Optimize business processes to gain operational efficiencies
ETRM 360° Introduction… ETRM (Energy Trading and Risk Management) 360 ° is a concept of enabling a 360 ° view of energy companies’ monitoring and managing risk from inception through financial settlements, through efficient use of systems infrastructure
Defining requirements in Trading and Risk Management operations
PA’s approach to comprehensive ETRM system implementation
PA Track record
Common ETRM myths ETRM 360° A number of common myths and misunderstandings undermine the success of ETRM system implementation, leading to increased cost, project delays, reduced system quality and mismatch in business expectations One system will meet most requirements, solve all business & technology issues Recognizing the potential need for a multi-system / application risk environment Having a holistic view of the entire “Risk System”, and required data interfaces Close involvement from commercial experts in all ETRM decision-making processes Taking a long-term view of any ETRM system investment that considers commercial strategies Evaluating analytics & reporting needs in parallel to transaction capture functionality User acceptance & parallel testing are critical for successful implementation Myth Systems offer straight-through processing & interface capabilities This is an IT project. The system vendor or developer can take care of it Vendor systems are modular and can be enabled in the future with a click of a button Vendor systems provide sufficient analytics & reporting tools for my business need Consequences Employing manual processes and one-off spreadsheets that result in time consuming data reconciliation Investing in large custom data interfaces that are critical to business processes Systems do not meet the business need; do not align with commercial strategy Separate implementation plan configurations & data interface chaos Licensing expensive analytics & reporting platforms to address reporting issues User acceptance & parallel testing are too time consuming for business users An unstable environment resulting in business user frustrations & distrust Reality
Defining requirements in Trading and Risk Management operations
PA’s approach to comprehensive ETRM system implementation
PA Track record
Defining requirements in Energy Trading and Risk Management operations ETRM 360° Define the Strategic Vision Develop ETRM business requirements Specify Commercial, Asset & Risk requirements Evaluate the risk infrastructure and business processes Develop and implement core business processes Evaluate vendor systems through specific scorecard metrics Lead the ETRM system implementation Explicitly considering the commercial and risk management objectives is a critical first step… Specify and develop risk & performance management tools From Concept… To Design… To Implementation From Phase I, business requirements and supporting business processes can be clearly specified… Successful implementation is achieved through disciplined project management – and alignment of the entire process to the business & risk objectives Phase I Phase II Phase III The ETRM system requirements do not start from identifying trade types and instruments. In order for an effective implementation of 360° view, the Energy trading and risk management operations require solutions that align with commercial and risk management strategies, and are “fit for purpose”.
Defining requirements in Trading and Risk Management operations
PA’s approach to comprehensive ETRM system implementation
PA Track record
PA’s approach to comprehensive ETRM implementation
Energy trading and risk management operations require solutions that are “fit for purpose”, and align with commercial and risk management strategies. PA’s view of the ETRM system implementation begins from business strategy going down into tactical implementation.
ETRM 360° Risk Management Review Business Requirements Vendor & System Selection Business Process Design Risk Analytics & Reporting Evaluate the risk IT and business process infrastructure versus current requirements, strategic objectives, and Best Practices Develop and implement business processes required to execute current and future state business and risk management strategies Identify and develop innovative tools and protocols to assess and report risk and financial performance Develop ETRM business requirements based on company strategies, policies, procedures and functional activities Evaluate vendor systems through detailed scorecard metrics aligned with business requirements, industry trends, and prospective needs System Implementation Lead the ETRM system implementation to manage stakeholder expectations, closely manage timelines, and costs
PA ETRM core value proposition – Business Requirements
We understand the energy industry, we evaluate your business strategy and we assess the specific ways you conduct your business. We then tie it back to company policy, as well as business plans to ensure the business processes incorporates appropriate internal controls that reflect objectives.
