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Module Final Project – Risk Assessment
Assurance and Management Control
Trevor R. Cozier
Table of Contents
- Nature of the project
- Brief summary of the company
- Business lines
- Business environment
- Strategic objectives
- Risk factors
- Assurance and management control
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- Nature of the project
The nature of this project is to select a publicly traded company and perform a risk analysis on the entity. The ultimate aims are to:
- Define and analyze the strategic objectives of the company
- Identify and analyze events that have the potential to adversely affect the company
- Assess the inherent risks as well as the likely impact that these risks might have on the company
- Describe the appropriate forms of assurance and management control that the company uses to mitigate the various risk factors.
- Brief summary of the company
The name of the company selected is Light and Power Holdings Limited (LPH). LPH was incorporated under the laws of Barbados on October 9, 1997. It is currently listed on the Barbados Stock Exchange. Emera Inc., a Canadian registered company purchased approximately 79.7 percent of the shares in 2011, effectively making Emera Inc., the majority shareholder in LPH. LPH has also invested in St Lucia Electricity Services Limited for 19% shareholding.
- Business lines
Its core business activity is the generation and supply of electricity in Barbados through its main subsidiary the Barbados Light & Power Company Limited. It is regulated by the Fair Trading Commission of Barbados. LPH provides electricity to over 124,000 customers on the island. LPH also operates a self-insurance fund which is used to manage some of the company’s insurance risks. It also holds investments in real estate.
- Business environment
LPH is at present operating in a climate where it is being severely threatened by the advent of renewable energy to the island. As the world is looking for alternatives to fossil fuels, The Barbados Government has endorsed this search by providing tax incentives to individuals and companies who get involved in the provision of renewable energy. To assist the general public, Barbados Light & Power Company Limited (BL&P) has introduced a Renewable Energy Rider which allows connection to the existing electrical grid and sells excess electricity generated back to the BL&P.
- Strategic Objectives
Homburg et al (2013) suggest that stakeholder theory looks at the firm as being a nexus of stakeholders who can affect or are affected by the attainment of the objectives of the firm (Freeman, 1984). Jones (1995) developed three approaches:
- The descriptive approach – a look into the firm and stakeholder relationship to determine how the firm deals with different stakeholders
- The normative approach – a look at what is the perceived interest of the stakeholders and how to deal with it by using moral and philosophical methods
- The instrumental approach – similar to the normative approach with the clear distinction being the firm’s performance consequences that result from accounting for these interests.
The main objectives of LPH are to:
Grow a successful Caribbean energy business paying special attention to the improvement of energy security and sustainability
- Achieve through its stakeholders
- Deliver energy with world class reliability
- Have security of energy supplies
- Leverage information technology
- Build on stakeholder affiliations
- Achieve robust financial performance.
- Risk factors
Formal risk handling
Mascini et al (2012) introduces Sabatier’s concepts of top down and bottom up methods for handling risk within a utility company. Based on the top down approach, risk assessment starts with the official policy and then a determination is made as to how the persons tasked with its implementation, are doing so and the extent of the success. The bottom up approach deals with the mapping of the actions of the individuals applying the policy.
Informal risk handling
Mascini et al (2012) again introduces two mechanisms to be dealt with. The first is discretionary specialization which suggests, from several academic studies, that employees de-emphasize the role that rules and procedures play within the firm. Therefore the mentality develops where they suggest the rules do always foresee all the risks and therefore do not provide the best solutions to fix the problem. Secondly, there is tacit knowledge where the value of formal training comes under the microscope. The argument is developed by some manual workers who are convinced that formal training does not teach the novice as much as on the job experience. Formal training is therefore blamed for teaching novices techniques without the appropriate context, based on an ideal world situation.
These risks can fall into several categories which can include:
- Operational Risk
Globally, climate change is having a major impact on the environment. The use of fossil fuels is alleged to be a major culprit in the emission of greenhouse gases. Power companies worldwide are now facing an increase in demand for electricity as the population of the world, especially in the developing countries, strives to mimic the more developed countries with improved standards of living. It is estimated that developing countries will demand most of the electricity consumed in the near future.
The main risk will be the power company’s failure to meet the increased demand. The Company at present obtains most of its electrical generation through the use of fossil fuels sourced primarily out of Trinidad. Trinidad is an arrangement with the Barbados Government to supply this commodity. The risk relies on the ability of the Trinidad oil producers’ ability to maintain a constant supply link to Barbados at competitive prices. Venezuela has entered arrangements with other Caribbean nations when Chavez was alive to meet their fuel demands. This in turn would have the negative effect of power outages and increase in the cost of the electricity.
- Reputational risk
A major risk to the utility company is that it emits huge amounts of greenhouse gases. The energy sector is quickly being seen as a heavy contributor to climate change. Consumers worldwide are now demanding the use of greener methods of energy generation. In this way the power company can use this opportunity to be a part of the solution.
