Enterprise Risk Management at Hydro one

Executive Summary

Hydro One’s main focus, which has remained constant over the years, is customer satisfaction. However, the changing environment exposes Hydro One to various risks and requires Hydro One to reconsider its strategy. Hydro One’s current ERM process is thorough in identifying potential risks; however, it lacks in objectively quantifying these identified risks.

We suggest that private companies embrace an ERM approach, but on a smaller scale in comparison to Hydro One’s approach. Overall, Hydro One has a well-rounded, intensive ERM approach. However, Hydro One’s approach has a few problems relating to its reliance on estimates and the disconnect between the ERM and the company’s internal control.

We recommend that Hyrdo One renegotiate with unions and better involve employees throughout the entire ERM process in order to improve employee satisfaction. We recommend that Hyrdo One implement objective methods, such as market research, historical case studies, or “as if” simulations, in order to quantify identified risks. We also recommend that Hydro One appoint a different officer for internal control. Finally, we recommend that Hydro one be proactive instead of reactive to potential governmental policies by implementing a conservation campaign in order to ensure that it can meet increasing power demands.

Strategy

Hydro One’s strategy, which has remained relatively unchanged, can be summed up in two words: “customer satisfaction.” Under Eleanor Clitheroe, Hydro One first adopted its consumer-focused philosophy. Under the subsequent leadership of Tom Parkinson, Hydro One continued its customer-focused philosophy. It followed a value creation strategy which included the implementation of ERM and a balanced scorecard that emphasized customer service. Under its current CEO, Laura Formusa, Hydro One still emphasizes customer service. Hydro One’s strategic plan is to become the best transmission and distribution business in North America. Formusa stated it will accomplish this by having the best safety record, top quartile transmission and distribution reliability, 90% customer satisfaction, top quartile employee productivity, operating efficiency, and an “A” credit rating.

Risks

One source of risk is what Hydro One refers to as “getting the work done”. In 2002, the Ontario Energy Board mandated lower distribution rates, capping distribution revenues until 2006. In response, Hydro launched a cost-cutting initiative which led to a hiring freeze and a decrease in benefits to union employees. In 2005, 800 employees went on an 18-week strike as a result of the cost cutting measures. There is a risk that Hydro One will be unable to renegotiate with the union and that it will not have the workforce it needs to meet production goals. Worsening this risk is the skilled worker