How trading hazards affect enterprise risk management at utilities.
Terry Pratt is director, Arleen Spangler is director, Richard Cortright is managing director, and Steve Dreyer is managing director at the Standard & Poor’s Public Utilities, Power & Project Finance Ratings division.
Over the past 15 years, trading’s role at utility companies has evolved substantially from ensuring sufficient power and fuel supplies for ratepayers to taking large, open, and speculative positions and maximizing asset value. Along with that evolution come a host of new business and financial risks for utilities.
Fuel and power, of course, must be available, and the potential impact of the financial risks of trading must be controlled and managed, lest they adversely affect the parent firm. And the financial risks, already highly complex, are growing: Today’s very lively market for energy-based commodities and their derivatives has traders at energy desks jockeying with desks at investment banks and hedge funds.
Trading desks are a critical asset for a utility, as they provide the freshest market intelligence. However, they are also charged with being a profitable business undertaking, which faulty intelligence about the weather, the supply chain, or the economy threatens. Faulty intelligence also can damage reputation and result in potential electricity shortfalls in regions served.
New regulatory and competitive information must be integrated fast, which requires speedy and effective technology.