapping of a butterfly's wings in Brazil could, through various weather processes, lead to tornadoes in Texas.  It may frustrate lawyers to learn that proximate cause does not hold in weather analyses.  Very small changes in initial conditions can result in very large differences in weather outcomes.  Hence the importance of the Reanalysis Project in assessing actual weather conditions and changes over time. Small differences in words may also make a difference.  Query whether there is a difference between "extreme weather" and "extreme weather disasters".  Anne Jolis of the Wall Street Journal European Edition set off a small controversy this weekend when she or her editors dropped a word from a quote from one of her climate research sources when she provided the Journal's spin on "climate alarmists."  Ms. Jolis offers an antidote to climate change-induced extremes in weather:  "There is at least one climate lesson that we can draw from the recent weather: Whatever happens, prosperity and preparedness help."  That is, countries that are economically advanced are more likely to fare better in the face of Mother Nature's onslaughts.  She compares Australia's response to Cyclone Yasi (only one death) to that of Myanmar when Cyclone Nargil ultimately caused the deaths of 130,000 people.  Therefore, concludes Ms. Jolis, economic activity should be enhanced, not diminished as alarmists would do. The butterfly effect here is the quote relied on by Ms. Jolis:  ""There's no data-driven answer yet to the question of how human activity has affected extreme weather," adds Roger Pielke Jr., another University of Colorado climate researcher."  What Dr. Pielke actually said, as set forth on his blog, "There's no data-driven answer yet to the question of how human activity has affected extreme weather disasters."  So was the omission of "disaster" meaningful?  Dr. Pielke's peers apparently thought so and queried him, thus prompting the blog response.  We don't intend to resolve that question.  We do wish to point out, however, that such editing can call into question the validity of an entire article.  Ms. Jolis makes a fair point about economic growth being an important tool to address the problems of climate change.  But we think she loses some credibility when her sources assert they were misquoted.  As Dr. Pielke points out, ín the climate change debate "anything that can be misinterpreted usually will be."

Carbon Dioxide | Climate Change Effects | Weather

FEMA Flood Maps are All Wet - They Don't Consider Climate Change

November 2, 2010 16:52
by J. Wylie Donald
Last week brought another edition of the Flood Insurance Rate Maps. FEMA announced on October 29 that it was releasing new preliminary flood maps for Montgomery County, Maryland. Click here.  It has been 14 years since the last flood plain map was created and the good citizens have seen substantial changes in that period. Montgomery County's planning arm sets forth in its 2007-2009 report that the population has boomed over the last thirty years with an anticipated increase of 14% this decade, the fastest growing in Maryland. Click here. The effect of all this growth is telling. "Several factors—including sustained job and population expansion, declining supplies of greenfield space, and land use policies favoring in-fill and transit-oriented development—have reinforced this pattern of concentrated development in recent years. Growth, density and mixed-used development are transforming former commuter suburbs into increasingly more urban-like environments." So with all that change, re-doing the flood plain maps is necessary, and overdue. Unfortunately, these maps are outdated even as they are issued. This is not simply because additional development affects them. It is because they do not consider climate change. This bears repeating. The FEMA flood maps do not consider climate change. And it is not just some blogger saying it. The Delaware River Basin Commission wrote in 2009: "Future development and the impacts of climate change are not taken into account during the development of FEMA flood hazard area mapping." Click here. Why is this significant? One of the fundamental predictions of climate scientists is that climate change is going to deliver more extreme weather. In the Northeast, for example, there will be more frequent storms and more severe storms. It should be obvious that these will increase the frequency of flooding and the 100-year flood will now become the 50-year flood or the 25-year flood. As most know, the FEMA flood map shows the 100-year flood plain. Inside the flood plain, certain construction requirements are imposed, and flood insurance is required of all who would be involved in federal programs (such as loan guarantees from Fannie Mae or Freddie Mac). Outside the 100-year floodplain, neither condition applies. Accordingly, if the 100-year floodplain is inaccurately set forth, numerous properties just outside the erroneous line are more likely to be subjected to a flood than the occupant or owner anticipates, and are more likely not to have flood insurance. If this sounds like a recipe for disaster, it is. The spring floods in Nashville caused over $1 billion in damage. FEMA reported only 100 National Flood Insurance policies in the the entirety of Davidson County (where Nashville is located).1  Why so few? Because no one believed they were in the flood plain. This mentality is only going to get worse, particularly if FEMA publishes flood maps without pointing out that it is ignoring an undeniable substantial factor: climate change.       1 Jeff Casale, Significant losses expected after floods soak Nashville, Business Insurance (May 10, 2010).

