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Betting Against the Gods

In search of the Holy Grail of utility risk management.

Fortnightly Magazine - October 2006

real time trading, but should offer a view of all of them together.

“Pulling that all together in all of the areas—front to back—and managing 100 percent of a company’s risk across all of their various markets I would call the Holy Grail,” he says.

Furthermore, Jim Roland, president of Trade Capture, says his customers not only want their information integrated, but also want more real time information.

“For books and records purposes, what we as a company had to do is give people more of an instantaneous feedback they were looking for. Part of that was driven around the volatility [in markets].”

RiskAdvisory’s Parkinson says electric utilities are looking way down in to the next hour type trading activity. “So, there is a definite trend toward granularity in their data management. In the last 12 months, all the requests are geared around how to do a pre-deal analysis. “I don’t want to do a deal until I know the affect before I execute the trade,” they say. [Utilities] want the whole decision process turned around in a matter of seconds rather than modeling in a spreadsheet and going through it over the course of a day.

However, it must be reiterated that many utilities don’t have this capability. In fact, Sungard’s Miksch acknowledges very few companies have the high level of integration that many describe as the Holy Grail for energy risk-management systems.

Those that do typically are public utilities that do not have complex requirements, he says. But with the formation of RTOs and ISOs, it makes it even more challenging for some companies to keep up with that change, he says.

"[Utilities] would ideally like to get to a place that has more

integration. It is at the forefront of their minds. If you look at what is going on in California with MRTU, all of the big utilities and players in the ISO are making sure they are prepared for the redesign of the market, and this will inevitably involve lots of system integration work." he says.

Of course, the reason utilities are seeking better integration on a company-wide basis is that many risk analysts have discovered that the utility tends to segment its risk. So much so, in fact, that one part of the organization may be unaware of risks in another part of the organization. Worse, one part of the company may increase the risks of the utility without knowing that it has.

“Where you have organizations that have systems built to manage different silos or different commodities, if you will, you don’t necessarily get the ability to manage the risk of a multiple commodity asset,” Ravo explains.

It’s not a minor point for the risk group to see the multi-commodity risk, he says. “If they don’t have that view—and some companies don’t—you run the risk of entering hedges. You are not seeing the natural offsets between commodities, so you can be hedging when you shouldn’t be hedging. So, it’s an absolute requirement to have an across-the-board view. Otherwise, you won’t know your true position, or