Document

Report
Risk Appetite –
Hydro One’s Approach
Rob Quail
Director, Enterprise Risk Management
Hydro One Networks Inc
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Rob Quail
Director, ERM – Hydro One
• ERM since 1999, 220+ risk workshops
Co-deliver Masters Certificate Program in ERM at
Schulich
Background:
• EH&S
• Internal Audit
• Outsourcing, commercial contracting/negotiations
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Learning Objectives
• Understand the right questions to ask to
gauge risk appetite.
• Adopt a proven method to begin and sustain
the risk appetite conversation.
• Strengthen your position to overcome
skepticism about your goals.
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Overview
• Context –ERM and Hydro One
• Our Approach to Risk Appetite
• Lessons Learned and Benefits
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Background on Hydro One
• Ontario, Canada electricity transmission & distribution company
• $20.8B assets; 5400 full time and 2000 non-regular employees
• 19,000 circuit-miles of transmission lines, 287 transmission stations; 412
transmission-connected customers (industrial customers and municipal
distribution companies)
• 180,000 circuit-miles of distribution lines, 1007 distribution and
regulating stations; 1.4 million distribution customers (mostly rural and in
small towns)
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ERM at Hydro One
Since 1999
All the usual reasons for ERM (uniformity,
governance, reduce surprises)
PLUS…
• Stimulate conversations ---- workshops
• Take more risks ---- overcome conservative culture
• Embed risk-aware decision-making ---- risk based
investment planning
o
Requires specific, detailed criteria
• Build an open culture – truth to power
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Why so skeptical?
Unclear (or overlapping) definition ,
No public examples of any clear value
Confusion:
- Attitude
- Appetite
- Tolerance
- Capacity
- Limits
- ???
Overabundance of new
“made-up” words in ERM circles
A solution in search of a problem?
“Limits”???
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Initial thinking
????
High-level
Strategy
Detailed
Risk
Tolerances
Strategic Goals
KPIs
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Pitfalls
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Our concept: three levels
Conceptual
Risk
Attitude
Strategic
Risk
Appetite
Tactical/
Operational
Risk
Tolerances
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Our approach
Risk appetite is defined in the context of individual
strategic objectives
Risk appetite is not expressed as a hard limit or ratio
Risk appetite expressed in relative terms using criteria
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Risk Appetite is on a Continuum
1
Averse
•
•
•
•
2
Minimalist
3
Cautious
“Sacred” – avoidance of risk is a core objective
Extremely low tolerance for uncertainty
When faced with multiple options, will choose
the one with the lowest risk, always
Will never trade off this objective against
others
4
Flexible
•
•
•
•
5
Open
Will take justified risks
Fully anticipate uncertainty or volatility in
results
When faced with multiple options, will
choose the one with the highest return and
accept the possibility of failure
Willing to trade off this objective against
others
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Risk Appetite Scale
Name
5 Open
4 Flexible
3 Cautious
2 Minimalist
1 Averse
Philosophy
Tolerance for
Uncert/Var
Fully anticipated
Choice
Trade-off
Will choose option with
highest return; accept
possibility of failure
Willing
Will take
stronglyjustified risks
Expect some
Will choose to put at risk,
but will manage impact
Willing under
right
conditions
Preference for
safe delivery
Limited
Will accept if limited, and
heavily outweighed by
benefits
Prefer to avoid
Extremely
conservative
Low
Will accept only if
essential, and limited
possibility/extent of failure
With extreme
reluctance
“Sacred” Avoidance of
risk is a core
objective
Extremely low
Lowest risk option, always
Never
Will take
justified risks
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Risk appetite workshop
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safety
5
technical innovation
4
customer
3
2
1
employee rel.
environment
0
corporate image
revenue growth
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shareholder return
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safety
5
technical innovation
4
customer
3
2
1
employee rel.
environment
0
corporate image
revenue growth
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shareholder return
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“Exhibited” Risk Appetite
Executive
Group A
Group B
technical innovation
safety
5
4
customer
3
2
1
employee rel.
environment
0
corporate image
revenue growth
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shareholder return
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Benefits of this approach
Provokes strategic discussion
• Deep understanding of the
strategy
• Differentiated business
objectives
• Relationship between risk-taking
and value-building
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Benefits of this approach
Diagnostic value
• Gaps between target and
exhibited; intent and action
• Differences across lines of
business
• Signal need for changes in
internal communication,
controls, incentives, etc.
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Future plans
Continued data collection, reporting
Annual refresh
• Use results to adjust tolerances
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Lessons Learned and Advice
Risk Appetite must have a specific business purpose and
benefit
There is no one “right way”. But should:
•
•
•
•
Link to the strategy
Drive other aspects of ERM and risk-based decision-making
Be communicated
Evolve
Stick to your ERM “brand”
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Questions?
rob.quail(at)HydroOne.com
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