Risk Management

Risk management is the process performed at all management levels of the Company which focuses on the identification, management and control of events that may negatively influence the Company’s achievement of its goals.

The risk management system is the complex of processes, methods and information systems which focuses on the achievement of the aims and objectives of risk management.

The key documents regulating the risk management system of IDGC of Centre, JSC are as follows:

  • The Corporate Governance Code (Minutes of the Board of Directors of IDGC of Centre, JSC No. 009/06 of October 18, 2006). The document is available on the corporate website of the Company at the address: http://www.mrsk-1.ru/docs/koduprav.pdf;
  • Regulations on the Audit Committee of the Board of Directors (Minutes of the Board of Directors No. 12/10 of June 02, 2010). The document is available on the corporate website of the Company at the address: http://www.mrsk-1.ru/docs/Appendixx9.doc;
  • The Risk Management Policy (Minutes of the Board of Directors No. 13/10 of June 15, 2010). The document is available on the corporate website of the Company at the address: http://www.mrsk-1.ru/docs/Regulition6.doc.
The Risk Management Policy of IDGC of Centre, JSC specifies the basic principles of organisation, implementation and control over the risk management processes within the Company, as well as top priority measures for establishment of the risk management system.

The Risk Management Policy covers the following spheres:

  • Risk management strategy
  • Basic risk management processes:
    • identification and assessment of risks;
    • development and performance of measures on risk management;
    • risk monitoring.
  • Risk management system architecture:
    • levels of risk management;
    • the operational structure of risk management subdivisions;
    • the roles and responsibilities of participants in the risk management system;
    • information support for the risk management system.
  • Risk accounting:
    • regulatory documents and standards;
    • communications, resolutions and reports;
    • evaluation of risk management performance.

The functions and responsibilities are distributed between the participants of the risk management system at different management levels of the Company as follows:

  • Audit Committee of the Board of Directors:
    • control over the risk management performance.
  • Chief Executive Officer (Management Board) of the Company:
    • organisation of effective risk management
    • approval of budgets for measures.
    • approval of the risk register.
  • Subdivisions of the Company:
    • identification and assessment of risks.
    • development and implementation of risk minimisation measures.
    • prompt communication of information on risks and management measures within the subdivision responsible for the organisation of the risk management process.
    • recording and transmission of information on risks that have occurred.
  • The Company subdivision responsible for the organization of the risk management process:
    • coordination of risk management processes.
    • training and consulting on risk management methodology.
    • support and development of a methodological and regulatory base for the risk management system.
    • information support for collegial bodies resolving issues related to risk management.
    • providing any interested parties with risk information.

The identification, classification and primary assessment of risks impacting on the Company’s activities has been conducted as part of the establishment of the risk management system at the Company.

Several risk groups were identified; they are classified by categories as indicated in the table below.

Risks Description of risks Measures for minimising risk consequences
Strategic risks
Risks connected with the political and economical situation in the country and in the region The forecast for the consumption of electric power and the development of energy production in the regions in which IDGC of Centre, JSC operates is determined by macroeconomic and economic situation in the country as a whole. The Company is subject to risks connected with the impact of the global financial crisis on the social and economic development of our country. The Russian economy remains vulnerable to changes in international market prices for natural gas and oil. The growth dynamics of prices for consumables in the country also remains a problem. All these circumstances may limit the Company’s access to capital resources and negatively affect the buying power of consumers of the Company’s products.

At the present time, the Russian Federation Government is also implementing a policy of restricting the growth of tariffs for the products and services of natural monopolies, including companies of the power grid complex, which may result in the underfunding of the investment programme of IDGC of Centre, JSC.

