We are faced with an array of risks, many of them well understood and controlled and others emerging and not as well defined. Our effectiveness at managing risk helps us to identify and prepare for new opportunities that may benefit our customers, improve the work environment for our employees and deliver value to our investors.
How we Manage Risk
Our enterprise risk management process continuously evaluates our levels of acceptable risk based on internal targets and guidelines, external environment and operating conditions. As part of our enterprise risk management and strategic planning processes, we have developed utility industry scenarios that present potential business trends and issues based on the key drivers in AEP’s business.
We implemented a new tool to quantify the risks associated with our competitive businesses. The tool simulates market prices, various components of the generation portfolio and other contract variables to produce risk measures, such as gross margin and cash flow at risk. In addition, stress test and hedge sensitivities are used when analyzing the financial risks of the business.
We also started a commercial compliance program, which builds on our existing control framework and organizational experience to comply with multiple regulations, including those issued by the Federal Energy Regulatory Commission and the Commodities Futures Trading Commission. Primary enhancements include mandatory compliance training for commercial trading functions, a defined policy and organizational structure, and surveillance and monitoring of transactions. These enhancements further mitigate the risks of a potential violation.
AEP’s Enterprise Risk Oversight (ERO) group, led by our chief risk officer, is responsible for developing the collective risk assessment of the company. This group gathers and analyzes information from functional business units at all levels of the company and reports to the Risk Executive Committee, which consists of members of the executive management team and functional unit representatives. To further the process of identifying, evaluating and understanding risks, the ERO facilitates business unit risk assessments. The Risk Executive Committee makes recommendations to business unit leaders for risk mitigation, where appropriate, and identifies the major risks and material issues on an enterprise-wide basis that could impact the company’s goals. These are monitored, reported and discussed on a regular basis with the Audit Committee of the AEP Board of Directors.