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October 2013

Plug in EY’s latest insights for Power & Utilities

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Copyright and legal disclaimers

14Out of the shadows

04Power to change

06India’s water worries

Internal audit: beyond compliance

08For your eyes only

10Top of the world

12

Contents

17Turning to spin-offs

For richer or poorer

22Smart move for Germany

25

Yielding to pressure

27Tax takes the spotlight

29Rethinking renewables

19

Power to changeEY’s new Global Sector Leader for Power & Utilities takes on the role at a critical time. We asked Alison Kay what she sees as the energy sector’s top issues, EY’s role in tackling them and why we need more female leaders.

“No other industry touches on as many aspects of human life and has the potential to change people’s lives as much as power and utilities — if the fundamentals such as electricity and water are not in place, then

social equity.”

Alison Kay, EY’s new Global Sector Leader for Power & Utilities, takes a broad and holistic view of the team she leads and its role in driving change. Appointed in July, Alison comes to the top job at a time of great transition for the sector and sees

and impact what she sees as the most pressing issues.

Big political agenda neededThe energy trilemma — the trade-offs between the three dimensions of energy security, social equity (energy access and affordability) and environmental impact mitigation (climate change and local pollution) — is a focus for all energy policy makers and energy companies.

“For the developed markets, the critical issues are security of energy supply and affordability,” Alison says.

“In the majority of developed countries, energy costs are only going one way, and this is affecting consumers as well as industry. Exploiting new sources of energy is critical to address the issue and will only be achieved through technical innovation, which will open up new sources of energy.”

“However, it is not good enough just to

have the infrastructure to transport it.

constraints, the abilities of governments to invest in that infrastructure is more limited than it, perhaps, has been historically.”

“When it comes to security of supply, a key challenge will be creating interconnections to allow the supply of power across geographic boundaries. This requires a big political agenda to be put in place.”

In the emerging markets, the big issues are, predictably, quite different.

“According to the World Bank, about 20% of the world’s population is still without access to electricity, while 25% do not have access to safe water — almost all of these people live in the developing world,” she says.

“This is a huge hindrance to economic growth. For example, it’s estimated that about 62% of Malawi’s land could be developed if access to electricity and water was available.”

“Clearly, the priority in the emerging markets is the building out of the generating capacity.”

“We must be proactive, not passive.”EY has an important role to play in meeting these challenges, according to Alison, who says the organization is better placed than many to make a real difference.

“My vision is for EY to be seen as a leading voice on these issues and a proactive, not passive, participant in helping to resolve them.”

“We have the ability to help emerging markets with their energy agenda. They need investment, capital and technology. We have a broad network, and so I see it is our role to act as the catalyst to bring investors, companies and resources together.”

“We can help craft a market in these countries to actually build out more affordable energy into emerging economies.”

4 | Plug in — October 2013

Alison Kay Global Sector Leader, Power & Utilities [email protected] + 44 207 951 1786

Alison joined EY in 2007 to lead EY’s Advisory and Utilities sector for the UK and Ireland, and on 1 July 2013, she became our

Global Sector Leader for Power & Utilities. Alison works with clients, including the National Grid, our biggest utilities client worldwide, to support them as they develop solutions to the energy challenges of the markets in which they operate.

Diversity brings better decisionsAlison is also determined to redress the

in the sector.

“I’m passionate about our role in the development of women leaders in the sector globally,” she explains.

“There is a real opportunity for EY to build on all the work we do around the women’s agenda and leadership agenda more broadly.”

Alison says the issue is about far more than equity.

“Bringing diversity will bring different conversations and different perspectives,” she says.

“My aspiration is to see far more women

help make more balanced decisions around the world’s energy needs.”

Alison says that, while she has never felt hindered by her gender, it is clear that women face different challenges in a sector heavily dominated by men.

going the extra mile and showing what they can bring to the conversation. Once this has been demonstrated, they can gain the

“I’ve seen great women in senior roles at

to break into the C-suite.”

“Without mentoring, coaching and sponsorship, many will drop out of the sector, which would mean a loss of real talent for the sector.”

Social obligations becoming more importantAfter an 18-year career in power and utilities, Alison says she is still drawn to the sector because of its intellectual challenges and potential to make a positive, far-reaching difference.

“I’m really motivated by the fact that this sector has a key role in all societies and all economies in changing people’s lives,” she says.

policy and energy agenda exciting in terms

better good.”

“For companies, balancing stakeholder demands with the social need of the country that you operate in is a real challenge.”

With a strong vision for the way forward,

shape the key and emerging issues in power and utilities.

“There’s an opportunity for us to really start thinking about the implications of not having power and water on people’s livelihoods, their ability to develop economically and access all sorts of social opportunities.”

“We are a very large organization, and we need have an obligation to the working world to go beyond just the pure link in to clients.”

“I truly think we are really setting the pace in creating a better working world — this is at the heart of our agenda.”


approaching water crisis. Water utilities must improve their performance and mobilize the private sector to help deliver the country’s much-needed “water revolution.” Chaitanya Kalia and Nutan Zarapkar report.

India’s water worries

India’s water sector is plagued by challenges that include scarcity, underdeveloped treatment and supply infrastructure, contamination and

various inadequacies is the country’s lack of a consistent water policy framework, particularly an effective water tariff, and the absence of incentives to drive sustainable water practices.

As India faces increasing urbanization, pressure on its water supply is growing further. Some progress has been made, most notably by government investment in large programs such as the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and the Urban Infrastructure Development Schemes for Small and Medium Towns (UIDSSMT), but much more needs to be done.

The Indian Government has produced two major policy responses — the National Water Policy (NWP) and the National Water Mission (NWM) — to drive more effective management of the country’s water resources. These policies aim to

through volumetric pricing, establishing water regulators and opening up the sector to private participation, mostly through public-private partnerships (PPPs).

The initiatives highlight the need for India’s water utilities to improve their water service delivery. It is estimated that even an incremental improvement in arresting distribution leakage losses by an average of 10% across the country would reduce the production cost of equivalent water supply by INR5.5 billion (US$103m).1

1. Status of Water Treatment Plants in India, Central Pollution Control Board, Government of India November 2011.

At EY, we have been working with many water utilities to upgrade performance through a number of measures that can be broadly categorized into three overarching approaches:

• Demand management: influencing demand through increasing block tariff systems, excess use charges, zonal pricing to reflect water scarcity values, water efficiency labeling schemes, revisions to plumbing and building codes, leak-detection programs, water rationing and taxation policies

• Supply management: advocating projects that enable an increase in the accessible, reliable and environmentally sustainable supply of water, for example, through the establishment of an inter-city distribution network or an inter-basin transfer of water

• Efficiency enhancement: benchmarking performance improvement across four broad areas: financial sustainability; efficiencies of operation and maintenance; efficiencies of investment; and responsiveness to customers

Incentives for industryOther sectors and industries must also play a part in bringing about the necessary changes. According to surveys of Indian industry groups, water-related concerns are expected to “become more of a priority” for businesses in the next 5 to 10

for business organizations.


Power and utility companies (P&Us) have

Thermal power plants are some of the most water-intensive operations in India, and more than 75% of the planned expansion of power capacity in India’s next Five Year Plan involves these types of plants. It is therefore important to persuade thermal power generators — and other water-intensive industry sectors — to become committed water stewards. Incentives must be introduced to encourage the

of new technologies to conserve it and the complete recycling of industrial water (zero-discharge). It should be noted, though, that even with the current absence of incentives, larger industries are already performing better than many Indian municipalities in sustainable water practices.

