In today’s fast-paced business environment, the process of managing risk has become a higher priority as companies are challenged to compete more efficiently and effectively. Increasingly, elected officials, regulators and customers are expecting utilities to more actively identify and mitigate risks, particularly operational risks. AEP’s Board of Directors and senior management recognize these trends and are committed to having a leading-practice risk management program.
We have enhanced our risk framework and process for assessing all risks, including operational risks. This is the process we use to identify risks, assess the risks and controls, plan mitigation strategies and monitor the risks.
AEP takes a risk-based approach to managing the business, which requires an integrated and proactive system of risk management. By integrating our risk functions across the company, we can identify risks before they impact the business and we can manage our exposure. We can more effectively allocate resources to projects, ensure regulatory compliance and drive business performance. This benefits our customers and creates the greatest reward for our shareholders.
Strong risk management leads to fewer surprises that can impact earnings and erode stakeholder confidence. It facilitates more effective decision-making because a structured consideration of risk is built into business activities. And it improves corporate governance. We use a risk framework and governance that allows for consistent assessment of risk across the enterprise.
We have enhanced our risk framework and process for assessing all risks, including operational risks. This is the process we use to identify risks, assess the risks and controls, plan mitigation strategies and monitor the risks. This process will inform and prioritize asset replacement strategies, and investment management decisions will be risk-based.
In 2016, we piloted the new operational risk framework in three business units and will expand that effort in 2017. The pilots are helping us develop a consistent, repeatable process for risk management across the enterprise and for risk management components that are significant for operations, such as asset management and investment management.
One example of how we are operationalizing our risk management approach is through the Transmission Asset Health Center, which allows us to prioritize our assets from highest to lowest risk of equipment failure. This ranking gives us the information we need to be proactive, minimizing potential impacts to customers. Through our risk management strategy, we can also improve reliability, reduce financial uncertainty and better communicate our operational decision-making to stakeholders.
Enterprise risk management is governed by an Enterprise Risk Oversight group, led by our Chief Risk Officer. This group is responsible for developing the collective risk assessment of the company. The Risk Executive Committee governs the risk processes and makes risk mitigation recommendations to business unit leaders, where appropriate, and identifies material issues on an enterprise-wide basis that could impact corporate goals. These material risks are monitored, reported and discussed regularly with the Audit Committee of AEP’s Board of Directors.
One area of risk we continue to monitor is the potential for policy changes in other states to cascade to our states and disrupt AEP’s business. For example, some of the proposals from the New York Public Utility Commission’s “Reforming Energy Vision” would significantly alter the role of the utility and the regulatory arrangements that govern its finances and operations.
Most importantly, we value our relationships with our customers, and this type of change would interfere with that relationship. The integrated nature of distribution and energy grid investments with customer technology preferences, either generation or usage related, requires coordinated planning and the ability for the utility to operate them to maximize the value of these investments and ensure the continued success of the AEP-customer relationship.
We work diligently with our policymakers and regulators to enable investment in grid modernization for the benefit of our customers in a cost-effective manner. The regulatory frameworks in our regulated states allow AEP the opportunity to earn a fair return on these investments.