Opportunities & Risk

Managing Risk

We are faced with an array of risks, some well-established and controlled and others emerging and not as well-defined. We must effectively manage our risks and strengthen our risk management capabilities, which include our ability to respond successfully to unforeseen risks. Our effectiveness at managing risk helps us to identify and prepare for new opportunities that may benefit our customers, improve the work environment for our employees and deliver value to our shareholders.

We continuously evaluate our levels of acceptable risk based on internal targets and guidelines and external operating conditions. We have created management systems and a culture that support our abilities to identify, evaluate and manage risk. For example, our culture encourages self-reporting if noncompliance is suspected. We have been developing future industry scenarios that will enable us to stress-test our business assumptions and to identify potential game changers and risks. Our commitment to comprehensive and forward-looking risk management is reflected in our efforts to put a process in place to identify emerging risks or issues that could become material risks.

These activities deepen our ties between risk management and strategic planning and give management and the board more information to understand, evaluate and respond to all of the risks and strategic opportunities facing the company now and to anticipate what could affect the company in the future.

Our Enterprise Risk Oversight group, led by our chief risk officer, is responsible for developing the collective risk assessment of the company. It gathers and analyzes information from functional business units at all levels of the company and reports to the Risk Executive Committee, which consists of members of the Executive Council and functional unit representatives. The 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 align with the company’s strategies, which are monitored and reported on a regular basis to the Audit Committee of the board of directors.

Financial risk is inherent in both our business and the regulatory framework in which we operate. We sell wholesale and retail electricity, which exposes us to energy commodity price risk and counterparty risk. The Market and Credit Risk groups, also led by our chief risk officer, are responsible for managing these risks and provide members of the Commercial Operations Risk Committee (CORC) with daily, weekly and/or monthly reports regarding compliance with policies, limits and procedures. The CORC is made up of our chief operating officer, chief financial officer, senior vice president of commercial operations, executive vice president of energy supply and chief risk officer. The Market and Credit Risk policies, among numerous other policies that govern our actions, are approved by the Finance Committee of the board and work in concert with the Enterprise Risk Management Policy to ensure that key risk areas are appropriately reviewed and managed.

On the regulatory side, we face significant financial risks: the uncertainty about rate recovery, for example, and the likelihood of more federal, state or local environmental regulations that might require significant increases in capital expenditures and operating costs. That could, in turn, lead to increased liquidity (cash) needs and higher financing costs.

AEP’s Transmission Strategy

AEP’s transmission strategy is supporting economic development and job growth, while bringing us closer to our supply line.

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