Climate Change | Flood Insurance | Weather

Highest Court Decisions Affirm Beach Replenishment is Avulsion - a Key Development in a World of Rising Sea Levels

September 23, 2010 08:57
by J. Wylie Donald
Last December 9 was the height of coincidences.  Both the United States Supreme Court and the New Jersey Supreme Court heard oral arguments on the same day in beach replenishment cases.  The fortuity did not continue.  Stop the Beach Renourishment, Inc. v. Florida  was decided by the U.S. Supreme Court in June.  It took the New Jersey Supreme Court over three months longer to decide City of Long Branch v. Liu, where the opinion came down just this past Tuesday.  Nevertheless, both decisions affirmed that beachfront ownership law would be determined based on common law rules.  More significantly, the State's interest in control of the beaches was found preeminent. In Stop the Beach, the Supreme Court considered the following facts:  shorefront property owners in Walton County, Florida, for many years had enjoyed unfettered access to the warm waters of the Gulf.  As part of its efforts to preserve Florida's beaches, the State had renourished (pumped tons of sand) onto the homeowners' beach, and then claimed that land for Florida.  In legal terminology, the property owners' property line changed from the common law mean high water line to a statutorily established erosion control line.  In other words, beach front property now meant that you fronted on a beach, rather than fronted on the ocean.  The homeowners challenged this development as an unconstitutional "taking" under the 5th and 14th Amendments to the Constitution. While the Court could not come to agreement on the meaning of taking in this context (a plurality opinion with two concurrences), the Court was unanimous that this particular circumstance was not one.  It concluded (as had Florida's Supreme Court) that Florida's common law treated the creation of a beach by replenishment as an "avulsion" and under the common law, the Court concluded, homeowners did not acquire ownership rights to such lands, although they did acquire (as Florida conceded) certain other rights (such as access across and an unobstructed view).  In Liu the facts were less sympathetic.  The Lius' upland property had been condemned and its value had been set by a trial.  The Lius also sought, however, to be compensated for the value created when New Jersey's beach replenishment program deposited sand on the Lius' beach and created more land.  Here too New Jersey's highest court found that beach replenishment constituted an "avulsion" and that because the Lius never owned the land below mean high water, they could not own the land created when sand was deposited beyond mean high water, even if that land rose above the surface and severed the Luis's contact with the ocean. Although neither decision addressed the rising sea level problem brought about by climate change, they are very likely to figure prominently in future controversies arising as communities attempt to deal with the submergence of the shore.  Both appellate courts found that beach replenishment constituted an avulsion:  “a sudden and perceptible loss or addition to land by the action of water or otherwise.”  Liu, at 14, “sudden or perceptible loss of or addition to land by the action of the water or a sudden change in the bed of a lake or the course of a stream,” Stop the Beach Renourishment at 3.  Since the common law did not permit property boundaries to be changed by an avulsion, all that was necessary for a decision in favor of the governmental defendants was a finding that beach replenishment constituted an avulsion, which is what the courts held.  One can envision a number of ways how that conclusion may not be obvious.  The courts creating the common law never considered that massive pumps at the bidding of the State would move the seabed.  Nor was it contemplated that governmental entities would be able, at their discretion, to convert littoral properties to land-locked properties.  But be that as it may, this is the law of the land. And as such, communities at the shore can take much solace that they will be able to act to preserve their communities by establishing beaches around their boundaries before they are engulfed.  And who is to say that such beaches may not morph into sand dunes, or even sand walls.  And will the common law permit seawalls and revetments to be constructed on the new lands, converting the former beachfront properties, into beach-view properties, then dune-view properties and ultimately into seawall view properties. The final chapter of this saga is not yet written.  What remains to be seen is whether in the future the littoral property owners at the beach will be as ineffective against the power of the State, as the courtiers in the fable of King Canute were against the rising tide.

