whitepaper
Capital Adequacy Extension
This paper builds on the 2003 Capital Adequacy paper through a number of expansions & enhancements including:
• Introducing a new and insightful “Equity at Risk” perspective which is supplemental to the NPV distribution perspective for assessing capital adequacy.
This methodology reveals potential interim states of capital inadequacy which would go unseen under the NPV distribution approach.
• Expanding capital adequacy insights into the realm of capital allocation
• Expanding capital adequacy measures into risk adjusted performance measures
• Delving into new best practices addressing the details of the operative risk category. Operative risk was given only cursory coverage in the first paper.
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Understanding ERM For Utilities
This paper provides an understanding of ERM and assists executives in developing and applying an ERM framework unique to the business of a regulated utility. A utility is defined as an entity that has rates that must be approved by a regulatory authority, be it local, state, regional or federal (including public power entities’ self-regulating governance), and tends to have extensive exposure to operative risks. The intent of this paper is to provide guidance to utilities that are implementing or improving ERM frameworks. Such frameworks are not prescriptive, one-size-fits-all endeavors. Rather, an ERM framework must balance the utility’s risks, business and regulatory structures and current risk management practices and governances.
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Understanding S&P Risk Ranking Survey
In 2006 S&P requested input from the CCRO to appropriately revise its risk management practices survey. Subsequently, the CCRO prepared this paper in consultation with S&P, and other interested parties.
This paper aides in understanding S&P’s “PIM” framework and the type of information that S&P would need to gather to establish insight into the specific risk management practices of an energy company. Furthermore, the paper discusses how information from the survey might be applied by S&P. Though not recommending specific lines of questioning that S&P should pursue, the paper does provide the CCRO’s summary view as to what are the most important elements to understand when assessing the effectiveness of an energy firm’s risk management capabilities. Additionally, by developing the concept of “appropriate practices” the paper provides much insight into the drivers for the expected divergence between the risk management approaches of different energy companies.
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Understanding S&P Risk Ranking Survey: Part B PIM Framework and CCRO Linkages
A companion paper to the ERM Ranking Survey paper, this document details many linkages between the “PIM” framework which S&P uses for their ERM survey, and the material found in CCRO published papers. Papers previously published by the CCRO address many components of the S&P PIM framework, and often provide greater detail and robustness.
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Market Clearing in the Energy Industry
The purpose of this paper is to advance the use of financial as well as physical clearing in the energy industry by: contributing to a common understanding and definition of clearing; identifying its benefits to the market; identifying hurdles and challenges still present; and presenting recommendations that promote its appropriate application and development. The appendix provides a summary description of each of the major vendors offering clearing solutions and a side-by-side comparison of them versus desired clearing attributes.
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A Framework for a Commercial Compliance Program
More than ever before, investors, regulators and employees all recognize the need for effective compliance programs in today’s energy companies. This paper establishes the foundation and sets out a framework for a Commercial Compliance Program (“CCP”) that will help energy companies ensure that their commercial activities are being held to the highest standards while observing the spirit and letter of all applicable laws.
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Enterprise Risk Management and Supporting Metrics
This white paper approaches the topic of ERM by breaking it into three broad discussion areas:
• A risk governance framework and how the ERM process fits within it
• The role of enterprise risk metrics in ERM
• Understanding “risk appetite and tolerance” and its application within ERM
To best illustrate the application of these concepts and topics, a fictitious company, “TYPIQ Energy” is presented in specific quantitative examples. Also included are appendices containing a more detailed technical exposition on key topics presented and a list of resources that the interested reader can consult for additional study on various aspects of ERM.
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Clarifying Enterprise Risk Management and FERC Order 2004-B
The objective of this white paper is to provide clarity to energy companies subject to FERC Order 2004-B on permissible activities of a centralized, shared risk management function (Enterprise Risk Management function or ERM). This white paper provides the CCRO’s guidance on best practices around ERM activities, providing some specifics of typical leading industry practices of the ERM function and demonstrating how these activities may be performed in light of FERC Order 2004-B.
The goal is to increase the confidence of both the Commission and the companies it regulates how the ERM function may be operating in accordance with FERC Order 2004-B. It is also to serve as a tool that can be used by a company in discussions with the Commission on the role performed by its ERM function.
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Guidelines On Establishing A Risk Management Framework And Policy – February 2005
This paper documents a framework for the major components that comprise a best practice risk policy document, and reviews a ‘menu’ of provisions for each. This paper provides an independent reference providing increased confidence to company management, their board, and other stakeholders that company risk policies are both complete and in-line with best and emerging practices.
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Measuring Financial Liquidity
The paper should be viewed as a starting point for an on-going development and
refinement of an appropriate framework for analyzing the liquidity adequacy of companies impacted by the S&P Liquidity Survey. It is intended to be a supplemental resource in the determination of a company’s financial health and overall credit rating. This position paper focuses on proposed improvements to the liquidity measurement framework in the following areas:
• Adequate Assurance • Market Stress Scenarios • Operating Cash Flows • Rating
Migration • Netting of Accounts Receivables with Accounts Payables
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Emerging Practices for Assessing Capital Adequacy
This paper lays out a risk-based capital adequacy framework that energy companies, industry analysts, and other stakeholders can use to analyze a company’s ability to meet both near-term and long-term obligations, with a particular focus on merchant energy activities.
Capital adequacy is a potentially vital financial metric designed to assess a company’s short- and long-term outlook for financial health. It measures the availability of capital necessary for a company to meet both its foreseen and unforeseen obligations in the short and long term.
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Best Practices for Energy Price Indices
Provides guidance on best practice attributes and processes for data submission by market participants and for index construction by index developers. The goal of this white paper is to recommend procedures that ultimately improve the transparency, accuracy, reliability, and robustness of energy market price indices thus enhancing price discovery and competition, which ultimately benefits consumers and all industry participants.
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Best Practices for Energy Price Indices Amendment to Master Agreement(s) to Provide for the Disclosure of Transaction Data
Best Practices for Energy Price Indices Data Submission, Usage, and Confidentiality Agreement
User's Guide to the CCRO's Clearing Novation & Release Agreement
To streamline energy trading, as well as to facilitate the reduction of collateral
requirements and counter party credit exposure, the CCRO published this model contract agreement (the “CNRA”).
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Volume 2 of 6 Governance and Controls
Provides guidance on the control infrastructure for business processes and on assuring robust governance over them.
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Volume 3 of 6 Valuation Risk Metrics
Develops methodologies and risk metrics to provide management with meaningful, consistent information about the values and risk exposures inherent in merchant energy operations.
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Volume 4 of 6 Credit Risk Management
Provides guidance on credit risk management and efficient use of credit.
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Volume 5 of 6 Risk Management Disclosures
Recommends meaningful disclosures that are responsive to stakeholders, such as investors, credit rating agencies, financial analysts, regulatory bodies, other industry associations, and the media, and that provide insight into company and industry performance.
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