By Patrick Reames
Vice President, Trading & Risk Management  

I was having a conversation the other day with an unnamed senior manager at an unnamed major producer/marketer (yes, I am purposefully being coy in order to protect the innocent here). This person was describing, in a manner I found curiously casual, the fact that he had just recently discovered that his company was being overcharged (and had been for several months) by a major pipeline to the tune of more than $300,000 per month. As the conversation progressed, I asked how it was possible that it was not caught earlier, because from where I stand, $300,000 is a lot of money. It turns out that the company was lucky it was caught at all. It was only discovered when senior management had asked for an economic evaluation of a particular field that was flowing into that pipeline. The person who was helping pull together the data happened to notice that the costs allocated back to the properties didn’t quite look right and did a little research and ultimately discovered the problem. Meaning, if senior management hadn’t asked for the unrelated ad-hoc report, the problem may have gone unnoticed. I asked about the process for invoice approval and how the invoice was ultimately approved for payment even though it was wrong. Didn’t they have payable statements from their ETRM (Energy Trading & Risk Management) system that provided detail of each transportation agreement, the volumes that flowed under that agreement, and ultimately the costs for the period? He said that sure, in most cases they do. Most cases? “Well, some agreements are just too complex to capture in the system.” This was one of those agreements. The discount structure was “too complex” to efficiently capture and would have created pathing and scheduling issues; so, they relied on their T&E representative to send an e-mail to the accountant responsible for that pipe, notifying them that gas they were moving to an alternate point under that particular agreement was supposed to be discounted. Unfortunately, the T&E representative got busy and forgot. When an invoice came in from the pipeline, they were erroneously charged the full rate for all delivery points under the agreement, and since it matched what was in the company’s ETRM system, it was approved for payment. 

The 80/20 Rule of ETRM Software

As someone who has been involved in many ETRM implementations from the vendor perspective, and one or two from a user perspective, I’m not particularly surprised by this event. It all goes back to the 80/20 rule, which as I’m sure you know, states that being able to manage 80 percent of your business in the system was pretty much as good as it gets; the 20 percent is that piece of your business that is so unique or so difficult to model that it just isn’t worth the time and expense of developing functionality to capture it. These would be the “workarounds,” those things that would be addressed, more or less, by process and spreadsheets, or more likely, more by spreadsheet and less by process. Users accept this as a given, acknowledging that “it is what it is.” The problem is, in this environment of consistently high prices and startling volatility, the exposure of the “20 percent” is greater than ever. Even in a world dominated by Sarbanes-Oxley process maps, those processes and spreadsheets find a way to break down. Complex spreadsheets have a way of getting corrupted even by experienced users, where a small change to a single formula ripples unnoticed throughout other formulas and creates answers, that although directionally correct, are just enough wrong to cost a company thousands or tens of thousands of dollars on a monthly basis. A process designed to ensure the relevant people are kept up-to-date and that loops monthly can get derailed by an unnoticed or unsent e-mail. Virtually all energy marketing/trading companies have some form of these workarounds and have learned to accept them as business as usual. However, as these workarounds were devised when the ETRM system was installed and implemented, and as UtiliPoint data indicates that the average life of an installed ETRM system for gas is about 6.5 years, simple math indicates that the exposure is much greater now with gas prices ranging around $6, as opposed to the $2-$3 range when the system was likely first deployed. Even with Sarbanes-Oxley forcing companies to formally document many of processes, it doesn’t change the fact that these workarounds are isolated from the more systematic business flow that is captured in the transaction management system, meaning that there is a greater likelihood of multiple points of failure. These failures are most likely not going to be catastrophic, as a complete failure is probably going to be quickly noticed. No, they will tend to be more erosive, as in when someone forgets to update a price and/or a formula in a spreadsheet, or forgets to send the e-mail to the accountant indicating that a portion of a gas deal got scheduled to an alternate delivery point on a particular day, and that the discounted transportation cost is not reflected in the system because the rate structure was too difficult or time consuming to model. So, what’s the point … even the best ETRM systems are prone to user error. Yes, they are, but with a central repository of information, errors are more easily recognized and corrected. Data and events are chained together, meaning that multiple eyes are seeing and implicitly reviewing the information as it passes through the system. Pricing and volumetric information can be looked at on a trended basis, highlighting any anomalous data points. The more visibility, the more likely errors will be caught and corrected. 

Reduce the 20 Percent and Your Operational Exposure  The latest generation ETRM systems provide more flexibility in capturing those unique deals and transactions that once required workarounds. Even for those deals that are the result of creative “price structuring,” or for negotiated transportation agreements that contain volumetric or rate optionality, there is likely a solution available in the market that will help reduce the number of workarounds in your organization. However, even the most sophisticated system will probably not be able to explicitly model every transaction for every user. For those instances, many of the vendors have created programmatic interfaces in Microsoft Excel, allowing users to tie their workaround spreadsheet directly to the system, helping to reduce the chances of keying errors, and also bringing the spreadsheets closer to the core processes, and in turn, helping to improve their visibility to the rest of the enterprise. Even if your system is relatively new, having been implemented in the last two or three years, given the potential cost of errors, it is worthwhile to be constantly reviewing your workarounds, both in terms of finding ways to incorporate them into the latest version release of your system, and in terms of ensuring that potential profits are not eroded by breakdowns in data or process. Take another look at determining whether it’s worthwhile to develop a programmatic solution to the workaround. Escalating commodity prices will, in many cases, shift the economic decision point. Spending tens of thousands of dollars to save hundreds of thousands is pretty much a no-brainer. However, do not ignore the ongoing costs of a partially customized solution. Future support costs and potential impacts on upgrading product versions must be part of the equation. Bottom line: the 20 percent is where most of the errors are likely to occur and propagate. By reducing that number, you can reduce the likelihood that your profits are being eroded. 

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