Risk management

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The analysis, prevention, and management of risk regard the different aspects of corporate activities. Terna’s business is exposed to market and financial risks (regarding the interest rate, inflation, liquidity, and credit), risks connected with financial requirements, operating risks connected with malfunctioning of the grid, regulatory risks and litigation risks. For a description of the procedures for preventing and managing such risks, see the 2011 Annual Report.

The following pages describe other aspects of risk, their relation with Terna’s activities and the related measures for coping with them. The aspects considered are:

  • risks and opportunities connected with climate change;
  • risks connected with the electricity market and the electricity system.

The coverage of several obligations connected with employee benefits is also described.

Risks and opportunities connected with climate changeEC2

Terna is a utility whose main business is electricity transmission of, i.e. the electricity transfer service from producers to distributors, to whose networks end users are connected. The Company is not involved in any way in electricity generation, and thus is not subject to any obligation to reduce emissions or to any emission trading scheme.

Therefore, government taxation measures (e.g., carbon tax) or regulatory measures (emission-reduction targets, inclusion in emission-trading schemes) with direct consequences on Terna’s business and financial performance are to be excluded. Climate change does not represent a threat for Terna as far as its foreseeable business prospects are concerned. On the contrary, climate change has led to a favorable development of legislation for renewable energy sources, which has already offered Terna new business opportunities.

Terna’s management recognizes the increasing importance of climate change and has identified – in addition to opportunities – potential, albeit remote, risks linked to global warming and the reactions that it might cause in governments and in the habits of consumers.

Potential risks and opportunities for Terna’s business regard the following aspects:

  • the task of keeping electricity injections and withdrawals on the transmission grid in balance, which Terna performs in Italy as the transmission system operator, becomes more difficult when the climate is extreme, for example when water is scarce or the temperature is extremely high or low. The possible occurrence of critical situations increases, which can entail the temporary disconnection of users in various Italian areas and consequently cause public authorities and the mass media to focus their attention on Terna. Such situations do not threaten corporate accounts, but rather Terna’s reputation. On the other hand, good management of critical situations constitutes an opportunity for Terna to consolidate its reputation as a reliable company;
  • concern about climate change or the increase in the price of energy raw materials could lead to a reduction of energy demand flexibility as the GDP increases. Based on other conditions being equal, the trend to energy saving and the effort to improve energy efficiency could cause the growth of electricity demand to be lower than it is currently. However, the rules adopted so far by the sector Authority for the remuneration of the transmission service exclude the possibility that a reduction in volumes could lead to a reduction in Terna’s revenues. In 2008, during a period of decreasing electricity consumption due to the international economic crisis, the AEEG introduced a mechanism that partially neutralizes the volume effect for the remaining part of the regulatory period (2009-2011). With the activation of this mechanism ensuring the level of revenues recognized, subsequently confirmed for 2012, we can say that the transmission industry has actually switched from a price-cap system, in which revenues also depend on the volume of electricity transmitted on the NTG, to a revenue-cap one, in which revenues are set ex ante and can vary with respect to the revenues used to establish the annual rates only by +/- 0.5%. With the regulatory review at the end of 2011, the AEEG identified a different mechanism, also oriented toward stabilizing the financial revenues that will eliminate the need for a neutralization mechanism of the volume effect. As of 2013, the transmission tariff will become binomial, based on two allocation drivers: approximately 95% of the recognized transmission costs, currently allocated on the basis of transferred energy, will be divided on the basis of available power in the interconnection points between the transmission grid and distribution grids, while the remaining part will be allocated according to transferred energy.
  • Electricity production from renewable energy sources represents various challenges for Terna, linked to increased grid connection requests for renewable energy plants and to the need to plan and implement investments for solving grid congestions problems and for efficiently and safely managing non-programmable production.
    Critical aspects. New power plants running on renewable energy with more than 10 MW of power must request Terna to connect them to the transmission grid. There have been numerous requests in the last few years. Up to the present, Terna has issued connection solutions for plants that – if they were all constructed – could produce up to 130,000 MW, i.e. more than twice the power consumed in Italy at times of peak demand. After the connection solution was obtained from Terna, only some of these proposals have been developed into projects and initiated the authorization process. Sometimes there has been a time gap between the plant authorization and authorization of the connection work, which has now been solved by the use of a single authorization process. This situation, together with lengthy time frames necessary for implementing development investments required for fully utilizing the production capacity from renewable, can expose Terna to reputational risks independently from its proper conduct. Moreover, intermittent production – particularly wind power – makes dispatching activity more difficult, increasing the need for reserves.
    Opportunities. Investments in the transmission grid made necessary by the connection of renewable-energy plants are a source of revenues for Terna. Furthermore, as explained in detail in the chapter on the Environmental responsibility, investments to develop the grid also entail significant consequences in terms of emission reduction in the entire electricity system (reduction of losses, improvement of the production mix, and connection of new renewable-energy plants). Terna’s image can be enhanced by this positive role. The Company can also develop business opportunities regarding the long-term development of solar plants in Africa to satisfy European consumption, which requires the parallel development of infrastructures to interconnect the two continents. In the short term, Terna has planned investments in energy storage systems (pumping, batteries) that can strongly favor the use of renewables while also solving problems of grid regulation. For Terna, these investments open new business opportunities indirectly connected with climate change, as occurred in 2010-2011 with the building of photovoltaic plants on land available inside or near Terna’s power stations, later sold with significant positive impacts on the company’s financial performance;
  • The increase in the production of energy from renewable sources – for which incentives are often provided by specific law provisions – requires Terna to prepare technical instruments that are appropriate for the new scenario. Because of its unpredictable variability deriving from changes in the atmospheric conditions, wind production entails particular problems for the regulation of the system. An incentive scheme has been in place for the period 2008-2011 that assigns Terna bonuses or penalties on the basis of the Company’s ability to correctly forecast wind production (maximum bonus: 3 million euro , maximum penalty: 1.5 million euro ). In each year of the three-year period the scheme has generated a bonus of 3 million euro for Terna (the maximum obtainable) thanks to the improvement of forecasts.

