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ERM at Hydro One (A)
Transcript of ERM at Hydro One (A)
Company History, Operations & Strategy
Three-phase ERM Program
Phase one: Employee participate in a series of workshops to develop a collective understanding of the company's key strategic objective and the risk that threaten their achievement
Phase two: The chief risk officer conducted a series of one-to-one interview twice a year with senior manager to review the corporate risk profile
Phase three: Conducted during the annual planning process, Hydro One allocated resources a prioritized investment project proposal based on the risks identified
Cost is high in term of managerial time.
Efficiency/effectiveness (are 30-40 interviews enough or too many?)
"Keep out of the red zone" philosophy drives investment decisions-manager worry more about downside risk rather than opportunity.
Reviewing the Corporate Risk Profile
Corporate Risk Profile
Industry : Electric Utilities in Toronto, Ontario, Canada
Procedessor: Ontario Hydro (1906)
Restructure in 1998, two saparate organization: a power generation utility & transmisión/delivery services
Hydro One founded 1999 with Headquaters: Toronto, Ontorio, Canada
Business: Transmission, distributon & telecommunication
Best safety record in the World
Top Quartile Transmission & Distribution Reliability
90% customer satisfaction across the board
Top quartile employee productivity
Top quartile employee efficiency
'A' credit rating
In late 1999, the Head of Internal Audit, John Fraser was asked to take on the additional role of Chief Risk Officer (CRO).
A Corporate Risk Management Group was established consisting of the CRO (part-time) and two full-time professionals,
In early 2000, the Corporate Risk Management Group prepared ERM Policy and an ERM Framework
Twice a year (January & July) CRO prepared a Corporate Risk Profile for the executive team
Conducted interviews with 30-40 executive plus analysis if other source:
Prior to interviews, CRO sends a one page news headlines of past 6 months and a summary of previous corporate risk profile
Determines what's changes/what's new to corporate risk profile
Final Phase - Senior Management set priorities on programs based on risk identified:
Hydro One spent C$1bn per annum on new physical capital
Investment planing debt and risk department jointly developes a risk based approach for allocating resources
Calculating 'bang for the buck' index to show risk reduction per dollar spent and ranked investment programs accordingly
Two days planning meeting to review index
Engineers had to defend each project proposal
Strengths of Approach
Formal approach which is easy to use and understand by management
Top management involvement
Face-to-face meeting (not form filling)
Simple, qualitative approach (every manager can do it)
Forwarding looking - getting manager to think over 2-3 year horizon
Risk trends are capture to provide context
Hydro One has experienced significant changes in its industry and business after the implementation of ERM in 5 years period.
The ERM implementation process has made use of a variety of tools and techniques, including the “Delphi Method,” risk trends, risk maps, risk tolerances, risk profiles, and risk rankings.
Among the most tangible benefits of ERM at Hydro One are a more rational and better-coordinated process for allocating capital and the favorable reaction of Moody’s and Standard & Poor’s, which has arguably led to an increase in its credit rating and a reduction of its cost of capital.
The implementation process itself has helped make risk awareness an important part of the corporate culture.
As a result, the management of Hydro One feels that the company is much better positioned today than five years ago to respond to new developments in the business environment, favorable as well as unfavorable.
- Agreeing about strategic objectives
- Developing a shared understanding of the principal risks faced by the organization.
Risk team informally polled managers and drew up list of 60-70 potential threats to the business .
The risk management team narrowed the list to 8-10 risks.
Doing workshop – Voted using The Delphi method
Discussed the preliminary action plans and assigned a manager to be the risk owner’s
Develop concrete action plans to mitigate the risk.
Risk Workshop and The Delphi Method
The Delphi Method
Using a combination of facilitated discussion and anonymous voting technology
Management team evaluated each risk by asking: Which of our objectives are most threatened by that risk and to what degree? It measured impact on a 5-point scale (Minor=1, Moderate=2, Major=3, Severe=4 and Worst Case=5).
Prepared a Risk Map
Key Risks assigned an action plan.
Increases risk assessment workshops to monitor progress and evaluate new/emerging risk.
Hydro One Risk Map
The board had mandate to prepare Hydro One become Public Company through IPO
Raise estimate C$5.5 billion for upgrading Ontario’s transmission infrastructure and paying down C$4.5 billion debt
Board appointed senior management team headed by chief executive Eleanor Clithoroe
In preparing IPO embraced new business practice: Consumer-focused services ethos, cost cutting, enterprise risk management, performance management and strategic planning
Raised media and political controversy -->Hydro One cancelled the IPO
Getting Started with ERM
Regulatory Risk: Hydro One is still heavy regulated. There is still price control imposed by the Ontario government.
Political Risk: Hydro One’s strategy directly affected by the incumbent government’s conservation and alternatives energy policies
People Risk: Continue downsizing and lack of hiring, strained relationship with employee unions from a recent 18 weeks
Operational Risk: Aging asset pose a risk of continuing service with increased demand
Sylvia Siska Indriani