If you have never visited the Czech Republic now is your chance. Energy Risk Central and Southern Europe will be taking place there 9-10 November this year. I'll be there too as I am speaking at the event on Energy Trading Risk Management - Trends, Issues and Systems on the 9th November at 1:40pm....

See you there?

It struck me today that I should post something about the office here in Brno. So here are a few photos of Frantiskanska 6, Brno where we currently reside.....

No - that is not my car - I walk to work these days!

Today I took a call from a company called Just Commodity and spoke with Ong Lay Kian, VP, Client Operations and Joel Lou, EVP, Business Development at the company. Incorporated in Singapore just a few years ago, the company now has around 20 top notch users of its software in the agricultural commodities space including Sime Darby, Asian Agri, IOI Group, Uni Mills and more. Apparently, the company has been growing steadily since inception with more than 150% revenue growth each year and is now a 30-strong company looking to expand into North American and European markets.

The company's product is called ContraXCentral which they say connects and creates a single business process across all business units and allows seamless communication throughout the entire value chain. It supports all back-end functions that influence communications and updates all contracts for internal and external party review, resulting in a smoother and more efficient trading flow.

Definately a company to watch in 2010.

Yesterday was a public holiday here in the Czech Republic and so I enjoyed a nice day off. This week and next the focus will be on writing up two study reports on emissions trading & monitoring and risk management.

I'm deep into graphing and charting the emissions study data and it looks really interesting and perhaps even a bit controversial given the supposed interest in emissions these days the survey suggests that it is still an area of relative inactivity at energy firms....

I am also in the midst of finalizing our vendor assessment materials which we hope to issue soon....

The CommodityPoint online trading & risk management software and services directory (http://www.trmdirectory.com) was launched last winter with the idea of providing a free online directory for those looking for potential solutions and suppliers in the trading & risk management area. The online directory has 149 company listings across 32 different categories currently and is becoming the online source for this type of information. The site also attracts vendors and service providers who are not currently listed seeking a listing and essentially places that company on our radar screen. This IssueAlert will highlight a few new additions that may be unfamiliar to you.

Note: The provided information is taken from the company’s websites much in the same way that they are listed in the TRMDirectory. CommodityPoint cannot garauntee the informations accuracy.

Power Settlements (www.powersettlements.com)
Power Settlements is a consulting and software company that specializes in assisting energy companies with validating and automating all of their ISO and bilateral settlement processes.

Settlement analysts perform a very data intensive process that involves the settlement of potentially billions of dollars for their company. Industry-wide, settlements is a largely manual process performed in spreadsheets. Its SettleCore™ software is used to put an application framework around the settlement process in order to instill automation, process controls, validations, traceability, and auditability into the settlement process. Power Settlements believe that with the right software in place, settlement analysts will not need to spend their time calculating settlements, but rather will have significantly more time to focus on data analysis, alerting the traders to the results of the after-the-fact settlement of their trades, and finding and filing more disputable transactions – all of which impact the company’s bottom line.

Currently the provider offers its solution for CAISO market participants and has recently signed its seventh user.

Just Commodity (www.justcommodity.com)
Just Commodity’s CTRM solution, ContraXcentral™, was developed to improve efficiency, allowing you to focus on your core competencies. By identifying areas which require the consolidation of information, ContraXcentral™ intelligently creates reports and alerts based on this information. Data is thus communicated accurately, keeping mistakes and time-consuming errors to a minimum.

The fast paced growth of emerging markets and growing global demand for commodities has placed enormous stress on the resources and operational efficiency of the global supply chain. Coupled with increasing market volatility, organisations need to control risk, exposures and maximize their operational efficiency now more than ever. In this constantly evolving world, being on the forefront of information can improve your trading operations and business productivity. With the most updated market intelligence, your trading operation becomes more lithe and efficient when you make knowledgeable business decisions.

The company has at least 9 users of its software currently.

ComFin (http://comfin.net)
ComFin offers software solutions and consulting services to the commodity and energy industries. ComFin’s TheBulldog™ software is a comprehensive package that supports trading, trade administration, operations, risk management, back office, finance, storage, logistics, and reporting. Its software is widely used by companies in the crude oil, chemical, petrochemical, soft commodity, shipping, and refined product industries and covers all physical transactions and paper instruments. With ComFin’s TheBulldog™ software all, processes of Front, Middle and Back Office are managed effectively. TheBulldog™ provides automatic market quote downloads from recognised data vendors and exchanges such as Platts, Argus, ICE, and NYMEX.

The company boasts more than 30 current customers.

Woodlands Solutions LLC (www.woodlandssolutons.com)
Woodlands Solutions specializes in helping gas marketing organizations improve their operational efficiency, manage their exposures, and demonstrably improve their control over operations through our Phoenix Energy Trading and Risk Management solution (Phoenix ETRM). Phoenix ETRM provides gas marketing organizations with a cost effective, front-to-back office, scalable solution which allows customers to focus on managing their positions rather than managing their data and processes.
Phoenix ETRM provides gas marketers with the functionality they need to automate and standardize their operations.

This new company has at least one customer currently.

Summary
When seeking a C/ETRM software solution it is easy to simply consider the ‘usual suspects’ but there are actually more than 140 prospective suppliers of CTRM software or aspects of CTRM software and services available to you. CommodityPoint continues to discover new suppliers and add them to the directory so that it is the definitive online source for our vendor and product research. Additionally, CommodityPoint obtains briefings with all vendors in the directory and initiates analysts coverage meaning that we are able to provide up to the minute advice and guidance around the CTRM software landscape. When combined with our unparalleled breadth of industry research often published in the form of reports (www.commoditypointstore.com), we should be your first port of call when seeking product and vendor information.

