Industry Application:
Palisade Software in the Utilities Industry
Deregulation of utilities has dramatically increased both risk and opportunity in the industry. It has changed the way utilities price the energy they sell, ratcheted up their need to anticipate production and consumption, and altered patterns of buying and selling within the industry. Decisions are much tougher now, and utilities and the professionals who consult with them often turn to Palisade’s @RISK, RISKOptimizer, and Evolver to find the best course of action.

:: Setting the Price of Energy
Anticipating energy consumption, how much energy to produce, when to produce it, and the costs of meeting environmental regulations are key considerations in setting the price of energy for consumers and businesses. Each of these factors incorporates many uncertainties, and this complexity has caused utilities to look to @RISK to create the very detailed and often very large models they need to price energy accurately.

The timing of energy production is a crucial factor in managing generators for efficient pricing—and here, the experience of one Palisade customer is telling. RiskAdvisory is a consulting firm that helps West Coast utilities schedule power plant generation. Their analysts used @RISK to create huge models of generator portfolio and load requirements. Using the @RISK Developer’s Kit technology, they were able to run high-speed simulations to provide up-to-the-minute information their utility customers demanded. Says one RiskAdvisory specialist, "It helps people sleep at night."

Corporations often contract directly with utilities for the power they use, and these contracts are worth millions of dollars. To sell a contract, the utility must establish a rate that is and will continue to be acceptable to both it and the customer. Palisade customers in the industry have found RISKOptimizer an effective tool for smoothing the peaks and valleys of future energy supplies and future consumption. Similarly, the Northern Indiana Public Service Company (NIPSCO) uses @RISK models to suggest rates and then uses Evolver to optimize the rate solution in light of the cost of new EPA emissions standards.

:: Utility-to-Utility Transactions
Deregulation has sped up the market environment for utilities and freed them in the ways they can buy not only power from other utilities, but power plants and other utility companies. As it does in many other industries, @RISK guides utility companies in their dealings with other utilities. Their buy/sell decisions involve variables with which many @RISK users are familiar—value drivers, return on capital, VARs of target companies—and they use their models to be poised for changes in strategy. “We’re not usually targeting a specific number,” says an analyst from Duke Energy, “but we are looking for results we can be 90 percent sure of.”

This kind of confidence is important, an analyst from NIPSCO points out, to achieving any utility-to-utility transaction. “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.”

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Case Study:
Halcrow Group Ltd and the UK Environment
Agency Manage Flood Risk using @RISK
Around five million people live in flood risk areas in England and Wales. It is believed that changes in the climate, such as sea-level rise, more severe storms, and wetter winters will increase that risk.

:: The UK Government and Halcrow Group Ltd
The UK government’s Environment Agency is the leading public organization for protecting and improving the environment in England and Wales. Through flood risk management, the Environment Agency can reduce the probability of flooding from rivers and the sea through the management of land, river systems, and flood and coastal defenses.

Halcrow Group Ltd specializes in the provision of planning, design, and management services for infrastructure development worldwide. With interests in transportation, water, maritime, and property, the company has commissions in over 70 countries and has an annual turnover of more than £280 million (about $500 million).

For many years Halcrow has undertaken contracts that form an integral part of the Environment Agency’s Flood Defense program, with work including improving flood defenses, redirecting rivers, and more.  

:: The Role of Risk Management
Risk management is embedded within the core principles of the Environment Agency. Careful management of financial risks can also assist in delivering more flood risk management schemes to protect vulnerable communities. All suppliers to the Environment Agency must therefore adhere to a proactive level of risk management. Furthermore, if suppliers meet the agreed terms of the contract they receive a pre-agreed share of the project budget. If however they do not perform as well as expected, their revenue is reduced.

:: @RISK for Portfolio Optimization and Budgetary Compliance
Halcrow has used @RISK for years, and for Environment Agency projects, Halcrow employs @RISK in the risk quantitative stage to set risk budgets at the start of each phase of the project commission. Starting with the ‘sunny day estimate’ of the project risk, it identifies, assesses, and quantifies every potential threat that could affect (i.e. increase) this base figure.

For example, severe weather could lead to a delay in the collection of survey data, with consequential effects for related work. Or, poorly articulated project outputs could result in tasks with weak focus that lead to inefficient resourcing and the need for reworking. Other hazards that potentially affect projects include increases in material costs, changes to the team, equipment failure, and more.

Using @RISK for ongoing risk quantification on individual projects allows Halcrow to monitor progress against original budget incentive thresholds and potentially allows decision makers to make strategic decisions on allocating funds across the whole portfolio of UK flood defense projects.

:: @RISK Shows “Most Effective Use” of Public Funds
Tim Wells, project manager at Halcrow, comments: “Halcrow’s line of business makes robust risk analysis an essential part of our daily lives, and the Environment Agency’s core principles reinforce this way of working. Palisade and @RISK provide us with a flexible product that is easy to use, as a result of which we are able to maximize our own revenues on projects. In addition they ensure that the Environment Agency is accountable to the UK public by putting its funds to the most effective use to guard against flooding.”

read the full case study
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Product Spotlight:
Excel Developer Kit for @RISK
Included with every copy of @RISK Professional and Industrial for Excel is the Excel Developer Kit (XDK). The XDK allows you to fully customize your @RISK for Excel experience using Excel's built-in VBA language (or any OLE-compliant programming language), giving you the flexibility to automate simulations, create tailored reports, or even design your own interfaces.

