US legislation enacted in response to the accounting and corporate scandals of 2001–2002, including Enron’s collapse. The Act was named after Senator Paul Sarbanes and Representative Michael Oxley and is arranged in 11 titles. Compliance with provisions of the Act is mandatory. The Sarbanes-Oxley Act of 2002 established the duties of a firm’s board of directors, as well as advising on auditing and other business requirements. The Sarbanes-Oxley Act of 2002 is generally considered the single most important piece of legislation affecting corporate governance, financial disclosure, and public accounting since the US securities laws enacted in the 1930s. The Act is often referred to variously as SOX, S-O or SOA.

   a methodology that attempts to build plausible views of a small number of different possible futures for an organisation operating in conditions of high uncertainty.

   an entity certified by California’s independent system operator to provide schedules for electricity deliveries within the state’s market.

   supplies of gas used for winter demand. This often includes gas from storage systems.

   all commodity futures markets are affected to some extent by an annual seasonal cycle or ‘seasonality’. This cycle of pattern refers to the tendency of market prices to move in a given direction at certain times of the year.

   the secondary market that encompasses all subsequent transactions following the primary sale within the Clean Development Mechanism. H See also Clean Development Mechanism.

   the packaging of assets (normally debt of some description) into securities. These may be higher-yielding and more freely tradable than the unpackaged assets. Securitising production revenues has become increasingly popular among commodity producers over the past few years. Electricity utilities have also started securitising their retail revenue.

   (Gas) the seller nominates the amount of gas it expects to deliver in a range around the estimated daily contract quantity. The buyer is obliged to take or pay for the nominated quantity on a daily basis.

   SERC Reliability Corporation – a North American Electric Reliability Council within the Eastern Interconnection.

   the risk that arises when payments are not exchanged simultaneously. The simplest see also credit risk

   a company that transports gas along a pipeline system. Shippers need to be registered with the local regulatory body. In UK gas market terms, a shipper is a company that buys gas ‘at the beach’ and pays Transco to transport the gas along the pipeline system.

   the seller of a financial contract.

   a position that increases in value if the value of the underlying instrument or market price decreases in value.

   equal to 0.9072 tonnes. A measure of weight used in the coal industry.

   1) gas losses in the transportation and distribution systems. 2) gas volume lost through the extractions of liquid gases and the removal of water and other impurities.

   the percentage of gas expected to be lost during the transportation and distribution of gas.

   the SGX was established in 1999 by the merger of the Stock Exchange of Singapore and the Singapore International Monetary Exchange. It is the Asia-Pacific’s first demutualised and integrated securities and derivatives exchange.

   skew is a measure of the asymmetry of a distribution. A perfectly symmetrical distribution has zero skew, while a distribution with positive (or negative) skew is one where outliers above (or below) the mean are more probable. An example is the distribution implied by the presence of a volatility skew between out-of-the-money call and put options.

   a transaction whereby two counterparties, which do not have credit with each other, ask a third party that has credit with both to be a middleman to facilitate a trade. This practice achieved some notoriety in 1998, when it emerged that the collapsed US power marketer Power Company of America had been regularly sleeving forward electricity deals.

    see superconducting magnetic energy storage

   sulphur dioxide.

   allowance trading is the centrepiece of the US Environmental Protection Agency’s acid rain programme. Allowances are the currency with which compliance with SO2 emission requirements is achieved. They authorise a unit within a utility or industrial source to emit one US ton of SO2 during a given year or any year thereafter.Utilities that can use high-sulphur coal – which commands a lower price per British thermal unit than low-sulphur coals – can buy an SO2 allowance and bundle it with a high-sulphur coal purchase to produce more energy.

   crude oil containing a relatively high percentage of sulphur by weight, typically more than 0.5%.

   natural gas with a high sulphur content, which requires treatment before use.

   a North American Electric Reliability Council within the Eastern Interconnection.

