Today’s era of disruption from distributed energy resources, digital technologies, and the electrification of other sectors require a consistent and data-driven Enterprise Risk Management (ERM) framework. Having a comprehensive implementation plan helps us to identify risks, address critical gaps and develop a culture that recognizes risk and is empowered to take appropriate action. AEP’s ERM process looks at all risks, actual and perceived, across all aspects of operations through an integrated risk management framework. This is the process we use to identify risks, assess the risks and controls, plan mitigation strategies and monitor the risks. This process informs and prioritizes asset replacement strategies, and enables us to make risk-based investment management decisions.
AEP’s risk framework has four major categories:
- Strategic – These are risks that affect our long-term or overall business goals and ability to achieve them.
- Financial – Potential risks that affect our financing needs, financial standing, and/or reporting requirements.
- Operational – Those risks that affect our ability to operate the power grid.
- Regulatory – Risks that affect our legal and compliance requirements.
When assessing risks, AEP categorizes risk impacts into six sub-categories – reliability, compliance and legal, reputational, financial, safety and strategic – and scores them based on the severity of potential consequences. This approach to risk management gives us the flexibility we need to respond to events or risks as they unfold.
From a governance perspective, these risks are reported from the appropriate business units or operating companies into the ERM process. The Chief Risk Officer reports a summary view of risks to the Risk Executive Committee, which is composed of senior leaders, to illustrate risk ranking and remediation dates and, ultimately, gain consensus on an action plan. This summary is then reported to the Audit Committee of the Board of Directors. The catalogue of risks is assigned to a specific Board committee or the full Board. At the end of the year, the Committee Chair and Lead Director review it to ensure the appropriate discussions have occurred.
Learn more about AEP’s risk management approach, including how we manage climate-related risk, in our report “American Electric Power: Strategic Vision for a Clean Energy Future.”