Case Studies

Energy Company Turns to Data Warehouse Solution to Better Manage Enterprise-Wide Financial Risk Exposure

The Client

A large utility that engages in the electric and natural gas businesses, including generation, transmission, distribution and selling electricity; transporting, processing, storing and marketing natural gas; as well as operating power plants.

What the Client Wanted

The client needed an integrated solution with a data warehouse at the center of the nightly processing that would provide a unified, enterprise-wide view of financial risk exposure. Greater precision was needed in the knowledge generated so risk managers could make better daily decisions and take advantage of opportunities as they came up. The client needed to establish additional rigorous risk tracking procedures and protocols and establish a better method to evaluate the return on the trading for raw materials such as coal, natural gas and crude oil, as well as daily decisions on buying or selling electricity.

Challenges

Each segment of the trading and fuels business — such as electricity, crude oil and natural gas — has fundamentally different variables driving each, and each are bought and sold in different ways, in different measurements (i.e. tons, barrels, BTUs, etc.); each segment is bought and sold by different traders for very different business reasons, ranging from fuels acquisition to hedging to speculative trading.

The Solution

LUCRUM built a data warehouse that pulls trading and exposure data from different business units and their respective systems, reclassifies it into a common language, maps it out so it can be consumed by the utility company’s existing proprietary Risk Engine and then generates reports for decision-makers at a greater level of detail than previously available. The data is then fed into a Monte-Carlo-based risk analysis application that looks at all potential trading, risk outcomes and how the various possibilities might play out. This information is then presented at the trader-specific level so that total risk is known as well as what percentage of that total each segment contributes.

Development and Implementation

Rapid Application Development was used so that a majority of the business value was delivered within three months due to the urgency for access to at least some of the information as quickly as possible. Ongoing work to optimize the system to deliver additional value continued over the following three years.

Benefits

• Consolidated view of highly volatile information used in daily decision-making
• Ability to get access to critical trading and exposure data from multiple business units prior to the start of the trading day; allowing them to react to new information prior to the opening of the markets, reducing potentially unnecessary market and credit risk exposure
• Vehicle to quantify exposure and the respective return on the commodity/trading portfolio versus other investment opportunities
• Decision-makers such as the chief risk officer and chief financial officer now have the detail of information needed to recognize a problem sooner so they can take immediate action to get companywide risk quickly back to acceptable levels

“Decision-makers such as the chief risk officer and the chief credit officer now have the detail of information they need to recognize a problem sooner so they can take immediate action to get companywide risk quickly back to acceptable levels. Reports can even be sent to top executives via their BlackBerry® if that’s what it takes. Now our client gets the right data to the right people at the right time for critical risk management decision-making.”
Jodie Heflin, Vice President Client Services, LUCRUM