GEOFF MILLER: What that illustrates too is the way in which the energy supply mix is changing and that to some extent influences the supply chain management issues as well. There was the dash for gas in the 1990s and so, if there were a significant event in the National Grid for instance, there would be increased demand on the gas generators. I think the industry is exploring their ability to withstand that demand.
A feature for me in the longer term is that the nuclear decommissioning programme is beginning to get underway. The ease or the difficulty with which projects will be completed within that programme may well influence the public view of the damage or the threat or the risk to the environment that the by-products of the nuclear industry pose. If it proves easier to decommission, it may detune the public sensitivities but if there are significant events during that decommissioning process it may exacerbate that sensitivity. Even with a long-term strategic plan, singular events can influence both public and political impressions of the appropriateness of that plan and cause a change in direction midway through it.
SARAH HARDINGHAM: Well there was the earthquake in Japan where damage caused a reactor to leak radioactive water. That certainly must have raised public awareness. I don’t know how they will manage that in terms of trying to give more comfort to the local population or for the technology as a whole, but safeguards were there. I don’t know the outcome. I suppose that will come out in probably months rather than weeks.
SIMON ALLEN: The initial reports suggest that that wasn’t as bad as it could have been, other than the sad fact that a few people lost their lives in the earthquake. I think they only had a few drums of radioactive material tip over and open and they had a contaminated water leak to the sea. It could have been a lot worse.
KITTY SINCLAIR: I think the issue is what the stations are built to withstand in Japan that is coming under scrutiny at the moment, and the fact that they did not have a case around it for the magnitude of this earthquake. Questions will be asked about the other sites and potentially, if they are doing building, what should they be able to withstand.
GEOFF MILLER: You can see that issue of the appropriateness of design standards in other sectors as well. With some of the storms we have had in the UK, the mean and gust wind speeds are pushing beyond the design standards of the above ground infrastructure. For example, there was an issue with the reservoir in Yorkshire recently, and it appears that one of the problems might be the capacity of the overflow to discharge the volume arising from the rainfall intensity that occurred. As an industry we upgraded our reservoir overflows back in the 1980s based on a probable maximum flood criteria then but whether that remains appropriate 20 years later with the advent of climate change remains to be seen.
SUE COPEMAN: We tend to talk about the effects of climate change as happening more in the future but do you think that any of your organisations have actually noticed some of the effects of it already?
KIM WATTS: Definitely, yes. In the energy procurement and energy trading spheres you have a view of customer demand and one of the parameters is what the weather profile looks like based on the last 20 or 30 years. You’re now having to consider how many years we’re going to go forward seeing abnormal weather trends which are kind of bucking the underlying assumptions. So you then have to move to some more sophisticated analysis and scenario planning around what the weather is going to be doing for the next year, five years, ten years or further out.
SARAH HARDINGHAM: Well if insurers can rip up their underwriting tariffs and charts and criteria with hurricanes Katrina and Rita and realise that they have underestimated the exposures and almost start again, we are at the sharp end of that. We have to be very aware of what changes we need to be forecasting. Everyone has the same issue.
KIM WATTS: The 1987 storm was supposedly a once in a 100 years storm, but we have had storms within the last four years of a certain magnitude. In East Anglia, for example, the power lines are generally overhead rather than underground. Rain makes the tree branches heavier, perhaps the storm comes from a slightly different direction than usual, and branches come down and can cause a lot of damage to our network.
GEOFF MILLER: In the Carlisle floods, it wasn’t just rainfall, it was high winds across north west England that caused significant problems for us. We were subjected to the loss of an electricity transformer station where we take supplies off the National Grid because the river rose to a level 12 feet higher than it had been previously and inundated the station. But it would not have been a supply problem for us had the high winds not taken out the alternative feed by bringing a tree down across it 30 minutes prior to the station being flooded. We were not alone in that experience, the emergency planning centres in Carlisle were flooded, so the whole issue of risk from river inundation complementary to other aspects of storm damage is fairly key for us.
SUE COPEMAN: Do you take into account that kind of interconnection when you do your continuity planning?
GEOFF MILLER: Increasingly we do. Being a multi utility we recognise the interactions because we are the electricity distribution network operator for much of our water supply region so we are reliant on grid supplies, incoming main supplies, and if we are unable to receive those we have to provide standby generations to ensure that our plants to continue to operate. But one area that is probably not well recognised is the inter-sector potential for consequential damage. We have a number of assets that potentially if they were to fail could have a consequence beyond the boundary fence. Because of the security classifications associated with each other’s critical national infrastructure we tend not to share the impact with other sectors. It’s part shared to a limited extent with the category 1 responders that you deal with in local resilience forums. It is not shared as well cross sector so we may impose consequences on you or vice versa and not realise the significance of those consequences and the need to protect those assets that generate those consequences to a higher level that might otherwise be done.
We were slightly better at this with Y2K. The Y2K utilities group to a degree shared that information but that was pre 9/11, pre 7/7, and I think to a large extent the shutters have come down now on sharing that knowledge any more widely than is necessary. But to some extent we are disadvantaging ourselves by that approach.
SUE COPEMAN: What do you think are the key problems or issues that face you on an every day basis?
KIM WATTS: I would say the topics we have looked at today but I was talking to Simon prior to this discussion about a report that’s been prepared on the top risks. So, Simon, what are the utility companies saying are their major risks?
SIMON ALLEN: Aon recently conducted a survey of client contacts in a number of sectors throughout the entire globe. This was a survey centred around culture, to try and understand how risk management culture was embedded in an organisation, but it also looked at key risk areas. For example, in general the top four risks across the whole survey were reputation, business interruption, third party liability and supply chain. For energy and utilities, they were reputation, environment/weather, regulatory and BI.