ETRM 360° Develop ETRM business requirements based on company strategies, policies, procedures and functional activities, organizational structure 1.1 Interview stakeholders 1.2 Develop corporate strategy 1.3 Identify and prioritize business processes 1.4 Develop detailed business requirements Principal activities Detailed corporate strategy and objectives document with high-level cost vs. Benefit analysis Business requirements incorporating the “to-be” future business strategy that are vetted against policies and procedures Underlying high-level assumptions around systems, data, reporting infrastructure and people requirements Key benefits Program and change management Methodology Customized organizational design, position descriptions, compensation parameters, roles and responsibilities Identify and articulate risk appetite, write risk policies, establish protocols, and derive limits and risk indicators Define business rules and transaction needs to make a system selection and facilitate business requirements PA’s approach… Business Requirements A B D C
PA ETRM core value proposition – Risk Management Review
Assessing existing risk system infrastructure help determine the level of change required and to accommodate the business requirements. An effective assessment should include future-state business strategies that needs to be supported.
ETRM 360° 2.1 Assess risk systems infrastructure 2.2 Map to known business requirements 2.3 Develop gaps and recommendations 2.4 Validate against strategic objectives Principal activities Risk systems integrated infrastructure map with manual processes identified Gap matrix of the systems infrastructure against known business requirements Recommendations to address key system gaps and data governance Key Benefits Evaluate the risk business process and systems infrastructure versus current requirements, strategic objectives, and Best Practices, portfolio design Program and change management Methodology Revised portfolio structure, business justification, an alignment of key data flows and system interfaces as well as Interbook protocols Risk identification strategy, alignment and classification Customized report templates supporting analytical and data architecture recommendations as well as reporting build out PA’s approach… Risk Management Review A B D C
PA ETRM core value proposition – Business Process Design
Business process design helps identify weaknesses and inefficiencies in day to day processes. It can help eliminate redundancies in business functions, multiple data hand-offs and manual interactivities etc.
ETRM 360° 3.1 Define a top-level business architecture with key processes identified 3.3 Identify decision points, hand-offs and organizational affiliations 3.4 Develop a detailed business process map for each functional group Principal activities Top-level business structure Detailed process maps with progressive decomposition of processes and sub-processes Classification and impact assessment of operational desk procedures Key benefits Program and change management Develop and implement business processes required to execute current and future state business and risk management strategies 3.2 Identify processes and workflows, activities and sub-activities Internal controls assessment and recommendations Methodology Development of processes and workflow activities for the front, middle and back offices. Operational risk mitigation due to duplication of processes and overlap of functional area responsibility PA’s approach… Business Process Design A B D C
ETRM systems value proposition – System selection
Selecting and establishing an appropriate systems infrastructure that helps run your business for the next 5-7 years is a crucial decision. Upfront investment to perform adequate due-diligence could save you from the risk of insufficient, unstable system environment and maintenance nightmare.
ETRM 360° 5.1 Identify requirements, qualify and assign weights 5.3 Conduct vendor demos, develop scorecard and evaluate 5.4 Negotiate with vendor and close the contract Principal activities Priority-weighted requirements matrix Request for proposal Vendor systems demo performance scorecards, reference checks and track record Key benefits Program and change management 5.2 Issue RFP and shortlist vendors Finalized system licensing contract Evaluating vendor systems and provide a detailed scorecard metrics based on the matching criteria to the business requirements, industry insights, track records and references Methodology Vendor & System Selection PA’s approach… A B D C
ETRM systems value proposition – System implementation
While identifying the right system is a critical component in the decision making process, the implementation of ETRM systems has proven to be more challenging in the energy industry.
PA’s unique strength in the ETRM system implementations is that we bring market insights and market modeling experience in addition to the world class implementation and project management experience .
