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Frontlines

The Northeast Blackout goes political.
Fortnightly Magazine - September 15 2003
  1. and complexities of trading, driving companies even further away from trading markets. "Managing credit-how much you can afford to extend and accept from others-has become more critical," says Laura Brooks, CRO of Public Service Enterprise Group (PSEG) in Newark, N.J.
  2. The capital markets, burned in the meltdown of utility stocks, have demonized unregulated energy businesses. "Capital pretty much dried up immediately post-Enron," says Robert Adams, CFO at Minnesota Power in Duluth. "It has become more available to utilities in the past 12 months, but the days of speculation-building a lot of capacity on the basis of price forecasts-are over."

As a result of these factors, utilities have fled the wholesale exchanges, folded up many deregulated business ventures, and replaced new-economy marketing flak with old-economy fare. "Back to basics" is the industry's new mantra.

However, these moves arguably represent more of a survival reflex than a thoughtful strategic shift. "They aren't voluntarily changing their strategies," says Sempra's Randle. "They did it wrong and they got hammered. They have no choice but to change strategies now."

Changing strategies, unfortunately, cannot guarantee better ratings or glowing analyst reports. "Going to Wall Street and competing for capital, potential shareholders may view the utility industry as being more risky than some others, when in fact it's not," says Patrich Simpkins, CRO at Dallas-based TXU. The industry's exhaustive disclosure requirements might be positioning investor-owned utilities in an unfavorable light, he says, compared to companies in industries with less stringent reporting requirements.

Additionally, analysts and rating agencies seem ready to penalize utilities no matter what they do. For example, Duke Energy announced earlier this year that it would divest itself from the volatile merchant energy business. But Standard & Poor's on July 24 lowered its ratings on concerns about "Duke's ability to effectively terminate the proprietary trading and marketing positions without adversely affecting the consolidated financial profile."

Duke's Osborne says that although the overall industry ratings trend remains bleak, eventually efforts to shore up balance sheets will prevail. "The financial strengthening that is under way should be reflected in the ratios the ratings agencies look at, and we will see credit given for exiting proprietary trading," he says.

In the meantime, the industry's CROs are striving to improve their companies' strategic plans by analyzing the big risk juggernauts-market, financial, and credit. At the same time, they are working to assimilate an expanding variety of less-tangible risks into an enterprise-wide analysis ().

"The CRO role is expanding to include things like capital adequacy risk, business continuity risk, and compliance risk," says Mike Smith, executive director of the Committee of Chief Risk Officers (CCRO). "All of these areas need to be measured and quantified to the extent possible, so the company can gauge the relative strength of the balance sheet."

Indeed, given this widening role, the need for a CRO and an enterprise-risk organization has never been clearer, Smith says. "Everybody is talking about changing strategies and strengthening the balance sheet, but how do you know if you've gotten it right?"

CRO as Portfolio Manager

To answer that question, the CRO