CCRO Leads Development of Risk Management Standards for Energy Markets
by Bob Anderson
The Committee of Chief Risk Officers (CCRO) 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 (FERC) directed at organized wholesale electricity markets and related regulatory responsibilities by the Commodities Futures Trading Commission (CFTC), a working group of theCCRO on Nov. 28 drafted a white paper, “Risk Management Standards for Energy Market Participants,” and shared it with interested parties in front of a Dec. 14 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 are to address minimum participation criteria and what should be the proper grace period to “cure” collateral posting.
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 California’s then-newly deregulated electricity 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, FERC directed each independent system operator (ISO) and regional transmission organization (RTO) to “develop these criteria through their stakeholder processes.” With several ISOs and RTOs operating in the eastern and western interconnected grids, individual stakeholder groups were bound to propose different standards. The CCRO, rather, is integrating inputs from market participants throughout the country and stands to harmonize varying perspectives in its formal “Version 1.0” due out by mid-January.
Thus far, PJM, ISO New England, the New York ISO and the Electric Reliability Council of Texas (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 theCCRO included 56 people from stakeholder companies of all types and sizes.
Led by co-chairs Morgan Davies of Calpine and Bradford Radimer of NRG Energy Inc., the CCRO Working Group developed a comprehensive array of individual standards and was working in late December to vet them for a second full draft. Also assisting were coordinators Jack Yeager and Phil Gootee.
The Risk Management Standards document brings together a spectrum of critical risk issues and organizes them into a risk management framework. Using this approach, the CCRO spells out about 30 individual risk management standards the working group leaders found necessary to make effective management of energy risks possible.
At the highest level, the components to the risk management framework include:
- Independent governance over risks,
- Adequate risk policies and procedures,
- Adequately qualified personnel, and
- Adequate risk management infrastructure.
Under each of these broad framework components, the paper provides brief discussion of the issue and 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 may email the CCRO at firstname.lastname@example.org or call 281-825-4870, extension 7003. Find more information about the CCRO at http://ccro.org.
Bob Anderson is executive director of the Committee of Chief Risk Officers in The Woodlands, Texas. Email him at email@example.com.
The Risk Management Standards paper has been published, and is available on the CCRO website.