Hurricane Katrina Aftermath - Day 20

No doubt the Energy and Utilities industry has witnessed increasing complexity and significant challenges in recent years, centering around compliance issues, competitive pricing pressures, and business continuity. These issues, amongst others, will remain the focus for Board and Management’s corporate strategy and 2014 planning meetings around the world. Looking back on year 2013, and ahead to 2014, building a strong, compliant, and well-governed business will rest firmly on the ability to ensure sustainable and repeatable compliance with increasingly complex regulations, establish centralized findings tracking and management mechanisms, prove that control testing works, eliminate legacy manual processes, leverage operational loss event data to drive decision-making, and build a forward-looking BCM and audit program. It is clear that despite the various challenges at hand, the opportunity for organizations to step up, and emerge as leaders in their space has never been greater.

Some of the key trends that have captured our attention in 2013 include:

1. Complying with the Dodd-Frank Swap trading rules proves to be a significant effort: With new rules being implemented every few months and years, companies have struggled to adapt to these changes. In 2013, many energy firms avoided compliance issues related to Dodd-Frank swap reporting rules for end-users through futurization, or the replacement of swap hedges with cleared products, primarily futures contracts. As the scope of the rules and deadlines for implementation continue to change, compliance representatives at their respective organizations have to go back to their management to explain the rationale for the changes, and any impact on the budget. The CFTC and SEC are trying to respond to industry feedback about the costs and impact of the original draft rule, and find the right inter-agency compromise as they approve the final rule and any upcoming changes, as part of a broader effort to achieve greater swap market transparency.

2. Demand for content about regulatory standards and centralized tracking of regulatory issues: Energy and utility companies are increasingly demanding external content about regulatory standards amidst an even greater need for stronger internal systems for tracking these regulatory requirements, and their corresponding internal controls and policies. In order to alleviate the compliance struggle, apart from hope for more extensions to various deadlines, the need for clarity in definitions and the data requirements for reportable fields has proven to be greater than ever.  The high volume of regulatory exam findings is forcing energy and utility companies to centralize their tracking and management of internal and external findings.

3. A series of power market manipulation charges: There were several high-profile cases of power market manipulation charges made by FERC against many power market participants. For the accused, this represented an important lesson around portfolio risk management and maturing markets, where price and liquidity risks must be reflected in transaction costs. Affirmative evidence of compliance with external rules and market standards is driving more emphasis on the compliance operations functions to prove that their control testing works.

As we look ahead to year 2014, the focus will remain on tackling these important issues:

1. Cost cutting pressures will not abate: Natural gas prices remain low, keeping electricity prices under pressure. Jobs are being cut as companies seek opportunities for rationalization and greater efficiencies. The emphasis on costs comes at a time when regulators expect significant increases in investments in controls and infrastructure to reduce legacy manual processes.  

2.  Energy and utilities companies can teach financial services a few important lessons: When it comes to governance, risk, and compliance processes and programs, banks would fare well to take a few pages out of the rulebook of energy and utilities companies. Energy and utility companies have long realized the value of collecting incident data to track operational failures. Financial services organizations should look to their own operational loss event data to support and guide decisions, ranging from employee training programs to the adequacy of their insurance coverage — especially when using beyond the required calculation of operational risk regulatory capital.

3. A no-mistakes and zero tolerance acceptance for man-made disasters: Despite advancements in technologies, especially those used for oil extraction and production, we still continue to see disasters involving oil spills. Devastating repercussions including loss of human and animal life, ecological damage, wasted natural resources, economic losses, and disruption to business operations are just a few of the many reasons why companies, the regulators, and society at large will need to work even more closely together to both prevent the likelihood, as well as minimize the impact of these incidences. This effort can be guided and supported by a robust and forward-looking audit program and sound BCM planning.

4.    Complex regulations aren’t going anywhere: Various regulations from the NSTA and EPA, as well as NERC and FERC regulations, are largely constructed with a complexity corresponding to the complexity of the industry they govern. With the continual changes to existing NERC standards, and the introduction of new compliance requirements, preparing for a NERC audit is like trying to hit a constantly-moving target. Audits are already difficult; and they will become even more challenging as our environment continues to change, especially as companies prepare for the transition to the NERC CIP version 5 Standard. In order to be successful, they must stay current with the various changes introduced in this new version, and continue to evaluate and re-evaluate their business strategy, especially in light of the rising cost of compliance.

Brenda Boultwood is senior vice-president of MetricStream. You can find more commentary from Boultwood here