Climate Change | Legislation | Regulation | Weather

Sinkholes and Climate Change - Leading to a Lack of Hurricane Coverage

September 21, 2010 18:24
by J. Wylie Donald
One of the things that is so intriguing about climate change is the development of things that no one is anticipating. More sophisticated thinkers call this the "law of unexpected consequences." I simply defer to Heraclitus: "expect the unexpected." So here. Today's Wall Street Journal has an intriguing article on the asymptotic rise of sinkhole claims against insurance companies. Florida's insurer of last resort, Citizens Property Insurance Corp., has seen sinkhole claim rates double since last year. Insurance industry spokesmen and some legislators blame a rapid increase in the number of public adjusters in Florida. The public adjusters respond that they are merely enforcing policyholders' contractual rights. They further assert that the source of the claims is too-rapid development that allowed building in areas sure to develop sinkholes. Sinkhole coverage is mandated by Florida law. See F.S.A. 627.706. One insurer uses this language: "We cover sinkhole loss to your house and other permanent structures caused by sinkhole activity. We also cover the costs to: stabilize the land under and around your damaged house or other permanent structure; stabilize the house or other permanent structure; and repair the foundation, caused by sinkhole activity in accordance with the recommendations of a professional engineer approved by us and in consultation with you." You can see the room for conflict when this is juxtaposed with a typical exclusion for structural movement: "We do not cover any loss caused by the settling, cracking, shrinking, bulging, or expansion of pavements, patios, foundations, walls, floors, roofs or ceilings except loss caused by sinkhole activity or catastrophic ground coverage collapse as provided under Extra Coverages ..." It is set up as a classic battle of the experts. If the policyholder's expert is credited, a cracked foundation is caused by a sinkhole. If the insurer's expert is accepted, the cracked foundation settled and is excluded.  So what do sinkholes have to do with hurricane insurance? We have previously discussed that Citizens does not charge enough premium to cover expected hurricane losses. See climatelawyers blog of Feb. 5, 2009. Now we learn that the carrier has not charged enough premium to cover sinkhole claims either. In fact, according to the Wall Street Journal, Citizens paid out last year over 5 times what it collected in sinkhole premiums. So just when Florida needs its property insurance the most (because climate change is going to bring more frequent and more severe storms), Florida's insurers are even less likely to be able to pay the claims because of the mushrooming sinkhole problem. I also should comment on the attacks on public adjusters. The insurance contracts provide certain rights. A public adjuster earns no dollars for his/her client unless someone (judge, jury, arbitrator, claims handler) credits his/her argument that there is coverage. The flip side of this is that the decisionmaker is also deciding that the carrier's language does not exclude the claim. If these circumstances occur, it seems a little ostrich-like to blame the public adjusters for the fact that there are too many claims. The problem has to be in the policy language, with which public adjusters had nothing to do. The so-called problem with adjusters should not have been unexpected.  Legislators are not insurance policy draftsmen.  The threat to Citizens and Florida's other home-grown property insurers may have been less apparent.  Who would have thought that sinkholes would take away the insurance structure Florida labored mightily to build in the face of increasing storms?  Or who would have thought otherwise?  Florida's insurance paradigm is broken, whether for hurricanes or sinkholes.  Premium does not cover losses.  Until that is fixed, one can expect more problems even if the exact contours of the problems are not now known.

