The utilities or energy sector is one of the most complex landscapes for compliance teams to operate in because of the nature of the products and services offered. These will often have a direct impact not just on the environment but on employees and the general public as well. Therefore, compliance should be an absolute priority for businesses that provide, produce and process energy solutions and their by-products.
Complex business environment
The utilities or energy sector is one of the most heavily regulated industries, with companies needing to adhere to a variety of guidelines from local and international institutions. In the United States alone, suppliers have to adhere to regulations from, among others, the Department of Energy (DOE), the Energy Information Administration (EIA), the National Nuclear Security Administration (NNSA), the Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Corporation (NERC).
Electricity, oil and gas are necessary public commodities. Therefore, political and government influences in the industry are a constant, with state-owned enterprises and monopolies being the key players. Spending in the industry is also highly significant, with organisations making major capital commitments and legacy investments.
Varying tax regimes and business processes, depending on location, contribute to an already complex environment for companies in the oil, gas and utility spaces.
The utilities or energy sector is experiencing a number of trends that is not only shaping the sector itself but also the compliance function. While demand for products remains high, businesses are grappling with scarcity in traditional resources, leading many companies to look for and tap into alternative sources for energy. There is a particular push, for example, on using renewable, environmentally-friendly resources.
Breakthroughs in technology systems are also on the rise, with companies eager to tap into these platforms.
It is this complicated matrix of different interdependent factors that makes it challenging for the compliance function to carry out its tasks.
Special compliance risks
When thinking of establishing a business or partnering with a supplier that operates in the utilities or energy space, there are a few things that companies have to consider, particularly when carrying out compliance tasks.
The first involves the dangers of dealing with politically exposed persons (PEPs). These are individuals who often hold high and prominent positions in government or in public institutions. The amount of paperwork and coordination needed to obtain licences and permits from such individuals appears to encourage some companies to become more susceptible to bribery and corruption. The recent Unaoil scandal revealed a glimpse into the types of extortion that may be occurring on a global scale. These even include bidding processes for contracts being rigged in favour of whoever can exert the greatest influence.
Besides corruption, the utilities or energy sector also faces environmental risks, which can lead to grave consequences that can take decades to recover from. For example, the Deepwater Horizon oil spill in 2011 had adverse effects on not only marine and wildlife habitats, but also on the fishing and tourism industries in affected areas. British Petroleum (BP), along with rig operator Transocean and contractor Halliburton, were found responsible for the faulty cement that caused the spill.
Employee health and safety risks are also often present, due in part to the nature of the products being handled as well as employee working conditions. For example, United States-based non-profit organisation, the Electrical Safety Foundation International (ESFI), recently found that electrical-related incidents were a leading cause of employee health and safety risks, often leading to worker disability and even death. Other common fatal accidents include physical overexertion and falls, as well as exposure to hazardous biological and chemical substances.
As technological platforms and software are constantly being upgraded and introduced to the industry, threats around cybersecurity are also becoming prevalent. Some companies in the nuclear space have a tendency to utilise automated systems for their entire operations. One hacking incident or cyber intrusion could therefore result in an impending disaster.
If you are an organisation who will be establishing a business or partnering with a supplier that operates in the utilities or energy space, it is vital that you implement an effective compliance programme. Compliance officers should ensure that the following features are present if they wish to mitigate risks that are prevalent:
- High level due diligence on suppliers, brokers and possible third party entities, especially if conducting business in a territory known for integrity risks
- Continuous and real-time monitoring
- Risk management strategies that involve stakeholders from other company departments
- Software or technological platform that is able to consolidate all of the elements for easier access.
The utilities or energy sector can be a volatile industry. As such, companies operating in the oil, gas or energy spaces are advised to be proactive with their compliance initiatives.