Our client, a large North America power company that has a presence in over twenty states, desired to pursue a more retail-centric strategy, and consolidate its Wholesale and Retail System Landscape into one platform to gain efficiencies and better align its system architecture to meet the business needs of its future portfolio. The current level of integration between the Wholesale and Retail business is low in the risk monitoring area which makes it difficult to accurately communicate the benefits of the retail-centric strategy to the financial community. MidDel was retained to evaluate the state of integration between the two business lines, and to provide a recommended course of action to improve technical infrastructure(s): including identification of critical changes, risk ranking, timeline, and cost to achieve.
MidDel’s senior team conducted a top-down analysis within eight weeks and reviewed existing architecture, data flow diagrams, high-level business requirements, and key dependencies. The team also assessed gaps and opportunities for system improvement, as well as researched wholesale and retail software platforms to develop a possible alternative solution in support of risk management.
Our team noted that the data architecture of the client is transaction-centered. Hence, data required by the Risk department is in so many solutions that it is burdensome to extract and manipulate for reporting and analysis. Our team also noted that the analytical software the client uses in regards to risk, analytics, and credit could not analyze the combined business portfolio efficiently in addition to not having the capability to adequately simulate extreme market events for evaluating risk related to the Retail business. Last but not least, the existing ETRM system, besides being unsupported by the vendor, is Wholesale centric and does not support valuation and position for an integrated Wholesale and Retail portfolio.
Keeping the integrated analytics as to the primary focus, the MidDel team short listed system solutions along with functionality analysis, platform limitations, implementation and support cost, and market reputation for the selected vendors. We then provided three proposed system landscape solutions to the client’s management team to improve current operations:
- Consolidate over seven database systems into one data repository to facilitate risk reporting and analysis, as well as to avoid manual data integration efforts which is cumbersome, prone to error, and time-consuming.
- Upgrade their risk analytics software to accommodate analysis on the combined Retail/Wholesale portfolio.
- Replace the existing ETRM system with one capable of managing the retail load.
By following our recommended solution, the client would have one version of the truth that would enable them to better facilitate integrated reporting as well as allow management to more effectively evaluate the risk exposure of their integrated business. The solution would also make our client more adaptable to retail acquisitions and market expansion by eliminating redundant data storage.
It is estimated that the improvement will save the client over $900,000 per year in cost avoidance in regards to system license, maintenance fee, vendor support, and headcount. It is estimated the client would save up to $15 million in bad debt expense reduction by having timely enterprise-wide credit risk analytics. Furthermore, our client could expect to reduce the volatility of their hedges by an estimated $100 million per year which reduces the amount of collateral they post and in return increases ROI.