AEP faces a variety of risks related to environmental and other public policy issues, safety in the work place, grid security, financial and operational performance, and other matters that could affect the company’s competitiveness or reputation. Effective risk management enables us to respond and adapt quickly and effectively in the rapidly changing environment that is described in this report.

We continuously examine our levels of acceptable risk based on changes in the internal and external operating environment and on specific circumstances. We weigh the potential impact of various risks on our financial health and reputation and on our ability to comply with legal and regulatory requirements. Our management team and board of directors discuss these issues and weigh our risk management options on an ongoing basis.

Our Enterprise Risk Oversight group develops and applies enterprisewide risk management tools. It gathers and analyzes risk-related information from business units and reports to the Risk Executive Committee and the Audit Committee of the board of directors. This enables management and the board to understand, evaluate and respond to the significant risks facing the company. Our Risk Executive Committee meets regularly to monitor the material and emerging risks facing the company. It reviews and evaluates the response to these risks and will request risk mitigation from business unit leaders, if necessary.

Risk management occurs at all levels of AEP. Individual business units are responsible for identifying, analyzing and assessing their risks and for implementing appropriate risk management controls. For example, we manage fuel inventory and purchases to balance supply needs with the ability to secure regulatory recovery of fuel costs at each power plant. This localized approach to risk management reduces the likelihood that a power plant will run short of fuel and reduces risk to our shareholders and customers.

In 2010, we began to track our sustainability commitments in relation to the company’s material risks. When reporting progress, business units are asked to identify actions that may create risks for the company. This ensures alignment of goals and actions and helps to identify emerging issues and trends. It also helps to inform goal setting and decision making.