Energizing the Marketplace
Entergy Solutions Taps SAS ® for Risk Avoidance in Power Purchases
Since Jan. 1, 2002, Texas homeowners and businesses have enjoyed the freedom to pick the utility company from which they buy electricity. Competition has increased among energy retailers ever since, and only those companies that can intelligently handle the risks inherent to the energy market will survive.
Delivering electricity to retail consumers carries a great statistical weight accompanied by spot-market price risks, demand risk and financial risks from purchasing derivative contracts. Entergy Solutions Ltd. the retail affiliate of Entergy Corp., which provides energy and services to customers throughout Texas has discovered that the way to monitor, mitigate, and manage these risks and remain competitive is by using SAS® Risk Dimensions .
"We couldn't stay in business if we couldn't get good numbers," says John Shaw, Entergy Solutions' manager of forecasting. "Using Excel, we'd never get to a point where people were comfortable with the numbers we were putting out. With SAS, our people have the confidence that we're managing our business effectively."
Creating Opportunities, Growing Revenues
SAS® Risk Dimensions allows Entergy Solutions to perform firmwide risk management and provides the company with an open, flexible and extensible environment for:
- Data management - access and consolidate position and market data.
- Risk analysis - analyze and explore data to compute risk measures.
- Risk reporting - effectively communicate risk measures.
"SAS is unifying the framework around both the physical and financial elements of risk that Entergy Solutions faces," says Gary Dorris, president of Ascend Analytics, the Boulder, Colorado, consulting firm that helped Entergy Solutions build its technical infrastructure. "The only way to capture those elements is to create a solution that addresses a particular need and it's nothing that can be purchased or easily adapted from an out-of-the-box application. That's because Entergy Solutions invested in sophisticated local infrastructure that we've been able to grow quickly while making decisions in a risk-adjusted framework. And, with SAS, we've systematically incorporated uncertainty analysis into the business processes."
With just over 40,000 customers currently, Entergy Solutions hopes to grow to 150,000 customers by the end of 2003. Without analytic capabilities, Entergy Solutions would be forced to make decisions without the appropriate assimilation of market and physical information, which would lead to lost opportunities and lost revenues through inaccurately priced contracts.
"With SAS, we developed a system that enabled Entergy Solutions to effectively make offers in the retail marketplace and measure and monitor their risk systematically for all of their activities," Dorris says. "This provides a significant competitive advantage."
Forecasting Uncertainties for Accurate Pricing
SAS also helps Entergy look at historical usage data and weather conditions to forecast customer load. For example, Entergy offers its customers a firm price for electricity. A major consideration on a daily or even hourly basis is what happens to their spinning asset base and overall company financial performance if fuel prices rise or weather patterns change unexpectedly.
"The whole point is to capture the uncertainty ahead of time so that when you're pricing a contract with a customer, those price fluctuations have been included," Shaw explains. "I was insistent on getting SAS because I don't know of anything else out there that's good for doing that. We went with SAS® Risk Dimensions because we could take the uncertainty I was already capturing and not have to make a bunch of different assumptions. We can be consistent all the way from my forecasting models to our profit-and-loss statements."
Using SAS, Shaw can now forecast customer load within 5 percent of actual load, he says. "Our entire pricing engine is driven to a large extent by what's coming out of SAS," explains Shaw. "Before we built our system around SAS, we did crude Excel-type things. We had no way of capturing distributions around our portfolio. We did some manual access routines for certain types of loads, but we couldn't do large customers at all only small customers."
Entergy Solutions is taking the Texas retail electricity market by storm in terms of percentage growth while its two main competitors are losing customers. With SAS, Entergy Solutions can understand the risks it encounters as growth occurs while maintaining levels of cash flow and earnings that beat projections.
"So Entergy has targets for cash flow, and they're able to meet those targets with reduced risk," Dorris says. "Entergy Solutions uses SAS to determine how to price our offerings and, more importantly, how to hedge those offerings. The bottom line is SAS addresses the daily analytical and forecasting needs while providing the controls and framework for incremental growth."