Mobilizing the private sectorThe Indian Government understands that the involvement of the private sector will be critical in transforming India’s water use. Both the NWP and the NWM explicitly encourage private sector participation in the water sector, and the JNNURM and UIDSSMT promote institutional reform through private sector capital and capabilities. But while India has seen some PPPs, many of these projects have been hampered by challenges, including the

to properly monitor and benchmark the service standards of PPPs and rushed bidding processes that lead to inadequate

Further changes to the regulatory

required to mobilize the private sector to

become an active stakeholder in the reform of India’s water sector. Once these changes occur, opportunities will be available to private investors in almost every facet of the water sector — from developing new

building wastewater infrastructure — for those companies that take the time to get to know this complex market. At EY, our teams are assisting potential investors in understanding the Indian culture and way of doing business in order to build a local presence and develop appropriate business models.

Hope of changeMuch like the country in general, the water sector of India is in the midst of

implementation of the NWP has

inspired hope that India is transitioning to ensure the security of future supply, it is clear that there is much more to do. A coordinated effort — by government and industry, particularly utilities — is necessary to bring about the strategic long-term planning and innovation required to deliver India’s “water revolution.”

Chaitanya Kalia Product Leader, Water and Climate Change Advisory Services [email protected] + 91 226 192 0250

Chaitanya is the product leader for Water and Climate Change Advisory Services in EY India with more than 20 years of

and is currently involved in promoting India’s new PPP model for water utilities.

Nutan Zarapkar [email protected] + 91 226 192 1316

Nutan is a senior manager with more than 15 years of extensive experience in the water and wastewater sectors and has worked in project management, design engineering and sales of water

treatment, wastewater treatment and recycling plants in India.

Read our publication, Riding the wave

For more information


Internal audit: beyond complianceIncreasingly under the spotlight, power and utility companies are demanding more of internal audit. But as expectations grow, so too do cost pressures — how can this important function meet the challenge? Torsten Vesper reports.

of technological change have consumers, investors and regulators demanding greater visibility into what utilities are doing. Internal audit must meet these expectations, taking on a broader mandate that goes beyond compliance to offer operational business insights as well as advice on the current and emerging business risks faced by the sector.

A global survey of chief audit executives (CAEs) commissioned by EY shows that more than half of respondents are aware of these expectations, believing that their mandate will expand over the next two years. But while they expect their role to increase, only about one-third of respondents expect their budget to rise in line with these added responsibilities. And, critically, most of the CAEs we surveyed

preventing them from stepping up to their expanded role.

Ever-expanding mandateInternal audit should focus on four key areas in order to meet the current needs of power and utility companies: 1. Expanding the internal audit mandate

Developing — and regularly revisiting — a risk-based annual audit plan that balances assurance and compliance with insights and strategic advice will help meet increasing stakeholder expectations.

2. Shifting the scope

Technology, big data and expansion into emerging markets mean the internal audit function of utilities must take a proactive approach to addressing compliance requirements and also serve as a strategic adviser.

3. Increasing competency requirements

To meet its expanding role, internal audit must either cultivate additional skills in-house or turn to third parties to provide these competencies.

4. Evolving the function composition

Leveraging resources within an organization or bringing in specialized skills will ensure the right people are

effectively.

But while expanding the role of internal audit is challenging in itself, it comes at a tough time for utilities. As cost pressures force many companies, particularly in Europe, to reduce operational costs and

expected to do more but with fewer resources. A reduced internal audit

an expanded mandate but is in danger of missing critical compliance risks.

In our experience, more and more utilities are partnering with third parties such

existing skills. In this year’s survey, 82% of respondents across all sectors and 95% of utilities surveyed said they co-sourced or outsourced some or all of their internal

shows that the skills most in demand are data analytics, business strategy, risk management and deep industry experience.


Utilities are realizing that third-party

international experience, as well as critical skills, including IT, and insights into emerging risks. They also receive ongoing training and are up to date on leading practices. It is worth noting that respondents indicate that much of this co-sourcing or outsourcing is at senior managerial levels, highlighting the value of experience.

Third-party resources also offer a fresh perspective, as well as the additional soft skills that are fast becoming as important as purely technical auditing skills. To be a strategic advisor to the business, auditors need to be able to think critically, apply business knowledge and clearly articulate insights to management.

Check your performanceThe CAEs of most utilities regularly review

years by the Institute of Internal Auditors. This assessment is a relatively easy way to ensure basic compliance requirements are being met.

But those utilities with high-performing internal audit functions are doing more. We work with leading utilities such as RWE to implement functional performance assessments that help these companies benchmark against best practice drawn from our global experience in the sector.

support utilities to better position their internal audit functions to match organizational needs.

Striking a balanceThe internal audit function of utilities

to strike a balance between meeting assurance and compliance requirements and broadening its role to offer strategic insights to the business. In a period of cost pressures, third-party resources may be

make the most of this opportunity to add lasting value.

Torsten Vesper Partner, Advisory Services [email protected] + 49 221 2779 18319

Torsten Vesper has more than 23 years’ experience in industry and consulting, helping clients in diverse sectors manage and

transform their internal audit function. Torsten works with major utilities such as RWE to assess the functional performance of their internal audit function and to support them through internal audit transition, adding value to the organization.


Read our publication Matching Internal Audit talent to organizational

Global Internal Audit Survey 2013.


In today’s corporate environment, protecting invisible assets, such as information, is just as important as protecting physical assets. To safeguard sensitive information, companies should invest in a good identity and access management (IAM) system that ensures employees have just enough information to perform their duties, while restricting access to any data that is unnecessary or could potentially harm the company if misused.

Employees who misuse sensitive data can cost a company money, threaten intellectual property, risk the safety of operations and damage its reputation. And, as we move to a “dual-use environment” in which people use devices, laptops or mobile phones for both corporate and personal use, this issue is more pertinent than ever.

Protecting sensitive data is particularly critical for power and utility companies (P&Us) as they manage the “unbundling” of the energy sector, increasing regulation and the avalanche of data generated by smart metering systems.

Industry transformation brings data pressuresThe separation — or “unbundling” — of vertically integrated utilities into separate businesses responsible for energy generation, transmission, distribution and retail sales has brought the need for diligent IAM into sharp focus.

In most regions, regulatory guidelines mean utilities must have IAM systems in place that control how employees access the data of these unbundled businesses. The rules may differ between jurisdictions, but this is usually addressed by either implementing different systems, separating internal systems (if possible) or separating the data in the system via access and

authorization methods. All of these approaches are challenging and highlight the need for companies to consider their choice of IAM carefully.

The ongoing rollout of smart metering systems also puts pressure on utilities to better control how employees view and use information. The big data generated by smart meters will give companies an almost complete picture of individual customers — including where they live, their energy usage, what appliances they use and when they are home. It is critical that utilities ensure their IAM systems protect against misuse of this private information.

While, in our experience, most utilities are aware of the need to establish clear data boundaries, many are still coming to terms with what is required of them and the implications of overlooking the security of sensitive data. Larger, better-resourced utilities tend to be doing better than smaller companies, and, perhaps unsurprisingly, those based in regions subject to more regulation, such as the US and Europe, usually have more-advanced IAM systems and policies than those in less heavily regulated areas, such as the Middle East and Africa.

