Managing utility risks through ERM

Common industry risks

Leadership nearing retirement, load shifts from traditional generation to renewable energy sources and financial staff turnover. These are just a few of the top concerns for utilities that may be invading your sleep – and with good reason:

• 75 percent of utility leadership is close to 60 years old as are 45 percent of department heads — the next generation of leaders have not been identified.
• 10 percent of the utility’s load has been replaced by customer solar generation which is increasing by two percent per year
• Employee turnover in core finance functions ( i.e. accounts payable, payroll, customer service) is moving at a clip of 20 percent annually as employees leave for better paying jobs

Although there are no magic solutions, there’s a proven methodology known as enterprise risk management (ERM) your utility can infuse into its business practices to evaluate risks and develop mitigation plans.

Enterprise risk management approach

A continuous process, ERM identifies, mitigates and monitors potential future events that create uncertainty, in a manner that reduces potential loss and increases potential gain. ERM helps a utility proactively prioritize limited resources, make decisions, protect assets and take advantage of new opportunities to increase the organization’s overall value.

The simple approach to ERM should consist of these steps:

• Discuss potential financial and operational risks with management, department heads, line workers and board members
• Use this discussion to make a current state assessment of the magnitude and likelihood key risks will occur and the utility’s readiness to address those risks
• Introduce risk management tools to this group to develop a more robust approach to developing mitigation plans to address key risks and enhancing risk monitoring processes and reporting tools
• Develop ongoing employee roles and a formal process to regularly report key risks and mitigation plans to management and oversight bodies
• Incorporate risk assessment into ongoing business process and strategy

Transforming the organization

Simple, right? If it were simple, every utility would have a program in place. Best practice organizations are good at developing processes to address the harder aspects of doing business and taking a long-term view of risk and risk mitigation strategies. So, if you’re not practicing ERM, how do you transform your utility into one where this is a part of process and strategy?

Step 1 – Obtain management and board oversight buy-in

Building awareness through education of management and board oversight bodies is key to a successful launch and implementation. You will need their buy-in to obtain funding, staff time and ongoing support for the ERM program’s sustainability.

Step 2 – Obtain department head buy-in

While upper management and board buy-in is important, department head buy-in is the most crucial. This level is where the work will get done and where the ERM program could be scuttled due to inaction or withholding of staff time for participation in discussions regarding organizational risk. Some key activities at this stage should include:

• Develop a core team. Try to develop “true believers,” if not those willing to try the program for benefits it will provide to their departments.
• Determine the team’s capabilities. Is more education needed or more resources? Give the program the resources it needs or the effort will be futile.
• Align initial expectations. Agree upon what will be accomplished by performing the risk assessment.
• Obtain a commitment. from the core-team of the time needed to perform their program roles.   

Step 3 – Introduce ERM at the business segment level

Another crucial step to ERM program success is to debut the program at the business segment level which provides a foundation for:

• Engagement. This allows the program to be involved in specific risk issues and showcases the viability of the methodology.
• Value. Starting off “small,” such as at the business segment level, demonstrates value from a disciplined risk management process.
• Operationalize. Participants can learn the ERM methodology on their home turf where they best understand the issues. 

Step 4 – Introduce ERM at the organization enterprise level

Once success has been demonstrated through the ERM program at the business segment level — or at least the bugs have been worked out, the next step and ultimate goal is to introduce ERM at the company-wide or enterprise level. This developmental phase focuses on:

• Collaboration. ERM is enhanced through collaboration across other departments to consider cross-department teams and interdependencies.
• Coordination. Enhancing ERM coordination with other areas within the departments that focus on specific exposure areas.
• Integration. ERM is fully integrated with business planning, performance management, quality and other key management processes.

Step 5 – Report and monitor

Don’t hide your ERM success stories – let their light shine! Success stories will lead to support throughout the utility and from top management and oversight bodies. Also, as risk is not static, regular monitoring of risks facing the utility, reporting on those risks and maintaining contact with department heads to develop risk mitigation plans is important. Your utility’s ERM function must never rest although you can banish utility risks from your sweet dreams.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.