ETRM 360° 6.1 Install baseline system and train core users 6.3 Develop custom analytic models, data interfaces and reports 6.4 Test system functionality and user acceptance criteria Principal activities Phased implementation work plan, Business process design and configuration System acceptance criteria Detailed functional specifications for enhancements and customization Key benefits Program and change management 6.2 Define Business processes for system configurations Detailed system, user acceptance and parallel testing scripts Methodology Leading the ETRM system implementation by applying industry and Best Practice insights in order to manage stakeholder expectations so the business objectives are met at each milestone Management reports, Executive dash board, Business intelligence report design Phased parallel testing and post-production activity and resource plan 6.5 Parallel test the system and support post-production activities System Implementation PA’s approach… A B D C E
Measurable value proposition ETRM 360° PA has a strong, successful track record of helping businesses through insights and testing of market and fundamental models, understand capital / collateral requirements to run the business Project successes are measured differently across different groups in an organization. PA can help companies achieve success of the overall project by ensuring proper use of business application, business usability and industry best practices coupled with technology standards and sound project management. PA’s approach…
IT measures the success of the implementation by ratings on latest technology standards, good project management protocols applied on the project, on-time and on-budget completions
IT measures success by implementing a solution that runs error free in the production environment
Business measures the success of the implementation by rating the business applicability and the nimbleness to support decision making in the real world
Business measures success based on the reliability of the data to make effective business decisions in the production environment
Value maximization through bridging IT & Business IT’s view of successful implementation Business’s view of successful implementation
Simplified approach to implementation ETRM 360° We believe an upfront well planned effort could mitigate the implementation risk of significant cost and schedule overruns. Based on PA’s observation in the market, most ETRM systems selections and implementations experience false starts and delays due to misalignment of expectations, poor business requirements, inefficiencies in workflow definitions, inadequate reporting tools and lack of subject matter and pragmatic project management expertise. In order to enable a fully informed and confident decision-making process, PA recommends the following steps be considered.
Evaluate As-is systems and analytics infrastructure against known requirements
Engage business users in “as-is” and “to-be” processes
Identify key functionality, deliverables and reports in each “as-is” system
Map “as-is” functionality and deliverables to the new ETRM system functionality
Engage in To-be business model and strategy review
Develop a validation/test criteria
Identify Off the shelf vs. enhancement requirements
Develop a phased implementation roadmap
Mobilize working teams involving business and technical groups
Implement a pragmatic project management and communication management
Implement an effective change control process
Define the Acceptance criteria
Define a Test strategy and plan; System and user acceptance test cases
PA’s approach… Pre-system selection phase System implementation phase
Health check on quality of system implementations ETRM 360° PA believes that implementing the checkpoints along each milestone will reinstate confidence in your ETRM system. PA can help reinstate the confidence in your ETRM system to gain long-term return on investments. A quick assessment of root cause of the delays in implementation and a roadmap with checks and balances to ensure your primary business objectives are delivered can go long ways in the overall success of the project
Evaluate project status and risks involved in meeting the business objectives
Identify the issues causing delays in implementation
Develop a gap matrix and reconcile against planned business objectives
Develop a roadmap with milestones and checkpoints to mitigate potential future delays
Develop a communication plan to ensure all project stakeholders including integration partners and product vendors are aware of scope and quality delivery commitments
Develop a user acceptance criteria to ensure the project milestones are not only met but also are pragmatic and reliable
Develop a transition and business continuity plan to ensure a smooth transition from vendors and integration partners into the core support team
Develop a support strategy to ensure the level of support is received from vendors and integration partners after the transition
PA’s approach… System implementation phase Post implementation phase
PA follows a well disciplined, pragmatic approach to content-led project management. PA’s toolsets such as integrated work plan, escalation hierarchy, status scorecards etc can be used from the outset to manage several project work streams and stakeholder expectations
We are independent and, while we have many alliances and partnerships, we have no exclusive alliances with software, product or service vendors. Our advice is always vendor-agnostic to ensure our clients gain the best value from their IT and related business process investments
PA brings the energy market expertise from assisting clients around the world in designing and implementing markets that best deliver benefits, including more efficient investment, more efficient and productive use of assets, better allocation of resources, innovation, and demand-side response
PA’s strong analytical experience in the areas of contract and asset modeling, risk evaluation and portfolio optimization delivers direct business impact to reliable risk and cash-flow metrics
PA’s unique risk assessment and audit during the course of implementation ensures the ETRM system complies to company’s governance and control structures
PA’s in-depth understanding of the 3-office model (Front, Middle and Back office), functional activities and the governance structure required to enable an effective 3-office model
PA’s strengths to differential between the ETRM operations and ETRM systems and to differentiate the myths from reality
PA’s capability to device key performance indicator (KPI) metrics from top level management to the tactical implementation of business and ensure the reliable reporting data is used in order for the management to make confident business decisions
We can help develop a test strategy and plan, acceptance criteria and test cases for user acceptance and parallel testing. Based on our experience, this is one of the areas almost all implementation fail to manage.
