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The blackout’s financial ripple

The biggest economic impact from the blackout of 2003 likely will be the expected investment of hundreds of millions of dollars in improving the nation’s power grid.
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Restaurants, grocery stores and airlines may have lost millions of dollars in business from the nation’s biggest power outage, but the main economic impact of the blackout likely will not be felt for months to come, experts said Friday.

The short-term effect on the national economy from a single day’s worth of lost sales is so small as to be barely measurable, economists said. In most areas power was off for 24 hours or less, making the event roughly equal to a small snowstorm in its impact on shopping malls, restaurants and other retail outlets. Displaced travelers will be booked onto other flights, and much of the lost retail business will be made up in days to come.

Some small operators with highly perishable goods could be out of luck. Insurance industry officials said business coverage routinely excludes any losses resulting from power outages.

So the biggest economic impact could be the hundreds of millions of dollars that utilities and governments undoubtedly will have to invest to improve the nation’s electricity grid and prevent a repeat of the still-unexplained disaster, several economists and analysts said. Such a wave of investment on the nation’s power infrastructure might temporarily hurt profits in the energy sector but would offer a boost to an economy that has been starved for new capital investment.

“There could be some positive effects,” said Sung Won Sohn, chief economist for Wells Fargo. “I think we’re going to be much better prepared in facing a problem like this in the future.”

Because so little is known about the genesis of the blackout, which darkened much of the Northeast United States and southern Canada, it is nearly impossible to begin sorting out economic winners and losers. But manufacturers who provide backup and alternative power systems clearly hope to be among the beneficiaries.

Boost for the backup business?

At Cummins Power, one of the nation’s two main suppliers of backup generator systems, executives began responding to the crisis 70 minutes after the first reports of an outage, said Tony Satterthwaite, a vice president for the Minneapolis-based business. The company soon began deploying its fleet of mobile generators — self-contained diesel-power units that offer up to 2 megawatts of electricity, enough to power a big-box type retail store or up to 200 homes.

Satterthwaite said the outage could spark interest in standby emergency generators offered by Cummins and its rival Caterpillar, which together dominate the business, worth more than $1 billion a year. “This kind of event will drive some business we hope, but sometimes it’s very hard to tell,” he said.

While many large businesses might be interested in adding emergency backup power, the large and complex systems typically are put in place only at the time of construction, so the industry has been suffering during the deep industrial downturn of the past two years. “What we need is some capital spending,” he said.

Still Satterthwaite said the blackout demonstrated the value of diesel-powered emergency generation systems, which he said have been much maligned in recent years in favor of cleaner-burning systems that run on natural gas. The difference is that natural gas cannot be brought in by truck in times of emergency.

“This unfortunate incident highlights the value of diesel standby,” he said. “It’s the only thing you can park and have ready for a rainy day.”

Few claims expected

Insurance industry officials said they expected the outage would result in very few claims.

“Most commercial insurance policies exclude damage or whatever impact might have been made from power outages or power failures,” said Elizabeth Mosely, spokeswoman for the Insurance Information Institute in Washington. “So we most likely won’t get any claims for business interruption — it’s excluded.”

Homeowners could file a claim for food spoilage, she said, but only if the loss exceeds the amount of the deductible, typically $250 or $500. The industry group was unable to provide an estimate of possible losses but said there were just $2 million in insured losses in the last major blackout to hit New York City, a two-day event in 1977. Total losses from looting and riots in that outage were put at $28 million.

While restaurants and grocery stores might have suffered losses, other businesses already are benefiting from increased sales of flashlights, batteries and other emergency supplies. And bars appeared to enjoy strong business Thursday night as urban denizens sought to escape dark, muggy apartments to commiserate by candlelight.

“You don’t need lights to pour drinks,” noted David Wyss, chief economist for Standard & Poor’s. He reported that watering holes in Brooklyn were “open and packed” into the wee hours Friday morning as New Yorkers celebrated in advance of a virtual three-day weekend.