Risk Management

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Risk Management and Control
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Case Hydro One

Table of Content

1. Introduction3
2. Hydro One’s Strategy and risks3
3. Major drivers to get started with ERM at Hydro One4
4. Different stages of Hydro One’s ERM process4
5. Up- and downsides of the ERM process5
6. Framework5
6.1 Establishing the context5
6.2 Risk assessment5
6.3 Risk treatment options6
6.4 Communication and consultation6
6.5 Monitoring and reviewing6

1.
Introduction

Hydro One is a transmission and distribution organisation of electricity, located in Ontario, Canada. 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 “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 One's 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 “government policy uncertainty” and “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 Hydro's 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 company's 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...
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