The most recent edition of the magazine Commodities Now includes an article by yours truly called Commodity Crisis - Are we simply avoiding the real issues? (Volume 13, Issue 3, September 2009). It is one of several articles of real interest I think to commodity traders and commodity trading firms in the issue.

If you do get to read it, I would welcome your opinions and responses.

This IssueAlert article is the first in what will be a series of interviews with consultants and systems integrators in the European CTRM software space seeking their views on some of the issues around European trading and CTRM software.

UtiliPoint: Describe Seminel, its goals, objectives and history.

Founded in 2003, we provide specialist ETRM Business and IT consultancy.Our focus is on ensuring ETRM solutions deliver value. Too often in the past, ETRM implementations had provided, for instance, little in the way of decision support. To address such shortcomings, we have developed approaches to enable businesses to define and then meet their objectives.
We participate in all stages of a Project: Planning, Vision & Strategy, Requirements, Package Evaluation and Implementation. We provide our services to Energy Companies but also Vendors and Integrators.

UtiliPoint: As an expert practioner, what do you see as the biggest challenges facing energy trading firms in Europe right now.

The Energy market is heterogeneous and evolving. Thus a key challenge is to produce timely, integrated information across multiple physical markets and asset classes without implementing an inflexible leviathan i.e., something that is time-consuming and costly to change or upgrade.

UtiliPoint: What developments have there been in European energy organisations that you see as important.

An interesting development has been the desire in energy companies to have an holistic view across the market, rather than each office trading independently. This has led to the setting up of a single entity within an organisation to be responsible for hedging aggregate positions&#151not dissimilar in a sense to how Financial Institutions are organized. Ultimately, if done effectively, I have seen this action simultaneously reduce transaction costs and enhance market power.

UtiliPoint: How do you see demand for ETRM and associated software&#151what is driving that demand?

Key drivers we see are to:

• Improve operational efficiency and consequently reduce costs
• Enhance decision making in trading, risk management, operations and senior management through having appropriate, consistent and timely information across the enterprise
• Reduce operational (and reputational) risk through eliminating costly errors
• Liberate users to perform value-added processes rather than manual, repetitive, labour-intensive task
• Enable the business to respond flexibly to changes in the needs of the organisation as well as the demands of the marketplace

UtiliPoint: What do you think users of ETRM software should be most aware of when selecting and implementing ETRM software?

First of all they should determine their goals, e.g.:

• What is the primary objective: operational efficiency, competitive edge etc&#151if competitive edge, might custom rather than package be worth considering?
• Is there a requirement to integrate positions across markets and asset classes (this could narrow down the field considerably)?
• To what extent do they need to integrate their Trading with Physical Operations (again this may reduce the alternatives)?

They ought to check the references of the vendor for a similar implementation.

Finally, I would recommend a thorough Conference Room Pilot to understand the capabilities of both package and vendor.

About Paul McLean-Thorne

Paul McLean-Thorne is a Director at Seminel, a specialist Energy Trading & Risk Management (ETRM) business & IT consultancy. At Seminel, Mr. McLean-Thorne has been involved not only in ETRM business analysis and systems implementation but also in the creation of a decision support framework.

Prior to Seminel, Mr. McLean-Thorne worked for business and IT consultancies such as Accenture, EDS, Cap Gemini and Sapient.

Mr. McLean-Thorne has experience at every level of ETRM IT implementation:

• Business Analysis: requirements & gap analysis, package evaluation, business case, process & data modelling etc
• Programme & Project Management
• Systems Integration & Package Implementation
• Software Analysis, Design & Development
• Strategy, Vision & Blueprint development
• Advisory & Quality Assurance.

Mr. McLean-Thorne has undertaken projects with clients such as Alpiq (Atel), BP, ConocoPhillips, DONG, London Electricity (EdF), E.ON, Essent (RWE), Halliburton, Nuon (Vattenfall), Shell and StatoilHydro in the Energy Industry, S&W Berisfords (Enodis) in Commodities as well as BFCE, Citibank, Credit Lyonnais, Deutsche Bank, HSBC, Morgan Euroclear, NCB, NMB and Rabobank in the Finance Sector.

In these projects Mr. McLean-Thorne has been involved in the deployment of Oil, Gas, Coal, Power, Commodities and Financial products in Europe, the United States and Asia across Front, Middle, Back Office, Operations and Accounting.

Mr. McLean-Thorne speaks at Energy Industry conferences and seminars and also publishes white papers on the Energy market and IT, for example this Beat the system energy risk article.

Mr. McLean-Thorne holds an Honours degree in Computer Science from the University of London.

Contact details:

Email: pmt@seminel.co.uk

Tel.: +44 (0) 20 7193 8321

Website: www.seminel.co.uk

A good brand and awareness of that brand is one sure way to be successful at selling anything. But what is a brand? While many people might believe that a brand is some statement like “I’m Lovin’ It” (MacDonalds) they would be wrong - that is a tag line that hopefully supports the brand. No, a brand can be likened to a person’s personality. A company will develop its brand essence - essentially a carefully composed and considered annunciation of its personality and value – and then use various means to communicate that to the market. Like a personality, getting that brand to ‘stick’ isn’t just about communicating it, it is about living it. It is about how customers, employees and other interested parties perceive and respond to the brand. In reality, the brand is what the market perceives in its interactions with the company.
Many ETRM/CTRM vendors work hard in developing and communicating their brand. In the end though, it is the market’s perception of brand that counts. That is why CommodityPoint performs a Vendor Perception Study every two years. We test the market perceptions of the vendor’s brands and gain a good idea about who the perceived market leaders are across a wide range of categories. As we perform the survey regularly we can get a good idea of how things may be changing in the space too. The last survey and report was released in Q2 of this year and was kindly sponsored by Navita and SolArc.
The study indicated that the TRM software market landscape is becoming increasingly dominated by a group of transnational vendors and products that includes OpenLink Financial (OLF), Triple Point, SunGard Energy, Allegro Development, SolArc and Ventyx. Other vendors have a higher degree of importance in particular geographies (for example Navita in Europe and OATI in North America) or in particular industry segments (e.g. Amphora in Crude Oil and other segments, Abacus Solutions in the Generation segment and so on). In terms of brand recognition, this smaller group of more dominant vendors is increasingly well known.
In general, the survey indicated that the market has matured and continues to mature. Users and prospective buyers are familiar with a broader range of vendors than at any time in the past. At the same time, there appears to be broader consensus about which vendors lead the market overall as the group of vendors mentioned by respondents as overall market leader has grown smaller and those vendors mentioned have mostly increased their perception as overall market leader. Despite that, for many segments of the industry or for specific areas of functional coverage there is remains some confusion and disagreement over market leadership.
CommodityPoint utilized previous performed perception studies to place the results in a historical perspective and there has been some movement between vendors in terms of both overall brand recognition and perceptions around market leadership – particularly in Europe. OLF and Triple Point have both made gains while SunGard Energy and Allegro Development have seen some erosion by comparison. Other vendors such as SolArc, Navita, OATI and others continue to emerge with greater brand strength and awareness. Ventyx, which has made several acquisitions over the last year or so, appears to suffer from some brand confusion as a result but may well emerge as a market leader as its acquisitions are consolidated.
In general, the survey showed continued maturing of the software category and consolidation of the major vendors however, it continues to demonstrate that the various flavors of TRM solution required across the commodities space, means that there is still a place for regional and segment specialist solutions.
As the group of five to six major vendors emerges however, in a sense the market is becoming increasingly competitive. Brand is becoming more important and these vendors need to carefully protect and further define their brand qualities in order to differentiate themselves. At the same time, emerging vendors are waiting in the wings to take advantage of any faltering steps on the part of the major vendors. There is still plenty of choice for buyers and still plenty of brand building to be done.

The 2009 Vendor Perception Study Report sponsored by Navita and SolArc can be purchased at www.commoditypointstore.com

CommodityPoint, in conjunction with Global Changes Associates, is conducting a study into emissions trading and monitoring software which is scheduled to complete by the end of September 2009. The concept behind the study was to gain an understanding of the use of emissions trading and emissions monitoring software in the industry at a time when the US Administration may legislate for a cap and trade market in the US and thus interest levels are high.

Cap and trade for greenhouse gas emissions will be the way forward for the US greenhouse gas regime not a carbon tax. Because of that fact, it is highly important that Fortune 2000 companies begin to actively monitor and manage their greenhouse gas emissions. The proposed US federal program will cover about 85% of the US economy and many companies that are not actively engaged in either energy trading or emissions trading markets will be required to report their emissions and either buy or sell carbon allowances. We expect that a federal deadline for active carbon emissions management may be sooner rather than later, and believe many companies to be scrambling to report and verify their emissions footprints in the next two years beginning in 2010. Recent protests against cap and trade are only political posturing for the inevitability of greenhouse gas management and an attempt to obfuscate this reality. Our study is the first attempt to categorize the needs of companies in this emerging market.

While the study is not yet complete, early indications suggest that both the emissions trading and emissions monitoring software markets remain immature and ‘virgin’ software markets still largely served by spreadsheets or homegrown software solutions. Other evidence to support this interim conclusion comes from the survey respondent’s lack of recognition of the key software providers in both software markets. Furthermore, future demand for both types of software seems somewhat lackluster given the potential for further legislation and the perceived general level of interest in all things environmental.

So far, our survey has had over 30 valid responses from a wide variety of industry participants dominated by Utilities, End Users of Energy and, Generators (Figure 1 below). Some 62% of respondents are located in North America and 30% located in Europe.

Figure 1: Types of Respondents


With the EU ETS now maturing and the chances of a US cap and trade market increasing rapidly, one may have expected to see more demand for both emissions trading and emissions monitoring software than is so far indicated by our survey. For emissions trading software only 19% of respondents say they will be procuring software in the next 24-months and only 6% in the next 12-months. For emissions monitoring software the interim results show even weaker demand with 16% planning on a procurement in the next 24-months and 6% in the next 12-months. On the trading side only 13% of the respondents utilize a vendor-provided software solution while on the monitoring side only 18% of respondents utilize a commercially provided solution.

As stated above, most reply on spreadsheets and homegrown software in both areas. Perhaps even more surprising is that the vast majority of US respondents have not yet performed an inventory of their emission sources or carbon footprint.

The survey interim results appear to be to some extent at odds with reports from the key vendors in the space who report highly increased interest levels. Indeed, there have been some important movements as many traditional ETRM software vendors have now or are in the process of releasing fully functional emissions trading modules including Triple Point, Allegro and others. Earlier in the year SAP entered the emissions monitoring software arena via its acquisition of Clear Standards. Additionally, the political momentum is certainly now tipped towards some form of carbon regime in the US which in all likelihood will act as a tipping point for even further developments that will have a significant impact on the energy industry as a whole. So what gives?

The survey suggests at this stage that all of the political activity and interest in the issue generally has not yet manifested itself in plans to procure commercially available software. Indeed, there appears to be confusion in the market as prospective buyers are faced with a wide variety of prospective suppliers offering a range of potential solutions. On the trading side of the house, it is likely that most will opt to simply utilize their existing ETRM solution somehow to manage emissions trades but in the monitoring side there are simply tens of small venture capital-backed suppliers offering predominantly SaaS or hosted solutions. Consolidation must and should be expected in this immature software market.