The most likely outcome for economic development in 2012-2014, assuming an active state policy is implemented aimed at improving the investment climate, increasing competitive ability and business efficiency, stimulating of economic growth and modernisation, and with similarly favourable external conditions, is for economic growth in 2012 of 3.7%, and in 2013-2014 of 4.0-4.6% per year. Nevertheless, regardless of the recovery of the national economy, growth rates are not yet stable enough. Considering the great dependency of the Russian economy upon the foreign economic environment, in the event of a downturn in the world economy, there is also a possibility of slowdown in the growth of the Russian economy to 1.5-2.5% in 2012-2013 and to 3.7% in 2014.
A programme of measures aimed to increase operating efficiency in unstable economic conditions is being implemented:
  • the reduction of costs associated with operating activities,
  • the optimisation of relationships with contractors,
  • the optimisation of contractual relations with consumers,
  • work with accounts receivable,
  • ensuring optimal tariff balance solutions in regions in which the Company operates.
The Company is working to reduce internal costs and optimise its investment programme, as well as pursuing a carefully weighed policy with regard to debt financing.
Risks connected with the geographical features of the country and the region The geographical features of the region in which the Company operates carry the risk of natural disasters in the autumn-winter period. These include the risk of interruption of power supply and the incurring of losses in connection with unfavourable weather conditions.
The Company considers these to be high risks, and for this reason the Company is bringing in a range of measures for preparing power grid facilities for the autumn-winter period, with the compulsory certification of each branch that it is prepared for the autumn-winter period.
The Company is implementing a range of measures to prepare power grid facilities for the autumn-winter period, with each branch of the Company certifying that it is prepared for the autumn-winter period (AWPAutumn Winter Period).
Company branches have long-term experience of the successful prompt mitigation of the consequences of the impact of natural disasters on technical facilities and the infrastructure of electric power networks. Work is continually conducted on reducing the time period necessary for prompt mitigation of the consequences of acts of nature in the autumn-winter period. IDGC of Centre, JSC has also concluded property insurance agreements for compensation of damage so as to minimise the possible consequences of natural disasters.
Regulatory risks
Risks connected with industrial regulation The most significant external factors in the electric power industry are:
  • the adoption of the Regulation of the Russian Federation Government No. 1172 of December 27, 2010 On the Approval of Rules for the Wholesale Electric Energy and Power Market and on the Introduction of Changes to Earlier Acts of the Russian Federation Government Concerning the Organisation of Functioning of the Wholesale Electric Energy and Power Market. The regulatory authorities reconsidered the tariffs for electric power transmission services across the Russian Federation (specifically, in all 11 regions in which IDGC of Centre, JSC operates) for the purpose of restricting the growth of tariffs to a level not exceeding 15%.
  • The adoption of the Federal Law of November 23, 2009 No. 261-FZFederal Law on Energy Saving and Energy Efficiency Enhancement and on the Introduction of Changes to Earlier Acts of the Russian Federation Government.
The development and approval of long-term regional development programmes, in areas where branches of the Company operate, in cooperation with regional and local authorities (signing of agreements).
Making changes to current legislation on pricing for the services of natural monopolies, working jointly with the Federal Tariff Service and the tariff regulation authorities of the constituent entities of the Russian Federation, with the aim of taking into account the interests of the distribution grid companies when establishing tariffs for electric power for the retail market.
The major buyers of the Company’s services are sales companies supplying electric power to end-users. This leaves the Company exposed to the risk of an increase in the accounts receivable if end-users fail to make prompt payment, and with the need to attract additional credit resources.
A risk of income shortfalls may also arise in connection with individual major consumers’ actual consumption of electric energy falling below projected levels.
At the present time the probability of this risk is estimated as low, with effects on the performance of the Company from moderate to severe.
The implementation of a carefully weighed credit policy, and receivables management focused on amount optimisation and the collection of debts.
Claim-related work on debt enforcement.
A policy of concluding direct agreements with consumers of electric power.
The diversification of the package of services provided to the consumers of electric power.
Construction by major consumers of alternative electric power grid facilities may result in future in the reduction of the volume of electric power transmission services provided by the Company.
The probability of this risk occurring is estimated as insignificant, with insignificant effects on the performance of the Company
The enhancement of operating efficiency by means of reducing production costs and making savings.
