Reliable, Sustainable and Innovative Risk Management at Axpo

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1 Success Story R2C_risk to chance Reliable, Sustainable and Innovative Risk Management at Axpo With the Schleupen AG R2C_risk to chance, the Swiss energy provider Axpo acquires a tool that will meet even the advanced requirements of the company.

2 Axpo Axpo covers the whole of the energy industry s value creation chain from power generation to distribution and sales. Furthermore, the company is active on the energy markets and offers energy services to customers in Switzerland and Europe. Axpo is owned 100 per cent by Swiss cantons in the northeast and supplies power to around three million people. Around 4,400 of its employees generated a turnover of 7 billion Swiss Francs (approx. 5.6 billion Euros) during the financial year 2012/13. Unternehmen: Axpo, Baden (Switzerland) Industry sector: Energy supply Used solution: R2C_risk to chance

3 An advantage of the energy sector is its high concentration of engineers, which means that many of its employees have a solid knowledge of mathematics and are familiar with quantitative methodologies. Therefore, the acceptance of our approach was relatively high from the beginning. Dr. Clemens Mann, Head of Risk Management, Axpo Group For decades the energy industry was considered to be rather sedate and boring the industry sector was characterised by stable sales markets, oligopolistic structures and the strong impact of public administration. This picture has changed radically: today energy providers are exposed to the immense pressure of competition and innovation by the trend of renewable energies and increasing government intervention, because of the increasing liberalisation and internationalisation of energy markets. Therefore the risk landscape in the energy industry is more multifaceted than in any other industry sector: an extremely broad range of possible opportunities and risks must be covered, from the short-lived turbulences in the energy market prices to investment planning for power plants, which will be in operation for several decades. Added Value Through Integration Against this background, the subject of risk management has enjoyed great importance since Axpo Holding AG (Axpo) was founded in the year 2001 and is also given high levels of attention by the administration council. This is shown not only by the fact that with the so-called Corporate Risk Council a high-ranking advisory board was established within Axpo, which includes apart from the group management and the group function of Risk Management representatives of the audit finance committee of the board of directors as well as important central departments (Legal, Corporate Development, ). Risk Management is not a stand alone task but must be networked with other functions and must interact, says Dr. Clemens Mann, Head of Risk Management at Axpo Group, emphasising the interdisciplinary approach of his enterprise. Added Value Through Optimized Processes Axpo follows the fundamental philosophy of dealing with risks in an integrated way and close to operational business transactions. In contrast, central risk management focuses on risks relevant to the group as a whole and monitors company wide exposure. This division of responsibilities is also mirrored in the individual phases of wider risk management processes: thus risk identification follows a consistent bottom up process, which captures the risks of single organisational units in a central database and as a consequence then makes it plausible by means of central risk management, which is coordinated throughout the concern. In contrast to many other companies, Axpo defines the concept of risk not merely as a potential for losses. In reality, all events are considered, which lead to positive (opportunity) as well as negative (risk) deviations from the planned targets. The heterogeneity of the risk landscape in the power industry poses a great challenge when identifying risk: Whilst we must predict our sales in the short term energy market for the next hours or days precisely to the hour, the planning forecast for building a power plant can be almost 80 years, says Clemens Mann, explaining the different challenges of risk management.

4 Axpo Axpo also shows itself as consistent and progressive in the field of risk assessment, which is carried out continuously on a quantitative basis: for one, each risk occurrence probability must be evaluated in the form of a percentage, for the other, the impact must be described by means of suitable distribution functions. This quantitative approach opens up the opportunity to aggregate the most varied of risks (possibly with the help of a Monte Carlo Simulation) and to obtain with this a comprehensive picture of the risk exposures at group level. In this way conclusions can be drawn, with which the EBIT value will not be compromised with a certain degree of probability. An advantage of the energy sector is its high concentration of engineers, which means that many of its employees have a solid knowledge of Mathematics and are familiar with quantitative methodologies. Therefore, the acceptance of our approach was relatively high from the beginning, says Clemens Mann, describing his experience of introducing the sophisticated methods of evaluation at Axpo. However on the whole, the company does not limit itself to the analysis of purely financial consequences: to collate risks holistically, the dimensions of security of supply, reputation and business environment are considered and undergo a qualitative assessment. Task reporting is carried out across the enterprise group bi-annually whilst commercial risk is monitored on a daily basis. Such information supplies the input for the next risk management process phase. Determination of Axpo s appetite for risk is based on the condition that the solvency of the enterprise is assured, even when unfavourable scenarios occur. This basis then provides the appropriate limits for the definition of individual control indicators. When the risk load capacity in defined stress or risk scenarios can no longer be secured to a sufficient degree, then the appropriate countermeasures must be developed and deployed within the framework of risk management. Apart from these operative components, Axpo also has strong elements within its risk management processes with its review and early warning activities. Thus a regular critical review is undertaken of the relevant risks to monitor self-evaluation and to identify possible blind spots. In addition, non-quantifiable and strategic risks as well as general trends (such as technological innovations, demographic development or similar) are collated in the form of a so called risk radar and are continuously monitored.

