Volume 3 — Valuation and Risk Metrics © Copyright 2002, CCRO. All rights reserved. 7 be represented as forwards and/or options within a liquid period, they could be marked-to- market. (For more detail on asset valuation, see Section 2.0.) 2.0 Mechanics of Asset Valuation The valuation methodology for assets summarized here can be applied to all assets (e.g., generation, pipelines, storage, leases, etc.) to assess the economic value of the output. Further details are contained in Appendix B. The objective is to measure and monitor the value of commodity positions and associated risks inherent in physical assets on a basis consistent with other contractual positions in order to provide management with a complete picture of the entity’s risks and potentials. This, in turn should enable effective management of these assets as an integral part of the entity’s energy risk management activity. The information generated during this process will help facilitate effective reporting of these activities to interested stakeholders. The level of granularity should be such that the performance calculation conveys useful information while protecting competitive information. 2.1 Calculation Below we describe a simple sequence of steps to value assets such as generating plants, pipelines, storage facilities, etc., from an economic or fair value standpoint. The objective is to highlight the value components and risk analysis that needs to be performed in the case of assets whose economic lives extend beyond the normal periods where active commodity and service markets exist, enabling active, dynamic hedging strategies. There is a mismatch between commodity markets’ tenor and the economic life of an asset. Therefore it behooves us to measure the economic value as well as risks in consistent yet dissimilar ways to capture the complex interactions between the markets. This is necessary in order to manage the risks and the inherent value and risk embedded in the assets itself. The following is an example of this calculation using a power plant (or a set of power plants). The steps are a sequence designed to capture the essential elements. For a more in-depth analysis split into a more detailed sequence of steps, please refer to Appendix B. Step 1: Define Market Years and Non-market Years To obtain and report meaningful information on the value and risks associated with assets in the portfolio, it is useful to break up the economic life of every asset into two parts. Market years ― The part of the economic life during which active, liquid markets exist in the underlying commodities and dynamic and active hedging around the asset is feasible Non-market years ― The part of the asset economic life comprising the expected value over the period beyond the market years and extending over the rest of the economic life of the asset When estimating the fair value of the asset, the market years is the portion where there is greater reliance on market information, and the non-market years is the portion where there is greater reliance on models and other non-market data.