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Risk Management Essay The company generates its electricity at the Niagara Falls and distributes it to various Canadian provinces and the United States. Founded in 1906 as the Hydro-Electric Power Commission, the corporation was later renamed to Ontario Hydro in 1974. In 1998, the provincial government passed the â€Å"Energy Competition Act†. Ontario Hydro was restructured into two separate organizations: a power generation utility and a combined transmission/delivery business to be called Hydro one. 2. Hydro One’s Strategy and risks Hydro Ones strategy has changed a lot during the last years. First of all, the company thought they knew what was best for their customers. Eventually their focus changed into a more customer-based strategy. With the change in their focus in addressing the needs of their customers, customer satisfaction has, in some areas, doubled. Although results have been positive, problems for the electricity supply in the future might decrease the satisfaction of the customers. In the corporate risk profile trends, the electricity supply has become one of the biggest risks with a rating of ‘virtually certain’. Only â€Å"government policy uncertainty† and â€Å"getting the work done† have the same level of risk. In the impact-probability risk map of the firm, it is clear that problems with the electricity supply are quite probable and that the magnitude is considerably large. There’s always a risk of new outages, which can affect over 100. 000 customers for more than seven days in the worst-case scenario. Worst case expectations about the service quality indices predict that only 25% of the overall expected performance will be achieved when the best case scenario predicts 95%: it is already quite certain that the 100% achievement will be impossible. Another big issue in Hydro One’s strategy is cost efficiency. Due to its aging assets, the company had to focus on cutting costs. This initiative resulted in Rating Agencies improving Hydros rating on its long term debt to A, A2 and A (high), respectively. On the other hand, employees protested heavily against these measures by a major 18 weeks strike. Unfortunately, reducing unit costs to its desired level might fail in the end. Only in the minor case scenario the unit costs are not reduced, other scenarios predict an increase of 5 to more than 25%. Cheap electricity encouraged Canadian consumers to increase their purchases of energy-intensive consumer devices. Hydro One had to cope with this increased demand on its aging assets, so it launched an active conservation and demand management program. In this way, Hydro One is undertaking conservation initiatives, despite their adverse impact on the companys revenues and earnings. Electricity supply is one of the biggest risks; the former Pikangihum chief even mentioned the problem to turn on Christmas lights. The vision that CEO Formusa endorsed in a strategic plan is to make Hydro One the best transmission and distribution business in North America. This vision would be achieved by having the best safety record in the world, top quartile transmission and distribution reliability, 90% customer satisfaction across all segments, top quartile employee productivity, operating efficiency and an A credit rating. The CEO also intended to reach out and negotiate a long-term deal with the unions. The risks concerning safety were big from 2002 till 2004 but are under more under control since 2005. 3. Major drivers to get started with ERM at Hydro One As part of the firm’s spinoff from the previous Ontario Hydro and in preparation of an IPO, the management and board of Hydro One set high goals for being a best-practices organization with superior corporate governance and business conduct. In preparation of the IPO, they responded to the requirement of the Toronto Stock Exchange for listed companies to implement strategic risk management. Despite this IPO was forced to a halt in the Ontario Superior Court, Hydro One continued to follow their value creation strategy including the implementation of ERM and a risk-based investment planning system. At the same time, the government of Ontario posed a new challenge that had to be addressed with a scheduled deregulation of the electricity markets involving conservation initiatives. Other new policies in the energy industry like carbon legislation, the adoption of renewable technologies and climate change posed new threats and opportunities. In brief, the increased scrutiny on corporate governance called for a comprehensive risk management program. 4. Different stages of Hydro One’s ERM process Hydro One introduced a three-phase risk management program: In phase one, a risk management team organizes a series of interactive risk workshops in order to make the employees of the firm familiar with the companies’ key strategic objectives and the principal risks faced by the organization. Prior to these workshops, the risk team made a list of 60-70 potential risks or threats to the business. This list was e-mailed to the participating management. Based on their feedback, the risk team shortens the list to 8-10 risks. These shortlisted risks then are discussed during the workshops. In phase two, the risk team prepares a corporate risk profile report for the executive team twice a year, in January and July. In this report, the principal risks facing the organization are summarized. The chief risk officer conducts a series of one-to-one interviews with the top 30 to 40 top executives to review the corporate risk profile. This half-yearly monitoring and review of risk is very important within the ERM process, because risks do not remain static. In phase 3, during the annual planning process, the investment planning department and the risk management team jointly develop an approach for allocating resources to prioritized investment project proposals based on the risks identified. The chief financial officer argues that looking at investment proposals from a risk management point of view gives high visibility to capital expenditure planning in order to let the top management make the right investment decisions. 