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Articles Archive
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July 2003
Why New Scheduling Products For Distressed Markets?
OpenLink's COLEMAN FUNG explains why now is exactly the right time to introduce two new scheduling products into the North American natural gas and power markets.
In the current tough market environment where budget cuts and staff layoffs are the norm, OpenLink's introduction of new scheduling products gMotion and pMotion for the North American natural gas and power markets, respectively, might seem a bit off in timing.
Many energy companies are still struggling to re-structure themselves for survival. Who would have the resources, budget, and appetite to invest?
Yet it is precisely because of these currently distressed conditions that energy companies — wholesalers, utilities, exploration and production companies, local distribution companies, asset-based marketers, and other energy players — must formulate new strategies to turn today's challenges into tomorrow's opportunities. One such "challenge to opportunity" scenario is a company's transaction and logistics IT software.
The logistic reality
For most — if not all — energy companies, the logistics of their IT infrastructure is usually one of a patchwork of systems, strung together through complicated, high-maintenance interfaces. And worse, they must maintain this convoluted configuration with labor-intensive workarounds. As a result, the support infrastructure within the majority of energy companies (eg, scheduling and operations staff, gas and power accountants, IT resources, etc.) has become a major bottleneck. This, in turn, means companies are stuck with the overly high costs of processing energy transactions. And this compromised infrastructure limits their capability to support new business initiatives or to adapt to changing market conditions.
Recognizing this problem, progressive energy companies, including many in bankruptcy, are searching for replacement solutions so that they can streamline and greatly improve their operations, in both the short and long term. In fact, these organizations are taking full advantage of the available resource "slack" (such as IT resources and business consultants) that is a result of the bubbles that burst in the post-Enron era.
If an energy company wants to truly re-vamp their operations, they must look beyond the current crop of logistic solutions. Deploying one of the new generations of scheduling solutions, such as gMotion and pMotion, is mission-critical to thrive within the volatile, fast-paced, and competitive energy markets.
This is where OpenLink's release of new scheduling solutions makes perfect sense, because the inadequate, orphaned, legacy IT solutions of the past have contributed significantly to the current patchwork reality.
Not-so-shining energy IT market
Despite deregulation of the North American natural gas markets in the 1980s, and its power markets in the 1990s, it has taken until now for software vendors to finally develop and deliver robust scheduling solutions that can either standalone, but integrate well with other critical transaction management solutions (eg, trading, market and credit risk management, settlements, accounting, etc), or more importantly are an intrinsic component of a straight-through-processing (STP) environment.
For years, financial institutions within the global capital markets have demonstrated that robust STP environments are the best tools (and investment) for improving operational efficiency and controlling spiralling infrastructure costs. Unfortunately, this leveraging of STP technology and the corresponding benefits seemed to elude most energy market participants.
The challenge is, of course, in managing and modelling complicated and evolving natural gas and power businesses. There is no question, however, that the track record of a number of energy IT vendors has been spotty, at best. More than a handful of once-promising or dominant software suppliers have come and gone since the early days of deregulation. The same consolidation trend continues today, making it increasingly difficult for energy companies to identify a dependable IT partner.
By introducing new scheduling products that can be implemented either as standalone solutions or as an intrinsic component of our robust STP framework, OpenLink, a fiercely independent and dynamic IT company, wants to change that view of energy IT vendors.
Discovery of the legacy baggage
Since it is the inadequate legacy scheduling solutions of the past that have caused this patchwork scenario, we took a different approach in our design of gMotion and pMotion to avoid repeating similar mistakes. Working closely with our clients who were still using many of these legacy systems, we started our development by focusing on how a robust STP framework would improve or eliminate these problems. From this analysis came two startling observations: legacy-scheduling solutions were mainly designed in "isolation" (ie, without due considerations for the full life-cycle requirements of transaction management), and this "isolated" framework was then later extended and amalgamated with other transaction management requirements (eg, structuring/trading facilities, risk management, operations, accounting, etc). The result of this evolution is the current convoluted IT scenario faced by almost all energy companies today.
