4/20/2020 Understanding Enterprise Risk Management for Utilities © Copyright 2007, CCRO. All rights reserved. 18 of counterparties. Also, if suppliers default, their inability or unwillingness to meet contractual obligations forces utilities to procure required energy, for example, at market rates which may be higher than those originally contracted. Finally, a downgrade of a utility’s credit rating can result in a problem that’s twofold: firstly, customers will have to pay a higher premium to offset a supplier’s risk of serving a customer with poor credit. Secondly, a utility with poor credit will find a limited number of suppliers willing to do business with them, exacerbating concentration risk. There is also the threat of regulatory or legislative risk, which can be a particular problem for utilities from a credit perspective. This includes any adverse political actions that threaten an organization’s resources and future cash flows and can bring a utility to the brink of bankruptcy to protect them from excessive costs they cannot recover. If a regulatory authority requires a utility to absorb costs they did not anticipate, disallows costs they thought they would recover, or defers the collection of costs to a future date, with the potential of having those costs disallowed, the costs could impact the utility’s credit rating. Rating agencies are concerned utilities may not be able to collect the costs of doing business while they are required to provide ongoing service, thus becoming more stringent in their ratings of these companies. 2.3.3. Operative Risk Operative risk includes all risks related to a utility’s operations. This risk category has been further divided into Operations risk and Operational risk. Operations risk is any risk associated with the failure or constraint of a physical asset. Operational risk includes risks related to inadequate or failed internal processes, people, and systems. Both are discussed in more detail below. Operations Risk Operations risk is associated with a failure or constraint of a physical asset. This is a major issue for utilities, especially vertically integrated utilities with transmission infrastructure, distribution systems and a generation fleet to operate and maintain. All utilities have some delivery requirement. The extent to which the company bears the risk of that delivery, however, varies with their regulated obligation. If a utility is only a load serving entity where all customers are required to procure their own supplies, then the utility’s obligation is to maintain the delivery system such that the energy that is delivered to the appropriate interconnection or City Gate is in turn delivered to the customer. Some electric utilities are responsible for maintaining transmission reliability because they are control area operators. Their operations risks are significant because they become the supplier of last resort. In the event suppliers do not supply adequate power to the grid, the control area operator must maintain the system reliability by either purchasing or generating the incremental energy needed. Although there are mechanisms in place to financially settle situations where a supplier could fail to perform, occasionally those mechanisms are not linked to the actual costs of these damages. Furthermore, the control area operator is responsible for security and safety