Risk management

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The analysis, prevention and management of risk regards 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 its financial requirements, operating risks connected with grid malfunction, regulatory risks and litigation risks. For a description of the procedures for preventing and managing such risk, see pages 83-84 of the 2012 Annual Report.

The following pages describe other aspects of risk, their relationship 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.

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Risks and opportunities connected with climate change

Terna is a utility whose principal activity is the transmission of electricity. The Company is not involved in any way in the generation of electricity and thus is not subject to any obligation to reduce emissions or to any emission trading schemes.

Therefore, government intervention through taxation (e.g. a carbon tax) or regulation (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 constitute a threat for Terna as far as its foreseeable business prospects are concerned. On the contrary, climate change has stimulated a legislative evolution in  favour of renewable energy sources, which has already provided Terna with opportunities to develop new business lines.

Terna’s management recognizes the increasing importance of climate change and has identified - in addition to the opportunities - potential, albeit remote, risks and opportunities connected with the warming of the Earth and the reactions that it might cause in governments, as well as in the habits of consumers.

The fields in which risks and opportunities are anticipated for Terna's business are the following:

  • The task of keeping injections and withdrawals of electricity 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. The probability of critical situations increases, which can entail temporary disconnection of users in certain areas of the country and which consequently cause the attention of the public authorities and the mass media to focus  on Terna;
  • concern about climate change or the increase in the price of energy raw materials could lead to a reduction in the income elasticity of the demand for energy. The trend towards energy conservation and the effort to improve energy efficiency could cause the growth in the demand for electricity to be lower than it is currently, all things remaining equal. The rules adopted so far by the AEEG for the remuneration of the transmission service make it very unlikely that the possible reduction in volume could translate into a decrease in revenue for Terna (see paragraph "Revenue Structure and Regulatory Framework"). The possibility of introducing a binomial rate - originally scheduled for 2013 - confirms this conviction: in accordance with what is proposed by the AEEG, about 95% of the recognized costs of transmission, today entirely allocated based on the energy transported, would be divided based on the power available at the connection points between the transmission grid and the distribution grids, while only the remaining part would be allocated based on the energy transported (see, in this chapter, the section "Revenue Structure and Regulatory Framework";
  • the increase in the production of energy from renewable sources poses various challenges for Terna, connected to the increase in the requests for connection to the grid for renewable energy plants and the need to plan and carry out investments to resolve the grid congestion problems and for efficient and safe management of production that cannot be programmed.

Critical aspects. The new power plants for production from renewable sources with power greater than 10 MW must request connection to the transmission grid from Terna. In recent years, there have been numerous requests. Only some of these requests led to the development, once connection was obtained from Terna, of an authorized project. Sometimes there was a time gap between the plant authorization and authorization of the connection work, which has now been resolved through the use of a single authorization process. This situation, along with the time necessary to realize the development investments required in order to make full use of the production capacity from renewable sources, can expose Terna to reputational risks regardless of how properly it acts. Furthermore, the intermittence of production, in particular wind production, makes dispatching activity more difficult, increasing power reserve and regulation requirements.

Opportunities. The investments in the transmission grid made necessary by the connection to plants using renewable energy are a source of revenue for Terna. Furthermore, as explained in detail in the chapter on Environmental Responsibility, investment to develop them also entails significant consequences in terms of emissions reduction for the entire electric system (reduction of losses, improvement in the production mix, connection to 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 infrastructure to interconnect the two continents. Terna has already planned shorter term investments in batteries which can concretely foster the use of renewable sources, while simultaneously resolving grid regulation problems. These investments open a new line of business for Terna indirectly connected to climate change, as already occurred in 2010-2011 with the construction of photovoltaic plants on land available inside or near the Terna electric stations, then sold with significant positive impact on the financial performance of the company.

Risks connected with the electricity market and system

Terna procures the resources it needs to manage the National Electricity System securely through the Dispatching Service Market. 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).

