Basin Electric receives assessment on risk measurement
In 2018, Basin Electric hired a consultant, KPMG, to assess risk culture and risk appetite, identify existing transaction strategies as either hedging, arbitrage, optimization or speculation, and identify appropriate risk measurement.
KPMG’s work started in September. They interviewed all directors, the Risk Management Steering Committee, and management from middle office and front office.
“They [KPMG] recommended some enhancements to our definitions for hedging, arbitrage, optimization, and speculation. They also proposed a risk appetite statement which more accurately represents the board of directors’ and management’s appetite for commodity risk,” said Kerry Kaseman, Basin Electric commodity risk manager. “That statement basically says that management is comfortable with commodity risk at Basin, whether it’s hedged or unhedged. For the commodity risk at Dakota Gas, they said they accepted it but it needs to be managed more closely.”
KPMG found that Basin Electric’s control structure is in line with its peers, and this was measured against other G&T cooperatives and investor-owned utilities.
“They gave some recommendations for risk measurement. They categorized risk measurement into three categories: foundational, intermediate, and advanced. Value at risk falls into that intermediate bucket,” Kaseman said. “They said we need to do some foundational work, which includes defining our book structure, improving volumetric and tenor limits, improving the way we value our commodity positions, developing a profit and loss calculation for each commodity, some enhancements to our position reporting, and to develop a P&L (profit and loss) attribution report.”
The Risk Management Steering Committee is going through the recommendations and developing a roadmap to execute them. They plan to propose some changes to the board’s fiscal policy to incorporate some of KPMG’s recommendations as well.