PA can be your trusted partner and advisor to help align your business needs to strategic vision, help enable a 360° view for transparency and accountability, evaluate market models, help through successful implementation of enabling systems and tools.
Develop models to measure term price and volatility structures
Implement new suite of models
Benchmark reporting criteria for key recipients and stakeholders
Map criteria to data requirements
Design executive summary, strategic and tactical reports
Develop distribution methodology including on line reporting
PA Team - Risk management & energy trading professionals
Bala Narasimhan is a Managing Consultant in PA’s Global Energy Consulting Practice with over 14 years of consulting experience in a variety of Energy Trading and Risk Management (ETRM) engagements. His vast experience include Trading book analysis, Contract review and valuation, Risk policies & procedures, Risk reporting, best-practice business process definitions, audit controls review and trading systems implementation across various energy commodities. Due to his experience in systems design, implementation and as business analyst he is able communicate effectively with all the various levels at the client organization and thereby quickly gaining clients’ rapport to best provide consulting services. His past experience have resulted in improvements in efficiency, controls, best practices and cost savings to the clients .
Jay Lindgren is responsible for developing and implementing advanced quantitative methods for client organizations. With 18 years of experience, Dr. Lindgren has worked on projects related to asset/contract valuation, risk measurement and portfolio optimization. He also supports client engagements involving risk management program development and development of marketing and trading strategies. Dr. Lindgren has deep experience working on trading floors and directly with traders. Additionally, Dr. Lindgren has numerous publications and is a frequent speaker on the conference circuit. Prior to joining PA in 2007, Dr. Lindgren was employed by a number of leading energy companies, including Ameren Corporation, Duke Solutions, Koch Industries and R. W. Beck. Dr. Lindgren holds a Ph.D. in Space Plasma Physics.
S id Jacobson brings forward 20 years of hands-on experience as a specialist in risk management, trading and supply strategy implementation. With PA, Mr. Jacobson has led a wide-ranging scope of assignments centered on business transformation, due diligence and valuation. Projects have ranged from transitioning the management and financial oversight of distressed generating assets and heating oil distributor, managing the build-out and strategy implementation of regulated and unregulated trading and supply organizations, to leading asset and contract portfolio valuation for a variety of client purposes. Prior to PA, Mr. Jacobson was the Risk Manager for Conectiv Energy responsible for company-wide portfolio risk management and a derivatives trader and risk manager for a variety of privately held financial institutions.
Charles Tooman has broad experience developing and implementing comprehensive risk and business management programs, founded on Best Practice principles and recommendations. Specific client work includes benchmarking all aspects of companies’ trading and procurement operations, across the Front, Middle and Back Offices, in diverse areas such as IT infrastructure, reporting and analytics, and capital allocation. He has executed large-scale organization change programs and improved risk and business management practices through implementation of enhanced processes, policies, and corporate governance hierarchies. Prior to PA, Charles was a risk management associate for a non-regulated power and natural gas provider. He is a certified Series 3, Commodity Trading Advisor (CTA).
ETRM 360° Selected profiles
PA Team - Risk management & energy trading professionals (cont.)
Jon Jacobs has supported clients in the analysis of ongoing developments in various energy markets and in the areas of price forecasting and asset valuation, particularly when incorporating uncertainty effects. Dr. Jacobs has fifteen years of experience in mathematical and economic modeling to support management decision-making. He has monitored the progress of electric industry restructuring nationwide and led the application of mathematical models and computer tools to the pricing and operations needs of a deregulated electricity marketer. He has worked on diverse modeling applications including hydro forecasting and scheduling, contract valuation, portfolio analysis and system reliability modeling. His doctorate is in mathematics.
Michael Abraham has over 10 years experience in the natural gas and power markets. He has managed several client engagements including natural gas and power forward price curve analysis, due diligence of a merchant energy company’s financial statements, and a spread option transaction model validation and supporting contractual review. He has extensive experience in midstream energy market infrastructure, financial and physical natural gas marketing and trading mechanics, economics and product movement of physical gas nominations and transportation valuation. His knowledge of energy operations provides valuable insight into the application of financial and physical risk management practices in natural gas and power markets.