Meanwhile, we would like more responses to our survey and if the results to date intrigue you we suggest that you take some time to complete our surveys online. We will provide a management summary of the results to all respondents when the study is complete. The survey questions may be found as follows; One is tailored for energy traders and this survey can be found at:

http://www.utilipoint.com/2/emissionstradingsoftware2009/
The other survey is tailored for those that monitor emissions. This survey can be found at:

http://www.utilipoint.com/2/emissionsmonitoringsoftware2009/

We expect many new software platforms to emerge as the US emissions markets become more mainstream. New applications of existing software platforms as well as new market entrants are already coming to the fore. Enterprise wide software solutions for emissions management is one more application of a new trend in environmental management.

We are pretty busy doing research right now and have three different surveys running. We seek your replies (energy companies only please).

The following are still open:

Credit Risk Survey - click here

Risk Management Survey - click here

Emissions Trading & Monitoring - click here

The results of our previous research can be found at our online store
Many Thanks....

While CommodityPoint is perhaps best known as a research-based analyst firm we ae quite often asked to help end users in CTRM software selection efforts and even pre-selection project planning. Most often CommodityPoint supplement the project team in an advisory and audit capacity where our expertise can help streamline and speed up the process while helping to minimize project risks. We can do this because, as the leading analysts in the space with much vendor and product research at our disposal, we have a good feel for the landscape that can be brought to bear on the project as follows;

• CommodityPoint has seen almost every product on the market and has models and views on each product and vendor that can be utilized to, for example, build long lists of potential solutions for end users thus eliminating a lot of required research on vendors and products and eliminating the risk of omitting a less well known solution from consideration. See our best selling book “Trends in ETRM Software – A Primer” available from Amazon.com for example.

• CommodityPoint analysts have significant experience in project management specific to CTRM software selection and implementation which can be utilized to help identify and minimize project risk – for example, see our best selling book “Selecting & Implementing ETRM Software – A Primer” available via Amazon.com.

• CommodityPoint can offer workshops that cover the entire gamut of the state of play in the market, the selection process, the implementation process and so on that can help with budgets, planning and preparation for the software selection and implementation.

• We also have a number of reports available covering the vendors, their market perceptions and more that can prove quite useful additions to any project planning or preparation process.

CommodityPoint analysts expertise around CTRM software can help ensure that your CTRM software selection and implementation goes more smoothly, faster and more cost effectively than it otherwise might have done. Let’s examine some commonly missed aspects of software selection for example.

One risk to your project is that you omit a vendor and product that may be well suited to your requirement because they are not very well known and more difficult to find doing basis internet research. In that regard, CommodityPoint has developed an online source that will help at http://www.trmdirectory.com that lists and links to all suppliers that we are aware of and to which we add any new ones that we find during our research. Despite the existence of this source, CommodityPoint can help quickly match products to your requirements and help develop a long list of potential candidates in the process.

Another risk is actually reference checking. Surprisingly, many buyers do not check references or do so inadequately. CommodityPoint has extensive databases of vendor clients and an extensive knowledge of the good, the bad and the plain ugly when it comes to vendor implementations across the industry. We can help you supplement your reference checking and ensure that you gain a good appreciation of the vendors such that risks can be identified and managed.

Finally, by having CommodityPoint involved in the project alongside your consulting firm or systems integrator you have an independent auditor of the project involved. Our independence means that we can honestly assess your project plans and deliverables for risks, oversights and opportunities to save time and effort.

CommoditPoint provide a multitude of tools to support your projects even if we are not directly involved. Some have already been mentioned but here is a list of tools available from us;

• Our book – “Trends in ETRM Software – A Primer”. This book will offer you and your project team a comprehensive glimpse into the software landscape, trends and much more and help get your project started with a shared set of knowledge.

• Our book “Selecting and Implementing ETRM Software – a Primer”. This book covers everything you and your team need to know about the process, the risks, the costs and how to manage them all.

• The TRM Directory online at http://www.trmdiectory.com offering lists of all suppliers, short descriptions of the supplier and their products as well as direct links to their websites.

• Reports available at http://www.commoditypointsore.com which cover vendor perceptions, market size, recent industry trends and more…
• White Papers and Technical Briefing Notes also available at http://www.commoditypointstore.com which provide informative discussion about recent trends and vendor product initiatives.

• The IssueAlert archive at http://www.utilipoint.com with an easy to use search term tool – find recent write ups regarding vendors, trends and issues in the CTRM software universe.

Three years ago this month I moved back to Europe after some 12+ years in Texas. They talk (ExPats do) about a thing called reverse culture shock and I know why. It is quite different in Europe on many fronts. In fact, arriving in the USA all those years ago was a big culture shock. Brits tend to think that going to the US will be easy – after all we speak the same language (almost!) and our culture is permeated with American TV, movies and fast food chains. But, like many Brits going to the US, I found America more alien than any other foreign country I had ever been to. Of course, you get used to it in the end which is why coming back is also a shock.

Pace of Life
One of the first things that hits you is the pace of things. In Europe, things seem to take longer and involve more time lining up for things. I’m not just talking about lining up to buy my groceries but also about the time it takes to do a business deal here. Europeans tend to like to get to know you before dong business whereas many Americans will give you a small project quite rapidly to see how well you do. Entering European markets takes time. You have to build relationships first and ask for the business later and you need to be patient during the process.
Then, of course, there are all of the rules! Watch out when sending email in Europe as you require your intended recipient to ‘opt in’ to receiving marketing emails and there are quite heavy handed laws protecting people against spam here. That means that you must be cautious about building email lists for those marketing blasts and that you must actively manage your lists with far more attention to detail than in North America. So how can you market here?

Well, forget online seminars for a start. Popular in the USA, online seminars are pretty alien to the culture here and not very popular as a result. Of course, blasting marketing emails to promote the event is difficult (see above) but it does seem that folks are much less inclined to take an hour out of their day to sit on the phone for a webinar here. Again, it may have something to do with the requirement to build a relationship before asking for their time and business. So marketing in Europe has to be conducted quite differently to in the US. Press announcements, building personal relationships through face-to-face meetings and visibility are the key aspects of marketing ere in my experience.

