Updated: Sep 18, 2019
Reconcile Costs & Break Down Cost Components to Include in Profit & Loss Reporting
When it comes to ISO settlements, the entire process can be manually labor intensive, error-prone, and time-consuming. Downloading ISO information and performing multiple calculations can cause you to scramble around trying to find the answers you need, instead of having all of this information at your fingertips.
After all, your company is counting on you to keep them in the black... Which means you’re always in the hot-seat. You’re tasked with making quick adjustments on buying and selling hedges with the greatest precision and least guess-work as possible. Get it wrong enough times, and the company profitability (and your job) may be at stake.
Errors in settlement charges and unexpected costs of energy are some of the biggest challenges for energy CFOs. Counter-parties and ISOs make mistakes in billing and clients need to know as soon as possible. You need to respond to ISO and sleeve deals quickly to rectify errors and adjust your account for unexpected costs. After all, you don’t want to pay for costs you’re not responsible for.
A good, automated Settlements package will provide a detailed view into the actual ISO charges allocated to a load serving entity’s account. The individual components make up the largest monthly cash flow expense for energy providers.
The challenge faced by energy providers involves the timing and granularity of data received through the normal ISO clearing process and the ability to jointly reconcile the critical information between the front and back offices.
A good automated settlements package provides a current daily granular view of the daily-weekly-monthly ISO clearing charges. It provides a dynamic platform to view expenses including any generation and/or bilateral trades with projected revenue load highlighting an energy providers’ overall position management.
Most energy providers conduct settlements monthly, normally at the end of the month. The problem with this approach is that it limits the ability to react to market changes and adjust position management and cost of service strategies during any given month.
Additionally, errors in the ISO data should be disputed as quickly as possible. Having a proactive, daily view to settlements data is critical because it eliminates both issues and helps minimize costs to end-user customers or members while maximizing revenue
As a result, the settlements package operates as an energy providers “cash register” and allows a Supply Manager, scheduling head and/or CFO the ability to investigate the details surrounding any days’ usage allocation or expense anomalies. Some critical reports that make up a good automated settlements package include reports contained on the following pages.
Gross Margin Summary Report
The hallmark of any Settlements package is a Gross Margin Summary Report. It summarizes the operating cash flow impact of your business by aggregating ISO settlements data across a user-defined time period.
Giving the user the ability to delineate by zone or sub-account is an important feature that allows the user to drill into their business and find the drivers impacting cash flow.
The Gross Margin Summary Report should itemize revenue and various costs (bilateral energy, DA energy, RT energy, and ancillary costs such as capacity, transmission, and other fees). Values should be provided in aggregate and on a per-unit basis. The additional granularity to detail provides the following benefits:
Per unit charges based on volumetric usage can be reconciled to shadow settlement and pricing engine metrics.
Quickly analyze your average costs in both the real-time and day-ahead markets.
Clear visibility to your day-ahead and real-time volumes to make sure that they are in line with your current purchasing strategies. It can also help to validate the accuracy of your forecasting methodology.
Automatic reconciliation of the initial versus final settlement allocations thereby highlighting the changes in the volumes and overall rates impacted.
Transparent calculation of revenue versus cost for any time period. Additionally, the ability to view revenue versus cost by ISO or by each individual zone in order to monitor specific performance.
Filtering capabilities by sub-account, time-frame or zone.
Invoice Actual Report
The ongoing challenge faced by energy providers is the ability to quickly reconcile and track fees (1) allocated by the ISO. This report provides the ability to quickly spot anomalies within a day to day period (2) on a sub-account by sub-account basis.
A good Settlements package summarizes and formats your ISO invoice data for you. It is vital that the raw data be accessible to the user so that they can do their own vetting if questions arise.
ISO Monthly Invoice Voucher Report
The Monthly Invoice Voucher Report condenses all of the various material ISO components (1) into a simple accounting summary format. This allows you to tie out these costs to the appropriate invoices. Each sub-account is displayed side-by-side (3) in order to match the invoice amounts to the correct sub-account. All sub-account costs are totaled (2) allowing you to validate any potential summary invoices.
ISO Weekly invoice Voucher Report
Similar to the Monthly Invoice Voucher Report, the Weekly Invoice Voucher Report displays all of the various material ISO components in a simple accounting summary format. The ISO total charges are partitioned into a side-by-side comparison of the individual credentials for each sub-account. This report allows the user to select the appropriate time period that matches the weekly invoice received from the ISO to further validate the ISO’s numbers. Some of the major charges to keep track of include:
Day ahead purchases and sales
Real time purchases and sales
Network Transmission Fees
Grand total summary allocated by day
Settlements Daily Report
The settlements daily report allows the user to look at very specific line items including DAM purchases/sales, RT purchases/sales, UCAP load factor, option premiums, swap transactions, FTR & CRR purchases/sales, on a daily basis.