More than an IT challengeWe see companies make some common mistakes regarding IAM. These include considering it an IT department issue, thinking that it can be solved by implementing a tool and focusing too much on security. A successful IAM strategy requires a far broader approach based on the understanding that it is an organizational challenge that requires fundamental cultural change driven from the top down. Everyone from the CEO to the mailroom clerk must be engaged and committed to the appropriate use of sensitive company data.

Managing employees’ access to sensitive data is becoming a more pressing issue for utilities. Patrick Fink, Sven Sando and Patrick Risch report on how effective identity and access management can address the challenge.

For your eyes only


We work with companies in power and utilities and across other sectors to put in place a step-by-step process for developing an IAM program:

1. Conduct an IAM readiness check, including an information security assessment

2. Engage with all stakeholders regarding the results of the IAM check and agree upon IAM goals

3. Develop an IAM road map to achieve these goals

All P&Us must control employees’ use of data, but those that strive for IAM excellence go beyond regulatory requirements. They make real business and cultural changes that improve processes and achieve competitive advantage.

Worth the investmentInvesting in a strategic and holistic IAM

for P&Us. Not only will it enable them to comply with regulatory guidelines regarding access rights, it will give them

peace of mind about the security of their

and transparency of their processes, guard their reputation and even speed up processes and improve productivity. In an age when information is a company’s most valuable asset, maintaining control over it is more important than ever.

Patrick Fink Senior Consultant, Advisory Services

+ 49 6196 996 20742

Patrick is part of our Advisory team and is based in Eschborn, Germany. With a focus on Application Risk and IT Assurance,

Patrick has led global IAM projects and SAP implementations for large companies across many sectors.

Sven Sando Senior Manager, Advisory Services [email protected] + 49 40 36132 21118

Sven is a Senior Manager in the Risk & IT practice of EY Advisory Services, based in Hamburg in Germany. He has nine years

of advisory experience and is the head of IAM services for Germany, Switzerland and Austria.

Patrick Risch Senior Consultant, Advisory Services [email protected] + 49 711 9881 26053

Based in Stuttgart, Germany, Patrick supports clients with business risk management (including internal controls and

processes and application risk), IT auditing and project managements. Patrick has led multi-project global IAM implementations, including organizational and cultural change, for clients in different sectors.

How we can help

At EY, we are a leading IAM transformation collaborator, supporting our clients across all aspects of IAM challenges — from creating policies and procedures through to the implementation of processes and controls, including training and change management. Our leading practices and deep sector knowledge mean we can offer fully individualized processes to improve the performance of IAM while increasing security and compliance and without harming the speed of the transformation process.


Read more about IAM in our article Off limits: controlling employee information access, originally published in Performance


our 11th annual European attractiveness survey shows that investors — perhaps now accustomed to the economic situation —

opportunities. The energy and utilities sector is proving particularly resilient, rated by our survey respondents as the second most attractive sector (behind information and communication technologies and ahead of pharmaceutical and biotechnology). Some of the key trends and themes impacting investment in European energy include:

1. Foreign investors favor UK nuclear Maintaining its historic lead in 2012, the

direct investment (FDI) decisions made and jobs created in Europe. In the power and utilities sector, the nuclear industry is

by the Government’s aim to replace its aging nuclear capacity by 2023. Rosatom is exploring opportunities to introduce its pressurized water reactor design, while China General Nuclear Power Group is in talks with EDF to co-develop the Hinkley Point C nuclear power plant. Hitachi — which now owns Britain’s Horizon Nuclear Power — is also keeping a close eye on decisions regarding nuclear subsidies,

two plants.

2. Intra-European investment

While the US is Europe’s single leading FDI generator, intra-European investment continues to be the biggest source of FDI in Europe, accounting for 55% of investment projects in 2012.

In the power and utilities sector, much of the intra-European focus is on renewable energy, particularly offshore and onshore wind generation. Many of Europe’s biggest utilities — including RWE, Vattenfall, Dong Energy and EDF Energy — are

mostly in the UK, but also in Germany and Belgium. The UK offshore wind industry has been boosted by a recently announced extension of subsidy levels to 2015 and a reduction in previously set subsequent cuts.

3. Shared service centers boost Central and Eastern EuropeCentral and Eastern Europe (CEE) regained traction as an FDI destination in 2012, securing a remarkable 26.1% more jobs and becoming the leading recipient of FDI jobs in Europe. Investors even ranked the region ahead of Brazil, Russia and India, with Patrick Deconinck, Senior Vice President of West Europe for 3M Company, noting, “CEE is increasingly attractive, offering improving infrastructure, investment climate and skills.”

Many of the region’s new jobs were in business support services, including shared service centers set up by large companies, such as utilities like RWE, to manage functions including accounting, HR and payroll, purchasing and IT. These centers can be a useful cost reduction strategy while also helping improve consistency and standards.

Despite tough times, Europe is still attracting more foreign direct investment than any other region in the world. And with energy and utilities ranked as the second most attractive target for investors, Alexandra Reuther highlights some of the key themes

Top of the world


4. More innovation neededDeveloping a culture of innovation and creativity is crucial for 36% of investors and Hendrik Bourgeois, Vice President of European Affairs for GE, echoed many when he told us that “ensuring a technology transition should be a top priority” for European governments.

Energy and utilities is a sector with much to gain from further innovation in technology. As Bourgeois explains, “The cost of energy is high in Europe, and natural gas is notably more expensive than in the US. So we need to use technology to bring down costs. This includes extracting unconventional fuels in an environmentally sound manner. Europe also needs to continue to invest in renewable energies, such as wind, solar and biogas, and to build more interconnected and ‘smarter’ power grids.”

This innovation is also crucial if Europe is to remain an attractive destination for business.

5. Work together to achieve more Investors see European unity as the best

survey respondents said the region would

integration as well as reduced regulation.

Kei Uruma, President and CEO of Mitsubishi Electric Europe BV, said that it is “now essential that the EU Member States put their differences aside and focus on stimulating the market for renewed growth,” while Patrick Deconinck notes that remaining competitive will mean Europe must realize that the continent can achieve much more together than individually.

In September, the CEOs of some of Europe’s biggest utilities — Enel, Eni, Gas Natural Fenosa, GasTerra, GDF SUEZ, Iberdrola, RWE, Vattenfall — said that investment in energy infrastructure was

frameworks and differing renewable energy targets of European governments.

“Energy security of supply is no longer guaranteed, CO2 emissions are currently on the rise, investments in the sector are not happening and energy bills are rising sharply,” the CEOs said.1

economic times, a well-functioning and integrated market for electricity and gas would further strengthen Europe’s resilience to future challenges and ensure its ability to cope — the European way.

1. “Heads of nine leading European energy companies propose concrete measures to rebuild Europe’s energy policy,” GDF SUEZ website http://www.gdfsuez.com/en/journalists/press-re-leases/leading-european-energy-companies-measures-rebuild-europes-energy-policy/, accessed 07 October 2013.

Alexandra Reuther Global Coordinating Analyst, Power & Utilities [email protected] + 49 711 9881 14465

Alexandra is a manager in our Global Power & Utilities team and has more than 15 years of experience as an analyst for the power and utilities sector in Europe. She coordinates a global team of researchers and analysts

that helps our practitioners and external clients to better understand the changing dynamics of the industry and its markets, as well as the implications of these changes on the clients’ agenda issues.