Working to increase the proportion of long-term contracts for providing electric power transmission services within in the total volume of concluded contracts.
A carefully weighed financial policy
Risks of tariff regulation The restriction of acceptance of expenses in tariff regulation (the switch to RAB-regulation). From January 01, 2011 all the branches of IDGC of Centre, JSC switched to tariff regulation based on the RAB method. The beginning of implementation of RAB-regulation came at a time of national economic difficulty. The global financial crisis of 2008 impacted negatively on the industry as a whole.
Furthermore, to prevent a jump in electric power prices in 2012 and to ensure the gradual growth of tariffs on natural monopolies, from January 1 till June 30, 2012 it was decided to set tariffs for electric power transmission services at a level not exceeding that of 2011. For the second half-year of 2012, the growth of the average flat-rate “joint operation” tariff should not exceed 11% in comparison with the first half-year of 2011.
Working with regional regulatory authorities on:
  • parity distribution of the tariff reduction load between participants in the retail market;
  • decreasing the investment programme for the reduction of the credit burden on branches of the Company.
Submitting to the regulatory authorities the documents necessary to confirm the reasonableness of costs and the volumes of electric power transmitted.
Working with the regulatory authorities on the inclusion of “lost income” in tariffs for the next period of regulation.
Providing economic justification for expenses included in the tariffs, including on the inclusion of “lost income” in tariffs of previous periods.
Operational (production) Physical deterioration, infractions of operational conditions and critical changes in the working parameters of the electric power grid equipment may result in equipment failure (breakdowns) and the destruction of facilities. It may cause the occurrence of operational risks:
  • the incomplete fulfilment of obligations under agreements for electric power transmission services;
  • the threat of breakdowns with partial or complete undersupply of electric power.
There is a medium-level likelihood of this risk materialising, and in the event of risk events occurring, the consequences for the performance of the Company might vary from insignificant to moderate
Insurance of key production facilities.
Reliably maintaining equipment and facilities at the required level:
  • achieving the targets set for maintenance and investment programmes with regard to replacement and reconstruction (up to 50% of the total volume of the investment programme);
  • the use of emergency control automation;
  • the modernisation of electric power capacities through the implementation of innovative power equipment;
  • the implementation of an automated assets management system (optimisation of the processes of operation, technical maintenance and the repair of power grid assets);
  • optimisation of the structure and scope of spare parts procurement;
  • selecting services and supply organisations by tender to improve the quality of services and materials provided, the responsibility of contracting parties and the reduction of unit costs.
Observance of the legislation on industrial safety and industry checks on compliance with the requirements of industrial safety
Ecological These appear in the shape of hazardous emissions from stationary installations and from transport systems and mobile sources (the emission of carbon, nitrogen, hydrocarbon and carbon soot), leakages of transformer oil at substationsSubstation, electric installation designed to convert and distribute electric power, which may result in oil contamination of water reservoirs of commercial fishing importance.
There is an insignificant likelihood of these risks arising, with insignificant consequences for the Company’s activity
Checks on the toxicity of motor vehicle exhaust gases.
An environmental policy has been approved and is being implemented. Its aim is to increase the level of environmental safety through the provision of reliable and environmentally safe transport and distribution of energy, and an integrated approach to the use of natural energy resources. Considerable attention is paid to work on handling of hazardous waste products — the observance of rules on storage, transportation, utilisation which significantly decreases the effect of toxic substances on soil and, as a consequence, on human health.
The replacement in 6-10 kV distribution networks of oil circuit breakers with vacuum circuit breakers, including the installation of reclosers, the advantages of which are: noiselessness, cleanness, serviceability, conditioned upon low arc energy release and no emissions of oil and gases in short-circuit current interruption; no contamination of the environment.
The replacement of elements and assembly units of electric power equipment with up-to-date alternatives whose configuration ensures high environmental production safety
System interruptions of power supply of consumers The geographical features of the region in which the Company operates carry the risk natural disasters occurring in the autumn-winter period (AWP), which may result in breakdowns at substations and sections of the grid.
These risks are estimated as high
The annual certification of each branch of the Company for winter preparedness.
Work on reducing the time period needed for prompt mitigation of consequences of acts of nature in the autumn-winter period (AWP).
