Emerging Practices for Capital Adequacy © Copyright 2003, CCRO. All rights reserved. 13 III. INTRODUCTION TO COMPONENTS OF ECONOMIC CAPITAL As discussed in the introduction to this paper, the framework for determining capital adequacy for economic value requires an estimation of economic capital ― the capital a company is required to hold to support the risk of unexpected loss in the value of its physical and financial portfolio. This economic capital should cover the most significant quantitative risks that a business faces. For energy companies, the primary sources of risk are: • Market risk • Credit risk • Operational/operations risk Sections IV through VI address each of these sources of risk. Section VII introduces methodologies for combining separate assessments of each of these risk components into a single representation of a company’s economic capital. Section II discussed how to determine a company’s capital adequacy by using economic capital, debt, and net assets. Section VIII addresses how to determine capital adequacy for liquidity purposes. In calculating economic capital and liquidity, throughout this document we reference the use of an appropriate confidence level. There is no standard across the industry for using a constant confidence level. The user must take into account the accuracy and robustness of its underlying modeling efforts to determine an appropriate confidence level.