Analysis of the processes regarding Terna’s interaction with the Electricity Market and the related risks has enabled the Company to identify those risks with the highest probability and greatest impact. In order to constantly monitor these risks, a dedicated system, called SIMM (Security Index Market Monitor) has been set up. 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 also monitors the Electricity Market data on behalf of the AEEG. The Risk Management Unit, which is part of Terna's Monitoring Department (Integrated text on the monitoring of the wholesale electricity market and the Dispatching Service Market, Resolution No. 115/08 of AEEG), 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 the indicators required by the AEEG. During 2011, the Company obtained certification of the TIMM process according to the ISO 27001 standard (see the section "Information Security").

Its responsibility for making the National Electric System work securely requires Terna to identify related threats and vulnerabilities – for example, exogenous events or failure to observe the Grid Code – and to adopt appropriate mitigation measures. The status of the National Electric System is monitored in numerous ways, such as:

  • monitoring of the status of the National Electric System;
  • checks on the performance of the plants connected to the grid through the process of self-certification and analysis of related documentation;
  • inspections of interruptible sites and checks on conformance with Terna’s technical requirements;
  • inspections of production plants under construction in cooperation with the Ministry of Economic Development to monitor delays in commissioning such plants and at the same time check the application of the Grid Code and the obligations of future production;
  • monitoring the design and construction of station defence systems and automation techniques.

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Coverage of obligations connected with employee benefits

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 the OECD countries, has been reduced by a series of reforms that began in the 1990s. Terna offers its employees supplementary defined-contribution pension coverage on a voluntary basis. Specifically, senior executives may enrol 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 hiring date and the date the executive first joined a supplementary pension plan. Other employees (blue-collar workers, white-collar workers, and junior executives) may enrol in the Fopen pension fund (http://www.fondopensionefopen.it. In addition to pension plans, the employees of Italian companies receive other defined-benefit payments.

In particular:

  • 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 indemnity), 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).
  • Senior executives are entitled to post-employment supplementary health care (ASEM);
  • Employees hired by June 30, 1996 are granted reduced rates on electricity consumed for household use (electricity discount).

The composition and changes of the severance indemnity and other personnel funds as of December 31, 2012 are shown in the following table.

Values in millions of euro 31.12.2011 Appropriations Interest cost Draw downs and other movements 31.12.2012
Benefits owed during employment          
Loyalty bonus 3.8 1.1 0.2 -0.5 4.6
Total 3.8 1.1 0.2 -0.5 4.6
Benefits owed at termination of employment          
Termination benefits 64.4 0.0 2.7 -4.1 63.0
IMA 6.5 0.2 0.4 -0.8 6.3
Allowance in lieu and similar benefits 2.7 0.0 0.0 -0.3 2.4
Total 73.6 0.2 3.1 -5.2 71.7
Post-employment benefits          
Electricity discount 30.9 0.6 1.3 -0.4 32.4
ASEM 10.9 0.0 0.3 -0.5 10.7
Total 41.8 0.6 1.6 -0.9 43.1
Total 119.2 1.9 4.9 -6.6 119.4

The item, equal to 119.4 million euro at 31 December 2012 119.2 euro at 31 December 2011), shows an increase on the previous financial year of 0.2 million euro, attributable to allocations for the year and recording of the period discounting expense (totalling 6.8 million euro) offset by period uses 6.6 million euro).

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

Values in millions of euro Severance Indemnity Allowance in lieu and similar benefits IMA Loyalty bonus ASEM Electricity discount Total
Current cost 0.0 0.0 0.2 0.2 0.2 0.6 1.2
Financial expense 2.7 0.0 0.4 0.2 0.3 1.3 4.9
Amortisation of actuarial gains/losses -0.1 -0.4 0.0 0.5 -0.5 0.0 -0.5
TOTAL 2.5 -0.4 0.6 0.9 0.0 1.9 5.6

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

Percentage values 2012 2011
Discount rate 2.05% 4.10%
Rate of increase of labour costs 2.0% - 4.0% 2.0% - 4.0%
Rate of increase of health-care costs 3.00% 3.00%