4/20/2020 Understanding Enterprise Risk Management for Utilities © Copyright 2007, CCRO. All rights reserved. 8 • Efficiently allocates spending capital • Addresses higher Board and Officer risk management expectations • Promotes a risk awareness and management culture • Enhances the external view and reputation of the entity and • Leads to better and more informed decision making. The key benefits of an ERM framework include improved internal processes, knowledge, governance, controls and communication, and enhanced stakeholder relations. ERM improvement in internal processes and infrastructure result in an integrated and cross-corporate view of risk, standardized language, metrics and tools, and enhanced transparency in reporting and controls. Improved corporate governance through consistent and well established guidelines is another outcome of a well implemented ERM framework. ERM practices lead to establishing an overall corporate risk policy that then drives the governance, policies and controls of individual businesses. With a clearly articulated risk appetite, tolerance and controls, all management has clear guidance on the parameters they must consider in making decisions. The increased clarity and resulting consistency in business decisions sends important signals, both internally and externally, about the firm’s strategy and risk management approach. For the Board of Directors, an ERM framework assures that appropriate policies are in place to identify and manage key risks and that there are processes in place to identify and communicate key risks to management. The Board must ultimately be comfortable that they are aware of the key risks facing the organization, their potential impact on performance, and the mitigating controls and contingencies. An ERM framework directly enhances the transparency, completeness and consistency in reporting to the Board and keeps the Board informed of the total levels and categories of risks being faced. A well established and consistent message regarding risk management also allows for the utility to demonstrate how all business decisions with an impact on rates, such as O&M and capital expenditures, were prudent given the utility’s risk profile. If utilities communicate expectations regarding risk appetite and tolerance, then regulators may be more inclined to agree with expenditures utilities make that are consistent with the agreed-to risk profile. A focused and well-implemented ERM framework can also assist in both operating and capital budgeting by providing another basis for allocating resources, reducing expenditures on immaterial risks, and exploiting natural hedges and portfolio effects. Under an ERM framework, all capital expenditures are scrutinized equally to include a review of risks, an assessment of the impact on the portfolio and a comparison to alternatives. As a result, a utility’s capital expenditures and allocation are improved through the use of processes that take into account the benefit of risk reduction in all major risk categories (that is, regulatory, financial, reliability, safety, environmental, reputation, and so on) by allocating capital expenditures with consideration of the optimum risk adjusted return on investment consistent with the company’s risk appetite. While the system can be complex, the result is a capital allocation process that is much more likely to lead the utility toward the optimal portfolio of capital projects.