5. Up- and downsides of the ERM process Hydro One developed enterprise risk management in response to a new corporate governance requirement. A positive thing about Hydro One’s ERM process is that it includes all layers of the organization. Employees need to participate in a series of workshops to learn more about the company’s objectives and their risks. The method that Hydro One applies is structured, systematic and on a timely basis which are all key principles of risk management. It provides a foundation for all risk data across the organization and delivers visibility to this data. This has improved accountability and control within the company. An enormous benefit of the ERM process for Hydro One was that the company achieved a lower cost of debt. However, if the company decides to change its client-based strategy, it might be wise to review the ERM process and make some necessary changes. The corporation also uses the Delphi-method, which is a valuable communication technique when properly used. One needs to keep in mind, when applying the Delphi method, that the role of the supervisor may not be underestimated. It is he who needs to rearrange the data. Subjectivity might play a role, so it might be wise for Hydro One to find somebody else than Fraser to handle the risk management activities. In the end, ERM is more a state of mind than a technique or process. When all layers of the company have a mutual understanding about the company’s objectives and risks, one can say the ERM process has been successful. Hydro One’s ERM process will surely pass this test. 6. Framework There are a lot of different frameworks available these times. But the ISO 31000 Framework is the best practice framework because it is relatively easy to implement in an organization’s structure and still gives some good outcomes for the company. The Frameworks are used to facilitate the implementation of the ERM process into an organization. The core of the ISO 31000 Framework is the Risk Management Process (RMP). RMP consists of five important tasks. Further, the ISO 31000 Framework adds Management Information System (MIS). Risk management activities should be recorded. In this way, it is easier to know which actions are taken to counter the risk threats. The company will be able to react in a faster way to important changes in factors that could affect the organisation. Another important feature of the Framework can be found in Commit and Mandate. It is important to fully intergrate the ERM process in the organization. Every agent or stakeholder should be involved in the ERM process. Communication and consultation are key elements in every organization. But to implement the ERM process, communication becomes even more important. Communicating with all your stakeholders is crucial. Everyone needs to be aware of the possible risk the company is facing and the actions that are taken to mitigate these risks. The next important process of the ISO 31000 Framework is Accountability. For every identified risks, the company will have to assign a manager as risk-owner. They need to make clear who is responsible for which risk. Obviously, every agent or stakeholder has to participate in the process of countering risks. It is clear that the ERM process should be monitored and reviewed continuously. Because of a fast changing economic world, the ERM process should be adapted to these conditions. 6. 1 Establishing the context Hydro One is trying to be able to meet the high demand in hot weather springs and summers. Due to the aging infrastructure, Hydro One is facing high maintenance and growing costs. While they were planning to introduce cost-cutting initiatives they have to take into account these costs. Their main goal is to be able to report optimal financial results. This can be done in two ways. On the one hand, they have to make sure there are sufficient revenues. On the other hand, costs and expenses have to be kept under control. The problem of the 18-week during strike has caused an environment in the company where not everyone is heading in the same direction. So Hydro One is challenged to make sure there is a common culture in the company. 6. 2 Risk assessment Risk identification Identifying the likelihood and consequences of the different risks is done by organizing workshops wherein employees can participate. They are asked to express their feelings about the risks that might threaten the organization. Risk analysis Employees need to identify which business activities are affected by those different types of risks and in which degree on a 5-point scale. By doing this, every risk is looked at from another point of view. Each person identifies a different impact based on his or her area of expertise. Risks that are rated higher than 3, are more investigated in detail. They identify the worst-case scenario for each of those risks if something goes wrong within the company. After this process the company will have a clear view in the magnitude of a given risk, the probability of occurrence of a certain risk in a 2-3 year time period and the strength of the key controls in the company. If some of these key controls fail, it could cause a lot of damage to the company. Risk evaluation One had to be aware of the fact that risk is not a static concept. The level of risk a company is facing can depend on the whole environment of the company and the actions taken to mitigate the risk. So twice a year Hydro One made up a Corporate Risk Profile report to understand the changes in risk threats. 6. 3 Risk treatment options To reduce the risk threats to a tolerable level, action had to be taken. Everyone had to participate in these actions plans, but each manager was assigned as a risk-owner and had the full responsibility for taking actions to mitigate the risks. . 4 Communication and consultation It is really important to have a good and stable communication when implementing the ERM framework. Everyone has to know what their responsibilities are and what is going on in the company and its environment. If everyone is getting involved in the ERM process, each person will be able to look for solutions and thinks about different alternatives to handle different situations. Even the employees on the work floor should be consulted in the ERM process. They could have another view on the risks that threaten the company. They can discover some needs of the company the management could never be aware of. In conclusion, all stakeholders should be involved in the ERM process of the organization. 6. 5 Monitoring and reviewing To make sure the ERM Framework is implemented in the right way and has a positive effect for the company, it is important to monitoring and control the implementation of the Framework. And if needed some adjustments should be done to make the ERM process optimal. As mentioned earlier, the environment of the company and the risks threatening the company are not stable concepts. As a consequence, the ERM process is not stable even. 7. Conclusion One may never underestimate the importance of a well-balanced ERM process. By weighing up the implications of key decisions, appropriate actions can be agreed and delivered to support the chosen strategy. We can conclude that Hydro One’s ERM process is a valid one. ERM adds value for the company and supported the corporation’s managers in making good decisions about risk-based issues. [ 1 ]. ISO 31000, clause 4