CEP Risk Analysis & Regulatory Compliance 2 — Questions and Answers
Question 1: A buyer locks in a fixed price for natural gas six months ahead but spot prices drop significantly at delivery. Which risk has materialized?
- Basis risk
- Volumetric risk
- Opportunity cost risk (Correct answer)
- Credit risk
Correct answer: Opportunity cost risk
Opportunity cost risk occurs when a hedged fixed price becomes unfavorable relative to the market price at delivery.
Question 2: Under FERC Order 2000, which entity is responsible for independent transmission system operations in a region?
- Local distribution company
- Regional Transmission Organization (RTO) (Correct answer)
- State public utility commission
- Bilateral contract administrator
Correct answer: Regional Transmission Organization (RTO)
FERC Order 2000 encouraged the formation of RTOs to independently manage transmission grids and improve market efficiency.
Question 3: A Value-at-Risk (VaR) model at the 95% confidence level over a 10-day horizon means there is what probability of exceeding the estimated loss?
- 5% (Correct answer)
- 10%
- 95%
- 1%
Correct answer: 5%
A 95% confidence VaR means there is a 5% chance (1 in 20) that losses will exceed the modeled amount.
Question 4: Which regulatory body oversees compliance for natural gas interstate pipeline transportation rates in the US?
- EPA
- CFTC
- FERC (Correct answer)
- EIA
Correct answer: FERC
The Federal Energy Regulatory Commission (FERC) regulates interstate natural gas transportation rates and pipeline access.
Question 5: A company's energy supply contract contains a 'take-or-pay' clause. Which risk does this clause primarily create for the buyer?
- Price risk
- Volumetric risk (Correct answer)
- Counterparty credit risk
- Regulatory risk
Correct answer: Volumetric risk
A take-or-pay clause obligates the buyer to pay for a minimum volume regardless of actual consumption, creating volumetric risk.
Question 6: In energy procurement, what does 'basis risk' specifically refer to?
- Risk that a counterparty defaults on a contract
- Risk that the price at a specific delivery point diverges from the hedge reference price (Correct answer)
- Risk from changes in environmental regulations
- Risk that load forecasts are inaccurate
Correct answer: Risk that the price at a specific delivery point diverges from the hedge reference price
Basis risk arises when the price at the actual delivery location differs from the benchmark price used in the hedging instrument.
Question 7: Which of the following best describes a 'force majeure' clause in an energy supply contract?
- A penalty assessed for early contract termination
- A provision excusing performance obligations due to extraordinary, unforeseeable events (Correct answer)
- A pricing adjustment mechanism tied to fuel indices
- A credit enhancement requirement for high-risk counterparties
Correct answer: A provision excusing performance obligations due to extraordinary, unforeseeable events
Force majeure clauses relieve parties of contractual obligations when performance is prevented by events beyond their reasonable control.
CEP Risk Analysis & Regulatory Compliance 2
A buyer locks in a fixed price for natural gas six months ahead but spot prices drop significantly at delivery.
Which risk has materialized?