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Betting Against the Gods

In search of the Holy Grail of utility risk management.

Fortnightly Magazine - October 2006

driven. In our case, seismic would be an event risk or a pandemic. There are other risks associated with IT security. That is something that a lot of companies have been dealing with. There are global trend risks, like climate change. Obviously, one that everyone is dealing with after 9/11 is terrorist-type risk.”

PG&E Corp. Chairman and CEO Peter Darbee says that the California energy crisis informed his decision to develop a much more robust risk culture at the company.

“The orientation of management prior to me moving to the CEO position was limiting that to commodity risk. When I moved to the CEO position, I had the ability to introduce a point of view that we had to be looking beyond the commodity to the major risks across the entire enterprise. And having been through such a tumultuous experience as the California energy crisis, one of the first things I asked myself as a CEO was, What are the big risks that you need to be concerned about? What are the big risks that you envision the company as confronted with? It is really important that you have action plans and programs in place to identify the true risks and manage the most significant of those risks.” Darbee believes that if the CEO is not thinking broadly about this issue, no one in the company will be.

But one question arises in every utility CEO’s mind after reading about Darbee’s enterprise-wide risk program: Where is the payback?

“Some might argue that we haven’t got the payback from the investment community for the improvement that we have made,” Darbee offers. “My reaction is that when you look at the cost relative to the potential consequences to the company, it is a very reasonable priced insurance premium.”

Building the Right System

Many utilities executives that have implemented enterprise risk systems say that the commodity risk-management component that requires IT systems doesn’t necessarily have to be a Hal 9000-like talking computer that costs millions to build. But there is a growing view of what is needed in any given utility.

Brian Miksch, vice president, Sungard, says the avoidance of disparate systems is the ideal objective in developing an energy risk IT system.

"If you can combine a vast majority of front, middle and back office functions into one IT infrastructure, utilities can gain great efficiencies in their operation. An ideal solution involves integrating all those processes as part of one IT infrastructure and supports the users' interaction with the outside world," he says.

Michael Ravo, vice president, industry solutions, Triple Point Technology, chimes in on what the Holy Grail on the systems side would be.

“The system needs to have true straight through processing. By true I mean front to back and all areas of the system are feeding off the same market and trade data, and even reference data, company data, credit data, and the ability to manage that across all aspects of the business,” Ravo says.

Furthermore, he believes that utility risk management systems should not segment generation or long-term trading or