Turning risk into results: Americas power & utilities snapshot
Balancing risk with reward is a goal all companies seek but most are challenged to achieve.
For regulated utilities, the challenges are even more complex. Multiple stakeholders — customers, communities, interveners, regulators and shareholders — present conflicting priorities that each party expects the utility to meet.
What are the risks involved, and is it clearly understood who “owns” the risk? Unfortunately, the answer, which can vary from jurisdiction to jurisdiction, is not clear.
The utilities industry is undergoing the most fundamental transformation the industry has experienced since the advent of modern power generation.
The utilities industry transformation is shaped by three forces that require organizations to balance opportunity and risk to drive performance:
- Velocity (the rate of speed with which something happens)
A single catastrophic event can expose the utility to a sudden crisis. Aging energy infrastructure, expansion of power grids to accept new forms of energy and changes in the generation mix all require massive amounts of capital investment.
- Volatility (the relative rate at which changes occur)
Shale gas transformed the pipeline economics and gas flow within the US “overnight,” with effects felt throughout the economy. Unconventional gas production faces its own societal and environmental challenges; it is an intensive industrial process that has ramifications for local communities, land use and water resources.
- Visibility (the relative ability to see under given conditions)
The industry continues to be plagued by uncertainty in energy policy — from cap and trade, to carbon controls legislation, to no climate legislation. Among this uncertainty, the complexity of regulation is increasing, both at strategic and operational levels and regulators have become significantly more stringent in their actions.
Our experience indicates that organizations manage risk for better performance in three interrelated ways:
- Value creation focuses on clear articulation of risks, whether borne by the rate payer or the shareholder, and determining the appropriate level of reward.
- Risk mitigation focuses on sound risk management, reducing the likelihood (frequency) and impact (cost) of the risks.
- Cost reduction efforts focus on managing costs to maintain reasonable rate increases and earn the rate of return.
Utilities can use these levers alone or in combination to drive better performance.