Utility Risk Management

Definitions, Objectives & Processes

January 1999

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Key themes

• Quick overview & definitions.

• Categories of business risks.

• Utility network risk issues.

• Risk management processes.

Quick overview & definitions

What is risk ??

• Risk is a condition in which there is a possibility of a deviation from a desired outcome that is expected or hoped for.

• Risk may not always be bad - some risks can be beneficial, although common usage implies that risk is “bad” and will result in loss rather than gain.

What is risk management ??

• Systematic process of identifying and quantifying risks that may occur in a given situation, deciding what risks are significant, and then “managing” those risks.

• Doesn’t necessarily involve eliminating all risks.

How can we manage risk ??

• Risk can be managed by one or more of the following methods….• Avoidance - refuse to be exposed to the

risk, generally by rejecting a certain course of action.

• Reduction - reducing the risks likely to arise from a certain course of action.

How can we manage risk ??

• Retention - do nothing, and simply accept the risks.

• Transfer - pass the risk to someone more willing or able to bear it (eg. an insurer).

• Sharing - part transfer, part retention.

Categories of business risk

Corporate control environment

• Strategic planning.

• Information management.

• Organisational vulnerability.

Informationtechnology

• Processing & operations.

• Security.

• Development environment.

• Managerial control.

Purchases &payments

• Ordering & commitment.

• Accepting charges.

• Controlling payment.

• Overall control & management.

Revenues &receivables

• Management & control.

• Ordering & dispatch.

• Billing.

• Credit control.

• Cash management.

Payroll &personnel

• Employment strategies.

• Recording & calculating pay.

• Payment processes.

• Personnel performance.

• Correct remuneration policies & levels.

Finance &cashflow

• Cash flows.

• Asset & liability management.

• Foreign exchange exposure.

• Off balance sheet exposure.

Asset management

• Protection.

• Utilisation.

• Valuation.

• Disclosure.

• Legal compliance.

Taxation

• Critical areas.

• Accounting system requirements.

• Compliance.

• Planning.

Utility network risk issues

Design

• Use of competent people.

• Use of correct standards & codes.

• Legal compliance of completed asset.

• Secured rights to any intellectual property involved (including reverse engineering & software / applications).

Design

• Correct recognition of community standards and values.

• Robustness of specifications and drawings.

• Sufficient auditing of methodologies and review of completed work.

Construction

• Robustness of contract conditions.• Structure & integrity of tendering processes.• Legal & environmental compliance during

site works.• Foreign exchange risks associated with

overseas purchasers.

Construction

• Manufacture of equipment at OEM’s works.

• Transportation of equipment - customs, taxes, insurance.

• Compliance with required standards.

• Importance of accecptance testing.

Construction

• Commissioning processes.

• Return of correct as-built information.

Operations

• Operational performance and reliability.• Industry guidelines and accepted practice.• Environmental compliance.• Public safety.• Information disclosure.

Operations

• Physical risks to the assets• Fire, flood, earthquake.• Interference by people.• System conditions eg. increased fault levels.

• Safety of employees.

Maintenance

• Personnel safety.

• Correct procedures & tools.

• Environmental compliance during work.

• Adequate information feedback to asset owners.

• Safe recommissioning & return to service.

Demolition & removal

• Safe planning & execution of work.

• Correct disposal of materials.

• Disclosure of any potential liabilities eg. site contamination.

• Suitable rehabilitation of site.

Risk management processes

Key steps

• Define objectives.

• Identify risks.

• Evaluate risks.

• Prioritise risks.

• Consider alternative methods.

• Implement the chosen alternative.

• Evaluate & review.

Define objectives

• Define what the risk management program will achieve.

• Define business areas to be covered by the program.

• Define the levels of risk that will be acceptable in each defined area (“risk profile”).

Identify risks

• Must comprehensively include all possible risks.

• Use documents, records, personnel surveys, interviews etc.

• Physically inspect assets and their surroundings.

• Ensure that documented processes match actual processes.

Evaluate risks

• Define whether evaluation will be heuristic or scientific.

• Heuristic evaluation involves qualitative, subjective, rule-of-thumb type techniques.

• Scientific evaluation involves quantitative, scientific techniques such as statistical modelling.

Prioritise risks

• Consider both consequences of failure and priority of failure.

• Define broad categories for when the risk will be addressed and what level of resources will be committed to addressing the risk.

• Compile into a single schedule of prioritised risks.

Consider alternatives

• Decide which risk management tool best fits each defined risk in relation to the risk profile eg. risk profile might define zero tolerance for oil spills - the best tool would be reduction, because avoidance (ie. don’t use oil) is impractical and retention (ie. do nothing) has significant legal implications.

Implement

• Develop action plan for implementing the chosen tool.

• Allocate resources as required.

• Implement the risk management tool - this could be anything from constructing an oil-bund to increasing insurance cover.

Evaluate &review

• Evaluate risk profile in relation to changing internal and external business environments, and amend as required.

• Evaluate effectiveness of each chosen risk management tool, and amend as required.

References

• Waring & Glendon “Managing Risk”, 1998.

• KPMG “Corporate Risk - No Surprises”.

• Vaughan “Risk Management”, 1997.

• Bannister & Bawcutt “Practical Risk Management”, 1981.

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