Managing Credit Risk: A Public Power Entity turns to RiskGauge Desktop™

THE CLIENT: A network of Community Choice Aggregators (CCA) in California

USERS: Credit Risk Management and Treasury Teams

Driven by the need to meet ambitious climate objectives, some communities in the U.S have turned to Community Choice Aggregation (CCAs) [1] as a mechanism for advancing cleaner, more sustainable energy portfolios. Community Choice Aggregation began in the late 90’s in Massachusetts and ten states have signed on to the CCA legislation, empowering the local governments to aggregate the electricity loads of residents and businesses within their jurisdictions. CCAs not only provide local control over energy sourcing but bring with them an era of innovation that promotes investment in local economic development and job creation.

With a focus on energy procurement and financing needs, CCAs are exposed to risk from multiple fronts. On the supplier side, CCAs must maintain strong credit profiles to secure power purchase agreements under favorable terms. Inability to meet payment obligations can lead to increased collateral requirements, elevated pricing, or reduced access to a reliable energy supply. On the customer side, revenue uncertainty stemming from non-payment, delinquency, or delayed remittances through utility billing systems poses a significant liquidity risk. Without adequate safeguards, cash flow volatility can impair the CCA’s ability to meet its contractual obligations, to invest in clean energy initiatives, or to maintain stable rates. This makes effective credit risk management imperative to the financial integrity and long-term success of Community Choice Aggregators.

The network of CCAs in focus here, identified a critical gap within their workflow to effectively manage their risk exposure. RiskGauge Desktop™ played a crucial role in streamlining their credit risk management. With its advanced analytics, RiskGauge Desktop™ facilitated quick and automated assessment of credit risk of their primary counterparties. The automation enabled efficient evaluation of counterparty financial stability, significantly reducing the time required for manual assessment. This led to more informed decision-making and lowered the risk of engaging with financially unstable counterparties.

Pain Points

In the absence of a credit risk management tool, the team faced extensive delays and difficulty in their commercial activities and counterparty selection process, hindering efficient operations. The Head of Market & Credit Risk at one of the CCAs involved, highlighted some key challenges they wanted to mitigate with the tool:

- Poor visibility of private companies' financials: Working primarily with small and medium-sized private retail and manufacturing firms, the challenge was to assess the credit risk of these firms with very limited financial information.

- Manual financial data extraction and spreading: Their excel-based process to spreading financials was time-consuming and inefficient. Much of the effort was wasted if the counterparty ultimately proved unsuitable.

- Inability to assess non-financial risk factors: Unpredictable market conditions required a more comprehensive risk assessment that incorporated external factors affecting their counterparties beyond financial data.

- Absence of industry and regional peer comparison: Their risk assessment process evaluated counterparties in isolation, without visibility of a company's position within its peers. They risked adding relatively underperforming entities to their portfolio, potentially increasing their long-term credit exposure.

- Insufficient post-credit monitoring: Once credit was extended, ongoing surveillance of counterparties’ financial health was inconsistent, heightening the risk of undetected deterioration in creditworthiness.

- Duplicative and siloed efforts: Sharing and documenting information across their CCA stakeholders was cumbersome, exacerbating key value propositions of working with a central CCA team, namely: traceability and transparency of credit risk decisions, and the counterparties financial health

The Solution  

Evolving market dynamics and interconnected financial risks across counterparties necessitates a strategic shift toward diversified credit risk assessment methodologies. RiskGauge Desktop™ leverages S&P Global’s deep credit expertise through a comprehensive array of features and provides a focused experience specifically designed for corporations’ credit risk management. Incorporating financial risk as well as business and market-driven risk factors, RiskGauge Desktop™ provides a transparent view of a counterparty’s credit risk, enabling you to monitor a portfolio of companies, investigate the risk drivers and identify early warning signals across the portfolio from industry level trends to potential red flags at the company-level.