Stories from the Risk Front

by Louis Caron and Leigh Parkinson

Changes in accounting rules, Sarbanes-Oxley and deregulation have forced utility companies to seek better risk management programs. As they broaden their risk management capabilities, the biggest challenge is consolidating massive amounts of data from a myriad of sources into a clean, complete and flexible data warehouse.


As organizations broaden their risk management capabilities, the biggest challenge is consolidating massive amounts of data from a myriad of sources into a clean, complete and flexible data warehouse.
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Organizations that can embrace this challenge will find this resource a “virtual gold mine.” Senior management will be better able to view the entire risk portfolio and drill down to more granular levels to make smarter and faster decisions on strategic business initiatives and stay on top of ever-increasing regulatory and accounting requirements. The tools are available to achieve this nirvana of data analysis. The following real-world energy entities took on diverse challenges through enhanced risk management capabilities.

From Brazil to Canada

When Brazil’s government required-at risk of severe penalty-all energy distributors to make more accurate predictions for their energy demand forecasts, one of the country’s largest distributors found itself being forced to narrowly define its risk profile.

The company realized it could benefit financially by implementing a forecasting system. Indeed, a 2003 benchmarking study of 10 U.S. utility companies by Capgemini proved that “the ability to more accurately predict the volume of retail and wholesale demand, along with more accurate revenue projections, could drive significant financial rewards.” The keys to achieving the forecasts were better integration, more flexibility, and greater functionality in the demand and revenue forecasting system.

Even an old-line utility company can transform itself into a modern energy and service producer. An eastern U.S.-based producer of electricity, oil and natural gas-with a major pipeline asset, large underground storage systems and millions of retail customers in varied regional markets-endeavored to take control. It employed risk management systems to quantify variations in customer demand, power production, weather and energy costs and then developed predictive models to create what-if scenarios on countless combinations of events. Armed with such detailed analysis, the senior management and traders were given the information they needed to make knowledge-based decisions that limit risk exposure and remain within their risk boundaries. And better yet: the information gave them cognitive freedom to exploit risk to the company’s advantage.

The transformation didn’t come easy. The company had been collecting data from more than 100 programs, all with different outputs and confusing tags. By integrating the data, the company achieved a foundation for effective risk analysis-and profit! Company officials said that analysis that took weeks to produce now takes days, or even hours or minutes. Senior management can view customizable reports that give them a snapshot of the entire risk profile, with drill-down capability to each business unit’s contribution to the overall portfolio. Greater confidence in reliability and validity of outcomes comes with high quality data.

An eastern Canadian natural gas and electricity aggregator found that its greenhouse farmer membership was growing rapidly, demanding enhanced services outside the capability of the aggregator’s spreadsheet-based IT infrastructure. The aggregator’s risk profile was growing exponentially and becoming extremely difficult to manage.

The answer to the aggregator’s problems? A comprehensive and sophisticated deal capture system that allowed the company to record every detail of its transactions. Energy transactions can be incredibly complex but this installation gave the aggregator the ability to effectively monitor the credit risks of its positions and make real-time marks-to-market. The deal capture system provided the company with flexibility and expandability-key functions for keeping pace with the growing business-through its web-enabled architecture.

When government agency analysts are spending 80 percent of their time collecting data and integrating it, something is wrong. The agency, which was responsible for royalty revenue accounting and budget forecasting, was employing decentralized processes that weren’t repeatable, auditable or secure. The forecasting models resided in numerous Excel spreadsheets, resulting in an untold numbers of calculation codes, with every cell having the potential to conceal errors and create corrupt outputs.

The agency opted to migrate its existing revenue forecast model to a business intelligence platform, providing it with the functionality needed to manage data, build analytical models, publish reports and conduct ad-hoc reporting quickly, all within a secure environment.

Authors

Louis Caron provides internal consulting services assisting the software sales and marketing function globally. Leigh Parkinson is an energy consultant with RiskAdvisory, assisting the software sales and marketing function in the Americas. Contact Mr. Parkinson at lparkinson@riskadvisory.com. RiskAdvisory is a division of SAS.

As organizations broaden their risk management capabilities, the biggest challenge is consolidating massive amounts of data from a myriad of sources into a clean, complete and flexible data warehouse.

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