Settlements: Less Guessing, More Quantification

Settlements: Less Guessing, More Quantification

By Steve Malkiewicz

The traditional settlement process validates the ISO billings each month.  These charges include clearings into the DAM and RT pools (energy charges) as well as the ancillary and other transmission adder components.  It is not unusual for the billings to contain errors in volume and/or price.  A formal process is required to quickly identify these errors and file for resolution, saving the business from large, erroneous costs.  As a result, most Retail Energy Providers (or REPs) have some sort of settlements process, mainly performed with monthly granularity. 

Leading REPs, however, have expanded the traditional settlements process to include all the major earning facets of their operations.  This process transforms the REP into one in which decisions regarding margin, supply, and price are made with the most up-to-date, relevant data, typically with a much finer temporal granularity.  This allows for a deeper dive into the workings of the business and will eventually lead to a tighter-run, more profitable business. 

  1. QUANTIFY Your Generated Margin.   Any settlements analysis is incomplete without correlating the cost of energy sources (supply, ancillary services, etc.) to the delivery of energy to the consumer.  Such a comparison, performed market-by-market, provides a direct comparison of customer revenues with its costs: capacity, energy, and ancillary services.   For example, scheduling deviations are easily derived by comparing the cost of real-time settlements with bilateral and day-ahead purchases and swap settlements.   This may reveal an extra $0.50 per megawatt-hour cost, for example.   However, solely reviewing the settlement invoice may miss the fact that temperate weather caused a severe under-collection of high cost capacity demand charges, leading to margins well below expectations.   But for a correlation of sources of energy to uses/deliveries of energy this may have gone unnoticed.   At best the firm may have anecdotally known their margins suffered because of the weather, but would not have had the right tools to quantify the impact.
  2. QUANTIFY Your MWh Inventory.   Retail energy is like any other business; you’ll have to control your inventory and secure assets from misapplication.  If a shop with 2 bicycles in inventory buys 25 bicycles and sells 20 bicycles in March, there should still be seven on the floor waiting to be sold!   Similarly, a REP may have 5,000 MWh in inventory at the beginning of the month (unbilled revenue).   During the month, it buys 20,000 MWh from the ISO; however, accounting for line losses, they take delivery of 18,000 MWh for customers.   With 23,000 MWh available for sale, its billing reports show 15,000 MWh was delivered to customers.   Therefore 8,000 MWh remained in unbilled status at month-end.   By imposing this kind of accounting discipline, the firm establishes a basis for understanding what factors most affected their business and profitability.   Unbilled revenue presents some unique challenges outside typical business and accounting models.   Reconciling beginning energy volumes to ending energy volumes helps ensure unbilled revenue is controlled and substantiated every month.   In addition, tying purchases to sales in this manner forces usage allocation of metered volumes and helps determine actual line losses and/or Unaccounted-For-Energy (UFE).
  3. QUANTIFY Your Price Points.  A deep and consistent monthly settlements analysis provide valuable data for pricing retail products for customers.   Of course, some variation between products exists, and may be significant, for example low load factor customers, or those that are highly weather-sensitive.   However, many costs can and should be socialized across all product categories within a zone, within a utility and within the ISO region.   These costs need to be routinely measured and compared against the cost build-ups the firm uses to create price offers to customers.   Such costs can include (but are certainly not limited to) (i) capacity; (ii) energy supply; (iii) line losses; (iv) load shaping; (v) utility charges; and (vi) ancillary services.

The need for quantification has driven the development of automated settlement solutions for the REP industry. The efficient and timely reconciliation of data allows the REP to not only shadow the settlement process pro-actively, but to provide transparent, efficient, high quality data suitable for use in executive business decision making.  Automated reconciliations can now be performed within days (and on a daily basis) — a far-reaching improvement from the end of the month race that is typical in the REP industry.  Automated settlements allow for unheard-of speed in the final resolution and most importantly, for complete organizational understanding of the drivers of margin and earnings.

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Steve Malkiewicz is Head of Supply and Risk Services at ESCOWare