 

Risks connected with the electricity market and the electricity system

Terna procures the resources it needs to safely manage the national electricity system through the Market for Dispatching Services. This activity is critical for the security of the electricity service and also has significant repercussions in economic terms (see the “Pass-through items” and “Incentive schemes” sections).

The analysis of the processes regarding the interaction of Terna with the electricity market and the related risks has enabled the Company to identify the risks with the highest probability and the greatest impact. A dedicated system, called SIMM (Security Index Market Monitor) has also been set up to constantly monitor such risks. This system enables the Company to follow the overall performance of the electricity market through several key indicators and to promptly pinpoint any deviations from pre-established benchmarks.

Terna monitors the electricity market data also on behalf of the AEEG. The Risk Management Unit, which is part of Terna’s Monitoring Division (“Integrated text on the monitoring of the wholesale electricity market and the market for dispatching services”, AEEG Resolution no. 115/08), must ensure impartiality, transparency, and security in acquiring and presenting information. For this purpose Terna created the TIMM data warehouse, with the objective of monitoring the magnitudes and indicators required by the AEEG. During 2011, certification for the TIMM process has been obtained according to the ISO 27001 standard.

Its responsibility for making the national electricity system work securely requires Terna to identify the related threats and vulnerabilities (for example, external events or failure to respect the Grid Code) and to adopt appropriate mitigation measures. The status of the national electricity system is monitored in various ways, such as:

  • monitoring the status of the national electricity system;
  • checks on the performance of the plants connected to the grid through the self-certification process and the analysis of the related documentation;
  • inspections of the interruptible sites and checks on compliance with the technical requirements required by Terna;
  • inspections of production plants under construction in cooperation with the Ministry for Economic Development to monitor delays in the entrance into operation of such plants and at the same time checking the application of the Grid Code and the obligations of future production;
  • monitoring the design and construction of station defense systems and automation techniques.

 

Coverage of obligations connected with employee benefitsEC3

There are no defined benefit corporate pension plans in the Terna Group. In Italy, the pension coverage provided by the public system, which originally was one of the highest in OECD countries, has been reduced by a series of reforms that began in the 1990’s. Terna offers its employees defined-contribution supplementary pension coverage on a voluntary basis. Specifically, senior executives may enroll in the Fondenel pension fund (http://fondenel.previnet.it), which provides for contributions by both the executive and the Company. In both cases, the amount varies according to the date of hiring and the date the executive first joined a supplementary pension plan. The other employees (blue-collar workers, white-collar workers, and junior executives) may enroll in the Fopen pension fund (http://www.fondopensionefopen.it). In addition to the pension plans, employees of Italian companies receive other defined benefit payments, specifically:

  • during their working life, all employees receive a contractual “loyalty bonus” when they reach their 25th and 35th year of employment at a company.
  • when they terminate their employment they receive benefits that are owed all employees (severance pay – TFR), senior executives hired or appointed by February 28, 1999 (allowance in lieu of notice), and blue- and white-collar workers and junior executives hired by July 24, 2001 (IMA- additional special allowances).
  • senior executives are entitled to post-employment supplementary health care (ASEM).
  • employees hired by June 30, 1996 are granted reduced rates on the electricity consumed for household use (electricity discount).
  • the composition and changes of the TFR and other personnel funds as of December 31, 2011 are as follows:
Million euros 31.12.2010 Provision Interest cost Drawdowns and
other movements
31.12.2011
Benefits owed during employment          
Loyalty bonus 4.2 0.0 0.2 -0.6 3.8
Total 4.2 0.0 0.2 -0.6 3.8
Benefits owed at termination of employment          
Severance pay 67.9 0.0 2.4 -5.9 64.4
IMA bonus 6.7 0.4 0.4 -1.0 6.5
Allowance in lieu and similar benefits 3.0 0.0 0.0 -0.3 2.7
Total 77.6 0.4 2.8 -7.2 73.6
Post-employment benefits          
Electricity discount 29.3 0.8 1.3 -0.5 30.9
ASEM 11.2 0.0 0.2 -0.5 10.9
Total 40.5 0.8 1.5 -1.0 41.8
Total 122.3 1.2 4.5 -8.8 119.2

 

Amounting to 119.2 million euro as of December 31, 2011 (122.3 million euro as of December 31, 2010), the item recorded a 3.1 million euro decrease with respect to the previous year, attributable to the year’s drawdowns (8.8 million euro), which were partially offset by the appropriations and the recording of the time-discounting expense of the period (a total of 5.7 million euro).

The following table breaks down the costs regarding liabilities for benefits to employees recorded in the Income Statement.

Million euros  TFR Allowance in lieu and similar benefits IMA Loyalty bonus ASEM Electricity discount Total
Current cost 0.0 0.1 0.3 0.2 0.2 0.8 1.6
Financial expenses 2.4 0.0 0.4 0.2 0.2 1.3 4.5
Disbursements and transfers -0.1 -0.4 0.1 -0.2 -0.5 0.0 -1.1
Total 2.3 -0.3 0.8 0.2 -0.1 2.1 5.0

 

The following table shows the main assumptions used in the actuarial estimate of the liabilities for employee benefits.

Percentage values

2011 2010
Discount rate 4.1% 4.1%
Rate of increase of labor cost 2.0%-4.0% 2.0%-4.0%
Rate of increase of health-care cost 3.0% 3.0%