The good news is though that once you have a client, they are much more likely to stick with you in Europe over the long-term.

Employing People
Thinking about opening an office in Europe? Well, Europe sets more importance on employees than employers and US firms need to check the lay of the land pretty thoroughly. Each country has its own laws and there are also European Union employment laws too. Here are a few general differences that I have observed that should of course be checked by any firm opening an office in Europe depending on the country your office will be located in (I am not a lawyer nor an expert so please get good legal advice);

1. You will hire prospective employees in some locations on a trial basis – most likely 90-days. During that period, you can fire them at any time for any reason but after that notice is up you will be mandated to provide a minimum of 90-days notice on either side and you may not fire them except for cause. For more senior employees anticipated notice periods can be 12-months or more if you wish to be competitive. Proving cause is also more rigorous than in the US. You will need to keep written logs and provide written warnings with the help of a lawyer familiar with employment law and what may constitute ‘cause’ in the US may not be at all relevant here – see below

2. Don’t even bother writing in non-compete clauses into employment contracts – there is no such thing here as it infringes the individuals rights to seek employment. Here in the Czech Republic, you don’t want them to compete you pay them not to. It’s similar in other European locations too.
3. Many other restrictive covenants common to US employment contracts are illegal in Europe. Want to protect your inventions, methodologies and so on? Forget it. In many European countries this is a non-starter.

4. Benefits – benefits are an expected part of any employment package and can run from company cars to meal vouchers. Oh – and four weeks’ vacation and a 35 hour week are pretty standard too!

5. Remember, Europe favors the employee in all matters and the employer has therefore to be careful in hiring.

What this all means is that the hiring process is slower here too. Employers are more cautious before offering employment because once they do it’s difficult to fire an employee that does not perform. Good legal advice is a must before hiring anyone in Europe in my view.
Additionally, bringing US staff over can be fraught with difficulties including work permits, visas, registration issues and so forth. One good aspect of Europe is the existence of free healthcare which is variable in quality and is often supplemented with private insurance. Here in the Czech Republic, social medicine is excellent but requires the employee to be paying health taxes via local payroll in order to qualify for example. Again, this is an area that requires good legal advice up front.

Summary
Life in Europe is neither better nor worse than life in the USA. It is just different. It does take a personality that is open to doing things differently and who has a good measure of patience however. There are also many other benefits to life here that include the ability to visit some amazing places, sample local cultures and language and … the energy industry at least is very similar!

Twitter is all the rage apparently these days and who are we not to keep up with these things? Follow us on twitter.com at http://twitter.com/UtiliPoint and find out what UtiliPoint is up to......

CommodityPoint’s recent study on the issues facing global commodity trading firms quite clearly indicated that credit and counterparty risk was considered to be a serious issue under current market conditions. Indeed, risk management overall was cited as the top issue among the respondents in that study and this has driven much procurement activity over the summer months.
Meanwhile there is also activity in the software vendor community. Last year, Triple Point acquired Rome Corporation and its’ credit risk solution while Temenos is now the owner of Rome’s biggest competitor – Raft International – via its acquisition of Financial Objects who had acquired Raft some time ago. Additionally, many traditional ETRM vendors have or are beefing up their credit risk functionality; most recently exemplified by Allegro’s announcement of its version 8.1 Credit component. But the energy credit software category is actually rather confusing.

Energy Credit Risk Software Solutions
Software solutions such as Rome (now Triple Point) and Raft (now Temenos) were really designed to serve the needs of the credit department at major energy firms. Many trading firms by necessity actually have multiple trading (ETRM) solutions implemented and these credit solutions were designed to integrate with all the trading systems utilized internally by their users firms. Additionally, the applications are very functionally rich. Other providers have also tackled this side of the market including House of Code, SpectrumPrime and Paragon Consulting for example.

At the same time the issue of credit has gained a more significant profile on the trading and risk management side of the business meaning that ETRM software vendors have also been adding functionality around credit risk management to their solutions. But in reality the two areas (credit and trading/risk management) have slightly differing requirements albeit these may be converging. The acquisition of Rome by Triple Point may also have served to accelerate the movement by ETRM vendors into more comprehensive credit risk functionality as Triple Point now has a fully fledged credit solution that it can sell either on a stand-alone basis or as an incremental add on to its ETRM software platform and other ETRM vendors are seeking to replicate this strategy.

Where Is This Market Headed?
CommodityPoint spoke with Aviv Handler, co-founder of Redshift International Limited, a specialist credit risk consulting company that offers expertise and services for the energy, commodity and investment banking markets, to gain another perspective. “Rome and Raft are targeted more at credit departments with quite heavy credit needs,” he told us. “I can’t really see the ETRM vendors catching up as they have to face the obstacle that most trading firms have multiple trading systems in place and that trading data needs to get into the credit solutions.” In fact, he also sees that most ETRM Vendors credit solutions are aimed primarily at meeting a reduced and different set of requirements in the trading & risk management area.

CommodityPoint agrees with Handler’s assessment in that there are two different sets of requirements and two different targets for the software vendors in the credit and trading/risk management areas. But, with credit risk so high a priority at all trading firms there may yet be significant convergence in requirements in our view and Triple Point’s acquisition may serve to be the catalyst that accelerates that convergence on the vendor side as well.

In reality, the market for energy credit software is quite complex as like most energy software markets it is horizontally tiered and vertically comprises of many different types of end users (marketers, utilities, oil companies, banks and so on). While many top tier energy companies will have significant credit departments that would primarily procure true energy credit software, many others do not and here the ETRM vendors may find fertile soil offering a smaller footprint credit module extension to their ETRM platform. Over time, as ETRM vendors add more and more functionality they may end up offering complete energy credit solutions. Indeed, this is where Allegro seems to be headed with its new credit component.

