How Much Will The NorCal Power Shutdown Cost Businesses?

As Northern California businesses braced for lost time and productivity due to the area’s widespread power shutdowns Wednesday, a question emerged: How much will all of this eventually cost?

To answer that succinctly: A lot.

A recent study found that 24 hours of downtime at a data center in the U.S. can cost as much as $12M, while retailers can see losses that range anywhere between $30K (for things like inventory at a single supermarket) to as much as $5M (for retailers using warehouses or with perishable goods, for example) a day. A two-hour power shutdown can cost between $5K and $10K (so $60K to $120K for 24 hours) for the average business, according to a separate report from utility research analysts at E Source. 

With the PG&E outage slated to last as long as five days, it is easy to see how the bill can add up.

One quick back-of-the-envelope way to calculate losses is to look at a similar scenario, which for Northern California is easily found in past earthquakes. While earthquakes might also impact other utilities and infrastructure, the quantification of how much they can cost customers in lost electrical power has been well studied. 

During the Loma Prieta quake of '89, nine of the counties currently under PG&E power shutdowns experienced massive material losses due to the damaging of substations, which cut power to 1.4 million PG&E customers and cost businesses $5.6B in downtime from interruption and transportation losses as some areas went without power for as long as two days.

That is — in just two days — $11.59B adjusted for inflation, most of which were related to electrical outages, as natural gas service was restored much more quickly. Currently, only eight of the nine counties affected by Loma Prieta are slated to face power shutdowns this week; San Francisco County isn't under a shutdown warning. Still, using that earthquake as an estimate, electrical outages could easily run $25B this week.

Jason Ballman, a spokesperson for the Southern California Earthquake Center headquartered at the University of Southern California, said current models of the effect a 7.0 magnitude earthquake would have along the Bay Area’s Hayward fault provide for billions of dollars in property losses due to electrical stoppages.

A quake of that size is estimated to cause around $83B in property and direct business interruption losses, excluding quake-related fires. You can see those losses modeled here. 

“People need to think about insurance, think about retrofitting, for electrical disruptions of any kind,” he told Bisnow.

These kinds of retrofits can mean installing generators or replacing appliances with ones that run on natural gas instead of electricity. 

“We encourage people to think about their business and how do they retrofit their building and lifelines such as electricity, water and gas.” 

What about business insurance to cover losses from being closed? That answer can vary, but Janet Ruiz, an insurance specialist with the Insurance Information Institute, told Bisnow that having advance notice of the shutdown will likely render most claims null.

“A planned outage isn't accidental, there was no pipe burst or earthquake or fire, things that might be named perils on your insurance policy,” Ruiz said. “So unless they sold a coverage specifically that said, ‘This will apply during a planned power outage,’ could mean it wouldn't be covered. I would have to defer to the policy they bought and the company they bought it from.”

In many instances, insurance coverage won’t cover losses that weren’t incurred as the result of “an act of God,” such as a natural disaster, or that happened off-site. Business owners in Connecticut, for example, suffered major losses during a snowstorm last year because much of the damage that caused power losses occurred off their property, say via downed trees or power lines.

“After some kinds of catastrophes, people will put in claims for maybe the loss of food in their refrigerator, but most people have a deductible on their insurance,” Ruiz said. “Usually with losses like that, you would be coming pretty close to that deductible on a food loss and food spoilage. If it was expected, you might not see much payout in a situation where it's so widespread.”

If the shutdown caused some sort of damage to the property, like a fire, that would likely be covered by business property insurance. Businesses are also usually covered by business interruption insurance, but that depends on the policy and the duration of time a company is out of commission. If it is for less time than it takes to pay a deductible on the policy, an owner won’t recoup much if any money. It can also take several weeks for a check for that damage amount to arrive.

Ballman said he has checked out his own coverage, just to be prepared the next time PG&E cuts power — which he said is a matter of when, not if.

“As a state, we clearly, all of us living in the state, have not put enough attention on our current electrical infrastructure. And I think a lot of people are kind of [playing] the blame game, you know, whose fault is it?” Ballman said. “And we like to say, we are all in this together and we all needed to find solutions and put attention on this and more forward to find those solutions.”