    see Sarbanes-Oxley Act

    see sulphur oxides

   the difference between the price of electricity sold by a generator and the price of the fuel used to generate it, adjusted for equivalent units. The spark spread can be expressed in dollars per megawatt hour ($/MWh) or dollars per million British thermal units ($/mmBtu) or other applicable units. To express it in $/MWh, the spread is calculated by multiplying the price of gas, for example (in $/mmBtu), by the heat rate (in Btu/kilowatt hour), dividing by 1,000 and then subtracting the electricity price (in $/MWh). Also called a spark arbitrage.

   the ratio of the mass of a given volume of liquid at 60° Fahrenheit to the mass of an equal volume of water at the same temperature. This is used to calculate the API gravity.

   specific risk is the portion of a security’s market risk that is unique to that security. For example, the risk that an individual stock’s price may vary because of its industrial sector rather than the broader equity market.

   the opposite of hedging. The speculator holds no offsetting cash market position and deliberately incurs price risk in order to reap potential rewards.

   any back-up energy production capacity that can be made available to a transmission system at 10 minutes’ notice and can operate continuously for at least two hours once it is brought online.

   a cargo that is available for immediate loading.

   in the energy sector, the spot market is the physical/cash crude, refined product, gas or electricity market. The market for immediate delivery rather than future delivery.

   the price of a security or commodity in the cash market.

    see strategic petroleum reserve

   the difference between the bid and ask price. Liquid markets are characterised by narrow bid/ask spreads.

   an option written on the differential between the prices of two commodities. Spread options may be based on the price differences between prices of the same commodity at two different locations (location spreads); prices of the same commodity at two different points in time (calendar spreads); prices of inputs to, and outputs from, a production process (processing spreads); and prices of different grades of the same commodity (quality spreads). Nymex offers the only exchange-traded options on energy spreads: the heating oil/crude oil and gasoline/crude oil crack spread options.

   statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution. Indicates probability of a variable or price falling within a certain band around the mean.

   the standard European coal agreement is a physical contract for coal delivered free-on-board into the Amsterdam-Rotterdam-Antwerp area. It is traded in contracts (lots) of 5,000 tonnes for delivery and priced at 6,000 kilocalories per kilogram. Although it is primarily a physical contract, counterparties have the option, where mutually agreed, to close out the position should neither party want to make or take delivery of the coal.

   designed by the US Federal Energy Regulatory Commission, in light of market manipulation of energy prices, to standardise all US wholesale power markets.

    see dynamic replication

   a stochastic process is one that can be described by the evolution of some random variable over some parameter such as time. One example is geometric Brownian motion, which is commonly used to describe the movements of asset prices.

   the Black-Scholes model of option pricing assumes stock prices follow geometric Brownian motion with constant volatility and interest rates. But the assumption of constant volatility fails for real markets, prompting a number of attempts to model volatility as a stochastic process. The most notable of these is the Heath-Jarrow-Morton framework.

   the amount of gas that can be stored to cover peak demand. The main types of storage (apart from pipeline storage) are: 1) Liquefied natural gas – gas cooled until in liquid form at -162° Celsius and stored in insulated metal tanks. 2) Salt cavities (caverns) – many cavities have been created underground by dissolving layers of salt. 3) Aquifers (porous rocks). 4) Depleted gas fields now converted into storage facilities.

   gas kept in storage in order to balance supply and demand over time.

   a company operating a storage facility where gas can be stored during periods of low demand for use in times of greater demand.

   the combination of a put and a call option with the same expiration date and strike price. A buyer of a straddle hopes the volatility of the underlying prices will increase, thereby creating profit opportunities.

   during the period of power deregulation in the late 1990s and early 2000s, many electricity utilities in the US have tried to recover stranded costs by pushing their state government to impose a tariff charge on all the state’s electricity consumers to pay for stranded costs. This process is known as stranded cost recovery.

   the costs accumulated by electricity utilities that have built expensive power plants and entered into high-priced power purchase agreements, which are no longer commercially viable when competition forces prices down and reduces market share.

   an options position consisting of the purchase or sale of put and call options that have the same expiration, but different strike prices.

   stockpiles of crude oil owned and controlled by the US government. The SPR exists to protect the US from the effects of interruptions in the supply of oil and can only be accessed by order of the US President. As of October 2008, the SPR consisted of around 701 million barrels of oil stored in underground salt caverns along the coast of the Gulf of Mexico. In May 2008, the US Congress voted to temporarily suspend shipments to the SPR.