European attractiveness survey — at a glance• Europe is still the world’s top FDI

destination, with 22.4% of investment.

• UK remains the top recipient of FDI, although Germany is closing the gap.

• There are mixed messages in Western Europe as investors look for bargains amid recession.

• CEE investment picks up after two disappointing years.

• US remains the top investor in Europe; BRIC investment weakens.

• London remains the most attractive city.


Read our 2013 European attractiveness survey


Out of the shadows

(P&U) companies are emerging into the spotlight. Those who take their complex role in a more strategic direction can help improve their organization’s performance and shape its future, Steve McCabe, Jeff Miller and Raghu Raj report.

An increasingly complex regulatory environment, pressures on costs, the expansion of rapid-growth markets and the need to upgrade infrastructure mean

and agile yet retain a sharp focus on cost

these challenges brings the role of Chief

with the right skills and the willingness to reinvent their roles can be the ideal candidates to lead their organizations

the vision for future growth.

A broader roleLarge and complex utilities are even more reliant on the skills of strong operational

power and utilities industry for two or more people to hold positions at levels of

with a variety of titles: operating company president, functional president and so on.

Despite the split into different functions, these executives manage operations that are easily as large and complex as those of an individual COO within other businesses. Thus, those who hold COO roles within P&U companies tend to have broader,

peers in other industries. Not only are they responsible for capital expenditure budgets that run into the multiple billions of euros or dollars, they must also guard against operational failure, ensure the

safety and reliability of supply and manage relationships with regulators and other authorities. Furthermore, they often have to operate across multiple jurisdictions, juggling local and regional concerns, while maintaining one consistent direction for their company.

Changing perceptionsWhile P&U COOs face many challenges, the demanding environment in which they operate also presents opportunities to add value across a broad range of areas.

about their role, proving they can go

corporate strategy and further broaden their role. Key areas in which the COO of a P&U companies can add value include:

• Driving cost optimization: as revenues are squeezed by sluggish growth rates and decreasing allowed returns on equity (ROE), COOs have opportunities around improving operational efficiency and maximizing achieved ROEs.

• Bringing a unique perspective: as overseers of their particular arms of the businesses, P&U operational leaders can break down functional and geographical silos, and identify ways of driving efficiencies and adopting leading practices across their organizations. This is particularly important for companies that span multiple jurisdictions.


• Leading transformation: many utilities are undergoing large business transformations in response to changing market conditions, increasing regulations and new technology. While COOs are already involved in these transformation projects, their mandate now is to shift from a wholly operational perspective to a more strategic one. At its core, this involves turning an abstract corporate strategy into a daily working reality, deploying specific frameworks and processes that can deliver on the strategic objectives set for each part of the organization.

• Collaborative approach: COOs must create bonds with board members and, in this regard, our research shows that P&U operational leaders are well ahead of their colleagues in other industries. The CEO-COO relationship is particularly critical and must be based on trust, regular communication, a shared vision, the right personality fit and the willingness to challenge each other on business concerns (and in private).

Room to improveIn our experience working with our P&U clients, we see many COOs making valued contributions to the performance of their organizations. But we also notice some areas that could be enhanced if the potential of this role is to be fully realized:

• Mastering the financials: perhaps the biggest issue for COOs is a need to develop greater financial acumen. Many ascend through the operational ranks of the organization with limited direct financial experience. A better understanding of finance fundamentals could enable COOs both to improve their performance and to heighten their visibility within the boardroom.

• Taking calculated risks: considering customer and regulator expectations around safety and reliability in the power and utilities sector, it is not surprising that utility COOs have developed a reputation for risk avoidance. But while utilities must deliver on these expectations, their COOs need to develop a different mindset when it comes to driving cultural and process change.

• Developing the soft skills: as the business transformation owner and key individual tasked with defining and implementing strategy, the COO must be able to manage and inspire people at the highest level. When we asked COOs about the key attributes they needed to help them perform at their best, it was the softer skills — leadership, people management and communication — that topped the list. The most effective COOs we see are strong leaders who motivate their teams to participate actively in the strategic journey they have planned. They also demonstrate personal charisma and the ability to “sell” their vision to the board.

Seize the spotlightPerhaps more than any other executives, COOs have the power to shape their organization. Operational excellence has become a key source of competitive advantage, and today’s tough economic environment demands a relentless focus on the smooth running of the business — a task ideally suited to the strengths of the COO. But those operational skills should be combined with a set of forward-looking capabilities, as well as the ability to lead, establish a vision and motivate.

How we can help

We work with many COOs, supporting them as they capitalize on their own unique opportunities and deliver their transformation goals. Our report, DNA of

the COO: Time to claim the spotlight, is

group of operational leaders. This ongoing program will address aspects of personal interest to COOs as they seek to develop themselves and their teams and learn from others within their communities.


Steve McCabe Principal, Power & Utilities Advisory practice [email protected] + 1 404 817 5573

Steve McCabe is a Principal with more than 15 years of experience in corporate strategy, enterprise asset management, supply chain, organizational alignment and business process re-engineering. Steve works with

many P&U clients to identify opportunities for strategic value creation and design transformational business solutions.

Jeff Miller Senior Manager, Power & Utilities Advisory practice [email protected] + 1 404 817 5879

Jeff Miller has almost 20 years’ experience working with companies in the power and utilities sector. He has advised clients on a variety of strategic and operational issues, including performance management, merger

integration, asset management, smart grid/advanced meter infrastructure (AMI), process redesign, corporate and business unit strategy and planning, and organizational design.

Raghu Raj Executive Director, Power & Utilities Advisory practice [email protected] + 1 312 879 2857

Raghu Raj has 13 years of experience supporting clients in business process re-engineering, systems implementation and organizational design within work and asset management. He has assisted utility clients with


Turning to spin-offsMany power and utility companies are turning to spin-offs to optimize portfolios, maximize returns and control costs. But along with strategic opportunities, these complex divestments bring many accounting challenges. Dennis Deutmeyer reports.

As reported in EY’s latest Global Capital

(April–October 2013), 71% of power and utility companies (P&Us) that are planning divestments expect to pursue the carve-out of one or more business units. These transactions, whether structured as an outright sale, spin-off, initial public offering or contribution to a joint venture, can be an effective way of releasing capital to shareholders or better aligning an asset portfolio with broader strategic goals.

But spin-offs are highly complex and involve numerous decisions that will impact the achievement of the overall objectives. To succeed, companies will need a decision-making process that is guided by well-informed management and backed by third-party specialists.

While there are currently no International Financial Reporting Standards that deal

most — though certainly not all — will fall under IFRIC 17, Distribution of Non-cash Assets to Owners. However we are seeing diversity in the application of these guidelines, highlighting the need for

judgements that arise when applying accounting requirements and to call on third-party advisers when in doubt.

EY is helping companies across many industries, including power and utilities, to

1. How to account for a spin-off transaction initially

2. How to account for a spin-off transaction in subsequent reporting periods

3. How to account for a spin-off transaction at transaction settlement

4. What to do with the associated transaction costs

5. What to disclose in the footnotes to

It is important to note that IFRIC 17 does not apply to spin-offs when the assets distributed are ultimately controlled by the same party (or parties) before or after the distribution.

