Dogs, tails and wagging!
April 1st 2006

Since last writing I have been reflecting on some of the challenges facing large consumers of energy and more importantly what can be done to solve it.My moment of clarity finally came when I spent some time with my peers in the market place a few weeks ago.As you can imagine,my conversations with energy consultants while civil, always resemble something of a fencing match,but it was during just such an occasion when one was attempting to summarise the differences between our respective Mark Dickinson, businesses that my moment of clarity struck: In this market 'the tail is wagging the dog'.

I thought I might share some of the themes which led me to the conclusion theat the energy market is getting it the wrong way round.

'People use our energy procurement service because they like our bureau, invoice checking or internet auction service'- energy consultant A.

Now I like the way my local carwash washes my car, I always use them and I get what I expect a car which is reassuringly clean. However when I need my car repaired, I don't ask the guy who washes my car to have a crack at the mechanics.

In the energy sector, energy buyers are prepared to pay more for washing the car than for looking after the engine spending a lot of money counting the pennies and forgetting trying to avoid spending them in the first place; this is simply the wrong way around - the tail is wagging the dog!

'Encore does some unique things with its risk management approach, but we know the markets and give our clients advice on when to buy and sometimes when to sell'- energy consultant B

I have analysed the energy markets as extensively as anyone since 1996, I now have a team of MSc qualified economists working eighteen hours a day analysing them and I still can not say 'I know the energy markets'. Moreover if I could predict when to buy and sell, as much as I enjoy writing this column, I would probably be relaxing by the pool with a large gin and tonic.

However, the madness doesn't stop there! The next claim by such consultants is that by hiring traders to do this buying and selling for you, you are somehow better off. This raises a few key concerns:

If these traders are really good why aren't they doing it for real in the city?; Traders often generate returns by taking speculative positions, is that really what you intend for your portfolio?; On what basis is the risk they are taking on your behalf being controlled?; How does this risk fit with your corporate strategy, how can it be changed as your strategy changes?

Surely you start with your corporate strategy and then decide on how to manage the risks you have and then optimise the energy procurement process; what is happening now is the wrong way around - the tail is wagging the dog again!

'We have done a special deal with an industry association' - energy consultant C

A consultant might have managed to sell your association a story that you should all use the same supplier and advisor. It may have started by them suggesting that if you act as a group you could buy some cheap gas direct from a producer. Of course if they had any vague experience in the field they would have pointed out to you that the only reason energy can be bought cheaper than the market price is if it has a different set of risks associated with it, or if it is bought on a fixed price basis longer term; a 5% saving on these current record high prices - again it's the wrong way around - the tail is wagging the dog!

'Its time to start wagging your tail' If you are going to put things right, you need to start focusing on managing your energy price risk, so here are just four ways to make a start:

• Don't spend vast sums of money checking your bills or running the traditional part of the tender process, they only influence a couple of percent of your cost
• Don't let advisors gamble with your portfolio no one knows how the markets will go, the best you can do is create a risk management policy that allows you to adapt your portfolio as the markets evolve
• Don't use the car washer to fix your car, hire the right skills for the right job
• Apply the same discipline and skill to managing your energy portfolio as you do the other elements of your business, by using good quantitative measurement as a basis for considered strategic decision making you will find delivering value and reducing the risk of your energy portfolio is not that hard.

Risk Management is not just working for one year but for five years, more importantly the consumers doing this are taking less risk, have more control and are enjoying more benefits than you currently are. Isn't it time to change?

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