Risk Amnesia

We've had More Than a Few Instances of Risk Amnesia in Our Industry. Like when an executive decides for some inexplicable reason that his company will be first quartile in maintenance spend (which in plain English means he cuts the budget and takes credit for doing next to nothing). Then when that storm blows through, and the lines go down and the regulators come calling, the guy who made the call to cut the tree-trimming budget can't be found. Why? Because he has developed a severe case of “risk amnesia.”

I first heard the term risk amnesia at EPRI's power delivery asset management seminar held last year in Chicago. Bill Menge gets the dubious credit for coining the term, or at least for bringing it to my attention. Menge, the manager of asset management and automation at Kansas City Power & Light, informed me they work hard to assure that decision makers do not come down with risk amnesia. This requires teams to hold one another accountable for spend decisions.

Menge reports to Bill Herdegen, vice president of T&D operations, who has been involved in innovative approaches to managing utility investments since long before the term “asset management” came into vogue. Herdegen's asset management processes not only enable his staff to improve the reliability of an aging system but also make forward-looking investments, so KCP&L will be prepared to meet the demands of an increasingly digital age.

All our utilities are faced with tough decisions on where to focus their investment dollars. So, when a low-probability event such as the explosion of a “vintage” network transformer occurs, we must quit looking for a scapegoat. Instead, let's collectively acknowledge the risk we knew we were taking when we invested in tree trimming. In most instances, we did not make bad decisions, it is just that our organizations have not been prepared to deal with the fallout from low-probability, highly catastrophic events.

Risk was not a word most of us were comfortable with when we joined our utilities; we were bred to be risk adverse. “But now, with money tight,” states Terence Donnelly, senior vice president of transmission and distribution at ComEd in Chicago, “we need to build risk models that will enable us to restack our spend. We must answer the difficult questions: How much risk does the spend mitigate and how much risk can we tolerate?”

Donnelly cracked me up when he shared how he addresses risk amnesia. “I take out my camera phone and take a photo of each one of us who are in the room making investment decisions. That way, none of us can later say, ‘I wasn't in on that decision.'”

With a billion-dollar spend and a diverse customer base spread over 11,000 sq miles, ComEd must tackle tough questions on how much money to invest in the downtown network and how much to invest in upgrading systems in the suburbs. With properly weighted risk-based tools, Donnelly relates that ComEd can take the emotion and guesswork out of the decision process.

Nick Lizanich, vice president of asset oversight with FirstEnergy in Akron, Ohio, shared investment strategies his utility is following. But, he started off acknowledging that his utility had survived a period where very little spend was focused on power delivery, resulting in a delivery system that was deteriorating over time. New executive management made the commitment to invest in infrastructure, and a process was put into place to direct the spend. Lizanich summed up the process in four steps:

  1. Identify the problem you are trying to solve
  2. Identify the solution
  3. Prioritize
  4. Execute.

Of course, this sounds simple, but FirstEnergy invested a lot of resources collecting data and performing analysis. To keep from suffering risk amnesia, FirstEnergy put together teams that became the owners of the assets. With a cost versus risk model, substation owners, for example, could evaluate the impact of an outage and assess the cost of restoration.

With risk models in place, our utilities will be able to better understand the potential impact of each dollar spent on the system and thus make better investment decisions.

Utilities are also reaching out to their regulators and sharing the output of their risk-adjusted spending models. So, now regulators can better understand the impact of rate case decision on the integrity of the network. By working with regulators early and often, we can reduce the risk of being put into the “regulatory jail” that occurs when public service commissioners prescribe solutions for a utility.

We need to apply our risk-based tools properly and communicate openly the risks inherent in the spend decisions we've made. Then we will no longer have to feign amnesia.

Editor's note: This editorial is based on the comments at the executive panel at the 2008 EPRI Power Delivery Asset Management Conference. For information on the upcoming conference to be held Nov. 4-6, 2009, contact Paul Myrda at pmyrda@epri.com.

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