At this point in time, CommodityPoint research would seem to suggest that in fact the majority of credit departments in the industry still utilize homegrown, custom or even spreadsheet-based solutions and is something of a virgin market. Triple Point and Temenos (Rome and Raft) have certainly made headway into the market but it is still quite early.

Help CommodityPoint with Our Credit Risk Survey!
In order to try to understand the energy credit risk software market in more detail, CommodityPoint is undertaking a short survey seeking to obtain more data on trends, installations and future plans. We seek your input and in return will offer the management summary of the study to those firms that participate. The survey is being conducted in relatively short order and so if your firm would like to participate, please do so before the end of August. The survey can be found at www.utilipoint.com/2/creditrisk2009/

Call an ETRM software vendor these days and they will tell you that despite the financial crisis, there are plenty of Requests for Proposals being issued at the moment. Further, they will tell you that the key driver behind these activity levels is risk management.

Risk Management was identified by the respondents to our Commodities study1 earlier this year as the primary critical business issue facing them as traders and executives a trading firms. In fact, it ranked an average score of 4.38 (on a scale of 1 to 5 where 5 was critical). Drilling down deeper into the responses to the study, the emphasis on risk management under current market conditions was even more emphasized by some of the other important business issues mentioned by the respondents which included:

• General Market Liquidity
• Understanding the Factors Behind Price Formation
• Rising Credit and Collateral Requirements
• Portfolio Management
• Reporting
• Credit Scoring
• Errors & Omissions
• Lack of Audit Trails
• Lack of Integration

This led us to produce a number of white papers around the theme of risk management and the idea of "holistic " risk management&#151including "Seeking total risk management solutions in today's commodity markets" and "Breaking down the barriers to holistic risk management."

Today, risk management must incorporate much more than just market risk. It must include a focus on liquidity risks, operational risks, regulatory risks and credit risk and, if involved in physical trading, it must also involve a focus on deliverability and other areas of exposure. This is what we have termed "holistic" risk management and it is this broader interpretation of risk management that is indeed the driver behind the activities in the ETRM software market today.

Areas of Concern

CommodityPoint has discussed several major areas of concern in the risk management area so far this year in several IssueAlert articles. Let's review them again:

1. The Need for a Broader View of Risk&#151most ETRM software solutions have adequate coverage of market risk but how well do they cover other areas of risk such as credit risk? Many pay lip service only to other aspects of risk management and require that users build or deploy off-system work arounds to cover credit risk, regulatory risk and so. Certainly, ETRM solutions vary in their coverage of risk management depending upon their pedigree and some provide better coverage of physical risks than others, some better credit risk management and so on.
2. Risk Analytics&#151as commodity markets have evolved and changed, particularly over the last 18-months or so, volatilities have often been very high. The algorithms used by many risk tools are somewhat dated and may no longer be ideal for current market conditions. Some methods assume that input parameters are within certain ranges including for example volatility and may now be highly suspect. Further, many utilize historical price movement s o predict future price movements and yet commodity prices and price trends have broken with history recently and in a supply constrained world are increasingly likely to do so. ComodityPoint has recommended a move towards more stochastic risk assessment methods and more stress testing and scenario building to compensate.
3. Lack of Integration&#151It's no secret that many trading companies operate utilizing software which is aging and or has to be supplemented by spreadsheets or other pieces of software. Further, the integration levels between these software components is poor. Under such circumstances, workflow cannot be properly implemented&#151if at all&#151and the infrastructure is fraught with areas of potential risk such as errors, omissions and fraud. Under today's market conditions, the issues experienced with poorly integrated software is magnified as they are increasingly stressed. In a nutshell, the software is increasingly an additional risk factor to consider.

4. Reporting&#151It's quite easy to get data into most ETRM solutions but often it's a little more difficult to get information back out again. While some vendors have made considerable advancements in this area, the need for real-time views into the operation and for tracking of key performance indicators often cannot be met compounding an already difficult situation.

There are, of course, other areas of risk but for CommodityPoint, these appear to us to be the key ones.

Changing Needs Will Drive Innovation

The changing nature of commodity markets and the increasing exposure that traders face are driving innovation on the part of both the vendors and the users. More market oversight and regulation is increasing the pressure on executive management to ensure that their trading operations are run to a set of comprehensive risk guidelines. That innovation can be seen in the existence of new ventures offering a different approach to managing risk and in the upgraded offerings being announced by existing vendors. Much more innovation will come in the areas of business intelligence, architectures, risk metrics and more.

Despite that, what is required is a more comprehensive understanding of some of the issues. What types of risk metrics and tools are deployed today? for example. CommodtyPoint have responded to this need for data and analysis by teaming up with UK-based consulting firm, seminel, to undertake a comprehensive follow up to the Commodities Study focused on risk management. Kindly sponsored by Abacus Solutions, Amphora, SAS RiskAdvisory and SolArc, this study is now underway and we would like your firm to participate. To do so, please complete our questionnaire available here. You will receive the management summary when completed and we will cover the results in an IssueAlert article at that time.

1Changes in Commodity Markets: Impacts on Traders and Software, CommodityPoint, 2009

We have launched our new survey on risk management. It is a follow up to our earlier Commodities study which showed that risk management was the clear number 1 critical business issue for energy and commodity trading firms.

If you are a trader or risk manager, please do take the survey by clicking here. You will receive a copy of the management summary when completed and a free copy of our book "Trends in ETRM Software - A Primer" worth $30!

NOTE: Vendor staff - please do not take the survey as your responses will not be included in the final results. Thanks.

Yes - its summer and so a summer sale is in order....

Check out the reports at the Commodity Point Store and if anything there takes your fancy, email me for your 25% off discount code provided you purchase from the website using paypal!

