The Overseer’s Undercurent: Do-It-Yourself Energy Risk Management

By Published On: April 2, 2005

Gone are the days when the major risk facing electric utilities was the possibility, however slim, that a regulatory agency might disallow a significant portion of revenues requested in a general rate case. As the industry has moved from entrenched monopoly to evolving competition, from slow-moving to fast-changing, and from analog to digital, the types and severity of risks have multiplied again and again. When credit-rating agencies look over the energy business today, they don?t simply worry about bond defaults. Full-blown Chapter 11 bankruptcies are a distinct possibility these days. When boards of directors select a new chief executive officer, they now must worry about whether a poor choice will drag them into court or before the Sarbanes-Oxley accounting police. This has spawned an industry of consultants who try to sell you ?risk management? services, which sound suspiciously risky. Diversification? Hedging strategies? Derivative products? Hey, aren?t those the same financial gambles that got so many companies into trouble only a few years ago? Risk is not limited to power trading and litigation, no matter what you think about Enron. Risk is a multiheaded monster that waits under your bed at night. Will it be a lightning strike that blows out a key transformer? Or perhaps the unknown computer hacker intent on crashing your cyber system? It might even be the mayor of your hometown, leading a campaign to municipalize your assets. Besides losing sleep over everything that could possibly go wrong, what?s a utility risk manager to do? Typically, risk management involves buying insurance and keeping your fingers crossed. Others try to spread the liabilities to other parties through contracts with indemnification clauses or liquidated damage provisions. But their lawyers are just as smart as your lawyers, so things usually come out a wash. Because life is a worst-case scenario, we offer you another way to manage all of your risks simply and conveniently. Deal with them one day at a time, with the Worry O?Matic Risk Management SystemTM. We?ve devised an easy two-step process for identifying your Risk of the Day as well as specifying exactly what you need to worry about and how much. Simply spin the dial on your personal Worry O?Matic board to select the Class of Risk you need to deal with that day. Then roll the dice and refer to the handy Risk Matrix. The larger die will tell you which Risk Category to worry about, and the smaller will set your Daily Level of Concern. For example, let?s say you start the week by spinning into Class H: Security Risks. Casting the dice, the larger die signifies a five, which is a cyber security risk of computer virus attacks. The smaller die shows a three, which means a medium level of concern that day. Better order a network scan to make sure your IT system isn?t infected. It?s as easy as that! We?ve identified 10 major classes of risk that utility managers must consider?ranging from business risk and system failures to resource risks or the threats of natural disasters. Within each class identified, there are six categories of specified risks in the A-J list below. With six different levels of concern, you have a possibility of 360 individual risk scenarios?one for each day of the year, with five risk-free days! You can choose to take them on major holidays, or bundle them together for a weeklong, worry-free vacation. Plan and manage your energy risks well in advance with the Worry O?Matic! Save tens of thousands of dollars compared to expensive consulting services! After spinning the Worry O?Matic (TM) to pick a class of risk, roll the dice. Large die indicates category of risk, and small die determines level of worry: 1-2 low, 3-4 medium, 5-6 high. <b>A. Business Risks</b> 1. Governance/Board Liability 2. Stock Price Drop 3. Credit Downgrade 4. Trading Security 5. Mergers & Hostile Takeovers 6. Bankruptcy <b>B. Regulatory Risks</b> 1. Rate Case Risk 2. Operational Disallowances 3. Franchise Fees 4. Affiliate Transactions 5. Consumer Protections 6. Market Power Mitigation <b>C. Legislative Risks</b> 1. Retail Choice 2. Aggregation 3. Taxes 4. Campaign Contributions 5. Investigations 6. Renewables Portfolio Standards <b>D. Legal Risks</b> 1. Antitrust 2. Business Practice Class Actions 3. Municipalization 4. Intellectual Property 5. Personal Injury Lawsuits 6. Force Majeure <b>E. Resource Risks</b> 1. Generation Outages 2. Transmission Instability 3. Pipeline Curtailments 4. Price Volatility 5. Record Peak Demand 6. Substation Failures <b>F. Business System Failures</b> 1. Customer Information/Billing Systems 2. SCADA 3. Energy Management Systems 4. Call Centers 5. Intranet 6. Outage Management Systems <b>G. Natural Disasters</b> 1. Fires 2. Floods 3. Earthquakes 4. Hurricanes/Big Wind 5. Freeze 6. Lightning <b>H. Security Risks</b> 1. Property Theft 2. Ecoterrorism 3. Armed Attacks 4. Worms 5. Viruses 6. Malware <b>I. Environmental Risks</b> 1. Emissions & Air Quality 2. Water Discharge Pollution 3. Hazmat/Asbestos 4. Nuclear Waste 5. EMF 6. ESA/Fish/Avian Mortality <b>J. Employee Risks</b> 1. Union Contract Talks 2. Aging Workforce 3. Workers? Comp 4. Health Care Coverage 5. Whistle-Blowers 6. Drug Use Order the Worry O?Matic Energy Risk Management System for only $14.95, plus shipping. <i>?Arthur O?Donnell is an independent energy journalist based in San Francisco and author of </i>The Guilty Environmentalist<i> and </i>Soul of the Grid.<i> Visit his Web site at </i>www.energyoverseer.com.

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