Timing is everything

for a spin-off is determining when to recognize the transaction. This may seem straightforward, but it frequently requires judgment to determine when the spin-off decision has been appropriately authorized and the obligation is no longer at the entity’s discretion. As it will also be subject to local regulations and laws, management needs to consider its jurisdiction while working through the decision-making process.

The next challenge is to measure the spin-off. Without exception, all spin-off transactions within the scope of IFRIC 17 are initially measured at the fair value of the assets to be distributed. This is perhaps the most challenging aspect of these transactions, particularly if shareholders

that a proper value has been ascribed to the business.

The valuation of a power and utilities’ assets is a complex process that is beyond the skill sets of most companies’ management. We work with P&Us to develop methodologies that determine the fair value of assets, which may include individual assets, customer relationships, contracts and leases.


Timing is a key consideration in this process because of the advantages of settling the spin-off in the same reporting period as its initial recognition. If a P&U has to account for a spin-off transaction in a subsequent reporting period, it may need to remeasure the fair value of the distribution liability. An entity has to account for the spin-off when the transaction is settled by remeasuring the distribution liability to fair value as at that date. It then de-recognizes the assets (and liabilities, if any) being distributed. Any difference is recognized

initial recording and settlement straddles multiple reporting periods, utilities may face a valuation mismatch on their balance sheet, particularly when energy contracts

price changes.

Speedy settlement also allows the company to move ahead with its strategy and sends positive messages to the market.

Costs and disclosuresWhen considering how to account for the transaction costs associated with a spin-off, companies should be aware that these are generally accounted for as a deduction from equity if they are considered to be directly related to the spin-off transaction. Any costs not considered directly related to the spin-off are to be expensed as incurred.

statements, particularly surrounding the carrying amount and fair value of assets, will depend on whether the spin-off distribution liabilities have been declared and recognized before or after the reporting period.

Local knowledge is critical to the success of spin-offs. The tax implications of these transactions can be complicated and

jurisdiction and local rules prior to and during the spin-off process.

dividend rules, which may impact their ability to pay cash dividends, especially if they must be distributed from positive retained earnings.

Spin-off successWith divestments, including spin-off transactions, increasingly being used by P&Us, it is critical that management address and understand the key

attention should be paid to valuations and the prompt settlement of spin-offs

these transactions.

Dennis Deutmeyer Global IFRS Power & Utilities Leader [email protected] + 44 20 7951 2947

Dennis has 27 years’ audit and assurance experience with multinational clients across a range of industries. As Global IFRS

Power & Utilities Leader, he monitors the impact of new and updated accounting standards and develops practical, technically sound solutions for our clients.

How we can help

We work with P&U entities on a variety of divestments, including spin-offs, and can support you throughout the life cycle of a transaction we can provide

areas in a spin-off, including IFRIC 17, valuations and tax implications.

Read our full paper, Spin-off transactions:

reporting challenges, ...



In 2003, EY began publishing its quarterly index, analyzing and scoring countries across the globe on the attractiveness of their renewable energy markets, energy infrastructure and suitability for individual technologies. The renewable energy sector is now almost unrecognizable from what it was 10 years ago. Today, it is much more aligned to macroeconomic, political and energy market fundamentals, rather

regimes. This increasingly diverse range of factors is driving record levels of new investment in an industry once considered on the fringe: global annual clean energy investment totaled US$269b in 2012,

ogyThe changing landscape has prompted EY to revise the methodology it uses to score and rank the top 40 countries to better

drivers. Key changes include:

• More focus on the extent to which markets are prioritizing renewables as a necessary and desirable part of the energy mix, including an assessment of:

• Energy supply and demand

• The competitiveness of renewables relative to other energy sources

• The importance of decarbonization (including targets and market mechanisms)

• An increased emphasis on the economic and political stability of a particular market

Investors continue to cite the ease of doing business as an important differentiator between markets, resulting in a renewed focus on investment climate and the

infrastructure and transactions perspective.

The sustainability and transparency of energy policies have also become more critical given the impact on long-term decision-making by investors and other stakeholders. Policymakers are now under increasing pressure to implement stable long-term policies that avoid “U-turns” and boom-bust cycles.

US back on topThe revamped index sees the US regain the top spot, as high barriers to entry for external investors realign China into second place. However, growth prospects in China remain strong, with continued GDP growth, increasing demand and the strategic importance of the sector to the local economy providing solid foundations for the future.

While South America continues to grow in prominence, new policy measures and tender cancellations in Brazil may temper the region’s rapid growth in the short term. Chile, meanwhile, continues to be the rising star in the index, supported by strong natural resources, huge energy demand from the mining sector and a rapidly growing project pipeline.

As it celebrates its 10-year anniversary, EY’s Renewable energy country attractiveness index (RECAI)the past decade. Klair White reports on the changes.

Rethinking renewables


improved thanks to robust macro conditions, a strong decarbonization agenda, cost-competitive wind power and high levels of deal activity with Chinese and Japanese investors in particular. Whether it remains highly attractive in the medium to long term, however, may depend on whether the upcoming federal election results in policy “U-turns” on issues such as carbon pricing.

continuing to see high levels of project activity and investment, while Thailand has entered the index (in 30th place) for

of Peru (in 26th place) — highlights the ongoing globalization of the renewables market, as investors and developers disillusioned with struggling Western markets seek new opportunities.

In Europe, ongoing economic concerns and rising electricity prices are triggering severe subsidy reductions. Even Germany — always a beacon of stability — is now considering downward revisions to its renewable support scheme. Policymakers in Eastern Europe, in particular, are also struggling to balance growth and sustainability, with Romania the latest to slash its subsidies while legislative delays in Poland are dampening investor appetite.

Political instability and an absence of clear policy frameworks across parts of the Middle East and North Africa region have resulted in Egypt, Tunisia and the UAE falling out of the top 40.

Transaction trendsDespite soaring levels of new investment in clean energy globally, 2012 also represented an 11% decrease on record levels seen in 2011. And it seems 2013

feet after a turbulent 12 months, in which falling subsidies, oversupply and capital constraints created a market focused on consolidation, restructuring and distress-driven transactions. This focus on portfolio management and deleveraging is expected to continue, and the mismatch between capital expenditure plans and

investment is expected to drive more asset disposals.

Macro drivers Energy market drivers

Rank CountryRECAI score

Macro stability

Ease of doing business Total

Prioritization of renewables

Bankability of renewables Total Wind Solar

Other technologies

1 US 71.6 77.3 71.2 73.6 38.6 75.0 60.4 68.0 79.4 52.02 China 70.7 66.4 44.2 53.1 58.3 62.9 61.1 77.5 78.5 55.73 Germany 67.6 75.7 61.0 66.9 55.4 72.7 65.8 59.9 63.0 45.84 Australia 60.6 85.1 73.0 77.9 53.6 65.6 60.8 46.9 57.2 30.1

5 UK 60.0 77.8 75.0 76.1 51.2 68.7 61.7 59.0 38.7 35.36 Japan 59.4 77.1 59.8 66.7 45.1 69.9 60.0 44.3 57.1 49.87 Canada 57.8 81.3 74.0 76.9 47.8 61.6 56.1 52.4 45.6 45.48 India 54.9 52.1 37.3 43.2 58.8 49.3 53.1 52.2 61.0 44.9

9 France 54.0 70.4 60.8 64.6 42.0 60.6 53.1 47.0 49.3 39.310 Belgium 53.9 67.3 78.0 73.7 65.0 61.1 62.6 42.4 36.9 26.4

Table 1: Top 10 RECAI rankings (at May 2013)

Source: RECAI, May 2013


At the same time, the changing risk

is driving secondary asset transactions, with greater value placed on operational projects over plant construction.

