US energy risk management group formed

28 May 2002 – A group of leading US energy companies announced Tuesday the formation of an industry committee to identify best practices in risk management. The group is comprised of chief risk officers from participating companies and will be called the Committee of CROs.

The creation of the Committee of CROs reflects the rapid growth of the merchant energy industry in the United States, following the expansion of wholesale competition in markets for natural gas in the 1980s and for electric power in the 1990s. The increasing profile and interest in the sector among investors, regulators and other parties has created demand for commonly understood and accepted risk management procedures.

Companies participating in today’s announcement include American Electric Power, Constellation Energy Group, Duke Energy, Mirant, Tractebel North America, Inc. and TXU. The committee is open to all companies participating in energy trading and marketing activities and encourages other companies to join.

“A robust risk management function is one cornerstone of a strong corporation,” said E. Linn Draper Jr., AEP’s chairman, president and chief executive officer. “In our industry, the rapid expansion of energy trading makes that function more critical from day-to-day. For that reason, the potential value of bring industry players together to focus on developing guidelines for trading-related risk cannot be overstated,” Draper added.

“Due to recent market events and the increased scrutiny being placed on companies involved in energy trading and marketing, it is important for those of us actively involved in the industry to take constructive steps to define risk management practices and communicate these standards to our stakeholders,” added Mayo A. Shattuck, III, president and chief executive officer of Constellation Energy Group.

“While individual companies have developed extensive risk management structures and procedures, members of this committee saw the need to work together on common standards that are applied throughout the industry and are recognized by investors, regulators, credit rating agencies and counterparties,” said Richard B. Priory, chairman, president and chief executive officer of Duke Energy.

“Greater co-operation in our industry can deliver tremendous benefits for companies and their stakeholders. The Committee of CROs is an excellent forum for making this happen. Through the committee, it is possible to create new netting agreements and clearing platforms that can reduce our industry’s collateral requirements by as much as 90 percent. Ultimately, that’s capital that can be invested to strengthen America’s energy infrastructure,” said Marce Fuller, president and chief executive officer of Mirant.

“We look forward to participating in this important initiative, sharing best practices, and demystifying risk management methodologies for the benefit of interested consumers and the U.S. energy industry at large,” added William P. Utt, president and chief executive officer of Tractebel North America Inc.

The Committee of CROs is forming working groups to develop proposals for standardization in areas including risk management metrics, credit practices and disclosure. In addition, the committee will also take steps to develop generic guidelines for risk policies and procedures.

The risk management metrics working group will identify, define and offer guidance on risk management and valuation techniques and metrics that provide energy trading and marketing companies with consistent tools to quantify and evaluate risk. As part of this effort, the group will attempt to define more specific valuation techniques and metrics that can be used to quantify capital at risk in energy trading and marketing companies.

The disclosures working group will identify disclosures to help interested parties reasonably assess the risks of a company’s energy trading and marketing activities and to compare them with risks incurred by other companies.

The working group looking at credit will identify, define and provide guidance on credit risk management techniques. This group will identify standards for credit measurement and monitoring. It will also look to advance credit and collateral efficiencies through development of a standard form master netting and margining agreement, as well as analysis and recommendation for utilization of multi-lateral clearing platforms for energy products.

The committee plans to release recommendations on key risk management issues to interested parties within the energy industry.

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