Utility risk management standards move forward

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By Bob Anderson
Executive Director of the Committee of Chief Risk Officers

The Committee of Chief Risk Officers is leading an effort among utilities, power marketers and regional power grid operators to adopt standards that will help them manage risks that threaten the uninterrupted sale and purchase of electricity and associated financial transmission rights.

In response to the first major credit action (Order 741) by the Federal Energy Regulatory Commission directed at organized wholesale electricity markets, and related regulatory responsibilities by the Commodities Futures Trading Commission, a working group of the CCRO has drafted a white paper – Risk Management Standards for Energy Market Participants – and shared it with interested parties in front of a December 14, 2011 compliance filing deadline.

Order 741 has major implications for wholesale power markets and affects activities such as billing and settlement periods, extension of unsecured credit and unsecured credit for financial transmission rights markets. Responses to Order 741 also were to address minimum participation criteria and what should be the proper grace period to cure collateral postings.

The paper’s initial draft drew on the CCRO’s work beginning in 2002 on numerous energy risk management challenges tied to the collapse of Enron in 2001 and the California’s (then) newly deregulated electricity supply market. Many of the recommendations for best practices and minimum standards link back to several of the more than 20 white papers published from 2002 to 2010.

Instead of specifying criteria, the FERC directed each ISO and RTO to “develop these criteria through their stakeholder processes.” With several ISOs / RTOs operating in the Eastern and Western interconnected grids, individual stakeholder groups were bound to propose different standards. The CCRO, rather, integrated inputs from market participants throughout the country and stands to harmonize varying perspectives. Version 1 is due to be voted on by CCRO members in January.

Thus far, PJM Interconnection, the New England ISO, the New York ISO and ERCOT (which officially is not subject to FERC’s authority) have been among the active participants along with their utilities and companies that buy and sell power in those regional grids.

By mid-December, a working group of the CCRO included 56 people from various stakeholder companies of all types and sizes. Those interested in learning more can do so via www.ccro.org. There one can also learn how to participate.

Led by co-chairs Morgan Davies of Calpine and Bradford Radimer of NRG Energy, the CCRO Working Group developed a comprehensive array of individual “standards” was working in late December to vet them for a second full draft.

The Risk Management Standards document brings-together a spectrum of critical risk issues and organizes them into a risk management framework. Using this framework context, the CCRO spells out 27 individual risk management standards the CCRO believes are necessary to make effective management of energy risks possible.

At the highest level, the components to the risk management framework include:

1. Independent governance over risks
2. Adequate risk policies & procedures
3. Adequately qualified personnel and training
4. Adequate risk management infrastructure

Under each of these broad framework components, the paper provides a brief discussion of the issue, related standard practices, and provides links to much more detailed information and discussion found in other published CCRO white papers.

Parties interested in learning more about the standards and practices emerging to comply with FERC Order 741 should contact the CCRO either via email, info@ccro.org or by calling 281-825-4870, extension 7003. More information about the CCRO is at http://www.ccro.org.

Author: Bob Anderson is Executive Director of the Committee of Chief Risk Officers where he has led its work on more than 15 individual efforts since 2005 to improve enterprise risk management for energy marketers. He is also president and founder of the Energy Data Hub company which is poised to bring much needed gains in market transparency and robustness to energy transaction and price formation.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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