ERAC Audit Procedures & Risk Mitigation 5

Question 1

A power plant operator wants to reduce exposure to unplanned outage costs. Which risk mitigation strategy directly addresses this operational risk?

Accepted Answer

Implementing a preventive maintenance program with reliability performance tracking

Answer

A preventive maintenance program with performance tracking reduces unplanned outage frequency and duration, directly mitigating the operational risk of unexpected downtime costs.

Question 2

During an audit, an auditor finds that a company's risk appetite statement has not been approved by the board of directors. What is the primary concern?

Accepted Answer

Risk-taking is not aligned with governance oversight and lacks board accountability

Answer

The board of directors is responsible for setting and approving risk appetite; without board approval, the risk appetite lacks proper governance oversight and accountability.

Question 3

Which document typically defines the maximum allowable position size, stop-loss thresholds, and escalation procedures for an energy trading desk?

Accepted Answer

Trading risk policy and limits framework

Answer

A trading risk policy and limits framework formally establishes position limits, loss thresholds, and escalation procedures that govern risk-taking activity on the trading desk.

Question 4

An auditor identifies that an energy company uses a single risk model for all commodities including electricity, natural gas, and crude oil. What limitation should the auditor flag?

Accepted Answer

Commodity-specific dynamics such as seasonality and delivery constraints may not be adequately captured by a generic model

Answer

Each energy commodity has unique price dynamics, seasonality, and physical delivery characteristics that a generic single model may fail to capture accurately, leading to mispriced risk.

Question 5

What is the purpose of a heat rate contract in electricity risk management?

Accepted Answer

To convert between natural gas and electricity prices using a plant's conversion efficiency ratio

Answer

A heat rate contract links natural gas and electricity prices using a plant's heat rate (BTU per kWh), allowing generators to hedge the spark spread between fuel cost and power revenue.

(ERAC) Energy Risk Auditor Certification Practice Test

(ERAC) Energy Risk Auditor Certification Practice Test

ERAC Audit Procedures & Risk Mitigation 5