Annual Report 2014 | Suomeksi |

Strategic risks

Fortum's strategy is based on three areas of focus:

  • Leverage the strong Nordic core
  • Create solid earnings growth in Russia
  • Build a platform for future growth

Investment, integration and project risks

Fortum's growth strategy includes expansion of operations. As a result of ongoing integrations or any future acquisitions, there is a risk to existing operations, including:

  • addtional demands placed on senior management, who are also responsible for managing existing operations;
  • increased overall operating complexity and requirements for personnel and other resources in other cultures;
  • the need to attract and retain sufficient numbers of qualified management and other personnel;
  • the need to understand and manage the new markets and different cultural and compliance requirements;
  • the need to understand and manage subcontractor risks and related safety issues

Political and regulatory risks

The political and regulatory environment has a clear impact on energy businesses. This applies both to existing and potential new businesses and market areas. Fortum is thus exposed to regulatory risks in various countries.

Nordic/EU

Nordic/EU Policy harmonisation, infrastructure development and integration of the Nordic electricity market towards continental Europe depend to large extent on the actions of authorities. The current trend of national policies could even endanger market-driven development of the energy sector and the uncertainty with regard to future policy targets and framework is currently considerable. Fortum favours market-driven development, which would mean e.g. more interconnections and competition in addition to policy harmonisation, by maintaining an active dialogue with all stakeholders.

Currently the biggest potential risks within the policy framework relate to the electricity market model, targets with regard to future climate change mitigation and renewable energy and taxation.

In particular, the interlinkages of these issues create uncertainty, as they are overlapping and undermine the effects of each other.

The EU is currently discussing capacity remuneration mechanisms that would change the market model. The specific details of targets for CO2 emissions and renewables for 2030 are also under discussion. The planned Government Bill for a windfall tax on some non-emitting and old power plants was removed during 2014. Furthermore, the nuclear safety directive is under revision, and a discussion on broadening nuclear liability in the EU is starting.

All these would pose risks, but also opportunities, for energy companies. To manage these risks and proactively participate in the development of the political and regulatory framework, Fortum maintains an active dialogue with the bodies involved in the development of laws and regulations at national and EU-levels.

Russia

Russia is exposed to political, economic and social uncertainties and risks resulting from changes in policies, legislation, economic and social upheaval and other similar factors, as other countries. The Ukraine crisis and EU and US sanctions have increased the risks and made the business environment for Russian business more challenging. Fortum is continuously monitoring the development and impliments risk mitigation actions if deemed necessary.

Fortum owns and operates heat and power generation assets in Russia under the operations of OAO Fortum. The wholesale power market deregulation in Russia has proceeded well, and to a large extent, according to original plans. The main policy-related risks in Russia are linked to the development of the whole energy sector, part of which, namely wholesale electricity, is liberalised while other parts, like gas, heat, and retail electricity, are not. Currently, there is the risk that the Government will freeze tariffs of certain regulated

products including gas, which creates a risk for Fortum's efficient operations. Cross-subsidies, which are supposed to be eliminated but still exist, compromise the competitiveness of energy-efficient combined heat and power (CHP) production. Artificially low energy prices do not benefit anyone in the long run, as they promote inefficiency by limiting investments efficient capacity.

Political risk concerning taxes

The current economic situation in Fortum's key operating territories has created an unstable tax environment that is leading to new or increased taxes and new interpretations of existing tax laws. This in turn has led to unexpected challenges for Fortum in the way the Group is organised and how its operations are taxed. The certainty and visibility around taxes has decreased. Where there is uncertainty, Fortum seeks to maintain its position in line with its tax policy.

Legal and compliance risks

Fortum's operations are subject to rules and regulations set forth by the relevant authorities, exchanges, and other regulatory bodies in all markets in which it operates.

Inadequacies in the legal systems and law enforcement mechanisms expose Fortum to a risk of loss resulting from possible illegal or abusive practices by competitors, suppliers, or contracting parties. Fortum's ability to operate in Russia may also be adversely affected by difficulties in protecting and enforcing its rights in disputes with its contractual partners or other parties concerning, for example, regulatory influence on business and unfair market conditions, and also by future changes to local laws and regulations.

Fortum maintains strict internal market conduct rules and has procedures in place to prevent, for example, the use of confidential information before it is published.

Segregation of duties and internal controls are enforced to minimise the possibilities of unauthorised activities.

Compliance with competition legislation is an important area for Fortum. Fortum has enhanced its compliance risk management by establishing a process to systematically and separately identify and mitigate compliance risks linked to the operational risk framework. This process also includes risks related to sustainability and business ethics and aims to capture also potential bribery risks.  Fortum has zero tolerance against corruption. Systematic compliance risk management has also been enhanced by forming a cross-functional network sharing views on changing regulations. Fortum has also established a Code of Conduct, including bribery risk assessment process, to enhance the compliance to business ethics.

Corporate Risk Management, together with other functions like the tax department and sustainability unit, has developed a country and partner risk evaluation processes to support

understanding of compliance needs at local and business partner level.The review of compliance risks assessment is periodic, documented and discussed with the Compliance Risk Network, with the Fortum Executive Management Team having oversight of the process. A systematic compliance risk assessment is included in the business plans, and follow-up is a part of the business performance review. Line management regularly reports on the ethical compliance activities to the Fortum Executive Management Team and further to the Audit and Risk Committee. Fortum employees are encouraged to report suspected misconduct to their own supervisors, to other management or, if necessary, directly to Internal Audit.

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