Emerging aspects of risk management within distribution businesses

By bringing financial incentives/penalties and service performance of distribution businesses into a direct relationship, the paper recognises that these incentives/penalties can be used as a proxy for the ´worth of supply´ to quantify business benefit arising from improvements in the service performance of distribution businesses. This will make risk based cost-benefit analyses far more effective. A simple example of an investment decision is presented to illustrate such an analysis. More importantly, such analyses will enable an optimal investment programme to be established by considering individual investments to be part of an overall investment portfolio. This new prominence of risk management in the financial performance of distribution businesses brings into focus a new aspect of their business, that of risk taking. Taking risks comes at a cost, as the risks have to be managed. Successful risk management has to be rewarded and unsuccessful risk management penalised. This should be recognised by the regulator in a transparent way. Distribution businesses are competent at managing numerous risks associated with distribution service performance, thus they have an opportunity to generate an additional value to both their shareholders and network users.