Situation

An electric power company suffered a $600 million loss as a result of the West Coast energy crisis of 2001. It had been caught short of wholesale power to deliver to customers during a time of extreme run-up of prices. After the crisis, executives conducted various analyses to assess the company’s risk management structure.

Solution

A NextLevel team member, who in the months after the crisis was the CFO and Chief Risk Officer (CRO), ultimately decided that a single area of risk—exposure to fluctuating wholesale power prices—was so important to financial results and also so technical that it needed dedicated attention. He therefore set up a committee of officers, with himself as Chair, to meet weekly with technical staff to make decisions on the hedging program and to report regularly to the CEO and Board. At the same time, he had an Energy Risk Policy approved by the Board that contained a risk metric to measure effectiveness of the energy risk management program, as well as tolerance levels and guidelines establishing limits for the management team.

Other risks that were less technical, such as liability for catastrophic events associated with certain assets, were explicitly managed in other areas of the organization and reported to the CRO under separate processes. This was seen as an interim step in achieving enterprise-wide risk management through a Board-approved risk policy and management committee for all risks deemed important to the sustained performance of the organization.

Results

  • Earnings were less impacted by fluctuating power prices
  • The company paid off the debt associated with the heavy losses of 2001
  • In 2006, the company achieved record earnings

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