Risk Measurement and Management

Evolving wholesale power markets have created significant new opportunities to convert generating capacity and fuels into fluid asset portfolios with considerable potential for fluctuation in values. These opportunities are not without cost. Conversion of hard assets to fluctuating market positions entails substantial possible reward with substantial possible risk. The first step in effective risk management is effective risk measurement.

PSE's resource planning staff is well grounded in statistics and has a proven publication and consultation record on risk measurement and management. We have found Monte Carlo simulation particularly effective in developing probabilistic characterizations of key decision variables in numerous contexts. In one recent engagement we constructed our HedgeHog model, which was used to price call options for 2X16 periods last summer. Probabilistic inputs included loads, unit availability, gas prices, and spot electric prices. We have also assessed value at risk for clients wishing to add large loads that would require them to enter spot markets on a periodic basis. Our staff has also developed swing option prices to attract and retain strategic large accounts.

PSE also has substantial experience in quantifying the uncertainty of load forecasts and the establishment of design loads for utilities contemplating capacity additions. This topic has become increasingly critical whether decisions are being vetted by regulatory bodies or by market forces.

PSE offers the following risk measurement and management services:


Wholesale market price exposure. Retail market weather exposure. Load forecast uncertainty. Option valuation. Value at risk. Gas and spot electric price volatility. Swing option pricing.