7 minute read 29 Aug 2018
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How to weather the winds of P&U regulatory change

By

Matt Chambers

EY Global and Americas Power & Utilities Risk Leader

Risk management leader in power and utilities. Solving complex problems with pragmatic solutions. Avid snow skier. Sports lover. Father.

7 minute read 29 Aug 2018

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As power and utility (P&U) organizations transition from traditional business models to customer-focused services, the role of regulators can’t be ignored.

As disruption continues to affect the P&U industry, exposing a range of risks that threaten the industry’s traditional business models, the parallel evolution of the regulatory landscape can create additional challenges.

As new technologies and competitors emerge, P&U organizations need to both maintain and improve existing operations — upgrading or replacing aging assets with more cost- and energy-efficient options — while investing for an as yet uncertain future that could see the sector look radically different.

All this is coming at a time when stagnating energy demand is making it harder to recover costs without raising prices, putting additional pressure on the industry.

Regulators are also trying to adapt to today’s changes and tomorrow’s needs. New ways of working for P&U organizations are emerging in innovative areas, such as the connected home, promising new revenue streams, as well as risks regulators may need to address. But nimble new entrants from other sectors don’t necessarily face the same level of regulatory scrutiny as P&U incumbents.

Utilities need the right incentives to invest in innovation and more energy-efficient solutions. Yet, most regulatory models continue to incentivize capital expansion rather than performance, which is becoming increasingly important to meet sustainability and clean energy goals.

In developing a report that explores how current risk strategies among utilities will change to address the demands of a new energy world, P&U executives identified the top five compliance risks. Is this how you would rank their importance?

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1

Chapter 1

The top five compliance risks facing P&U organizations

From tax and fraud to the rise of environmental regulation, regulatory challenges can cause significant concern.

Power and Utilities. Current most critical compliance risks for the industry

No. 5: Tax compliance

In an effort to create network and asset volume that can boost revenue and improve dwindling margins, cross-jurisdictional merger and acquisition activity is likely to continue to increase.

Just as utilities take advantage of all that digital technologies have to offer to remain relevant in an increasingly competitive environment, governments are leveraging digital platforms to assess, analyze and share taxpayer data with other agencies. This introduces new complexities around tax functions, which may challenge utilities to keep pace.

The resulting increasingly complex, country-specific and cross-border tax compliance obligations open up reputational as well as compliance risks — which is why 20% of respondents ranked this in their top three compliance risks.

No. 4: Fraud, waste, abuse and corruption

Over the last few years, utilities have made headlines in cases of fraud, corruption and conflicts of interest, so it is perhaps unsurprising that 28% of respondents ranked this in their top three compliance risks.

These abuses can result in significant fines, bans on financing and corporate deals, restricted access to markets or lengthy prison terms for rogue executives and employees, as well as significant long-term reputational damage.

No. 3: Complexity and volume of regulatory requirements

The vast majority of countries have committed to making significant changes to their energy usage, and regulations demanding utilities become good energy and environmental stewards are common from legislators and policymakers at all levels.

“Despite all the talk of lessening regulation, the pace of new regulations continues to accelerate as the pressure intensifies for utilities and energy providers to be more socially responsible.”
Stacy Mines
P&U Risk and Compliance, EY

However, the precise nature of future requirements remains unclear as regulators continue to assess both what is needed and what may be possible to deliver to address concerns, and there remains considerable variance in attitudes and approaches from jurisdiction to jurisdiction. This combination of ongoing change and increased volume of requirements is why 84% of respondents ranked this in their top three compliance risks.

No. 2: Health and safety

According to the US Bureau of Labor Statistics, electrical power line installers and repairers suffered fatal work injuries at a rate of 19 per 100,000 full-time equivalent workers in 2014. This was over five times the US fatal work injury rate that year.

Even though occupational injuries have mostly been in long-term decline, whether it’s in a plant or in the field, P&U workers continue to put themselves at risk on a regular basis to provide customers access to safe and reliable power, gas and water.

