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Outlined below are some details of the existing curve validation process and
its application to the proposed validation of tariff curves. Wholesale Curve Validation The existing process incorporates validation of all wholesale curves and includes monthly validations and random curve reviews. Every month, results of the validation are summarized in a memo and distributed to the Senior Management. Results of the random curve reviews are brought up to the attention of Desk Heads responsible for the respective curves and Senior Management as necessary. Curve Assessment Green: - curve is reasonable - small P&L impact from curve shift Yellow: - curve is illiquid - medium-to-large position and P&L impact from curve shift - some ability to validate prices from external sources Red: - curve mark is inaccurate (based on external data obtained) - curve is illiquid: no ability to validate externally - significant positions and P&L impact from curve shift Curves that are inaccurately marked based on data obtained from external sources are urged by the Senior Management to be corrected. In the cases where external data is not available or clear, the Senior Management urges the respective Desk Head not to increase an already large illiquid position or to built in a risk premium by widening the respective bid/offer spread and not to take on positions inside of that spread. Selection Criteria The criteria for monthly curve selection are the following: P&L sensitivity Largest positions Staleness (curves have not been marked for a period of time) Completeness (curves that have not been validated in a long time) The main criteria for random curve validation is new deals. Curve Validation Tools Broker Quotes/Other external data Graph Analysis (curve slope vs. a peer group, curve humps/sculpting vs. a peer group, curve shift vs. position shift, etc.) New Deal Analysis (comparison of curve marks and executed/quoted prices) Boundary Analysis/V@R Simulations (comparison of curve to simulated curve boundaries using Enron's V@R Engine) SAVA Model Comparison (comparison of curves to model generated results) Tariff Curve Validation Scope/Timing: ASAP - 20 curves with the largest positions related to deals pending review: (Frito-Lay, Quaker Oats, Starwood) - to ensure timely and smooth approval of these deals. Next 30-days - 20 curves with the largest positions/P&L impact Monthly/Quarterly - 20 curves selected based on criteria described above Randomly - curves with significant positions/P&L impact, resulting from new deals Data Gathering: This Month: Listing of 20 curves (related to deals in progress) and the related support requested by EGA (to be provided by Scott Stoness) On-going Basis: The process of obtaining data should be streamlined and the curve validation process should be relatively painless: - RAC should have access to the curve data (Minal Dalia is fully devoted to EES and is currently residing on the EES floor) - Curve assumptions should be documented (to be provided by Scott Stoness) Execution/Reporting: RAC, EGA and EES Risk Management Group work together on curve validation utilizing available tools and work on developing new tools Utilize the Wholesale Curve Assessment methodology (Green, Yellow, Red) Generate a curve validation report (see template attached) Provide feedback to the Desk Heads and distribute the Curve Validation Report to Enron and EES Senior Management Other Curves Other curves related to EES business should be gradually incorporated into the aforesaid process (ancillary services, congestion, DSM and labor related curves) - let us set a timetable. In conclusion, curve validation results should be evaluated in conjunction with other risk analytics: stress testing of prices, volatilities and correlations, Value-at-Risk/Capital-at-Risk analysis, performance measures, capital allocation framework, etc. Vlady.
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