Volume 3 — Valuation and Risk Metrics © Copyright 2002, CCRO. All rights reserved. 8 Defining these intervals should be done consistently for all assets and related contract positions in the same region or market. The market years interval needs to be reexamined as time passes because (1) the markets for the commodities are dynamic and may become more or less liquid, resulting in contracts of longer tenors being traded more or less frequently, and (2) the delineation between market years and non-market years consequently will change. Either of these situations will affect the reported mark-to-market or fair value and the P&L changes. Any period can be used for the market years as long as it consistent with the basic level of liquidity in the marketplace for generation assets. (This tenor might be extended at the reporting company’s initiative.) By providing a projection of operating revenues along with a periodic analysis of the variance between realized and projected operating revenues, management will be able to convey to stakeholders useful information about the mechanics of the business, the quality and composition of the assets, and the asset management capabilities. Step 2: Identify Positions For the market years, identify the asset positions, hedges, and other trading positions. For simplicity and tractability, the volumetric exposure should be calculated as “delta equivalent” volumes or alternatively expected production/consumptions values (physical measure), which can be obtained for each asset and each commodity associated with each asset. The delta volume will typically be obtained from the model(s) used for the particular asset transaction. Step 3: Calculate Value for the Market Years For the market years, calculate the value of the activity. Step 4: Calculate Value of the Non-market Years Valuation for non-market years is typically driven by fundamental factors, and the models used are predominantly planning types as opposed to operational types. In other words, the model structures and inputs are such that they are more static and do not change from day to day, unless there are structural shifts in the economy or the user needs to evaluate the impact on the value of some prespecified changes to the model inputs and parameters. The valuation will be much more model-based depending on the inputs and assumptions, which are more structural and systemic and not necessarily based on transient market characteristics. For the non-market years, fair value is calculated as economic value that is a function of principal value and risk drivers, such as: • Projected economic or demand growth for commodity and services • Projections for prices of principal input commodities • Relative stocks of assets, such as power plants in the case of generation assets and developing and producing fields in the case of natural gas • The projected technological changes and their likely effect on the industry/activity of interest • The financial market projections, such as interest rates