Richard J. Osborne
Executive Vice President
Chief Risk Officer

THE CRISIS IN CONFIDENCE IN ENERGY TRADING IS INDUSTRY-WIDE, AND REQUIRES INDUSTRY LEADERSHIP.

Every company involved in energy trading and marketing is responsible for restoring market confidence and vitality.

As a founding member of the Committee of Chief Risk Officers (CCRO), Duke Energy is working with more than 30 other companies to develop best practices for energy trading and marketing. These standards will make wholesale energy businesses easier for investors, customers and regulators to understand and compare, through better reporting of the risks and financial aspects of their operations.

The CCRO has identified best practices in a number of areas – corporate governance, financial controls, risk management and measurement, including credit risk, and disclosures about trading and marketing operations. Duke Energy is already in compliance with many of the CCRO’s recommendations; we’re in the process of implementing others, and reviewing our own practices against these new industry standards.

We’ve hardwired new control measures into our risk management and trading practices.
We consolidated our risk management oversight functions to ensure a uniform approach and the application of industry best practices across all of our businesses, as we measure and monitor our exposure to both credit risk and energy commodity price risk.

Increasingly sophisticated risk limits allow us to better monitor our market exposures. We’re enhancing both energy and credit risk management by clarifying accountabilities, improving measurement criteria, and updating our documentation and reporting practices. We’re implementing new risk management information systems to summarize and capture data faster and more accurately, improving our ability to track results. And most importantly, while our corporate and business unit risk management professionals understand the technical and analytical aspects of risk management, they also know that effective risk management means more than monitoring a series of measures and limits – it means understanding the overall risk of an operation or position in a very practical sense.

We’ve also created a trade operations compliance group. This group studies trading rules and regulations, creates policies and procedures, clarifies standards, provides training and monitors our operations for compliance.

If we find problems, we move quickly to fix them.
“Round-trip” trades – simultaneous or prearranged transactions that lack a legitimate business purpose, and are conducted for the purpose of increasing volume or revenues – are against company policy. In response to a Securities and Exchange Commission investigation of energy companies’ trading practices, we conducted a thorough review of 750,000 transactions going back to 1999, and uncovered 89 such transactions. The round-trip trades totaled less than one-third of one percent of our trading revenues for that period, and had no material impact on earnings.

We publicly reported the transactions, took appropriate disciplinary action and strengthened our controls. Governmental entities continue to review the practices of Duke Energy and other companies that trade energy commodities. This scrutiny should encourage a less risky, better controlled wholesale energy market.

Trading and marketing are the lifeblood of a healthy, competitive energy industry. But they are still somewhat new to the industry. We’re working from the inside out, calibrating our controls and policies, and from the outside in, collaborating with industry partners and regulatory bodies, to restore order and trust to this emerging business.