   to stress-test is to simulate an extreme market event and examine what happens to prices under the ‘stress’ of that behaviour.

   the price at which the underlying futures contract is bought or an option is exercised. Also called an exercise price.

   an over-the-counter product, which may incorporate several individual instruments – generally options embedded in a debt instrument, such as a medium-term note. The aim is generally to construct a payout profile that is attractive to a specific investor or group of investors, because of their risk-reward preferences and/or opinions on the market.

   non-standard contracts not associated with owned or leased assets and involving tailoring of terms to fulfil client needs.

   gases formed principally by the burning of fossil fuels containing sulphur, such as coal and oil. Sulphur oxides, such as sulphur dioxide (SO2) and sulphates, are pollutants that contribute to the formation of smog. Since SO2 dissolves in water vapour to form acid and interacts with other gases in the atmosphere to form sulphates and other products that can be harmful to the environment, ambient air-quality standards have been adopted in many areas to regulate sulphur oxides emissions. see also nitrogen oxides

   a corollary to the precipitation swap, this instrument is linked to the number of hours of sunshine. The party taking out a sunshine option would be compensated if the number of hours of sunshine fell below a certain level. see also weather derivatives

   a method of storing energy within a superconducting magnetic field.

   the nomination a gas shipper gives the pipeline owner when the shipper signs up a new customer. The pipeline owner then works out the charge for transporting gas to the new supply point. Once the shipper accepts this charge, he takes responsibility for transportation charges to that supply point.

   an agreement whereby a floating price is exchanged for a fixed price over a specified period. It is an off-balance-sheet financial arrangement involving no transfer of physical energy – both parties settle their contractual obligations by means of a transfer of cash. The agreement defines the volume, duration and fixed reference price. Differences are settled in cash for specific periods – monthly, quarterly or six-monthly. Swaps are also known as contracts for differences and fixed-for-floating contracts.

   an option to buy (call option) or sell (put option) a swap at some future date.

   crude oil containing a relatively low percentage by weight of sulphur – typically less than 0.5%.

   variations in gas demand.

   in gas purchase agreements, the swing factor is a measure of the flexibility to vary nominations and is expressed as a ratio of peak to average supplies.

   the right to take more or less of a specified commodity. The opportunity to swing up is effectively a call option on the commodity specified in the contract, and the opportunity to swing down is a put option on the commodity, subject to obligations to take certain quantities over the entire life of the contract. Swing options are most commonly used in the gas market.

   a company or country that changes its crude oil output to meet fluctuations in market demand. Saudi Arabia is seen as the world’s major swing producer, as it deliberately limits its crude oil production in an attempt to keep supply and demand roughly in balance.

   launched in 1998, Swep was the first ever electricity index in continental Europe. It is based in the Swiss town of Laufenburg, a major hub for power supplies between Switzerland and Germany.

   the SFE lists electricity futures contracts based on the markets of the Australian states of New South Wales and Victoria.

   a method of splitting risk among several counterparties.

   an internal rating based on factors that are deemed the most important for establishing counterparty credit quality.

   also known as portfolio insurance, this is a technique for replicating an option payout by buying or selling the underlying or futures contracts in proportion to movements in the theoretical option’s delta. Essentially, it is delta hedging with nothing to hedge. Those trying to replicate a long option position lay themselves open to increases in market volatility, but benefit if volatility declines. Synthetic replication is generally used if implied volatility of options is thought to be too high.

   a body responsible for operating and maintaining the physical electricity network. For the US, see independent system operator

   the benchmark price for all electricity sold within an integrated grid system, calculated on the basis of all transactions within the area disregarding price fluctuations caused by bottlenecks. The system price is used as a reference for financial settlements. see also area price

   the risk that the financial system as a whole may not withstand the effects of a market crisis. In recent years, attention has been focused on emerging derivatives markets, where a handful of players dominate trading. The concern is that the failure of any of these might have serious and widespread consequences for others in the market. The economic crisis and credit market contraction that developed in 2008 raised concerns about financial institution collapses and resulting systemic risk.