Enterprise Risk Management

AEP is faced with an array of risks, many of them well understood and controlled, while others are emerging and not yet well defined. Our effectiveness at managing risk helps us to identify and prepare for new opportunities, ensure regulatory compliance, drive profitability and growth, and encourage controlled risk-taking in innovative investments.

Our enterprise risk management process continuously evaluates our level of acceptable risk based on internal targets and guidelines, the external environment and operating conditions. Good risk management reduces risk and, in the long-term, lowers costs to serve customers by allowing us to focus resources to improve reliability and reduce the length of customer outages.

One way we are managing risk is through our new Transmission Asset Health Center, which allows us to prioritize our assets from highest to lowest risk of equipment failure. This ranking gives us the information we need to be proactive, minimizing potential impacts to customers.

As part of our risk management and strategic planning processes, we can improve reliability, reduce financial uncertainty and better communicate our operational decision-making to stakeholders. We use an assortment of tools to identify and quantify risks. For example, our commercial compliance program provides mandatory compliance training for commercial trading functions as well as surveillance and monitoring of transactions. This tool helps mitigate the risks of a potential violation of regulations, including those issued by the Federal Energy Regulatory Commission and the Commodity Futures Trading Commission. By embedding risk management into business units and functions, we can better manage regulatory expectations while improving business results.

An area of emerging concern is the potential for significant policy changes in other states to cascade to our states and disrupt AEP’s business. For example, the New York Public Utility Commission’s “Reforming Energy Vision” proposal would significantly reduce the role of the utility, including restructuring the New York distribution system’s rate-making, system efficiency, resource diversity, reliability and resiliency. If such a change were to occur in the states where we operate, it could have a material impact on our financial and operational performance.

AEP expects our relationship with our customers to continue to be valued, as surveys have shown. The convolution of distribution and energy grid investments with customer technology preferences, either generation or usage related, requires the AEP-customer relationship to endure.

We work with our regulators to invest in our system for the benefit of our customers. The regulatory frameworks in our states allow AEP the opportunity to earn a fair return on these investments.

AEP’s enterprise risk management is governed by an Enterprise Risk Oversight group, led by our Chief Risk Officer. This group is responsible for developing the collective risk assessment of the company. A Risk Executive Committee makes recommendations to business unit leaders for risk mitigation, where appropriate, and identifies the major risks and material issues on an enterprise wide basis that could impact corporate goals. These are monitored, reported and discussed regularly with the Audit Committee of the Board of Directors.