Davies Consulting

Strategies for Complex Organizations

Utilities, Risk & Uncertainty: A Quick Reality Check

Utilities, regulators, and intervenors share responsibility for reducing risks related to energy delivery.  This may seem like a revolutionary statement, but it is reflective of an observable trend taking place in the utility world. The regulatory process is evolving to enable these stakeholders to collaboratively manage the risks and uncertainties at play. And – as in any evolution – progress is punctuated with occasional leaps forward, triggered by significant societal events.

Most recently in California, independent investigators found that the utility, regulators, and consumer advocates each had some accountability for the San Bruno incident as a result of a flawed regulatory process that traditionally has been focused on least cost alternatives and limited consideration of risk.  The parties are working to improve decision-making and agree upon methods for dealing with risk and uncertainty as part of the rate case process. This evolution to a more collaborative and shared responsibility for addressing risks is necessary and welcome, and principles are emerging that will support utilities and regulators in other parts of the country as they begin to explore similar issues.

Utilities and regulators acknowledge some foundational factors:

  • It’s essential to integrate operational risk and enterprise risk management priorities;
  • Identifying risks without integrating them into asset management, investment planning, and rate making does not translate into risk reduction; and
  • Education and communication must support risk mitigation to actually improve public safety and maintain a reliable energy supply.

Challenges remain, specifically with respect to how regulators, utilities, and intervenors deal with uncertainty. It is important for the parties to acknowledge their common mission, establish a common language for discussing risk and uncertainty, and agree upon a common risk tolerance level within the context of day-to-day uncertainties. The work to establish commonality is difficult, and should be approached as an evolution, not a revolution. This will certainly be a long process, but most agree that a successful end result will effectively improve the safety and reliability of our energy supply while ensuring reasonable cost. The keys to success will be transparency and consistency, since these qualities enable collaboration where the historical process has been adversarial.

The move toward risk-informed regulatory decisions has come out of urgent necessity in California (due to the San Bruno event), but other jurisdictions are moving in a similar direction. Utilities across the U.S. face the challenge of managing risks inherent to an aging infrastructure while satisfying the public’s insatiable appetite for more and more energy. System upgrades and additions are costly but essential to support economic growth. This reality is prompting regulators, utilities, and intervenors to recognize their need to cooperate for better-informed decisions.

Evolution is upon us, and – in this case – successful adaptation will require a collective effort.

Pat Delaney is a partner with Davies Consulting, LLC. His team is engaged with leading California utilities, supporting the creation of risk-based ratemaking processes that are fair, transparent, and consistently applied. He spoke recently about utility risk modeling at the Probability Management Conference in San Diego, California. For a copy of his full presentation, contact Info@DaviesCon.com.