What are you waiting for???

email me at gvasey@utilipont.com

The phrase "Energy Trading and Risk Management" (ETRM) would seem pretty self explanatory. It means, well, the trading of energy and managing the risk associated with the trade or trades. Right? Well, yeah, but not really.

ETRM has been adopted as a label by software vendors in order to readily identify themselves and their products to a marketplace comprised of a very diverse group of companies that transact in energy commodity products. The term first appeared more than a decade ago and was actually intended to be ETTRM&#151Energy Trading, Transaction, and Risk Management&#151implying an even broader set of capabilities beyond the trading environment, reaching out to include those systems that tracked and managed transactions that were not based upon the sale or purchase of a commodity, but rather focused on the logistics involved in managing the commodity, such as pipeline nomination systems.

As an analyst covering energy and commodity trading, including the systems and technologies employed to support the trading business, I find myself struggling with term. Because "ETRM" has achieved fairly ubiquitous usage, it's become the default identifier utilized by many different software development houses that field systems that touch anywhere along the wholesale (and at times, even the retail) energy supply chain. Given the wide variety and complexity of processes involved in the commercial exchange of energy commodities, it's exceedingly difficult to effectively capture in a single bucket the breadth of tools and applications that are required to meet the needs of today's market players.

On one end of the ETRM product spectrum, you'll find specialist systems, such as a web delivered solution that calculates Value at Risk (VaR) for wholesale energy trading books. On the opposite end of the spectrum are systems that are very broad in functionality and encompass capabilities that attempt to cover virtually every aspect of the extremely complex process of energy delivery from "source to sink", including production management, wholesale trading, commercial marketing, contract management, position management, risk analytics, logistics, operational optimization, financial accounting, and credit and credit risk management.

Some vendors have, appropriately, narrowed the term down to more accurately reflect their competencies by using the term "risk management" system. Even within this category however, you'll find a wide variety of capabilities. At CommodityPoint, we see the term "risk management system" applied to solutions whose capabilities involve contract management and deal capture for physical and financial products, the ability to consolidate the value of those deals to a single screen or report (position management), and finally, be able to produce fairly complex analytic metrics such as VaR or PaR (Profit at Risk). Then again, on the other extreme, we see software packages that pull in transactions from other systems (instead of direct deal entry), produce a simple position management view or report (but only for financial transactions), and provide little in the way of analytics beyond the financial position management capability and a VaR or Mark to Market (MtM) calculation related to those positions.

Beyond being able to identify a system by its functional footprint, one also needs to understand the complexities poised by commodity coverage. There a several systems available today that can capture a purchase or sales deal for virtually any commodity (either physical or financial), and can, with a fair amount of functional competency, address the unique logistics requirements of those commodities, whether they travel by barge, ship, wire, pipe, truck, plane, or train. Still other systems are available that provide the same types of broad functionality (deal capture, scheduling, position management, accounting, etc.), but are more focused on managing the unique needs of a single commodity. These single commodity systems shouldn't be viewed as less capable; in fact, it could be argued that for their specific coverage, many provide a greater depth of capability, particularly in the area of logistics, than do those systems that cover a wide range of commodities.

So what's the point of all this? It really boils down to this&#151it's very difficult for any potential buyer of "ETRM" software to understand and stay abreast with the ever changing capabilities of all the various vendors that serve this space. Despite what their marketing materials and sales staff may indicate, an ETRM system from Vendor "A" does not equal an ETRM system from Vendor "B". Each system has evolved in a unique manner, having been developed to meet the needs of the individual vendor's clients and potential clients in their target market, both of which will change over time. For example, Vendor "A" may have started in the wholesale power markets a number of years ago, supplying tools that allowed wholesale power traders to transact in various ISO's and RTO's, and only later built out natural gas capabilities in response to their market's demands for a system that could also manage fuel procurement; and from there, it was on to wholesale gas trading and risk management. Vendor "B" may have evolved in the opposite direction, initially serving natural gas trading organizations and moving into the wholesale power markets much later. So they both currently serve the same markets, however, it's likely that the relative strengths of their products will be significantly different, with varying degrees of "maturity" for specific functions or commodities. If you're a buyer looking for a system to help you manage your business around, for example, the NYISO, which system would be the optimal solution? The answer may be Vendor "C". Unless you have a gas portfolio, or plan on developing one in the next five years, you might be better off with a system that is focused only on the regional power markets.

If you haven't had experience with those products and understand their relative strengths, it could be very difficult to discern any differences amongst the multitude of ETRM vendors based upon their sales and marketing materials. Painting the market with a broad "ETRM" brush can produce a lot of confusion for companies seeking software solutions to fit their specific functional needs. As such, it's certainly in every buyer's best interest to seek out expert advice and guidance as to which vendors are capable of addressing that buyer's specific needs, and have done so successfully with similar companies. Unfortunately, many times companies seeking out software solutions will fall back to what they know and have had experience with. While that limited view may produce a "best fit", the odds are that there is a better solution available for that particular buyer, one that provides either a better functional fit with their assets and strategies, or one that provides higher value in terms of cost vs. functional coverage.

Think of it this way&#151you need a motor vehicle to take you from point A to point B—on one hand you can hire a cab, on the other extreme you can buy a bus and drive yourself; both will get you there in about the same amount of time, but one is going to be a heck of a lot more expensive; unless of course you travel that route every day, and always travel with thirty of your best friends; or you may only travel the route once a week, but you may be able to pick up a couple of dozen high paying riders along the way; or you might need to carry a lot of cargo with you, or … never mind, it's complicated.

CommodityPoint maintains a number of free resources to assist companies as they seek out new "ETRM" systems, including the online TRM Directory (www.trmdirectory.com) which lists all the providers of software in and around the energy and commodity trading, transaction and risk management software space along with service providers and other resources. The ETRM Community website (www.etrmcommunity.com) and blog provides additional information and news on ETRM software. The UtiliPoint Europe Blog (www.utilipointeuropeblog.com) also provides similar information, more focused on European markets.

