Enterprise Risk Management Program APPA s Risk Management & Insurance Meeting Austin, Texas March 29, 2007 Presented by: L.D. Hollingsworth
Agenda Introduction - Why ERM? Governance & Reporting Structure CPS Energy s ERM Framework ERM Implementation Risk Assessment Process Benefits & Challenges The Future Copyright 2007 CPS Energy 2
Introduction Why Enterprise Risk Management ( ERM )? There are many reasons to implement an ERM program. Dynamically changing environment in the utility space Risk based decision making and allocation of resources Increasing focus by rating agencies It is the right thing to do Copyright 2007 CPS Energy 3
Governance Structure A key first step in developing a viable ERM Program is support from the top. Critical to have support from highest levels within the organization (GM or CEO) Establish governance structure appropriate for your company, Enterprise Risk Management Committee ( ERMC ) Chief Risk Officer is the champion of ERM at CPS Energy Copyright 2007 CPS Energy 4
Governance Structure Board of Trustees Enterprise Risk Management Committee Chair CEO CRO Co-Chair EVP/CFO EVP Energy Delivery EVP-Strategy EVP Energy Devel. VP Gen Counsel ERMC meetings to be conducted monthly Copyright 2007 CPS Energy 5
Reporting Structure The Chief Risk Officer reports to CPS Energy s EVP and CFO to ensure optimum risk management performance across enterprise risk risk Strategic Operational risk Financial Legal/ regulatory/ compliance risk risk Hazard/ event Copyright 2007 CPS Energy 6
CPS Energy s Approach Risk Assessments Energy Development Energy Delivery Financial Services Enterprise Risk Management CPS Energy ERM Enterprise Technology Risk Platform Assessment Achieve CPS Energy s Goals & Objectives IT Enterprise Risk Reporting Copyright 2007 CPS Energy 7
CPS Energy s Approach Best Practices Leverage COSO Leverage experience of mature ERM programs Conference calls and site visits of peers UTSA, Valero, Tesoro Selection of ERM Software Scalable improved efficiencies Automated platform Reporting Capabilities Management Reporting Via intranet Risk metrics customized for CPS Energy Integrated with Strategic Planning & Decision making process Utilize a Best in Class Consultant to jump-start your process Copyright 2007 CPS Energy 8
Implementation Process 1. Phase1: Lay Ground Work ERM Policy Governance Structure Enterprise Risk Management Committee (ERMC) Promote Culture Change & Risk Language Selection of ERM technology 2. Phase 2: Select Pilot Area Perform Pilot Risk Assessment 3. Phase 3: Lessons Learned 4. Phase 4: Rollout to Enterprise Copyright 2007 CPS Energy 9
Risk Assessment facilitated workshops to identify risks Copyright 2007 CPS Energy 10
Key Components of Risk Assessment Process Top Down Approach: Begin risk assessment process with Executive Management and work down through organization. Measure Risk: Heat maps provide a good communication medium Scale of 1 5 Impact: Each number is assigned a dollar value by CPS Energy based on internally determined materiality levels Probability of the occurrence over a defined time horizon Impact Probability Copyright 2007 CPS Energy 11
Key Components of Risk Assessment Process Prioritize Risk: Tier Concept Low Med High Validate Controls/Mitigation: Current state Mitigate Risks: Action Plans Developed by Risk/Control Owners with assistance from ERM Team & Audit Services Copyright 2007 CPS Energy 12
Key Components of Risk Assessment Process Audit Services Involvement Assist with validating risk assessments Leverage risk assessment results to guide Annual Audit Plan Copyright 2007 CPS Energy 13
Collateral Benefits Employee s make risk-based decisions Risk based allocation of resources Strong credit ratings lead to lower cost of capital Increased job ownership & accountability Identification of undocumented processes Copyright 2007 CPS Energy 14
Challenges LPPC members face challenges with successful development and implementation of ERM Buy-in from the top Endorsement Budget Insurance Services vs. Enterprise Risk Management Education Getting the word out Talent competition for staff Copyright 2007 CPS Energy 15
The Future Rating agencies are continuing to look for ERM capability in their client segments The energy sector will be first, then role out to other sectors By the end of 2007, S&P intends to move to a full ERM analysis Arleen Spangler, S&P director of utilities, power and project finance as reported by Treasury & Risk Copyright 2007 CPS Energy 16