New entrants will spur increased

corporates are developing energy mix optimization strategies to manage their own energy portfolios and institutional investors are looking to renewable infrastructure assets as attractive low-risk investments with moderate yields.

Companies and investors from the

continue driving sector-wide deal activity.

Importantly, new markets relating to grid infrastructure, capacity markets, energy storage and smart meters will also need to emerge to facilitate the ongoing expansion of renewable deployment.

From subsidy to diversityThe diversity of factors now driving renewable energy will impact its future. As we move closer to grid parity, the role of policy will need to change, and governments must consider what

sustainable support looks like in a

regulation rather than policy may emerge, and cross-border or global agreements could help transcend local politics, geographical constraints and protectionist measures. The focus is now on the affordability of renewable energy and its impact on energy security, economic growth, job creation and infrastructure investment. And it will likely be these factors, in addition to the decarbonization agenda, that will provide a much more robust foundation for the growth of renewables in the foreseeable future.


How we can help

EY’s Global Cleantech Center offers you a worldwide team of professionals in assurance, tax, transaction and advisory services who understand the business dynamics of cleantech. We have the experience to help you make the most of opportunities in this marketplace, and address any challenges.

Read the latest RECAI issue for more details and individual technology indices.

Klair WhiteEnvironmental [email protected]+ 44 161 333 2734

Klair White is a Manager in the UK Environmental Finance team and is the editor of the RECAI publication. She has six years of

experience in transaction advisory services, three of which have focused on providing

energy sector.


After a four-year period where banks have tightened credit and reconsidered their lending policy, some companies, particularly in Europe, remain in a precarious position

“drowning” in cash, which brings its own challenges and opportunities.

While the highly regulated nature of the power and utilities sector means utilities

extreme ends of the cash spectrum, we are nevertheless seeing some in more of a “cash poor” situation, while others could be considered relatively “cash rich.” In either case, the role of the CFO is key as P&Us work to seize opportunities, manage the complexities and steer their company through this unusual economic environment.

Surviving droughtManaging drought has forced cash-strapped utilities to focus on several key areas. While priorities differed by regions, the main objective for many utilities was to restructure the balance sheet to free up capital and reduce debt. Divestitures of non-core assets were a central element of this strategy and triggered a wave of disposals that drove down prices. Many utilities have also focused efforts on a shift from mature markets where growth had slowed to rapidly emerging markets.

In Europe, in particular, companies are operating amid regulatory frameworks and national energy policies that are now characterized by a desire to reduce subsidies to the sector, particularly for renewable energy, and to reduce or curb increases in retail electricity and gas bills. These circumstances have created

European P&Us to adapt their businesses to drought-like circumstances.

But, despite the work done so far, CFOs of cash-poor companies can potentially do more, especially as a sharp upturn in the global economy looks increasingly unlikely in the short term. Utilities in drought may need to make more fundamental decisions about their business model and adapt it for a low-growth, low-cash environment through several measures:

• Build trust with banks and other finance providers: P&Us must ensure they continue to communicate clearly with their banks and strengthen these relationships.

• Move from tactical to operational working capital improvements: Most utilities have already restructured their business — for example, by creating shared service centers and restructuring their purchasing function (i.e., centralization of key purchases, systematic tender processes for significant spending and escalation thresholds) and by developing operation expenditure reduction plans.

Both cash-rich and cash-poor power and utility companies (P&Us) face unique challenges in a still-volatile economy — and the actions of the CFO are critical to overcoming them. Louis-Mathieu Perrin reports.

For richer or poorer


• Turn to the tax department: Utilities are continuing to build stronger links between their tax function and the business to optimize their tax position and uncover inefficiencies.

• Investigate non-bank sources of debt: Many utilities have begun to explore “hybrid financing,” a combination of both equity and debt. In the past couple of years, they have also turned to different non-bank sources of finance, including private equity, pension funds and sovereign wealth funds.

• Rethink the supply chain and business model: In particular, utilities need to take a close look at their portfolio to determine whether there are any assets that could be offloaded to free up cash and improve performance. Acting early is key to avoid giving the impression of “selling in distress.”

The world’s utilities are perhaps less

cash. In part, this is due to the nature of their business model — as owners of large, expensive assets, P&Us tie up a large portion of their cash by continually investing in these assets. That said, some utilities are currently in a very strong

But large cash balances in today’s volatile economy create their own challenges for utilities. Perhaps the biggest is the risk of becoming complacent, not paying enough attention to a changing environment and subsequently making poor decisions. Hanging onto cash while waiting for opportunities to arise will

consider this strategy to be suboptimal balance sheet management. Too much cash may also increase the risk of buying the wrong acquisition — one in the wrong sector or geography — for the wrong price. Key considerations for utilities that are “drowning” include:

• Invest, payout or buy back: Before the financial crisis, many utilities essentially used to return excess cash to shareholders in the form of share buybacks, and some currently maintain a high payout ratio level. These cash payouts send positive signals to financial investors but may create longer-term problems if they hamper investment and growth in the business.

• Articulate the rationale for your cash-rich position to investors: Utilities must continue to focus on communicating clearly to stakeholders, including investors.

• Lock in finance at record rates in a golden era for bonds issuance: For CFOs of utilities with a relatively sound economic footing, it has never been easier or cheaper to sell bonds. Investors need to find a safe haven for their cash, and this has brought down borrowing costs to unprecedented levels. We have seen many utilities take advantage of these circumstances, extending the average length of their debt and securing very good financing terms.

• Develop a clear treasury risk management strategy: Most P&Us understand the importance of this measure and are working to ensure their treasury departments continue to sharpen their focus on identifying and mitigating risk.

• Support your supply chain: Utilities have turned their attention to their supply chain, not only to cut costs but in response to increased attention from regulators who are prioritizing efficiency from P&Us.


How we can help

EY is working with the world’s leading P&U companies to best manage cash-rich or cash-poor situations. Our dedicated CFO program (http://www.ey.com/GL/en/Issues/Managing-

CFOs to excel, through providing insight and guidance that helps them develop themselves, their teams and their organizations.

Read more about considerations for cash-poor and cash-rich companies


• Explore M&A opportunities: While a slow economy has reduced appetite for acquisitions, P&Us are selectively looking at new investment opportunities, particularly in rapid-growth markets.

The role of the CFOWhether the utility is cash-rich or cash-poor, the role of the CFO is crucial.

CFOs who have excelled in navigating their organizations through the complexities of their situation:

1. Clearly communicate the situation to the market: High-achieving CFOs have developed the ability to “look beyond the numbers” to clearly communicate the situation — good or bad — to all stakeholders. An outstanding CFO does not attempt to hide a difficult situation but rather ensures that all stakeholders have a good understanding of the challenges ahead and how they will be overcome.

2. Act early: The utilities that coped best with the financial crisis were those that acted early, whether their

efforts were directed to selling assets, managing debt, issuing bonds, building relationships with public authorities or managing their regulatory burden.

3. Be decisive: An excellent CFO is a strong leader. He or she does not take a “wait and see” approach but is prepared to make decisions, even if these decisions are difficult — such as reducing headcount — or may create short-term challenges for the business.

