ACES’ Risk Management Approach
Systematic and Disciplined Approach
ACES encourages a systematic disciplined approach to energy risk management. This approach has two main components: the Energy Risk Management Cycle and Integrated Portfolio Management.
The Energy Risk Management Cycle is an iterative 6-step process that provides a foundation for identifying, understanding, and effectively managing energy risks.
Step 1. Risk Identification and Quantification
Before risks can be effectively managed, they must be identified and measured using either statistical tools or a qualitative approach.
Step 2. Establish Risk Tolerance and Risk Management Policies
After priority risks are identified, Energy Risk Management policies are developed to formalize risk objectives, risk tolerance, a decision making process, and identify authority for individuals or committees to carry out transactions.
Step 3. Develop Hedge Plans and Execution Strategies
ACES develops policies for establishing the boundaries for managing risk and execution strategies for implementation and compliance purposes.
Step 4. Implement Controls and Procedures
Risk Management Policies need to be supported by controls and procedures to ensure an appropriate level of oversight.
Step 5. Execute the Hedging Strategy
With a clear understanding of the risks being taken, Energy Risk Management policies in place, a hedging strategy developed, and controls and procedures in place, the hedging strategy can be executed.
Step 6. Risk Monitoring, Measuring, and Reporting
Existing risks should be continuously monitored and reported up through the risk management governance structure. As new risks emerge, they should be reported through a systematic process to determine if policies or strategies need to be altered.
Integrated Portfolio Management
Integrated Portfolio Management takes this cycle as a starting point and adds several components to create an approach to managing energy risks, which is complete and consistent across the entire organization.
1. All Commodities, Products, and Resources
All commodities, products, and resources (both physical and financial) need to be included in the Energy Risk Management Process.
2. Sufficiently Long Time Horizon
The time horizon for managing risk needs to be sufficiently long to capture all significant risks and opportunities.
3. Coordinated Strategy Development
Development of risk management strategies should be coordinated across all components of the power supply portfolio and should reflect a structure based on transparency, open exchange, and information sharing.
4. Sophisticated Software Tools
Sophisticated analytical tools are needed to simultaneously evaluate several major risk factors in a probabilistic fashion, allowing “what if” scenarios to be quickly analyzed in the development of risk management strategies.
5. Well-Defined Business Processes
Software tools need to be complemented with well-defined business processes to create a seamless approach to integrated portfolio management.
6. Clear, Accurate, and Timely Reporting
Clear, accurate, and timely risk and performance reporting are critical for tracking risk and risk management performance.