The submission by the Company’s management for consideration of the Board of Directors of a report on preparation for operation in the AWP and a report on the results of the past AWP
Financial risks In the event that one or more of the risks specified below were to materialise, IDGC of Centre, JSC would undertake all possible measures to minimise the adverse effects of these risks; risks connected with:
  • the structure of the Company’s capital,
  • lowered profitability and liquidity,
  • foreign exchange movements,
  • credit risks
  • interest rate fluctuations.
Taking into account the stabilisation of situation on financial markets, the risk of rate changes is estimated by the Company as moderate
To partially eliminate risk, possible measures to be taken in the event of the occurrence of any given risk have been developed. However, in view of the uncertainty surrounding how such a situation might develop, the parameters of measures to be taken will to a large extent depend upon the specifics of the situation arising in each specific case.
Interaction with credit institutions working with budgetary funds (at state, regional and municipal levels) and with international financial institutions.
Selecting financial organisations for the provision of financial services through the holding of an open single-stage competitive tender or public auction in accordance with the procedures established by the legislation of the Russian Federation, in accordance with which the price of the government order or municipal contract is fixed and cannot be changed in the course of its execution.
A number of measures are being realised in order to reduce the consequences of inflation development:
  • the enhancement of operating efficiency through the reduction of production costs;
  • the expansion of the proportion of long-term contracts for providing electric power transmission services within the overall volume of concluded contracts;
  • the implementation of a carefully weighed financial policy.
Measures to ensure the steady development of operations, including (but not limited to):
  • the reduction of volumes and the development of an investment programme with maximum positive cumulative efficiency, which also satisfies reliability and quality requirements;
  • the elaboration of the question of possible inclusion on the list of strategic enterprises;
  • concluding agreements with credit institutions on maintaining limitations on risk for the company, by which their debt refinancing commitments is meant.
The Company has developed a strategic model of activity planning that considers various development scenarios for the raw material and financial markets and, the Company’s management believes, will allow a suitable response to a possible worsening of the situation. However, considering the high levels of uncertainty as to the further development of events in the global economy, there are no absolute guarantees that implementing this strategy will bring about the desired results.
Legal Ambiguities in the interpretation of tax legislation norms capable of leading to the incorrect calculation and payment of taxes, as a result of which penal sanctions on the part of tax authorities may follow.
Changes in the legislation, as well as incorrect legal processing of documents and legal support of activities of the Company. To limit such risks, practically all transactions of the Company undergo obligatory preliminary legal analysis.
Appeals by shareholders against major transactions and transactions in the execution of which there is financial self-interest (on the execution of such transactions without the proper prior approval of the Board of Directors or General Meeting of Shareholders, as well as those approved in violation of the established procedure).
Risks in the sphere of shareholder relations — the risk of “corporate blackmail” on the part of the shareholders; the risk of unfriendly shareholders carrying out of actions intended to disrupt future general meetings of the shareholders of the Company.
Legal proceedings concerning the obligations of third parties to the Company, as a result of non-fulfillment by them of their obligations in respect of the principal activities of the Company.
The risks specified, in the opinion of the management of the Company, are insignificant at the present time.
Work on legitimate improvement of the methodology for calculating the taxation base for different taxes, and control of their compliance with current legislation.
Preliminary legal analysis of transactions concluded with respect to the existence of reasons for the carrying out of preliminary corporate procedures provided for by the current legislation of the Russian Federation and/or the Articles of Association. If necessary, the relevant transactions are submitted for consideration by the competent management bodies of the Company.
Maintenance of the register of the Company’s shareholders is performed by a professional registrar — OOO Reestr-RN. The Company performs a range of measures focused on sharing information with the shareholders and the complete observance of the legal rights and interests of the latter (disclosure of information in accordance with the procedures set forth in the regulatory legal acts, holding of regular meetings of the management of the companies with the shareholders in order to clarify relevant issues of the current activities, observance of corporate procedure and by-laws).
The Company performs mediation settlement of disputes, and conducts negotiations to minimise the risks of the initiation of legal proceedings and harm to the property of the Company