Investor-owned utilities might seem fairly robust, but they’re not impervious to unpredictable black-swan events. Ensuring the industry’s survival might depend on our ability to reduce our...
The Northeast Blackout goes political.
Nearly a year ago, cover story announced the rise of the chief risk officer (CRO). "Utility senior management is becoming positively enamored with the office of the CRO," we said. "Fully 40 percent of America's CROs work for utilities and energy companies."
Given the uncertainties and changes in the industry, one might assume that the CRO's position is more important today than ever. Many of the industry's CROs are dealing with an expanding scope of risk issues, from capital adequacy to compliance with the Sarbanes-Oxley Act. "There is much more focus on risk management than there was two years ago," says Richard Osborne, Duke Energy's CRO. Events that have occurred since late 2001 "have created a need for energy companies to have robust risk-management functions," he says.
However, if the CRO's role is defined more narrowly-to oversee trading-oriented risks, for example-then the position becomes more tenuous in today's environment.
"As part of our return to being a seven-state power and gas utility, we eliminated the CRO position," says a spokesperson for Aquila Inc. in Kansas City, Mo. "We no longer have a need for a risk officer now that we are out of the merchant marketing and trading business."
Aquila isn't the only company distancing itself from the wholesale trading markets, or whose former CRO is pursuing other opportunities. El Paso Energy, for example, is liquidating its merchant energy portfolio, and the company eliminated its CRO position earlier this year.
Whether these moves signal an industrywide trend is unclear. Instead, they might represent efforts by a few companies to send Wall Street the message that risks have subsided. But this assertion seems ill-conceived to some in the industry.
"It reflects a somewhat narrow view of what a CRO is," says Mark Randle, CRO of Sempra Energy in San Diego. He explains that the CRO was associated too closely with trading at some companies, and eliminating the CRO upon exiting the merchant markets is largely a cosmetic step. "It was a knee-jerk, near-term reaction that will prove to be a bad decision," he says.
Risks still loom large for the industry, and virtually all companies will face those risks-whether through the office of the CRO or some other executive. Top risk executives will be busy for the foreseeable future, defending their companies in a hostile industry landscape.
The current state of the industry might not be hellish, exactly, but utilities and their shareholders are suffering what seems like an eternity of torment.
The current nightmare has three main features easily identified by most industry watchers. Namely:
- The withered condition of wholesale power markets has created extreme price volatility, forcing companies to abandon or scale back their trading business. Furthermore, it has made it difficult to hedge forward-price risks. "No one wants to go out on the curve," says Scott Smith, CRO of American Electric Power Co. "The market has stabilized, but it's still in a sorry state. I don't see long-term deals coming back for a couple of years."
- Credit-risk concerns have increased the costs