:: Complete Library for Unlimited Flexibility
A complete library of @RISK macro and function commands is at your disposal. The @RISK simulation engine, all 38 @RISK probability distribution functions, @RISK graph types, reporting functions, statistics functions, target analysis, sensitivity graphs and reports, correlations, distribution fitting algorithms, and more are available. Stress Testing, @RISK Goal Seek, and advanced sensitivity analysis are included as well. Every aspect of @RISK for Excel is at your command.

Automate common tasks to avoid time-consuming repetition. Run macros before, during, or after simulation runs. By writing your own custom applications using @RISK for Excel, you will enjoy truly unlimited analytical power.

:: Get up to Speed Fast
Documentation and example files are included to demonstrate how to use the most common @RISK commands. In addition, technical support is included with your maintenance plan for basic XDK questions. Palisade consulting services are also available to help you design and write applications from scratch.

:: You May Already Have It
If you own @RISK 4.5 for Excel Professional or higher, you already have the Excel Developer Kit. Many companies have used this powerful toolkit for their custom needs. Get started today.

:: @RISK Developer Kit Outside Excel
All the functionality of @RISK for Excel can also be added to applications outside the spreadsheet using the full @RISK Developer Kit (RDK). The @RISK Developer Kit enables you to write applications using .NET or any Windows programming language, and includes ActiveX and DLL interfaces. Bring the power of Monte Carlo simulation to stand-alone or Web-based applications. Available separately from @RISK for Excel, the RDK has been deployed by thousands of users for a range of applications.

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learn more about the @RISK Developer Kit

Author David Apgar to Deliver
Keynote at Palisade User Conference continued from above
“We are very excited to have Mr. Apgar at the Palisade User Conference,” says Palisade President Sam McLafferty. “His innovative research into risk is what our event is all about – new and effective ways to deal with the uncertainty we all face every day, regardless of industry.”

:: A New Way to Think of Risk
Contrary to conventional wisdom, Apgar shows that operating, business, and strategy risks are not random but in fact learnable. As a consequence, businesspeople must develop their “risk intelligence”—how fast they could learn about the risks of the projects they take up. The talk builds upon Apgar’s new book, published in August by Harvard Business School Press.

Simply put, learnable risks must be approached entirely differently from random ones. The traditional approach of treating projects like stocks—that is, subject to random risks—and diversifying project portfolios accordingly is dangerous because it leads managers to take risks they have no natural advantage in assessing. Unlike stock portfolios, lists of projects where managers have low risk intelligence across the board are likely to fail.

:: Broad Experience
Apgar is a managing director of the Corporate Executive Board, with research management responsibility for corporate treasurers and controllers. He joined the company in 1998 from McKinsey, where he served insurance, reinsurance, and capital markets clients as a consultant and engagement manager for three years. Prior to that, he was a vice president in Lehman Brothers, Senior Policy Advisor to the Comptroller of the Currency, and staff economist to Senator Bill Bradley, where he proposed a debt relief program for Mexico and designed the precursor to interest rate relief Brady bonds. Apgar also teaches at Johns Hopkins University’s School of Advanced International Studies.

full keynote abstract
more about David Apgar
full schedule for the Palisade User Conference
register for the Palisade User Conference

Ask Amy continued from above

Note: If you have a version earlier than @RISK 4.5.3, you may need to install a patch that makes @RISK recognize the stacked matrix. To obtain this patch, click here.

To rebuild the matrix, take the following steps:

1. Break your original matrix up into smaller blocks.
Move from left to right breaking up the matrix into smaller blocks. The number of columns in the blocks should be less than the column limit in the version of Excel that you’re using. Each block should have the same number of rows as the original matrix. Make as many of the blocks the same size as possible.

For example, when using @RISK with Excel 97 or higher, work within a limit of 256 columns. With a 400 x 400 correlation matrix, break it up into 2 blocks, each with 400 rows and 200 columns. A 789 x 789 correlation matrix could be broken up into 3 blocks with 789 rows and 750 columns and one block with 789 rows and 39 columns.

2. Stack the blocks vertically to create a new matrix.
Move from left to right placing each block under the one before it. The second block will be placed under the first block, the third block will be placed under the second block and so on. If there is one block that has fewer columns than the other blocks, the smallest block should always be placed at the very bottom of the stack.

3. Add RiskCorrmat.
Once the matrix has been rebuilt and entered into your workbook, the final step is to add the RiskCorrmat function directly to the cells containing your inputs. In your Excel workbook, add the RiskCorrmat function directly to each cell containing the input functions that you wish to correlate. The syntax for the RiskCorrmat function is:

RiskCorrmat (matrix cell range, position, instance)

Note: The matrix cell range reference must be rectangular; it can’t have an irregular shape. If you end up with one section of the matrix that has fewer columns than the rest, make the matrix cell range reference rectangular by including empty cells in the reference.

full KnowledgeBase article with example spreadsheet model
KnowledgeBase articles about Palisade Software

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