The purpose for the Committee of Chief Risk Officers (CCRO) recommendations, as stated in the introduction to their 198-page opus, is "to provide guidance on new methods and tools to establish a...
Beware of a national energy crisis that eclipses California's.
It seems rather elementary in an economic downturn to say that generating capacity will easily match demand over the next few years, especially with all the new plants that have been built lately. But what happens to the supply picture when you factor in a possible economic upswing, with continued high natural gas prices, an illiquid wholesale market, and an aging transmission infrastructure?
These were but some of the concerns voiced by David Sokol, chairman and CEO at MidAmerican Energy Holdings, before the U.S. Senate Committee on Energy and Natural Resources in March, testifying on the financial condition of the industry.
At the Senate meeting, Sokol said, "In the last three years, more than 170,000 megawatts (MW) of planned new capacity have been tabled or canceled. Some of these cancellations represent an appropriate correction for overbuilding, but some needed projects are also being suspended. Moreover, there is significant under-investment in transmission facilities, also caused by the lack of capital availability."
In addition, Sokol said that if the industry fails to turn the situation around, he fears that the industry will be laying the groundwork for a repeat of the Western energy crisis. In fact, Sokol sees more than a few similarities between the current state of the industry and the conditions that led to the Western crisis.
"For the many senators on this committee from the West, I hope you will ask yourselves why an Enron was able to manipulate markets in your region, but not the markets of other regions. The answer, I believe, is that the West was dangerously short of both capacity and the infrastructure to deliver that supply to market. Coupled with the terribly conceived California market structure, conditions were ripe for anti-consumer behavior," he says. But many ask just how to develop "sensible market rules" and "adequate infrastructure" to ensure that a California style crisis does not repeat itself? Especially as results have been mixed in the movement to develop greater confidence and liquidity in wholesale energy markets, as well as to attract capital to develop aging transmission infrastructure .
The Committee of Chief Risk Officers: Failure Is not an Option
It has been rather unfortunate that the Committee of Chief Risk Officers, which has set out to strengthen risk management and disclosure practices in the physical and financial trading and marketing of electricity and natural gas, hasn't really had the success yet that other best practices groups have enjoyed. In fact, some members of the media and the financial sector have dismissed the organization as nothing more than an industry smoke screen to ward off Draconian regulations. The critics argue that the CCRO has not gone far » enough in promoting best practices and that it lacks credibility because the recommendations it makes are non-binding on its members.
Certainly, this was the charge leveled at the Group of Thirty, a well-known best-practice group that was set up in 1978 to help upgrade operations in the banking industry. That organization found great credibility during the early 1990s, after