Tools for measuring credit risk.
Jim Rich is a vice president in ERisk’s consulting practice. Prior to joining ERisk, Rich was a member of Oliver, Wyman & Companys’ risk management practice. Curtis Tange is also a vice president in ERisk’s consulting practice, where he develops the firm’s energy practice.
For some time, managers and directors of energy companies have known that their company's risk management programs must do more than simply monitor exposure to market risk within some value-at-risk limit. While market risk remains the largest risk faced by energy companies (particularly for power and gas marketers), credit risk brings up a strong second and looms large enough to create company-killer situations. In just this past year three widely discussed industry-wide credit events (the California crisis, the PG&E bankruptcy, and the Enron bankruptcy) have once again opened the eyes of managers to the need for improved credit risk management practices.
The most recent such event, the Enron bankruptcy, highlights the destructive potential of credit events. At the time of Enron's bankruptcy filing, the aggregate exposure to Enron of all its counterparties was estimated at $6.3 billion.1 Energy companies held $900 million2 of that exposure, and the "Top 10" most exposed publicly traded energy counterparties among this unfortunate group held a combined total of $685 million3 or 76 percent of all energy company exposure. (See Figure 1)