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DHS Funding: Dueling for Dollars

The big-money question in securing critical infrastructures is: Who pays how much, and for what? Or, in the case of the electric power industry: Where do you draw the line between ratepayers and taxpayers?

"The energy sector is probably most emblematic in terms of developing that economic model," says John A. McCarthy, executive director of the Critical Infrastructure Protection Project, a joint project of George Mason University and James Madison University. It's a problem so complex that GMU has Nobel laureate Vernon Smith working on it. But, McCarthy quips, "It doesn't take a PhD to understand that if you don't have power, certain things aren't going to work."Diver-sity TrainingAssante never thought he'd be worried about finding, hiring and paying for specialized security divers trained to search ships for explosive devices. But these days, he is. That's because if the nation's maritime threat profile reaches its highest level, American Electric Power will have to hire divers to check the hulls of barges that bring diesel fuel into its power plants. (Facilities that receive hazardous materials via waterways are considered a type of port.) This new requirement is part of the Maritime Transportation Security Act, passed in 2002.

If security measures like this added only 15 percent or 20 percent on top of the overall security budget, Assante says his company would simply absorb the costs. Even above that level, he's confident that AEP's stockholders would pay, assuming the investment ensured the reliable generation and distribution of electricity. But maritime security? "My customers aren't expecting to pay for maritime security," he insists.

This is where the dividing line between ratepayers and taxpayers begins to blur. There's no DBT in this case to determine at which point AEP can start depending on the government to take over security. But, Assante muses, wouldn't the Coast Guard be able to help AEP with security divers if it meant keeping the nation supplied with electricity during a time of crisis? (To understand the complexities behind this reasonable-sounding idea, see "Same Ship, Different Day," Page 26.)

Beyond having the government actually step in and take over some of the security initiatives, there comes the problem of figuring out how to pass on the costs, once a company decides they can no longer be absorbed into the budget.

The obvious solution is simply to raise rates, but in the energy infrastructure, that's not so easy. AEP is starting to go to public-utility commissions in states where electricity rates are due for negotiation and asking for increases to cover security costs, which Assante says have more than doubled in some areas over the past two years. (Staffing costs have skyrocketed, for instance: Two years ago, AEP didn't even have a vice president-level executive devoted to security.) "Now we're looking for the state to say, 'Yeah, spending money on security post-9/11 made a lot of sense, and we're going to help you recover the costs,'" Assante says.