The ability to analyze cost trends on a daily basis can be crucial to the success of your business. This gives you the ability to react appropriately when trends are identified. This report is vital when disputing charges with the ISO since the ISO provides a limited time window for disputes.
Having to wait for back-office personnel to download the relevant data from the ISO, format said data for computation and analysis (and then there still be an opportunity for typos) does not leave much time (if any) to file a dispute. Having this data at one’s fingertips the VERY NEXT DAY is essential.
Key features include:
A user-defined time period and sub-account
An itemized, line-item display of the data
With daily granularity
Settlements Daily Outliers Report
Let’s face it, Settlement reports are a sea of numbers. They can be organized but are still a copious amount of information. The Settlements Daily Outliers report takes these numbers and uses color coding to highlight specific line items that fall outside of a user-chosen standard deviation for the selected time period.
For example, if you lost money during an Arctic Blast and had to rely on Real-Time market pricing in excess of $1,000, the high cost of your Real Time Energy Purchases would be readily apparent.
Additionally, regular use of this report will lead you to recognize inherent weaknesses in your processes, be they load forecasting deficiencies, forward hedge strategy deficiencies or overall business strategy issues.
Key Features include:
User-defined time period and sub-account
User-defined exceedance level
Color coding of outliers
Settlements Daily Prices Report
Another valuable report is the settlements daily prices report. It provides you with two specific views of your per unit energy costs; a daily view and a rolling 30-day view. This report will display increases or decreases in your energy costs. If your daily energy unit costs increase, you might want to look at your forecast to check its accuracy or you might want to see if there was a price spike. If your 30-day rolling per unit energy cost increased, you might want to look into adjusting your retail prices to compensate for the increased cost you incurred.
Key Features include:
User-defined time period and zone
Settlements Summary Report
The Settlements Summary report allows for easy zonal comparison for a user-defined time period. Want to know how you fared in ComEd as opposed to PPL for an Arctic Blast or a brutal heat wave? This is the report that will get you those answers. The same cost line items that are used in the Settlements Daily report are also utilized in this report so that you can drill into the underbelly of your business.
Key Features include:
User-defined time period and sub-account
USE CASE: Daily ISO Cost Analysis and Reconciliation
PROBLEM: ISO Settlement Invoice too high
Costs exceed forecasted projections
Inadequate information to identify specific cause
ANALYZE PROBLEM: Client Analyst Reviews Daily Settlements Reports
Reviews gross margins summary report
A drilldown of the outliers exposes increased reserve margin
Outliers report identifies specific problematic days
DEVISE SOLUTION: Accuracy Review: How to Correct ISO Invoices?
Analyst escalates this finding to ISO Contact with specific information on erroneous charges
ISO Issues new, corrected invoice
RESULTS/IMPACT: Impact: Cost Realignment
Enterprise value maintained
A good automated settlement package is truly the lifeblood of a proactive cost reconciliation and management platform. It should be able to quickly summarize data and highlight anomalies or nonrecurring charges. It should be able to show your costs and analyze whether the fees are accurate and reasonable over certain time frames. It should also validate the associated charges and fee adders embedded into the ISO invoice. Additional settlement functionality ideally should include:
Turn-key implementation - a good automated settlements package should require minimal set up time. All that should be required is to provide your ISO sub-account credentials.
Automated delivery of ISO Settlements Data – Logging into each sub account for each ISO every day to get the settlements data you need is a time-consuming task. Additionally, once you have the data, getting it into spreadsheets so that you can manipulate and review the data can be error prone. A good settlements package can do this for you automatically and all that’s left for you to do is review the reports.
Robust reporting – a good automated settlements package should provide multiple reports to address different needs and should highlight key aspects of your business. The reports should also highlight margins, material cost breakdowns, unusual variances, and much more. The Accounting and Risk departments should be able to quickly validate their invoices and cost components for a subsequent comparison to their prices. The reports should show what the customer paid for forward hedges and DA/RT volumes to track performance.
Granularity of Data – With a good settlement package, the customer needs to be able to select a time period for analysis. As days are added to the daily view, the reports need to highlight day over day differences along with weekly, monthly, and yearly aggregations with the ability to split or combine zones/sub-accounts.
Advanced data visualization – A good reporting tool should show the processed settlement data so that the user can easily and quickly spot the important numbers they want to see. It should present the data in any way that can create a different spin on the numbers to allow the user to understand the information in a different way.
For more information, contact POWWR today at: 475-444-8040
Download "Anatomy of a Good Settlements Report Package" PDF by clicking here.
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