- Regulatory risk
As electricity prices spiral upwards due to the heavy reliance on fossil fuel to generate electricity, consumers are agitating to have the monthly bills lowered. This is having the effect that consumer lobbying organizations are petitioning governments and politicians to act. New laws are being put in place – Electric Light and Power Bill, 2013 (Barbados). This new law has broken the monopoly of LPH and will allow new greener methods of producing electricity to be used and even sold back to the grid.
- Hurricane and catastrophe risk
Living in the Eastern Atlantic Ocean, Barbados is in the hurricane belt of the hurricanes which are birthed in Africa and usually meet their demise in North America. Most of LPH infrastructure including poles and lines are situated above ground and as such are subject to severe damage from the elements. The risk is that power supply could be affected for extended periods usually resulting in loss revenues. This may also have the effect of higher operating costs due to the restoration of power to customers.
- Currency exposure risk
The Company’s finances are denominated as Barbados dollars. Most of the LPH debt and products are purchased using United States dollars and the stability of the Company depends on the continuation of the peg of the Barbados dollar to the US dollar.
- Technology risk
Technology worldwide is continually being upgraded to be faster and more efficient. To remain viable, investment in technology will need to be made as the customer will demand an increased use of technology e.g. e-billing platform to receive and pay utility bills. The need will also be there to have increased security around vital systems as hackers could easily hold a small country to ransom.
- Economic risk
Barbados, as well as most Caribbean nations, is facing severe austerity measures. The demand for electricity could be severely depressed by the prevailing conditions as families find it hard to meet monthly commitments. LPH is part of an international conglomerate; Emera, Inc. What-ever shocks the parent company faces will have the trickle-down effect of LPH.
- Assurance and management control
Having identified the risk factors that can impact the company, it is now incumbent on management to address these issues. With regards to the following risks:
- Operational – recovery of fuel costs due to constant fluctuations in market prices - the company at present has the permission from the Fair Trading Commission of Barbados (FTC) to implement a fuel adjustment clause. This mechanism allows the company to recover its fuel expenses from customers through monthly fuel rate adjustments. This in essence will guarantee the company some measure of profitability and safeguard the investment made over time in the infrastructure.
- Reputational risk – the company remains committed to the improvement of its generation platform. In recent times, LPH has begun to invest in renewable energy. It formed LPH renewable Energy Ltd. in 2012, which now imports distributes and installs small renewable energy systems to its Barbadian Customers.
In 2012, LPH introduced an e-billing system which has significantly reduced the size of its carbon footprint. Customers can now opt for a summarized bill which they can receive electronically. This will in due course reduce the amount of printed bills being distributed along with the requisite reduction in printing and postage costs to LPH.
- Regulatory risk - a department has been established solely to address any issues related to regulatory functions. LPH determines that this will guarantee a more consistent interaction with the FTC.
Hurricane and catastrophe risks –
- LPH views its occupational health and safety very seriously. LPH received its ISO certification in Occupational Health and Safety Management (OHSAS 18001:2007). It also has ISO 14001:2001 in Environmental Management. The linesmen of the company are the first in the Caribbean to successfully complete the CARILEC Linesmen Certification Program. Elements of the training emphasized the “value of error-free work, safety, teamwork and communication”.
- There is self-insurance fund (SIF) which was established in 1993. This was done because of the unavailability of adequate commercial insurance cover to insure against damage caused by hurricanes and other natural disasters. The SIF is regulated by the Insurance Act of Barbados as well as the Insurance (Barbados Light and Power Company Limited) (Self Insurance Fund) Regulations, 1998. Accordingly, the SIF covers the BLPC against the risks of catastrophe perils inclusive of hurricanes, tropical storms, tornadoes, volcanic eruption, earthquake, flood, overflow of the sea. And rain. The SIF is currently managed by trustees and is regulated by the Financial Services Commission of Barbados. None of the assets can be used for mortgage purposes and the SIF can only invest in securities with a rating of AA or higher.
- Technology risk - Isakson (2012) stated the traditional utility companies have seen substantial changes over time as the “traditional one-way, franchise monopoly, service model’ has evolved. Isakson continues by saying new strategies and tools will be needed by utility companies to allow them to:
- Understand the technology which has to be integrated and the needs of the stakeholders who own and operate the technology
- Detect the skill sets to meet the future customer driven technology needs
In conclusion, from an examination of the risks and risk mitigating strategies of the LPH, the company is adequately dealing with a resource that can affect the lives of millions across the Caribbean. Its future plans seem well developed and articulated. Stakeholders should rest assured that the firm is taking on its role as a sustainable energy provider very seriously by implementing plans that will ensure the continued reliable supply of power irrespective of the catastrophe that might befall the region.
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