An interesting development in the climate change debate occurred this summer in the U.S. Congress. It wasn’t the Senate’s work on the Lieberman-Warner Climate Security Act; that was a...
is evolving into an enterprise portfolio manager. "The CRO's role has changed from a control framework to a decision-support and optimization framework," Simpkins says. "The mandate used to be 'protect what you have,' and now it's 'protect and optimize what you have, and ensure that the investments you make going forward add value from a risk-reward standpoint.'"
Working at the enterprise level, the CRO/portfolio manager will help the company to establish standards and benchmarks for its risk-reward propositions. Then the CRO's organization will analyze and manage the assets and businesses that the company owns or controls in a way similar to an investment fund manager's approach to managing a portfolio of securities.
Using such a portfolio management approach, a company will weigh value calculations against the pre-defined benchmarks. The CRO and other senior executives will apply this process actively and continuously, seeking to optimize the company's assets and strategic positions on a forward basis.
"We are focusing more on hedging the asset portfolio," says Laura Brooks, CRO of Public Service Enterprise Group in Newark, N.J. "We are having input early and often to ensure risk is understood in the transaction-approval process."
With a CRO/portfolio manager guiding its moves, a company will, in theory, be more likely to acquire assets that serve its goals and to liquidate or reposition those that do not. This is particularly important in the current environment, where companies are jettisoning "non-core" assets and looking for bargains in the depressed market.
"We're taking advantage of this trough to grow our nonregulated business in a controlled way," Randle says. "We are looking to make selective acquisitions, and we are positioning ourselves as a leader in liquefied natural gas."
A strong CRO can help to ensure that such opportunities improve the company's overall value and not just the value of a given business unit. The result is a more competitive company, and one that is less likely to make bad investments.
"We need to get discipline into the [utility investment] process, or we'll fail to see a mismatch in expectations and the range of outcomes possible given today's volatility," Brooks says. For example, an undisciplined company might build assets based on long-term price curves, without any means of hedging short- and mid-term volatility. The effect for the company can be disastrous, as recent business failures so vividly illustrate.
A strong risk-management organization has the respect of the company's board of directors and audit committees, as well as the authority to influence executive decisions. "Risk management can't be viewed as a tactical function, or someone will make an end run around it and decisions will get made without adequate input," Randle says. "These are big risks that can make or break a company."
If it's true that what doesn't kill you will make you stronger, then companies that survive the present adversity should be practically invincible.
"We've taken this industry through a pretty rough ride," says Minnesota Power's Adams. "The shakeout will be good for the industry. Although it will bring gut-wrenching pain for many players, it will sharpen utilities'