Climate Change | Insurance | Weather

The Most Extreme Weather is Climate Change at the Margins

September 8, 2010 16:53
by J. Wylie Donald
As the season of elections unfolds, I am reminded that "all politics is local." I think the same might be said for weather and we have had plenty of that this year. Some might say, "well, no more than anywhere else." But I would disagree, and the Baltimore Sun's September 8 front page story by Frank D. Roylance supports me. . Maryland this year has tied or set records for snowiest winter, snowiest February, hottest summer, the most 90 degree days, and the most 100 degree days. Couple that with drought conditions that have ruined the corn crop, brought summer vegetables in too early, threatens the soybean crop and may prevent the planting of winter wheat and barley, and I think it is fair to say that Maryland got extra in the weather department this year. So what does all this have to do with climate change. Quoting experts at the National Center for Atmospheric Research, the Sun provides one of the best explanations I have seen: "global warming's role is felt most when natural climate variability is already pushing weather events toward extremes.". By way of example, the impact of global warming is "if the drought starts to form, the onset is quicker; it's a little more intense and the heat waves are a little hotter . ... Sometimes it's the straw that breaks the camel's back, ..." This analysis is right on the money, and of great significance. Without climate change, natural climate variability will on occasion lead to extremes. Engineers incorporate those anticipated events into hurricane building codes, flood plain delineations, dam storage capacity and a host of other standards on which we rely. If the anticipated extremes are relied upon, and climate change pushes those extremes even further, then those standards may no longer be valid.  That may disrupt many sets of expectations. For a lawyer, this may mean that standard language may be inadequate to protect his client. If, for example, a contract does not require flood insurance because the property is outside the plotted 100-year floodplain, but climate change has enlarged the floodplain, then a bank's security may be at risk.  If a community's water supply is based on the local reservoir, but flood control requirements force lower water levels to accommodate the more severe storms predicted by climate scientists, counsel should be looking to protect her client's ability to conduct its business, including preserving water availability.  The point is not that climate change will force a wholesale revision of how business is conducted.  Rather, as is generally the case, success or failure will depend on how one attends to risks at the margins and in order to do that, one will have to understand them.  This applies not just to lawyers, but to anyone investing, or planning, or managing, or governing. Another famous saying concerns everyone talking about the weather, and nobody doing anything about it.  Some would say, that sounds just like politics. updated

