Nigel Blackaby

Energy retailers operating big sales forces to service their large commercial and industrial customers face a number of challenges to remain competitive within a volatile market. A new software package from Excelergy promises to fully automate the process behind the sales transaction, reduce risk, and improve profits.

Individuals charged with the job of selling electricity have to overcome a number of obstacles, not least of which is the fact that the product itself has few distinguishing characteristics. Unless a customer is looking for a feature like “green energy”, a kWh is just the same no matter who is selling it and will do exactly the same thing.

For this reason, pricing usually becomes the differentiator to the extent that pricing actually becomes the product. Increasingly complex structured pricing packages for power are being designed. Structured pricing can be anything from a fixed rate to more complex arrangements like floating rates, caps, collars etc. Managing these product offers can be difficult and time consuming.

At the same time competition has reduced margins and meant that perfect execution of all aspects of the retail transaction is needed if any profit is to be achieved. Failure to handle any part of the transaction quickly and accurately puts the merchant retailer at risk. The complexity of industry practice means there is scope for mistakes and misunderstandings to occur in the interfaces between customers, sales representatives and the pricing/trading desk.

For some time, the development of specialist systems to manage retail transactions has been a neglected area. Software companies have preferred to focus on billing and energy trading systems, which they regard as larger and potentially more lucrative markets. However, although retail transactions are relatively small in themselves, when aggregated they can represent a real exposure to a retailer. As for wholesale trading, the demise of Enron has led to a vast reduction in liquidity and removed what some saw as a never-ending growth market.


Executing complex structured deals in competitive energy markets is both challenging and demanding
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Structured deals

US energy software specialist Excelergy Corporation has turned its attention to this issue with the release last month of its HedgeDirect platform for structured pricing deals. Excelergy HedgeDirect is a real-time transaction management platform that provides complete automation in the quoting, execution, confirmation and contract management of structured retail pricing for power and gas.

“Most energy marketers are still using the kind of manual, spreadsheet-based processes that put their bottom line at tremendous risk,” claims Kevin Swenke, vice president of managed services at Excelergy. “Although some of these solutions deal with certain aspects of the retail process, none offer an end-to-end solution that is complete,” says Swenke. “This industry can be resistant to change but sales representatives will see that HedgeDirect will make them more efficient, which will free them up to make more sales.”

Using HedgeDirect, energy retailers can link their sales force to the trading desk in real-time, providing forward curves using live data, which is maintained centrally. Forward curves are used both for energy trading and in the physical market and represent a view of the price of energy in the future. HedgeDirect includes tools that enable the maintenance of forward curves utilizing live market feeds. Bid/offer spreads can be automatically embedded by order size and the system will create a full audit log on all pricing and price changes.

HedgeDirect’s PricingWizard allows the creation of the full range of pricing product and generates structured individual customer quotes, which can contain definable limits, rules and products. A sales representative can thereby have access to the full range of available products while control is retained centrally and accurate deal and commission details can be recorded. A Credit and Finance module within the software allows the user to assign credit classes to each customer account. Premiums can be embedded and activity controlled by class. The system allows for pricing to factor in the cost of capital so that finance charges can be recovered.

All aspects of transactions undertaken are electronically recorded through HedgeDirect’s Deal Capture module. This records all pricing components and maintains a real-time consolidated hedge book view with full drill down capability for use in forecasting and risk management. The Deal Capture module also provides automated electronic transfer of all pricing data to the retailer’s billing system.

With a distributed sales force, record keeping becomes more difficult and so HedgeDirect has as part of its programme a Contracts Management module in which customer contracts are electronically stored. It will create proposals, contracts, pricing addenda and deal sheets and provide email confirmations and notifications.

HedgeDirect’s Market Clearing Option facilitates real-time clearing of all orders through designated third parties. It also eliminates holding risks associated with small and odd lot order allowing the balancing of a hedge book in real-time.


Hedge Direct offers retail traders the same speed and precision that traders demand in wholesale markets
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Evolution

HedgeDirect evolved from a product being developed by Dallas-based Forwardmarkets LLC, a provider of real-time risk analysis and hedge trading solutions to the retail energy industry. Excelergy acquired Forwardmarkets in January 2003.

Excelergy is looking to market HedgeDirect among merchant energy retailers in the US. In Europe it is looking at regulated and deregulated markets with particular emphasis on the UK, Germany, Holland and Belgium. Bill Mahoney, president and CEO of Excelergy, explains: “Organizations with large sales forces are best suited, and have often come about through recent mergers. In all cases, this is a product that will get retailers and traders working together better.”

Mahoney has been at the helm of privately-held Excelergy since November 2000 and has helped the company achieve a 65 per cent annual growth in software license revenues. “We reduced the emphasis of the company from pure technical advances towards focusing on what our products can actually do for our customers. Our customers are seeing an increased return on investment,” explains Mahoney. Excelergy says that within 12 months of deployment, its award-winning Trader BackOffice product improved American Electric Power’s cash flow by $10m and increased its assets by $40m. “This new platform is further proof of our commitment to offer measurable and sustainable return on investment to our customers across the energy value chain,” says Mahoney.

Excelergy’s clients include eight of the top 20 energy/utility companies in North America, with a growing client base in Europe, Asia and Australia. Its systems are offered directly or through blue chip global systems integration partners such as Accenture, Cap Gemini Ernst & Young, IBM Global Services, Pricewaterhouse-Coopers, Sapient and Elsag (Italy).

Excelergy HedgeDirect is being offered either as a managed service or as a standard application license. It does not force traders to use new screens. The platform can be added to existing infrastructure. Where a customer elects to buy the package under licence, Excelergy will assist with the set up but the customer will be responsible for arranging hosting of the web-based product. Excelergy believes that operators of HedgeDirect under licence will experience payback within six months.

The managed service is offered on a transactional basis and therefore there is only a nominal set-up fee and no capital cost. Excelergy will arrange the web hosting and fees are payable per transaction. The cost of the platform is embedded in the pricing of each transaction and is effectively passed on to the customer.

Partnerships

Excelergy is looking for a partner to act as host for HedgeDirect and offer the higher level of service that is needed. “An industry partner would bring more to the table, such as consulting services, risk management, process automation or training services,” says Swenke. Excelergy is in discussions with IBM Energy & Utilities as a potential host in Europe.

Excelergy has revealed its first two customers for HedgeDirect with Houston-based Occidental Energy Marketing and Select Energy from Connecticut agreeing to become charter clients. Excelergy expects to announce further sales of HedgeDirect shortly although Swenke says that some customers are reluctant to go public and reveal what they believe to be a competitive advantage.

The release of HedgeDirect coincides with a period of extreme volatility, with power and gas prices presenting challenges and opportunities for buyers and sellers. In the UK, prices can move as much as two per cent during the course of a day’s trading on long-term contracts. With margin built in, this can equate to a five per cent movement, which creates a real risk if the trading book is not linked to the retail book. The timing could prove opportune for Excelergy.