liquidated damages clause. I want to make note of this in the context of program selection, because I have concluded that with fixed price contracts, a strong liquidated damages clause is an absolute necessity. In contrast and to the advantage of capped-price programs, many marketers now recognize capped-price programs can be provided with a much less demanding liquidated damages clause, or no liquidated damages clause at all, which is less intimidating for the customer and therefore easier to sell. The reason is that if a customer terminates a capped price program early, the price protection fees already paid (and which are not refundable) provide margin protection to the energy marketer on any undelivered volume. Bring it all Together with Process Automation Process automation is the means by which data is automatically and seamlessly collected and transferred from a website, to a back-office computer system and then to a hedging and risk management system without any human intervention. Applying good process automation is incredibly vital to risk management because it largely eliminates the time gap between committed sales and hedging, and also eliminates data input errors. Perhaps most importantly, thorough process automation frees up human resources to do bigger, better and more important things, like taking care of your customers and grow your business! Market Stress Test Simulation & Reporting In any successful hedging and risk management system, marketers should have the ability to model or “stress test” different hypothetical market scenarios prior to taking action to hedge exposure. Such stress tests should include hypothetical purchases, changes in sales volume, hypothetical sales programs, and seasonal shifts in weather. Stress test simulation is also great for financial planning, such as the ability to forecast margin call expenses in a changing market. Market stress test simulation goes hand in hand with another key aspect of a marketer’s business intelligence: the need for accurate and impactful automated reporting. In an incremental hedging program, owners and supply managers alike should be informed on a daily basis about margin expectations and performance, long/short positions and any other potential exposure. An ideal way to do this is through an automated email system, which further reduces to a glance the time required to oversee a hedging program. A great incremental hedging system will in turn generate customized reports, as desired, for any specific need or benchmarking purpose. Incremental Hedging for your Business & Peace of Mind With the implementation of an incremental protection program, in which price protection is sold year-round, comes the method of incremental hedging. Without a doubt, incremental hedging has allowed me to put market volatility in the rearview of my focus, taking the stress out of market movements and allowing me to spend more time growing my business. Long gone are the days of being mentally and financially whipped around by the markets. Incremental hedging is the process of viewing your hedging portfolio on a short-term basis, which includes sales, wet barrels and derivatives like swaps, options and futures. Incremental hedging takes place on a nearautomated basis, since it involves some minimal human decision-making and action, but this is as automated as possible. Quite literally, for many marketers, incremental hedging may only take 15 minutes or less per week. Consider how many hours per week you spend overseeing your hedging strategy and what else you may accomplish with that time. For many marketers, this new-found free time may be a catalyst for achieving greater objectives. For anyone interested in reviewing their hedging methodology, I recommend marketers retain the services of one of the many professional hedging consultation firms or commodity trading firms who can easily set up or manage this task and let you do what you do best – run your business! In sum, it has taken the combination of many years of experience and the advent of technology such as webbased interfaces to lead me to understand the benefits of incremental price protection and hedging, and how the customer experience and program administration may be automated end-to-end, from marketing to marginprotected cash flow. Now empowered with this knowledge and automated processes in place, my price protection program and incremental hedging system cruises on auto-pilot, at altitude high above the whipsawing sea of uncertainty below. Gary Sippin is Marketing Director of Destwin Energy Systems, LLC and any opinions expressed herein are his. Destwin Energy Systems LLC provides turn-key, data-integrated customer web portal, price protection and risk management systems for energy marketers. ICM/March/April 2016 27
ICM March-April 2016
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