Recently, I had the opportunity to sit down with Mr. Williams. In the following interview, he provides sage advice on risk analytics and how to grow awareness of risk-based thinking within an organizational culture.
Q1: Mr. Williams, as the Risk Manager for Grant County Public Utility District, what are your primary responsibilities?
Chiefly I am tasked with developing our enterprise risk platform and integrating it with company operations. That includes developing staff both in my group and outside, and sponsoring processes to improve risk-based thinking. We are focused on doing so right now with our audit function, our capital budgeting and operational budgeting functions. Also, we review deals proposed to hedge our power portfolio and customer rates.
Q2: Establishing a culture that is aware of risk methodologies and risk-based decision making is difficult. How are you doing this?
From a high level we are sharing and sponsoring the concepts of probabilistic thinking in the planning and evaluation process both on the front end and back end of our efforts. Sometimes this happens formally through our job duties. A lot of it happens informally. Luckily, we have the confidence of our executives. We get asked to advise committees and groups or projects as well.
Q3: Can you provide an example of how this way of thinking impacts a risk management process, at Grant County PUD?
For example, we are doing test evaluations of capital projects. Instead of using an IRR type of criteria, we are proposing a risk-adjusted return on capital. That is serving in the discussion long before the project would ever be done. It serves to flesh out what are the project risks and encourages the discipline on the part of the proposers that know best about it to attempt to quantify those risks and concerns, not only of the project but of its outcomes. Not all avoided costs are certain but let’s go ahead and put what we think are the avoided costs in the return. This is actually very beneficial if we are willing to step in the risk space as opposed to keep things on a very engineering economics level.
Q4: You seem to be advocating for a more dynamic approach to risk management, rather than a static use of standard risk metrics.
Yes. There is the concept, just like the outcomes can always change, that so too can the inputs. It’s a little bit like an agile software release, where we need to continually refresh the information we are getting and the information we are bringing to our meetings in different ways as we learn more and make more decisions. Keep the discussion at a level that keeps people engaged, because that is how you continuously get better and better information going into your work product.
Q5: You mentioned an agile approach. When you think about analytic models or an analytic process, what do you look for?
I like to be able to have very clear access to the inputs, controls, and settings in the model. I think that sometimes what gets lost with analytic models, powerful wrenches that they are, is the communication of the sensitivities and central assumptions that are governing the work product. The better we do that and the better we teach other people to use what we created, our work becomes more usable and accessible by everyone across the business and people are a lot more willing to apply it. So, instead of a dashboard, have a control panel on the model. For example, we are coming up with a different rate for a different class of customers and my group was asked to develop some risk-based components for that. We came up with a model that is more of an analytic framework. It explains the inputs and key assumptions, and suggests how these need to be refined. We highlighted, placed comments and explanations of what these inputs and assumptions are and how they could be applied. This really builds our engagement and greatly enhances the likelihood that the work product will be used. Therefore, you have a chance to impact the company culture.
Q6: These are important lessons for communication and utilization. When talking to senior management about risk, how do you communicate risk in a way that is actionable?
I think it’s a two-step process. First this to share some conclusions in plain English, such as “our analysis is indicating X & Y and it is based in these sensitivities and root causes”. And then dig into the foundation of why we think that. Some more technical calculations may come up but having the context of what conclusions we are drawing from it makes its easier to understand the calculations and appreciate them. I like to focus on the simple first and get into the underlying complexities after we have engagement at the higher level, which is the reason we are there.
Q7: Do you make use of risk metrics like VaR or CFaR/GMaR, and how do they influence concrete actions?
There is a project where we have done a portfolio VaR and a VaR stress that turns into a cash-flow test. At no point in the discussion, writeup, conception did I use the words VaR or cash-flow-at-risk. Those are words that mean plenty to me, but they don’t necessarily mean much to many of our stakeholders. I see it as part of my job and my team’s job to demonstrate interpretations of the results and share the specifics of how those results were achieved in a later discussion. I think that is probably the key. If they are presented as concrete concepts upfront, you have a chance to getting to concrete actions. If you weigh people down with technical concepts up front, they are likely to disengage. Its on me to make my work product work for everyone else. That makes me no different than a chef or a contractor. We all have to please our customers.
Q8: Earlier you mentioned improving access to capital. What are primary lessons that you have learned to make sure access to capital is maintained?
Investors can and do read financial statements, but I think getting that quantification of potential underlying outcomes, and what likely and concerning events could cost, having them understood and having the value of their limits understood is probably the greatest challenge to improving access to capital for the company. Explaining to people why we might impair a deal’s value or a forward projection with probabilistic outcomes can be difficult, but it helps the over-all product considerably.
Nothing is really Tab-A into Slot-B in our business. There are a lot of things that can go right or wrong or different. But having an appreciation for the likely path and some potential surprises serves to make a more understandable operating envelope. By including the exposure to both the upside and downside our projections are more believable and this improves access to capital.
Q9: Finally, what is a relatively new risk factor that has emerged for you in the last few years?
While not entirely new, one would be the claims and litigation culture. This continues to build, and the degree and weight are greater than what we would have thought 10 years ago. Consistently low gas volatility is another one. That is a new world for electric utilities and their cost models. I would also add, in a way that is surprising people with the internet of things, the costs and security of tech integration is a major opportunity and risk for utilities that we continue to monitor.
This interview was conducted by David Leevan. David is the Managing Director of cQuant.io, a SaaS platform for energy analytics.
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