4. Look beyond day-to-day operations: While CFOs of utilities in drought may be more constrained in their day-to-day management of the business, CFOs of drowning utilities are challenged to look beyond today. They must keep an eye on the future to ensure they identify the right acquisition or the right growth investment at the right price.

Forging a path to the futureIn today’s economic climate, the gap between the “haves” and the “have-nots” of the power and utilities sector has rarely been wider. But whether cash-rich or cash-poor, utilities can still do

plenty to overcome the challenges of their situation. A well-prepared CFO that acts decisively with a broad view of the business’s long-term strategy can help ensure that his or her organization survives drought or drowning and secures a more sustainable future.

Louis-Mathieu Perrin Assurance Sector Resident, Global Power & Utilities [email protected] + 33 6 74 57 72 89

Louis-Mathieu Perrin is a Director with more than 10 years’ experience in the power and utilities sector. Louis-Mathieu supports clients across a range of areas including audit, IFRS transitions, due diligence,

asset valuations and reviews of internal systems. He works with many of Europe’s leading utilities and France’s energy regulator, Commission de Regulation de l’Energie.


Smart move for GermanyA tailored approach could see Germany’s smart-meter implementation become Europe’s best. Helmut Edelmann and Alain Bollackthe proposed rollout.

As Germany restructures its energy mix, renewables are increasingly in focus — the country plans to triple its share of renewables to 80% consumption by 2050. Smart meters will play an important part in this Energiewende, or energy transformation.

But just how these metering systems are rolled out to consumers has been unclear. Now a new economic assessment by EY has determined a way forward that considers the Energiewende while keeping consumer energy costs as low as possible.

Selective rollout is key to savingsWhile a 2009 EU directive recommended member states roll out smart meters to 80% of consumers by 2020, our analysis shows that most German households would be unable to save enough energy to recoup the costs of installing and operating smart meters. We found that a better option would be a tailored rollout to four distinct groups:

Consumer group 1: The 15% of consumers that use more than 6,000kW of energy per year

Recommendation: Roll out smart meters — if not already in place

Why?: These consumers use the most energy — about 75% of Germany’s energy consumption — so smart meters will see them save energy costs while helping the country meet its low carbon targets.

Consumer group 2: Those consumers that produce combined heat and power (CHP) and solar and wind renewable energy — about 5% of all consumers

Recommendation: Roll out smart meters

Why?: We recommend using metering to limit renewable energy producers to 5% of their annual energy capacity during times of grid congestion, thus mitigating the need for costly grid expansion.

Consumer group 3: Consumers in new and renovated buildings — about 10% of all consumers

Recommendation: Roll out smart meters

Why?: It is easier to install smart meters when these systems are considered during the building process. Rolling out the approximately 500,000 smart meters per year required to this group adds security to investors and also ensures that these consumers will save energy.

Consumer group 4: The majority of German consumers — about 70% of the market — including smaller businesses and households whose energy consumption is less than 6,000kW per year

Recommendation: Roll out intelligent meters

Why?: These meters show consumers their actual energy usage via an in-home display (without communicating this to the utility company), encouraging energy

usage consumers save energy and costs, and enable load shifting. They are easily upgradable to smart meters.

This mixed rollout will help all consumers save power and money. It also increases economies of scale and allows market participants, such as device manufacturers and meter operators, to plan ahead with more certainty and less risk.


Chart 1. Tailored roll out

Fitted with smart metersRollout of intelligent meters

30%

70%

A question of timing This rollout strategy (see Chart 1) sees consumer groups 1, 2 and 3 (30% of

2022. The rollout of intelligent meters to consumer group 4 (70% of the market) would follow Germany’s usual meter calibration cycle of 16 years.

The cost of this mixed rollout of smart metering systems and intelligent

than implementing the EU target while

the outset. Our modeling shows that this scenario would see Germany lead Europe in meter rollouts by 2029.

Managing the rolloutGermany’s smart-meter rollout brings both opportunities and challenges for utilities. Opportunities abound in developing new business models to allow for the integrated, streamlined implementation of meters by the country’s more than 1,000 distribution network companies (DNOs), although

both traditional players and new market participants.

Challenges will lie in reviewing and updating business models and ensuring that proposed rollout plans are in line with our recommended strategy. And, while smart meters offer opportunities in data management and value-added services, utilities will need to be vigilant in managing the associated privacy and data security

other utilities or third-party advisers may be a wise and cost-effective approach.

Next stepsIf the Government proceeds with this rollout — a decision is expected by the end of 2013 — the German smart-meter strategy has the potential to reap real

opportunities for utilities and other businesses, and help achieve Germany’s energy transformation.

Helmut Edelmann Director, Utilities [email protected] + 49 211 9352 11476

Dr. Helmut Edelmann joined EY in 2002 and has more than 25 years’ practical experience within the electricity, gas and

water sector. His work focuses on the transportation, distribution, trading and

behalf of Germany’s Federal Ministry of Economy and Technology.

Alain Bollack Director, Global Power and Utilities [email protected] + 44 20 7951 7147

Alain is a director, working in Global Power and Utilities and is responsible for driving the global growth of our advisory

business in the areas of smart metering and smart grid. Alain has almost 25 years’ experience supporting clients as they transform their business.

Our teams understand the global impact

issues in Germany and other national markets. We have the experience and capabilities to help utilities throughout their entire smart-metering journey, from assessing readiness, developing and executing implementation programs, and ensuring business processes are ready for life with smart meters.

For more information on smart metering, please go to our dedicated page on EY.com



Yielding to pressureThe relative safety of regulated utilities appealed to investors during an uncertain economy. But as optimism increases and the industry transforms, the pressure is on US utilities to maintain attractive shareholder returns. Dean Maschoff reports.

During recent uncertain economic conditions, investors turned toward the relatively safe harbor of rate-regulated utilities. In the US, record low interest rates made utilities particularly alluring, offering an average dividend of 4.2% in 2012 that attracted investors and drove price/earnings (P/E) multiples well above historic norms.

But as the US economy began to show signs of recovery, interest rates climbed,

utilities began to appear overvalued. Now the sector faces losing investors to higher growth opportunities while also dealing with unprecedented earnings pressure brought about by fundamental industry changes. Forecasted anemic electric demand over the next two

investment requirements, will place pressure on utilities’ ability to continue to deliver attractive returns.

above 10-year averages, these peak valuations are unlikely to be sustainable in the long term. As they prepare for the challenge of maintaining attractive yields in various ways, utilities are adopting various strategies.

Almost all companies are striving to improve operations and earn the maximum allowable return on equity (ROE), while at the same time seeking earnings growth through capital investments in their regulated businesses. In presentations to investors, many of these companies talk less about long-term earnings growth

and instead emphasize planned capital expenditure growth, which should translate into an almost one-to-one correlation with earnings. While this model for growth is a good one, the challenge going forward will be to minimize regulator and customer fatigue with year-after-year rate increases.

Other utilities are looking to reduce risk by either disposing of competitive generation or acquiring additional regulated businesses. Two prominent examples of this strategy are FirstEnergy’s recent decision to retire about 2,000 megawatts at two facilities, primarily in response to low gas prices, and Ameren’s sale of its merchant company, Ameren Energy Resources, to Dynegy. This type of consolidation and restructuring, along with M&A activity, will continue to play a major role in reshaping the sector.

Third, some companies, particularly independent power producers, are pursuing growth through the development of contracted generation and other competitive businesses across a diverse geographic area while still cutting costs from their existing businesses.

