No risk management?
April 1st 2006

It is a myth perpetuated by ignorance that risk management is for those who are prepared to take risks. It is in fact quite the opposite, by understanding your exposure to the market you are in a position to protect yourself from its vagaries. Tim McManan- Smith met up with Mark Dickinson , managing director of Encore International

Energy risk management is one of the latest buzz words in energy procurement. That is why I started a column written by Encore International explaining what is going on in this new area. But I must confess that I am guilty of not fully understanding the true nature of risk management. I considered that it was a black art and that without the help of professionals to guide you through a complex and bewildering set of procedures there was no point in getting to grips with it. I was wrong; after visiting Encore's operation's centre in Budapest I have come to the conclusion that the risky option is not to do risk management. I rather missed the point; by putting in place relatively simple procedures you have a good opportunity to beat the market and more importantly to mitigate against extreme price fluctuations.

Encore International was formed in 2001 and struggled to establish itself at first. According to Mark Dickinson many people didn't understand the idea and associated risk management with trading. They had also become less open to innovative ideas after the uncertainties caused by the demise in the UK of both Enron and TXU. But then energy prices started to rise and the need to deal effectively with this became a priority. Mark believes that we will seepurchasing utilising risk management strategies more and more. "We are at the logical conclusion of where things are heading,"comments Mark. Encore International, has managed its portfolio well and enabled customers to buck the trend of high energy prices and have realised market savings of 34% for the next three years - benefiting them by over £20Million.

There are the five simple steps to achieving procurement excellence:

• Set up a clear risk policy and procurement strategy
• Ensure you have a contractual relationship that allows decisions to be taken flexibly
• Set a budget and a limit to the amount of risk your business is prepared to take
• Measure the changing value of your portfolio and its risk every day
• Use this information with your procurement strategy to optimise decisions

The risk management specialists use market expertise and technical processes to manage positions when markets are open and complete risk modelling when closed. "The thing about risk management is that depending on what sort of risk you are willing to take you can set the limits on your exposure to the market.

The Value at Risk approach allows you to determine the value of your energy portfolio you wish to expose to market conditions. Modelling programs show how much you should expose on a particular day calaculating it from your risk profile, market analysis and expertise help you decide which periods you should change your exposure for. It is not a gamble but a calculated risk taken within predefined limits that is consistent with your overall business strategy", explains Mark, "energy risk management provides a competitive edge to customers of that there is no doubt. Many people think that you must be willing to take risks to control your energy costs and perform well against the market. However, Encore's customers have just one tenth of the price risk taken by their competitors who do not engage in energy risk management."

The Value at Risk approach allows you to take advantage of a falling market by exposing more and more of your portfolio to the falling prices and getting cheaper energy while in a rising market it would fix most of the portfolio. It would always be better to be totally fixed in a rising market and unfixed in a falling one but to do this you would have to be certain about exactly what is happening in the energy markets and this is impossible to know. So having the ability to fix and unfix your portfolio flexibly seems to be the only sensible approach to what is a very volatile market.

2005 has been a highly successful year for Encore International. Their client base grew by over 100% and their energy responsibility rose to over 1 billion euros. Mark Dickinson, added, "Our clients have been outperforming the energy markets by 30-40% and taking ten times less risk than other large consumers of energy since 2004 and they are guaranteed to continue those results for 2006, 2007 and 2008." I used to think such claims where the domain of risk takers; I now realise such claims could only be credibly made by those who are risk managers

Mark Dickinson, MSc. Finance (LBS), managing director Mark has over 10 years of commercial experience across the European energy markets negotiating and leading teams in the area of structured risk products, long term supply contract negotiation, risk management and supplier operations. Founding and developing Encore International, the specialist energy risk management and consultancy business, delivering projects encompassing each stage of the energy value chain across Europe.

Career Highlights:

• While working for a US energy trading house Mark developed traded and marketed oil based risk management derivates across Europe, transacting some of the first European deals.
• While at BG international he negotiated and marketed the company's Interconnector capacity to other UK gas players as well as taking an active roll in the monetisation of the companies uncommitted gas portfolio.
• While working for TXU Mark was a Senior Risk Analyst and Negotiator, creating a number of asset and business valuation frameworks in addition to having pricing responsibility for a £40million retail gas portfolio.

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