Business & Money

Obtaining a position measurement in energy markets has become more complex and has increased financial risks for integrated utilities.

"What's your position?" The answer to that simple question in today's energy markets is anything but simple. In fact, answering this question may be the single most difficult challenge faced by a fully integrated energy firm in its efforts to manage risk. Position measurement, and therefore risk management, in today's deregulated energy market is complicated by the fact that weather, fuel costs, outages, transmission availability, embedded optionality, and a host of other interrelated factors all dramatically affect position on a real-time basis.

Without an accurate, granular, and unbiased estimate of position, risk management and generation optimization are impossible. Moreover, without consistent and timely position discovery, hedging programs cannot safely be implemented-and, of course, the efficiency and performance of the trading and marketing team cannot be evaluated.

Discovering, estimating, and valuing one's position requires a rigorous methodology and a computational architecture to back it up.

In late 2000, Cinergy Corp., the Cincinnati-based utility and one of the largest electricity trading companies in the United States, undertook a comprehensive review of its risk management methodology and systems. Cinergy was fully aware of the volumetric risks and embedded optionality in its merchant energy portfolio. However, its internally developed client-server system was not sufficiently up to the task of handling all of the complex data capture, valuation, storage, and presentation nuances of its complex deregulated portfolio.