Utility Uses @RISK, Evolver to Manage Risks of High Stakes Contracts
Many corporations contract directly with utilities for the electricity they use. At NIPSCO (Northern Indiana Public Service Company, a subsidiary of NiSource, a FORTUNE 500 company), a diversified utility in northern Indiana, it is not unusual for millions of dollars to be hanging on a single contract. Mark Rudd, principal/regulatory compliance at NIPSCO, is heavily involved in these agreements. The goal is to arrive at rates that are acceptable to both NIPSCO and the corporate customer. To be successful, they must accurately predict the customer's needs for power and the timing of this demand. In addition, NIPSCO must optimize its use of generating assets in order to meet increasingly stricter clean air standards. @RISK, Evolver and RISKOptimizer have proven to be the perfect tools for managing these uncertainties.
Mark has been a longtime fan of Palisade software. He discovered @RISK as an MBA student at the University of Chicago. Upon graduation he began putting it to work for NIPSCO. He uses @RISK and RISKOptimizer to model pricing scenarios and investment decisions and frequently uses @RISK's extensive presentation-quality graphs and comprehensive reports to offer decisive information to top management. What he finds most valuable is the persuasive power of the tool. Showing a board of directors or a chief executive the numbers behind your assumptions makes all the difference. "Simple spreadsheets tell a number. @RISK paints a picture! Show them they have an 80% confidence level in these outcomes," he says, "and they come to a decision in minutes!"
Recently he discovered the capabilities of Evolver while analyzing production scenarios for NIPSCO's generating assets to meet new EPA standards on nitrous oxide emissions. Evolver proved indispensable to finding the best solution to this complex issue. The question was how to optimize the use of generating plants to reduce emissions. "We started out quite simply," he says. "We were trying to answer 'What's the best solution from a capital standpoint?'" The question then became "What's the best solution in terms of operations and maintenance costs?" And finally, Mark considered the puzzle from the perspective of net present value.
With each "generation" of possible solutions, Evolver showed the company how to meet the new standard, whittle its investment, and maximize its earnings. Eventually, Evolver's evolutionary optimization technology modeled a scenario that showed a 30 percent savings to the utility.
Deregulation looms in NIPSCO's future, and with it increasing risk is attached to every customer contract. That's why Mark sees his company relying more and more on Palisade's analytic tools. "The great thing about the Palisade tools is that they take the emotion out of the process of making tough decisions. They allow top management to see right away whether or not they can accept the risk in a particular course of action--and why."
He puts a good deal of work into honing his skills with the Palisade tools. In light of industry trends, he considers it part of a necessary professional development. Greater facility with the software allows him use the tools to examine an ever broader range of issues. Now he and his colleagues are even using Palisade tools to anticipate changes in the regulatory environment. "Really. We are modeling what we "think" the EPA is going to do and when they're going to do it!"
With millions of dollars on the line for many contracts, analyses with Palisade tools have been— and will continue to be— time well spent.