An interesting example of this strategy is demonstrated by NRG Energy, the country’s largest competitive power generator, which has established the spin-off company NRG Yield to operate and acquire contracted conventional and renewable power generation infrastructure. Another large utility, NextEra Energy, also has an extensive renewable energy portfolio that is unregulated but largely backed by contracts.


Pressure on integrated utilities, potential for LDCs While integrated utilities have performed well in recent times — their 3.6% total shareholder return (TSR) in 2012 was the sector’s best — such results are unlikely to continue in the long run. These businesses are increasingly challenged by the expenditure pressures associated with replacing aging infrastructure and required investment in environmental compliance. They are also starting to feel the impact of the trend toward distributed energy, particularly in California and the US Southwest, which will eventually erode the market share of central power plant generation.

Natural gas local distribution companies (LDCs) may be in the best position to make the most of future growth opportunities. LDCs began 2013 with a rebound from the 2012 doldrums, producing a segment TSR

of 11.6% — the highest of the sector. The potential of top LDCs to outperform lies in their ability to take advantage of continuing low natural gas prices to increase capital investment, improve the reliability and safety of their businesses and therefore grow their rate base and rate earnings.

shifting landscape, they face a number of challenges in their quest to maintain attractive shareholder returns. Many companies may plan to mitigate earnings pressure through growth in non-regulated businesses. However, if these non-regulated businesses do actually grow earnings, rating agencies will likely lower their credit rating. This dilemma has no easy solution, and utilities will need to tread carefully as they navigate a way forward.

helped utilities drive shareholder returns based upon market uncertainty is over. Higher interest rates, pressure on ROEs, depressed energy prices and rate pressure from the combination of lower demand and regulator fatigue will increase stress on

they will need to work harder and smarter to attract investors. Those companies that can drive positive capital expenditure, build strong relationships with regulators and customers and position themselves for future opportunities stand the best chance of delivering steady dividends and credible growth prospects in the face of industry transition.

Dean Maschoff Power & Utilities Executive Director, Advisory [email protected] + 1 312 879 2671

Dean has more than 30 years of experience in corporate and business unit strategy, strategic performance management,

capital investment and market performance, and organizational design and effectiveness. He has deep consulting experience in all sectors of the electric power and natural gas utility industry.

How we can help

At EY, we are working with leading utilities across all segments as they develop strategies to address the challenges of driving growth amid industry transition. We advise companies on their operating models, cost structures and performance management to make sure they are strongly positioned to fund infrastructure investment, drive future growth and manage their regulatory obligations.


For more information, read our analysis of total shareholder return in ‘The great yield rush.’


Historically, the tax director was predominantly a technical expert within the

reporting, compliance and tax planning, the function had little, if any, alignment with the rest of the business. But times are changing. Today’s tax directors must play a more strategic role in addressing business challenges. And the pressure to perform is particularly high for tax directors operating within the power and utilities sector, which faces many transformative changes.

Drivers of changeThe shift in the P&U tax director’s role has been largely driven by:

• Economic volatility, bringing cost pressures to utilities and leading officials in many countries to be more aggressive in seeking tax revenue.

• Increased regulation, creating a more complex compliance environment for P&U companies through Sarbanes-Oxley in the US, similar laws in other jurisdictions and more restrictive energy regulations.

• Globalization, forcing the tax director to manage the tax implications of intercompany transactions and arrangements on an international scale. He or she should consider, not only the appropriateness of transactions, but also manage and mitigate inherent tax risks. This is a particular issue for P&U companies, which must consider the potential risks of (unwanted) permanent establishments.

• Improved technology such as smart meters and big data, which mean that controls and processes that gather data — for risk management or any other reason — can now do so in real time.

Many of these factors are being felt across the business world, but it could be argued that the pressure to adapt is higher in the power and utilities sector due to the huge transformative changes currently taking place. These challenges are forcing tax functions in P&U companies to evolve much more quickly. Here, the tax director is now closely aligned with top management and involved in almost all important business decisions.

Identifying risks and opportunities

currently facing the power and utilities sector. It is, however, critical to the success or failure of the many initiatives designed to address these changes. As utilities face big decisions about divestments, restructuring, investments, analysis of potential governmental grants, raising capital and the rollout of smart grids, the tax function must ensure these decisions are made in the most

planning certainty for the organization. On the one hand, business models should be

must be taken to ensure they are not too aggressive. Tax directors, especially those at big utilities, must also consider the impact of public scrutiny and ensure that tax decisions do not risk the company being seen in a poor light.

While a big part of the role of tax directors is to ensure these business decisions contain no tax “showstoppers,” it is also important that they are seen as enablers, creating opportunities to take action and add value. In our work supporting tax directors at some of the world’s biggest utilities, we see many making a tangible difference to their organization through reshaping their policy regarding transfer

Tax directors at today’s power and utility (P&U) companies are moving away from a role of custodian and becoming more of a real-time commentator and advisor to management. Stefan Waldens reports.

Tax takes the spotlight


pricing — that is, the price at which companies or divisions of a multinational group transact with each other. By aligning the transfer pricing policy to the organization’s business model, the tax department can substantially reduce risks, ensure consistency and compliance, and strongly support business decisions and incentives.

These developments point to tax directors playing a greater role in risk management and intercompany effectiveness. This involves enhanced interaction with other parts of the company, moving them out of their traditional silos and toward being partners with other leaders in the business. These leaders, particularly the CEO and CFO, now expect more from the tax functions than the traditional goal of “no surprises.” Reporting on the past now goes hand in hand with planning for the future.

To deliver on all of these objectives, tax directors must acquire a deeper knowledge of the business, align with operational aspects and work closely with a range of

A crucial ingredient is strong leadership and clarity of vision around the role of the tax function. But while these “softer” skills may be increasingly vital, so too is the need for high-quality, accurate and

complete data. Tax directors will need to embrace technology to enable them to

as well as effectively manage compliance and planning.

Make a bigger contributionThe role of the P&U tax director is

commercial. Managing complex risks in a dynamic environment and adding real value require tax directors to look to the present and the future. While there is no doubt that the pressures of today’s tax director are greater, so too are the opportunities. Tax directors prepared to broaden their scope and align themselves with the broader business will be recognized for both their traditional and their new responsibilities and be equipped to make a bigger contribution to their company.

Stefan Waldens Power & Utilities Sector Leader — Tax Germany, Switzerland and Austria [email protected] + 49 211 9352 12085

Stefan is an International Tax Transfer Pricing Partner in

practice, including tax audit defense, competent authority procedure and advance pricing agreements. Stefan has worked across a variety of industries with particular experience within the power and utilities sector.

Read our T magazine article “Tax directors: shifting from custodian to advisor.”


How we can help

Our Tax teams offer advisory and compliance services related to business tax, human capital, indirect tax, international tax and transaction tax. We support tax directors at P&U companies, providing them with the tools and methods they need to realize the potential of their role.



About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

About EY’s Global Power & Utilities Center In a world of uncertainty, changing regulatory frameworks and environmental challenges, utility companies need to maintain a secure and reliable supply, while anticipating change and reacting to it quickly. EY’s Global Power & Utilities Center brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant sector issues. Ultimately it enables us to help you meet your goals and compete more effectively.

© 2013 EYGM Limited. All Rights Reserved.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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Date post:	24-May-2020
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