Mark Germer has strong subject matter expertise in strategic planning, finance & accounting, risk management, system planning, and IT management. Mr. Germer is a Certified Public Accountant (CPA), and is also a certified Project Management Professional (PMP). Prior to joining PA, Mr. Germer was a Director of Risk Management in the Utility and Risk Services and International divisions of Pace Global Energy Services in Fairfax, Virginia. In addition to serving as a risk advisor to the City of Dover (Delaware) and BOC Gases, he was Project Manager for all ongoing strategic planning and business process assistance to Gazprom Marketing & Trading, London, UK. Mr. Germer also led various other projects such as a risk profile assessment for a mid-western electric utility and FAS 133 compliance studies for U.S. Steel and Mittal Steel.
Rahim Inoussa has expertise in credit risk management, credit system implementation, structured finance lending, process reengineering, and financial analysis techniques. He has led or worked in a variety of strategy and risk management assignments in the energy and capital markets sectors. Prior to joining PA, Rahim worked at GE Capital, Energy group and at ABB Structured Finance. At GE, he managed several process reengineering projects aimed at improving the internal procedures around credit risk and funding. At ABB, he underwrote credits and developed analytical models on credit risk and capital investment. Rahim is a Chartered Financial Analyst (CFA) charterholder.
ETRM 360° PA People… Selected profiles
Business, risk, and IT credentials ETRM 360° Conducted a system selection process and assessed information system resource requirements as part of a project to design and implement a viable supply, trading retail aggregation function. Conducted a comprehensive assessment of the organization’s ETRM and broader risk and logistics systems; led efforts to “rehabilitate” the ETRM system, retrain users, and resolve on-going issues with application problems including interfaces to other key systems. Led an ETRM system selection, implementation, and testing effort on behalf of a merchant generating company in bankruptcy; led development and implementation of risk and performance dashboard reports. Led all phases of a rapid system evaluation, selection, implementation and testing program (including project and vendor management, among others); also amended business processes to meet new requirements. Selected qualifications Developed and implemented a proprietary market, credit, and cash flow measurement and reporting system, which was integrated with existing ETRM system applications to yield up-to-date on-line reports. Implemented a crude oil forward risk reporting system for commercial personnel and key stakeholders to manage marketing and trading activities; assisted in the organization of the Risk Management group to ensure transactional control. Trading & Risk Management & IT Led vendor selection, “build versus buy” assessments, system implementation, and solution consulting to assist clients to identify ETRM business requirements, functional specifications and process optimization. Developed several proprietary database tools in support of “to-be” business processes, as an aspect of a comprehensive Business Transformation initiative; led specification of a large data warehouse required for a complex revenue requirements / rate development activities. Determined the appropriate end-state and trading / risk management organization and IT blueprint; developed a gap analysis against which the desired end-state was compared; helped refine current risk policies, processes, and IT infrastructure to meet the revised business focus. Client Confidential Multiple-Clients
Business, risk, and IT credentials ETRM 360° Members of PA’s current staff advised OMV on the development of a set of policies and procedures, governing trading and risk management activities, to underpin the establishment of its new joint venture vehicle, ECONGAS. The joint venture was set up in response calls from the regulator to unbundle its activities, as part of a European drive to liberalise the Austrian and neighbouring gas markets. Members of PA’s current staff were seconded to InterGen to assist in the establishment of a new trading function for its gas and electricity trading activities in the UK. This work encompassed all aspects of the new operation, including basis for evaluation of market and credit risk, performance measurement and control, specification of trading and authority limits, transfer pricing arrangements, development of internal policies and procedures, and specification of systems requirements. Selected qualifications PA Track Record… Risk Management & Trading Client Confidential Review of trade controls across BE’s Power and Energy Trading division (BEPET). Focus was on the role of risk controlling activities within the organisation and development of capabilities across market, credit and collateral management. This review forms part of PA’s ongoing role to provide external advice to the Trading Risk Sub-Committee over the next three years on industry ‘best-practice’ and ‘state of the art’ control Regimes. PA were engaged to review a client’s risk governance arrangements and make recommendations with regard to improved governance arrangements. In particular, the review addressed the relationship between existing risk control frameworks and other business control frameworks such as the financial control framework. PA r eviewed current risk management processes and technological infrastructure in conjunction with business strategy and benchmarked current status against industry leaders. Identified gaps in risk management capabilities and provided prioritised recommendations for strategic growth (including included geography, commodity and instrument) and increased risk management sophistication. Conducted a diagnostic of clients current capabilities by reviewing documents and interviewing staff to benchmark against industry leaders. Worked with executives to determine end-state trading / risk management organization blueprint, including development of implementation plan. Client Confidential
