Emerging Practices for Capital Adequacy © Copyright 2003, CCRO. All rights reserved. 72 GLOSSARY The CCRO has defined here the commonly used terms in the business, a number of which are used in the white papers we have published. Many of the terms are standard, with wide applicability in sectors other than energy, but others are primarily focused on the energy business. Therefore, we have addressed those terms that are applicable only to this business or that have a different interpretation or nuance in the energy business. The category is listed after the word or phrase below, and any reference used is listed after the definition. Availability - The percentage of a year that a plant is available to operate. Generally equal to hours available divided by total hours per year or [1 – (planned outage rate + forced outage rate)] Basel Accord - A rigorous reporting of risk and capital requirements for international banking. The New Basel Accord measures capital adequacy for banks as a minimum ratio of total capital to (Credit Risk + Market Risk + Operative Risk). The accord also defines a supervisory review process to ensure sound internal processes at banks. In addition, the accord provides for enhanced reporting of risk and capital used by international banks. Capacity - The potential output of a plant, usually expressed in MW. Capacity factor - The total MWh generated in a year divided by the potential MWh generation (i.e., maximum capacity x 8760 hours per year) Capital adequacy - The estimate of capital required to support the business. Capital adequacy requirements for (energy) trading and marketing companies provide stakeholders with a certain amount of confidence that various types of potential adverse events and event externalities will not drive the business into a bankruptcy. Combined cycle - A plant where the combustion of fuel in the combustion drives a shaft that operates a generator. Exhaust heat from the turbine is captured in a HRSG (heat recovery steam generator) that creates steam that is used to drive a steam turbine that powers another generator. Combined-cycle plants are much more efficient than simple-cycle plants. Contingent Liquidity - Liquidity a company is required to hold to support additional demand for fixed payments, cash collateral, or other financial support because of adverse moves in market prices, credit rating, or violation of debt covenants. While economic capital protects against losses in the company’s economic value, contingent liquidity is held to support the risk of unexpected reduction in the cash balance. Counterparty performance risk - Potential adverse occurrence of a counterparty’s ability to operationally execute on an agreement or obligation. Credit economic capital - Capital required to protect against unexpected credit loss at a given confidence level and time horizon. Credit loss distribution - Representation of the range of possible portfolio values that a company might observe as a result of counterparties not fulfilling their contractual obligations. Credit risk – (1) Variation of portfolio market value due to default or a credit downgrade of an issuer or counterparty (2) potential adverse occurrence of a counterparty’s ability to pay its obligations. Default frequency – The likelihood of default based on an obligor’s creditworthiness also referred to as default probability.