The isolation framework
The isolation framework can trace its roots back to the early days of deregulation. At that time, the main concern was how to manage flows and the related logistical details, especially in a fluid environment where procedures and protocols were ad hoc or constantly changing. In fact, early energy systems were all scheduling based, designed specifically for such requirements. As a result of supporting these "fluid" procedures and protocols, all of the early scheduling systems had developed a unique capability to capture and manage unstructured logistic parameters and related transaction details or attributes.
Other transaction management business functions, such as trading and risk management, were yet to be defined.
As both the natural gas and power markets matured, the full transaction management life cycle began to take shape. At that point in time, once-prominent software vendors were in the perfect position to take advantage of this opportunity providing they could re-vamp or open up their isolation framework to properly address and account for these new requirements.
However, vendors continued to develop their logistic-based systems using workarounds to meet new requirements. Since these offerings were especially capable of collecting ad-hoc parameters (originally for changing scheduling requirements) and other related transaction-level attributes, these legacy vendors were quick to pull together one improvised set of attributes for not-so-rigorous risk calculations, another set for simple credit exposures, yet another set for financial exposures, and so on and so forth. These systems were quick to market, but there was a catch: none of the ad-hoc attributes were well designed or consistent from a modelling perspective. Essentially, they were building the "Tower of Babel".
The OpenLink advantage
Given the known limitations of the isolation framework and its resulting logistic reality, OpenLink has leveraged its expertise in (financial market-based) STP technologies and risk-centric modelling facilities to complete the design and development of our new scheduling products, gMotion and pMotion. On the surface, both may appear to offer similar functionality and utilities, as other legacy products, including many claimed integrated facilities in trading and risk. However, the real difference is underneath the hood and in how transactions are modelled and processed.
In legacy systems, transaction data and details, including the many previously mentioned attributes, are simply stored and used for record keeping, interfacing with pipelines, reconciliations, manual workarounds and related tasks. Anything but the actual processing.
For example, many legacy systems can "store" complex deal structures, but require scheduling users to manually (or through a convoluted interface) break down complex physical transactions with tier pricing and keep-whole provisions into separate simple deals before processing them. Therefore, a series of manual workarounds is needed to manage these complex transactions and the corresponding relationships.
In both gMotion and pMotion, especially when used within OpenLink's STP environment, scheduling users will share the same set of consistent transaction data used by traders, risk analysts, operations staff and accountants; and be able to process it accordingly. There is no hidden conversion or translation from one set of ad-hoc attributes to another. No fudging of profit and loss numbers. And no reconciliation!
For gMotion and pMotion, the difficult work — modelling transaction attributes analytically — is already done upfront; therefore adding support for new products is often a simple structuring exercise, new configuration, or combination of both. What does this mean in business terms? Savings. Increased productivity. Improved efficiency.
The real benefit of gMotion and pMotion is the rapid and efficient client-based implementation of new services or functionality for changing business requirements. And, these new services are not just for scheduling needs. For example, due to the liquidity squeeze within the market, the latest development in the credit risk arena is the implementation of current and future potential exposures. To capture the proper exposures, the amount of energy delivered but not paid must be included as a component of the current exposures. Now, imagine the convoluted routine one must implement using a legacy scheduling system that can only process stripped or broken-up transactions!
To risk or not to risk
What is the best IT scheduling solution for your company? A legacy solution with an extended isolation framework, or gMotion and pMotion, OpenLink's new, risk-centric, STP-enabled scheduling solutions?
To us, the answer is clear. But, don't take our word for it. Contact OpenLink and other vendors. Test-drive each system. And, compare the isolation framework to an STP solution.
As seen in EPRM's Technology Special Report supplement - July 2003
Copyright © 2003 Risk Waters Group Ltd. All rights reserved.
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