Business, risk, and IT credentials ETRM 360° Reviewed the company’s considerable trading portfolio and advised lenders as to the current viability of company operations; worked to develop a new set of risk management policies and procedures, based on a comprehensive assessment of the middle office. Reviewed the risk management and trading capabilities of business units to identify areas of overlap and gaps; designed and led the implementation of a new organizational structure and functional business processes. Designed the organizational structure, business processes and corporate governance infrastructure as part of the implementation of an integrated, multi-commodity wholesale to retail commodity organization. Developed functional business processes to ensure tasks across the Front, Middle and Back Office areas are completed, including the timely and accurate identification and mitigation of risk, transaction valuation and monitoring, and daily settlement of supply portfolios. Selected qualifications Developed policies and procedures to establish a fully functional Corporate Risk Management function; designed and developed necessary infrastructure at the Business Unit-level to enable proactive identification, measurement, and management of commodity risk. Implemented the risk management infrastructure for a large merchant generator in bankruptcy, including policies and protocols, business processes, risk and business management strategies, and tools, reports and analytics. PA Track Record… Risk Management & Trading Client Confidential Acted as independent representative to the Risk Management Committee (RMC), on behalf of a 30 bank ownership interest of two of the largest gas-fired generation facilities in North America; sole author the company’s Risk Policy and procedures and Energy Management Plan. Developed and documented best practice risk management policies and operational procedures for power trading operations; integrated and improved risk management practices and contract/credit review and oversight functions. Assessed current risk policies, and evaluated process segregation within the trading business unit (EPME); reviewed and improved the middle office risk analysis and communication capabilities between the trading business unit and the corporate office.
Business, risk, and IT credentials ETRM 360° Developed potential growth opportunities based upon the company’s corporate objectives. Investigated and prioritized the list of growth opportunities based on estimates of financial and business impacts. Developed and applied a real options-based methodology to identify the optimal mix of long-term gas sales agreements and supply commitments for a proposed combined-cycle merchant power plant, with a focus on retaining operational flexibility. Developed and implemented a proprietary asset/portfolio optimization model that enables the dynamic valuation of gas and power assets in the context of the organization’s geographic asset network; serves as the organizations sole asset strategy tool. Created a tool to provide insight into production, sales and purchase, and logistic management decision-making, focusing on the dynamics of production and logistic costs, market supply and demand, and geographical diversification. Selected qualifications Modeled embedded value and economic capital for a representative portfolio of financial assets, physical commodity contracts and real assets; evaluated alternative management strategies for this portfolio, identifying the optimum combination of risk and reward. . Developed and applied expertise in operations modeling for hydro-owning utilities and potential acquirers of hydro plants, with a particular concentration on portfolio optimization and methods of capturing asset-flexibility. PA Track Record… Strategy, Asset Management & Portfolio Optimization Evaluated potential growth paths and recommended the creation of a multi-utility strategy. The objective was to build a portfolio of investments to enable the Company to achieve it’s medium and long term earnings and growth targets. Redirected OPC's gas acquisition activities from a bundled individual plant supply approach to a portfolio management approach; developed a fuel supply and logistics acquisition and management strategy for gas-fired generation assets. Developed a template to disaggregate the risks in supply agreements, and identify embedded optionality in contract language; developed an interim pricing engine geared to generate a risk-adjusted commodity cost for a set of target load profiles. Client Confidential Client Confidential
ETRM 360° Bala Narasimhan Managing Consultant PA Consulting Group Houston , TX 832-661-3360