The public can also be affected by health and safety issues, and incidents can drive increased scrutiny and action from governments and regulators that can have wide-reaching, cross-border implications. Despite improvements in safety, this is why 80% of respondents ranked this in their top three compliance risks.

No. 1: Energy and environmental regulation

Legislators around the world are increasing their efforts to develop and implement ever more rigorous environmental regulations designed to mitigate climate change, control pollution and improve energy efficiency.

As a result, utilities are having to navigate increasingly complex and ever-changing policy and regulatory environments with global (e.g., GOP21), regional (e.g., the EU Emissions Trading System), national (e.g., the UK’s RIIO), and state or local (e.g., public utility commissions) dimensions.

With 88% of respondents ranking this rapidly changing regulatory environment in their top three compliance risks, it also emerged as the number four risk overall in our survey.

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Chapter 2

How to approach P&U compliance in a rapidly changing environment

With continual regulatory change, organizations need to adapt and evolve their strategies to keep compliant.

As we move toward a new energy world, today’s top compliance risk — energy and environmental regulation — is expected to become even more important. Similarly, the third ranked compliance risk today — complexity and volume of regulatory requirements — is also expected to become more significant. It is likely that the emergence of new technologies could introduce even more regulatory complexity.

One thing is certain: as the winds of change accelerate, utilities will continue to face increasingly robust regulatory demands as they seek every opportunity available to them to keep up. To avoid being caught out by compliance issues, organizations should:

  • Avoid resting on their laurels where good progress has been made and:
    • Regularly review and update policies and procedures to address fraud, corruption and other risks that could compromise their reputation
    • Remain vigilant in adapting to and addressing evolving health and safety regulations, as well as explore and adopt appropriate technologies that can help monitor risks and the well-being of field operatives in real time
    • Educate the public about serving as another set of eyes and ears — e.g., what to do if they notice a safety or pollution issue
  • Align their tax strategies with corporate drivers as business models evolve by:
    • Developing approaches to tax that can meet the expectations of a wide range of internal and external stakeholders to prevent reputational issues
    • Regularly assessing and advancing policies, processes and controls, technology and talent to help cash flow, improve transaction values and financial reporting, and strengthen business performance
  • Ensure they have the right representatives and stakeholders at the table to:
    • Gain a complete understanding of the cost of compliance for evolving energy and environmental regulations
    • Work with policymakers and regulators to create models that balance the cost of moving toward a cleaner, greener energy supply with fair compensation

Facing the risk of new regulations not only can prove to be onerous but also threaten the financial viability and reputation of a business.

But while there are certainly risks and challenges, by proactively addressing concerns on environmental issues and the scarcity of natural resources, utilities have the chance to work collaboratively with regulators. With the right approach, there is an opportunity to help craft regulations that incentivize innovation to accelerate the shift to a new energy world in ways that make sense to regulators, businesses and consumers alike.

With energy and environmental regulatory risk top of mind, what questions should utilities be asking?

  • What is being done to keep pace with the increasing volume and complexity of regulations?
  • Are the organization’s compliance risks clear?
  • Is there clarity over who is accountable for managing them?
  • How do you assess whether current compliance programs are working?
  • What is being done to more proactively assert good corporate citizenship, particularly as it relates to energy and the environment?

Take the risk pulse of your own organization

Read our other survey results and deep-dive articles to learn what your peers are saying about key risks in the financialoperational and strategic categories, or find out more about how our risk and cybersecurity professionals can help.

Summary

The rise of new environmental regulations may be the biggest compliance concern for P&U organizations, but it’s far from the only one. To keep ahead of these risks, leadership needs to engage the right stakeholders and remember the landscape is constantly shifting – so they have to respond accordingly, or risk falling behind.

About this article

By

Matt Chambers

EY Global and Americas Power & Utilities Risk Leader

Risk management leader in power and utilities. Solving complex problems with pragmatic solutions. Avid snow skier. Sports lover. Father.