GEOFF MILLER: How many companies have actually quantified their risk capacity against those exposures to the point where they know whether their exposure is at or below their tolerance level?
SIMON ALLEN: The survey asked how well companies had prepared for a risk and whether they felt they had got it covered.
GEOFF MILLER: It may be that the financial impact tends to be the lowest common denominator in quantifying these risks. How satisfied are you that your organisation could take that level of hit without blinking? We have begun to refine our understanding of our risk capacity at board level which is very useful because it provides a framework for employees to understand the resilience of the organisation and the relativity of the risks they personally manage. It begins to put in context for senior managers the need to address risk management more significantly than perhaps they might have if they realise they have got ownership of an exposure that exceeds the organisation’s risk capacity. That is one of the drivers for embedding risk management.
SIMON ALLEN: One of the things I found really interesting was that reputation was sitting on top not only across the board but specifically in energy and utilities. It is very difficult to put a financial figure on reputation and if you are trying to quantify it for risk management, it’s a slippery topic.
GEOFF MILLER: Market capitalisation might be one way.
SUE COPEMAN: I have seen in two recent surveys that in the UK regulatory risk tops the bill and to a certain extent what you have been talking about today tends to bear that out. Maybe it comes back to the UK being a very keen enforcer of the different regulations that come out of the EC. I have heard people say that the UK is actually putting its industry at a competitive disadvantage because we are enforcing these standards so rigorously, regulations which apparently in some European countries might just be met with a shrug!
SIMON ALLEN: I don’t think it’s the enforcement of health and safety regulation, that makes sense, it is an important factor, but maybe it’s enforcement of useless regulation, redundant things. In many areas there are forms that constantly must be filled out, there are processes to follow that. It just makes everything so much more tedious and onerous when it could be done in a much more simple way.
KITTY SINCLAIR: Essentially all of us here, I think, would say that we are self-regulated and that the regulatory body oversees what we do and expects us to do it in a manner that satisfies the intention of the over-riding legislative acts. So we don’t feel it is necessarily a burden. It can be a burden depending on how you adapt it and distribute it across the organisation. It’s a matter of how you interpret it in your own organisation, how you impose it, how you encourage it as part of a normal working environment rather than something that is a tick box exercise.
GEOFF MILLER: My impression is that you need to look at this from different time horizons really. In the short term, the die is cast in relation to directives and national legislation that flows from these directives. There is not a great deal you can do about that. In the medium term, providing your organisation’s radar is working, you can identify where European directives are beginning to form around concepts, ideas, and the opportunities are there to influence the debate and the direction of those directives before they are determined and transferred into statute. It is hard work but it is worthwhile work to influence future direction. In the long term is the idea of European nations co-operating to reduce barriers to trade, to improve individuals’ ability to move around Europe, to reduce the likelihood of future wars within Europe. My personal view is that this is good, but from a corporate perspective you need to determine what is relevant to you, what potentially you have the capacity to influence, and then put relatively scarce resources in the right position to have the most impact you can.
KITTY SINCLAIR: Certainly I support that. We are very actively involved in the discussion groups which are encouraged around forthcoming legislation, as I am sure you all are, and very much welcome the opportunity to have an input into that.
SARAH HARDINGHAM: It is better to be proactive. Being a passenger would be bad news for business in our industry sector.
SUE COPEMAN: What do you think are the important issues for you? Are they communication, embedding risk management, getting the right funding, problems with trying to buy insurance or find other appropriate risk transfer instruments? Perhaps we could go round the table on this one before we finish.
GEOFF MILLER: It goes back to the comment you often see in the first chapter of the risk management text books, don’t try and go down this road unless you’ve got the serious engagement of the board. Anything that you try and do within your organisation to influence risk management isn’t going to go very far without the credibility and resources necessary to implement the infrastructure that you need to foster, facilitate and grow risk management as a capability within your business. Once you have got that it is still not easy and you shouldn’t presume that you bring risk management in with a missionary zeal to your organisation. There is a lot of capability and understanding out there already. What is important to me is getting that infrastructure in place which builds on the skills that we have got, complements those skills and shares best practice across the board.
KITTY SINCLAIR: Some of the issues we have spoken about today are highly significant for us. Environmental issues are crucial to us, as is supply chain. We have an ageing fleet which is something we are focusing on. Business continuity in its widest context is also an issue.
SARAH HARDINGHAM: Business continuity is definitely one for us. Our fleet has been operating for the longest part coming up for nine years now; we are building on that experience. We are still relatively new in terms of the other companies represented here. We buy into the philosophy of highly protected risk status for all of our plants; we are actively working to gaining that status and we see that as key to our success. It certainly helps to bring down our insurance costs and it engenders a higher standard of safety and security as well for the staff on site. We have more eyes and ears and third parties investigating us to see if we are running effectively and properly and adhering to those standards. The bar is raised high and we are happy to have that high bar - that is in our culture. But we do have the advantage as a relatively new company that we don’t have to change the culture, we can drive the bus as we go along which helps.
SUE COPEMAN: How about you Kim? What are your key issues?
KIM WATTS: ERM definitely, specifically being involved in the strategic planning process at the front end rather than at the back end. Linking risk management to performance management, where “good management is good management”, and an integral part of that is risk and performance management, hitting the targets. Do you have the right measures, do you understand the risks to your business and more importantly can you demonstrate that understanding to other people?
Compliance enforces minimum standards, some discipline in the business, and one can see a value in limiting downside risk by containing the fallout but it is difficult to demonstrate value for money. That’s why it is important to be involved in the strategic planning process, that’s where you can really help create value for a company. So we want to move away from the downside to thinking how you can create and preserve value within the business and the potential for destroying that and to think of it at a strategic level.