Managing risk in the new power business: a sequel

Abstract

As the power business is moving into new territory with market deregulation, there is a need for expressing a view on financial and physical risks. By means of an example published earlier in this magazine, we discuss what could be appropriate measures of risk for a producer. In the article by M.V.F. Pereira, et al. "Managing Risk in the New Power Business," (see ibid., p.18-24, April 2000), management in the deregulated power markets is discussed. The article is valuable, both in its reflection on risk and its description of market issues. However, a central theme that resonates throughout the article involves the use of min-max regret as a method for controlling risk in the decision-making process. We have observed that the use of this measure is, itself, a "risky" prospect, largely because its conclusions can be so sensitive to the manner in which the problem is posed. In response to this observation, we suggest alternative approaches to risk management.