As I write this article, the price of crude oil has already exceeded $70/bbl for a time and other commodities such as coffee and sugar have also reached record prices. Media headlines are beginning once again to highlight "speculation" by hedge funds and other investment vehicles as, yet again, being the culprits for driving up commodity prices&#151particularly oil. Once again, I feel compelled to counter this media theme and try to focus attention on the real issue which seems to be largely and constantly ignored by both the media and politicians alike. That is that we (the human race) are in deep trouble simply because we are finally facing the end of the era of plentiful and cheap natural resources. The movement into a supply constrained environment will have significant social and political impacts.

The Truth about "Speculators"

Hedge funds and other investors smell profit in commodities because they have understood that where we left things midsummer 2008&#151with almost every commodity at or close to record prices&#151was not a temporary phenomenon. It was the rapid collapse of commodity prices that was and remains a temporary situation.

By midsummer last year, stockpiles of most metals had reached very low levels, almost every commodity was in short supply and this was due to growing demand fueled by Asian growth and indeed North American growth. As recession loomed, demand for raw materials peaked and dropped off rapidly and as those prices fell and credit became harder to obtain and significantly more costly, investment projects were curtailed or postponed. But as soon as some level of growth returns, any excess of stockpiled raw materials will be rapidly utilized and we will experience record commodity prices again almost immediately. This is something that threatens to ensure that economies will continue to struggle under the burden of higher raw materials prices. We are in the same situation but the end result has simply been postponed awhile.

Investors looking at places to place their money all too readily see this. Commodities are the place to be. It really is that simple. Indeed, commodities are no longer an isolated group of instruments where price is dictated purely on fundamentals. They are an asset class that can and are used as a hedge against other asset classes. For example, recently, oil has again been seen as a hedge against the weakening U.S. Dollar and thus, prices have moved for reasons unrelated to fundamental factors.

Indeed, many "speculators" are trading in secondary financial markets. They are taking on someone else's risk and in doing so they play a crucial function increasing liquidity and in a sense helping to temporarily insulate producers and physical players from price increases. Yes, there are those who pursue long only strategies to benefit from rising prices but as we have observed over the last couple of quarters, many of these were badly damaged by rapidly falling commodity prices. Many no longer exist. Additionally, speculators speculate on upward and downward moving prices but I have yet to see (and most likely never will) a headline saying that prices are being driven down by speculators!

And yet it also true that over the last quarter interest in investing in commodities has begun to increase again as evidenced by the launch of many new commodity focused hedge fund vehicles.

But we are actually discussing the symptoms of a problem when we look at investors and commodities. If there wasn't a fundamental reason for commodity prices to rise why would anyone want to invest or speculate at all in commodities?

The real issue is that natural resources are finite and increasingly harder and more expensive to find. A higher oil price is required to justify the expense of developing new supplies.

Commodity Relationships and Industry Convergence

Perhaps masked by the periodic focus on speculators and volatile commodity prices is the growing convergence between commodities. Increasingly, relationships between commodities which result in price swings across broad aspects of commodity markets are helping to highlight the growing convergence between industries such as agriculture, energy, mining and others. In the past, these relationships were quite weak simply because there was some elasticity in supply but as we reach a situation where natural resources are increasingly supply constrained, they are strengthening. The focus on alternative fuels has helped set up tighter price relationships between agricultural and energy commodities while demand for energy has strengthened relationships between certain metals and energy commodities.

The resulting volatilities and tightening of commodity relationships is in a sense increasing the need for commodity price risk management&#151not just for traditional energy traders&#151but for a wide variety of producers and end users of commodities. Indeed, CommodityPoint has observed an increasing number of producers and end users procuring TRM software and we believe that these two industry segments will primarily sustain demand for that software class over the next several years.

In fact, as one examines issues such as the need for renewable energy, greater energy efficiency, alternative fuels, recycling and conservation, the more it is apparent that these are no longer simply energy industry issues but social issues that will require some significant change across industries. As an example, as countries seek to invest in wind power to meet renewable energy targets, they find that it is a supply constrained market for wind turbines and that planned projects cannot be initiated due to an inability to manufacture the turbines in required timescales. It is the fact that most raw materials (and by default, finished goods) are increasingly supply constrained that is helping drive convergence and that is setting up new dependencies between commodities, making commodities increasingly volatile and attracting " speculators" to those markets.

To me, price volatility cannot be significantly dampened by reducing the ability of investors to "speculate" nor can it be addressed by greater market oversight and regulation (not that this may not be required for other reasons). It can only be addressed by recognizing and understanding the fact that for now and the future we are truly in a supply constrained world and that demands a higher level of thinking, a more strategic set of thinking and strategies at both the national and trans national levels.

Returning to Europe has the advantage that one can follow soccer again and anyone that knows me will know I am a die hard Hull City (Tigers) fan. For those that don't know it, Hull got to the Premier League last season after 104 years languishing in the lower divisions and survived by the skin of their Tiger teeth. So another season of magic coming up....

Right now though is a short summer break and I have to admit that when not following commodity prices, CTRM vendors or writing IssueAlerts, I am glued to the internet watching the transfer rumors. Right now it seems that Michael Owen - The Michael Owen - might just play in our Black and Amber next season.... WOW!

The great thing is that Premier League games are on TV even in the Czech Republic meaning the odd Saturday afternoon downing wonderful Czech beer and watching the Tigers claw their way to victory.

However, my luck hasn't been good recently and I had just nicely booked some ultra cheap flights for a late summer's break when just two days later the airline - SkyEurope - announced they had filed for bankruptcy....

Oh well - back to watching commodity prices and TRM software.....