CEP Risk Analysis & Regulatory Compliance 4 — Questions and Answers
Question 1: A company uses a 'collar' strategy in energy procurement. What does this accomplish?
- Sets both a price floor and a price ceiling, limiting exposure on both sides (Correct answer)
- Eliminates all price risk through a fixed contract
- Only protects against upward price movements
- Only protects against downward price movements
Correct answer: Sets both a price floor and a price ceiling, limiting exposure on both sides
A collar involves buying a cap (ceiling) and selling a floor, which bounds the buyer's effective price range on both the upside and downside.
Question 2: Under EPA's Clean Air Act Section 111(d), what primary obligation does it create for energy procurement professionals?
- Requirement to procure only renewable energy
- Awareness that carbon emission regulations may affect the cost and availability of fossil fuel-based supply (Correct answer)
- Mandatory hedging of all natural gas contracts
- Required disclosure of all energy contracts to the SEC
Correct answer: Awareness that carbon emission regulations may affect the cost and availability of fossil fuel-based supply
Section 111(d) authorizes EPA to regulate greenhouse gas emissions from existing power plants, potentially affecting fossil fuel procurement costs and supply availability.
Question 3: Which scenario best illustrates 'load shape risk' in electricity procurement?
- The counterparty fails to deliver power at peak demand hours
- Actual hourly consumption patterns differ significantly from the contracted block supply profile (Correct answer)
- Power prices spike during an unexpected cold snap
- A transmission line outage disrupts scheduled deliveries
Correct answer: Actual hourly consumption patterns differ significantly from the contracted block supply profile
Load shape risk arises when a customer's actual usage profile (hourly variation) differs from the flat or block-shaped supply contracted, creating imbalance costs.
Question 4: What is the role of a 'credit support annex' (CSA) in an ISDA Master Agreement for energy transactions?
- It specifies the physical delivery terms for commodities
- It establishes collateral posting obligations to manage mark-to-market credit exposure (Correct answer)
- It defines the force majeure provisions
- It sets the regulatory reporting requirements
Correct answer: It establishes collateral posting obligations to manage mark-to-market credit exposure
A CSA under an ISDA Master Agreement governs the exchange of collateral (margin) between counterparties based on the mark-to-market value of open derivative positions.
Question 5: In a restructured electricity market, what is an 'Incremental Cost' or 'Locational Marginal Price' (LMP) designed to reflect?
- The average cost of all generation in the market
- The cost of delivering one additional megawatt-hour to a specific location, including energy, congestion, and losses (Correct answer)
- The regulated retail rate for residential customers
- The fixed capacity payment made to generators
Correct answer: The cost of delivering one additional megawatt-hour to a specific location, including energy, congestion, and losses
LMP reflects the real-time marginal cost of supplying electricity at a specific node, incorporating energy cost, transmission congestion, and line losses.
Question 6: A risk manager calculates a 'stress test' for an energy portfolio by simulating a 30% price spike. What does this test assess?
- Average expected portfolio performance under normal conditions
- Portfolio resilience under extreme but plausible adverse scenarios beyond VaR (Correct answer)
- The exact probability of a 30% price increase
- Regulatory compliance with FERC reporting requirements
Correct answer: Portfolio resilience under extreme but plausible adverse scenarios beyond VaR
Stress testing evaluates how an energy portfolio would perform under severe market conditions that fall outside typical statistical models like VaR.
Question 7: Which federal regulation requires large electricity consumers in wholesale markets to register as 'end-use customers' and comply with market behavior rules?
- FERC Order 719
- FERC Order 745 (Correct answer)
- FERC Order 841
- FERC Order 2000
Correct answer: FERC Order 745
FERC Order 745 requires demand response resources to be compensated at the LMP when they reduce consumption and are cost-effective, affecting large end-users participating in wholesale markets.
CEP Risk Analysis & Regulatory Compliance 4
A company uses a 'collar' strategy in energy procurement.
What does this accomplish?