Climate Change | Weather

Tilting at Windmills: Cape Wind PPA Pending Review at MA DPU

August 20, 2010 04:26
Its been 10 years since Cape Wind Associates, LLC originally proposed developing 130 wind turbines in Nantucket Sound and, after navigating successfully through a labyrinth of federal, state and local permitting and siting challenges and fending off the perfect storm of litigation, the winds may finally be blowing in Cape Wind’s direction. (Check out this link for a good history of Cape Wind, details on the project, and legal challenges and the controversies surrounding it: Even though now fully permitted for construction, however, the challenges for the nation’s first offshore wind project are far from over as utility regulators consider whether to approve the power purchase agreement (PPA) and public debate in Massachusetts continues to question the wisdom of allowing governmental support for a private project.  Cape Wind still needs to complete the project financing arrangements, estimated at $1 to $2 billion, and an approved PPA is a crucial foundation for commercial financing. According to National Grid’s May 10, 2010 filing with the Massachusetts Department of Public Utilities (DPU), in which it submitted the PPA documents requesting approval of the power purchase arrangements, the utility subsidiaries of National Grid, Massachusetts Electric Company and Nantucket Electric Company plan to buy about 50% of Cape Wind’s power output at 20.7 cents per kilowatt hour over 15 years, which would represent approximately 3.5% of National Grid’s electric distribution load in Massachusetts and exceed its mandate under the state’s renewable portfolio standard obligation, as set forth in the Green Communities Act.  National Grid further stated that the average residential homeowner using 500 kWh per month would see an increase of $1.59 per month in 2013, equal to 2.2% increase on the bill at today’s energy commodity prices. And so, now that the tough environmental and siting decisions have been made in Cape Wind’s favor, the issue has been joined at the DPU on the project’s economics and whether the public (in the form of Massachusetts ratepayers) should support the project.  Just this week, an Op-Ed writer in the Boston Globe criticized the administration of Massachusetts Gov. Deval Patrick’s alleged lack of transparency, political support for the high energy cost of the PPA and the price risk contingencies in the contract.  (The energy cost can go up or down depending on certain market conditions and there is a limited sharing of risk in the PPA related to the project’s power output and qualification for tax credits.  The actual costs presented to the DPU are based on forecasts, but there are uncertainties and risks as well.) This might be a good time to comment on what I like to call the renewable energy economic facts of life.  It’s a fact that renewable energy costs more than energy generated with fossil fuel sources, such as coal or natural gas.  There’s simply no way around that fact. Whether a project is solar, biomass, fuel cell, wind powered or some other renewable source, the cost of the technology and project development is simply higher and sometimes far more expensive than fossil generation.  When it comes to market forces, therefore, generators of renewable power cannot sell the energy economically into a functioning market without substantial price supports or other subsidies. One such subsidy is the federal government’s 30% investment tax credit and the production tax credit, but these tax credits are not enough to help renewable projects to clear the hurdle.  They still need a long-term PPA with a credit-worthy energy buyer and a vibrant market for the renewable energy certificates (RECs) generated by the project.  (Just yesterday, New Jersey's governor signed into law a measure that would create ocean RECs or ORECs to support such projects.  See blog post below.)  Depending on deal terms that include who (buyer or seller) acquires the ownership rights to the RECs, the per-kilowatt-hour energy cost can increase or decrease. In Cape Wind’s case, the PPA buyer is acquiring all of the environmental attributes of the wind power, including the RECs, and capacity rights in addition to the energy itself.  That means that National Grid will have the right to sell the RECs in the market and credit the ratepayers for revenues generated in the marketplace as a result.  The net energy cost, therefore, will likely be less than the 20.7 cents per kWh specified in the PPA. Ultimately, the question for Massachusetts regulators and the public will be whether the renewable energy, which promises clean renewable energy that reduces greenhouse gas emissions and global climate change, is worth the cost.  If we really want to diversify our power supply with clean renewable energy and reduce our reliance on coal and natural gas fired generation, projects like Cape Wind deserve public support and contracts like the ones pending before the DPU merit serious consideration.

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NJ Governor Signs Offshore Wind Measure Into Law

August 19, 2010 08:47
New Jersey Gov. Chris Christie signed into law the Offshore Wind Economic Development Act Thursday, thereby endorsing an initiative designed to spur economic growth through the development of renewable energy and green jobs. Just as NJ has been a leader in providing substantial market-based economic support for solar energy through a rigorous solar renewable energy certificate, this new legislation is intended to establish an offshore wind renewable energy certificate program (OREC) to provide market support for wind energy.  The measure also provides offshore wind developers with financial assistance and can be combined with tax credits from existing programs for businesses that construct manufacturing, assemblage and provide water access facilities to support the development of qualified offshore wind projects. “The Offshore Wind Economic Development Act will provide New Jersey with an opportunity to leverage our vast resources and innovative technologies to allow businesses to engage in new and emerging sectors of the energy industry,” Christie said in a prepared statement. “Developing New Jersey’s renewable energy resources and industry is critical to our state’s manufacturing and technology future. The bill directs the New Jersey Board of Public Utilities (BPU) to develop an offshore renewable energy certificate program and, by requiring that a percentage of electricity sold in the state to be generated from offshore wind energy, creates an offshore wind “carve out,” or subdivision within the existing renewable portfolio standard in NJ similar to the solar program. The offshore wind carve-out is intended to support at least 1,100 megawatts of generation from “qualified” offshore wind projects, which are defined to include projects developed in the Atlantic Ocean and which are connected to the electric transmission system in New Jersey. Through the legislation, the New Jersey Economic Development Authority (EDA) will provide financial assistance to qualified offshore wind projects and associated equipment manufacturers and assembling facilities. The signing of the Offshore Wind bill is not the first time Christie has expressed support in recent months for offshore wind development.  In June, he signed a memorandum of understanding with nine other East Coast governors establishing the Atlantic Offshore Wind Energy Consortium to facilitate federal-state cooperation for commercial wind development on the Outer Continental Shelf off of the Atlantic coast.

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