3 Questions to Consider if Management Rejects Recommendations Due to Cost

Occasionally, I examine local or national events with a risk lens to see what went right and wrong, such as this example of poor vendor risk management in my local community.

Doing so can help us better understand areas we may need to improve in our own organizations to avoid similar consequences.

Quick Synopsis of the Event

Last month’s deep freeze and blackouts across Texas is another event that deserves careful examination from a risk perspective. While winter storms are not unheard in the Lone Star State, this year’s event was particularly harsh with widespread, devastating impacts. To illustrate the severity of the cold snap, average temperature in Austin, Texas for February 16 is a high of 67OF and a low of 45OF (…or 19OC and 7oC respectively).

But on that date this year, the temperature split in Austin was a high of 25oF (-4oC) and a low of 6oF (-14oC). Now I personally like a little bit of cold weather, but ouch!!!

In order to avert a complete meltdown late on Sunday, February 14, the industry non-profit that operates around 90% of Texas’ power grid, the Electric Reliability Council of Texas (ERCOT), ordered rolling blackouts throughout the state. According friends in San Antonio, the power was supposed to be on for 10 mins then out for 50 each hour, but that wasn’t how it really worked. Many people went hours without power, possibly even water, while other areas were on boil water precautions.

Following a less-severe freeze in 2011, ERCOT, the Texas Legislature, and utilities were presented with recommendations on how to manage the risk of blackouts, but the recommendations were ignored.

It was clear following a 2011 ice storm and the subsequent blackouts that the state’s power grid needed some upgrades for the next time a similar event occurred, which was likely considering prior storms in 1989 and 2003.

In this situation, a risk (or potential roadblock) to achieving ERCOT’s objective of providing reliable electrical power to Texas residents was exposed. Therefore, following the 2011 event, various industry experts provided several mitigation recommendations, including winterizing power-generating equipment and fuel-delivery infrastructure, such as pipelines, and investing in reserve-generating capacity in the event a plant goes offline.

Sadly though, these recommendations were ignored mainly due to cost. As this story from Texas Monthly explains:

Both moves would impose somewhat higher costs and result in marginally higher electric rates. But they might have averted the much higher costs Texans now face for business disruption, broken pipes, flooding, and spiking electric bills – not to mention human suffering and death.

The second half of this quote provides a glimpse of the consequences of ignoring these risk recommendations, some of which include:

  • At the peak of the crisis, 46 gigawatts or 40% of the state’s generating capacity was offline.
  • A 20% decrease in oil and gas production, a staple industry in Texas.
  • An estimated $18 billion in insured losses will make this the costliest winter weather event in Texas history and larger than Hurricane Harvey, according to A.M. Best.
  • And saddest of all, the estimated human death toll from carbon monoxide poisoning, hypothermia, and auto accidents currently stands at 80. However, officials explain the full death toll will not be known for weeks or months, if then.

Of course, these are just a few examples. The full cost and impact will likely never be fully known.

When management says risk recommendations and controls are too expensive…

We would be ecstatic if executives in our organizations would jump on all the recommendations we provide to manage the high priority risks. However, this just isn’t so…which means we have to work with what we’re given.

If management begins pushing back due to cost, we should ask ourselves some questions:

  1. What are things that can be done incrementally at lower cost?
  2. Are there ways to spread out or shift the cost outlay?
  3. Can internal resource management be improved to ensure the risk treatments can be done?

(For example, are there areas where risks are being over-treated and therefore resources can be shifted around?)

If an incremental approach is an option, the risk will be fully managed by the time you reach the end of the list.

In the case of the freeze and blackouts, ERCOT and others could have taken this approach with the equipment winterizing efforts. They could have focused on the most vulnerable or highly populated areas and worked their way out from there. While there would have been a cost outlay, the cost of rolling blackouts and damage caused by ice, not to mention lost productivity, is far greater.

For the reserve-generating capacity, the Texas Monthly article describes how the companies generating the power have no incentive to set aside reserves. Therefore, ERCOT should have thought about how those companies could be rewarded for helping to mitigate this risk. Maybe the companies pay for the initial cost of generating the power, ERCOT pays a small stipend annually for the storage of the reserves and then, when the reserves are needed, the companies can be paid extra per KWH for the power. (Or something like that – I am certainly not a utility expert!)

The Bottom Line

ERCOT’s decision 10-years ago doesn’t appear to be risk informed…they failed to consider the ripple or “downstream” effects that rolling blackouts would lead to.

Now it is possible that ERCOT did not receive the information they needed to make an informed decision, which is why the quality of “outputs” are so important. Are you providing your executives with the information they need to make a decision? As I explain in this article on outputs, ERM has to provide a reality check on what is possible and its impacts.

The story of Texas’ failed electric grid and subsequent impacts should be a wake-up call to risk managers considering how preventable the tragedy was. I can tell you that from a personal risk tolerance standpoint, this story is motivating my husband and I to make some modest investments in more emergency generating capacity and other upgrades to make the transition to standby power easier.

Because the truth is had the dip in the jet stream that brought the frigid arctic air to Texas been 500 miles to the east, our area in Florida would have been freezing…and of course, we cannot forget hurricanes too!

Has your organization ignored risk recommendations just to later suffer more drastic and costly consequences?

As always, part of my goal with these posts is to prompt discussion that help us all learn more, so please feel free to leave a comment below or join the conversation on LinkedIn.

If you are getting frustrated by the lack of action on management’s part or are struggling to determine which risk recommendations should be acted on first, please don’t hesitate to reach out to me to discuss your situation today!

Featured image courtesy of Alexander Popov via Unsplash.com

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Meet Carol

Helping companies achieve their vision and strategy, and succeeding in today's turbulent world, is something I'm honored to be a part of. Whether you're an occasional blog visitor or a long-term client, thank you for letting us be a part of your journey.

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