5 Based on the bottom up processes, which we carry out with risk management, it was important for us that our risk owners could handle the RMIS (risk management information system) quickly and confidently. Dr. Clemens Mann, Head of Risk Management, Axpo Group Added Value Through IT Obviously an integrated and innovative risk management approach such as Axpo s can only be realised with the aid of equally integrated and innovative software. Therefore, it quickly became clear that the previous combination of reporting in an Office application with subsequent transfer to an Excel tool and the calculation with the simulation add-in Crystal Ball was not an acceptable basis for a sustainable and integrated risk management system as these widespread solutions are in practice expensive and prone to error. Thus, the integrity and consistency of the entered data can never be guaranteed without standardising the inquiry and pre-setting essential mandatory fields when risks are collated and assessed, as well as when relevant countermeasures are determined and followed up. Different to a specialised risk management information system (RMIS), the respective processing status cannot be viewed by the relevant risk owner at a central risk management position as the person responsible for the process, which often causes time-consuming follow on questions. Lastly changes in the passage of time cannot be shown by Excel in a transparent way this, however, is an absolute must with respect to audit reliability.

6 With this in mind it became clear very quickly that the existing IT support had to be urgently replaced by a fully valid RMIS. After a first market review at the end of 2008, an intensive analysis of offers followed in the next year, whereby Axpo also sought out the support of an external advisor. When considering the required criteria for choosing a tool the company had to master a difficult balancing act: The new solution had to be in a position, on one hand, to meet the high levels of demands on the Axpo Risk Manager as far as risk assessment and aggregation was concerned. On the other hand the software had to be clear, comprehensible and easy to operate as far as the multitude of necessary functions was concerned. Because of the bottom up process, which we apply in the risk management system, it was important to us, that our risk owners could learn to handle the RMIS quickly and efficiently. This constitutes the central condition for the acceptance of the tools and, with this, the quality of risk management as a whole, says Clemens Mann On one hand Axpo received a tool that can handle the advanced needs of the company. On the other hand, some features, which were developed in collaboration with the Swiss energy provider, have become a firm component of the standard version of the R2C_risk to chance ever since and are therefore also available to all other Schleupen customers An important point in the development of the new functionalities was the question of whether simulation could be integrated directly into the tool or whether it would have to be connected via an interface. In this area of tension between integration and flexibility, the decision was finally made in favour of close integration of the simulation features. Clemens Mann appreciates this solution above all because of the fact that he can rely on the consistency of the data at any time: Only an integrated solution can assure that the data that I download for the report to the administration council, for example, corresponds exactly with the data used as Only an integrated solution can assure that the data that I download for the report to the administration council, for example, corresponds exactly with the data used as part of the risk assessment calculations. Dr. Clemens Mann, Head of Risk Management, Axpo Group explaining a important criterion in the decision making process for choosing the tool. Over the course of intensive beauty contests the Schleupen AG R2C_risk to chance emerged as the solution, which could combine the best of both worlds in the optimum way. Apart from its well-known, simple usability Schleupen was prepared from the beginning to venture further into the complex field of risk simulation with us and to extend the functionalities in this area, says Clemens Mann remembering the beginning of the successful collaboration with the software developer from Ettlingen. In the meantime, Schleupen AG s great willingness to tackle this topic has proven fruitful for both sides: part of the risk assessment calculations. The certainty of working with such a single version of truth is an enormous simplification of the process and therefore also increases the acceptance of the risk management process as a whole. Above that, the integrated solution also offers the advantage that errors in transmission are effectively ruled out, no manual effort is needed and the (interim) results are transparent, traceable and therefore also audit-proof at any time. After all, only the chosen form of realisation ensures a complete illustration of the risk landscape. Because of the greater expense in the case of a possible transfer to specialised simulation software, we would have had

7 to decide, which risks would or would not be assumed by the simulation. Because of the complete integration and the high performance of the simulation engine of R2C_risk to chance, we are now able to work with all of our approximately 500 risks captured by the tool we therefore have really comprehensive risk assessment at our disposal and avoid having to make selective decisions and, with this, a further source of potential errors, says Clemens Mann showing that he is convinced of the found solution. As experience has shown in the meantime, even supposedly small risks can be important and together can pose significant risk potential. When you venture into unknown terrain you need a partner you can rely on one hundred per cent. And with the company Schleupen, we had such a competent as well as cooperative partner at our side, praises Clemens Mann the good cooperative relationship with the solution provider from Ettlingen. Forecast Standing still means going backwards this especially applies to risk management. Therefore Axpo works permanently on the optimisation of its risk management. The focus is on the continuous improvement and expansion of the quantative models used, to illustrate more complex scenarios, as well as to be able to evaluate risks over a longer period of time. Apart from the many contextual challenges, technical problems must be solved again and again perhaps the question whether and how the distribution functions, which were collated with the help of specialised software tools, can be best and most simply integrated into R2C_risk to chance. Furthermore, the realisation of the possible (and often also very surprising) changes in legal/regulatory framework conditions for the energy industry at any time is particularly demanding. Many risks such an interruption to operations or short term price turbulence on the energy markets characterise themselves in that the initial position returns relatively quickly. Regulatory intervention, however, often changes the competitive environment radically and, above all, is often long-term. Such bipolar risk gives the planning of scenarios and risk management quite different challenges, says Clemens Mann describing a central problem in the energy sector. Against the background of these complex challenges, Schleupen AG will surely be able to develop its RMIS R2C_risk to chance in the future and be able to offer its customers optimum solutions for their multifaceted problems. The following solutions are part of the R2C product line: Risk and Opportunity Management Documentation and monitoring of the internal control system Anonymous reporting of critical incidents and complaints

8 SCHLEUPEN AG Business Unit Risk Management Otto-Hahn-Straße 20 D Ettlingen phone _ fax _ published in January 2015 pictures: Axpo / front page: istockphoto.com