Case study: Centrica

Carolyn Clarke, group head of audit, risk and control

Centrica provides energy and services to over 25 million customer accounts mainly in the UK, Ireland and North America through brands including British Gas, Direct Energy and Bord Gáis Energy.

The UK’s decision to exit the European Union presents a number of risks, particularly in the event that Brexit takes place on 29 March 2019 without an agreed UK/EU deal. The main potential impacts of Brexit for Centrica include the following:

• the impact of macroeconomic factors (a weaker GBP, lower UK interest rates) which are likely to be felt if there is no Brexit deal);
• the loss off efficient cross-border electricity trading arrangements;
• uncertainty around GB carbon pricing policy if/when the UK leaves the EU Emissions Trading Scheme;
• a range of potential impacts on energy trading if the UK is no longer recognised under EU financial services and energy trading legislation;
• in a no-deal Brexit scenario, a risk that the Single Electricity Market (SEM) will not be maintained across the island of Ireland;
• a need for the Euratom Supply Agency to re-approve nuclear supply contracts (e.g. fuel supplies) from the EU to the UK, given the UK intention to terminate its membership of Euratom and create a new independent nuclear safeguards regime;
• the imposition of WTO import tariffs and the risk of logistical delays at border due to new customs clearance procedures, should the UK leave the EU without agreeing to develop (at least) a free trade deal; and
• a loss of ‘blanket’ data adequacy recognition covering transfers of personal data from the EU/EEA to the UK.

In addition, potential changes to the UK’s immigration policy post-Brexit and the resulting loss of freedom of movement could constrain Centrica’s ability to effectively source specialist workers, potentially leading to a shortage of skilled workers to satisfy demand. Looking to the longer term, Brexit also presents risks concerning changing UK policies in relation to the energy market and carbon emissions in a post-Brexit environment, as well as the loss of UK influence over EU policies which will continue to impact the UK energy sector, directly or indirectly. These issues will also need close attention, but they are not the main focus of Centrica’s short-term contingency planning.

Brexit project group

Shortly after the EU referendum, Centrica established an internal Brexit project group to investigate and assess the concerns raised by Brexit which could impact the Group and its customers. The project group is headed by the Corporate Affairs function. Other departments involved include the business units dealing with nuclear energy, energy trading, Centrica’s Irish assets, customer facing businesses, Group Strategy, HR and the legal, regulatory and compliance teams.

Group Internal Audit remains independent to be able to provide objective assurance and advice. This offers GIA oversight of key events and allows them to raise questions and challenge assumptions and call out findings and observations.

Scenario planning

Two potential outcomes of the Brexit referendum are whether the UK should embark on a hard Brexit or soft Brexit. Currently the former scenario is being actively discussed within Centrica. Its priority is to continue to deliver its core operations by delivering the best price for its customers and ensuring it can still meet customer needs if a no-deal Brexit makes importing from the EU more difficult and expensive. It is considering the practical implications on its operations of all potential scenarios.

Internal audit view of risk and approach

The Head of Internal Audit doesn’t view Brexit as a stand-alone risk, but sees it as a factor that increases the probability and/or impact of a range of risks arising. This includes skills access and its ability to trade efficiently with counterparties and continue to serve its customers in the UK and Ireland. The audit function is balancing these risks in the same way as any other risk affecting Centrica’s operational effectiveness. The focus is on ensuring that there are adequate contingency plans in place to respond to all eventualities as traditional control mitigation auditing is challenging due to the lack of certainty around a future UK/EU relationship. GIA will be continually reviewing the effectiveness of the mitigation measures that are in place as the deadline approaches.

Advice for other functions

It is tempting to view Brexit as an overwhelming problem for an organisation, but the Head of GIA advises other internal audit functions to treat Brexit in the same way as any other external factor creating risk for the organisation. It is important to focus on the specific issues and risks that occur as a result of ongoing uncertainty. She stresses the importance of prioritising and identifying the consequences for individual organisations, considering contingency plans for those areas of greatest impact for a business in the likelihood of a worst-case outcome. Contingency plans to mitigate the risks associated with Brexit must be at an acceptable level for the business. Internal audit needs to retain its independence and focus on those risks that are of most importance to the organisation, strategically and operationally, as opposed to those risk areas receiving a high level of press coverage. This is what the Board and Audit Committee will seek assurance over and will value.