Reviewed by Mark Williams, SVP Risk
Management, Citizens Power

The long awaited second edition of Managing Energy
Price Risk has finally arrived. It has been four years
since the first edition was published. During this hiatus,
a lot has happened as risk management within the
rapidly expanding energy industry has come of age as
a respected discipline. The second edition is a rich
compilation of papers by a surprisingly representative
group of industry leaders, practitioners and academics.

The books strength is that it reinforces the fact that
risk management principles initially applied to a narrow
band of energy commodities can and should be applied
across a wide array of energy commodities including
electricity. As expected the book does a solid job in
capturing an international perspective on the various
challenges, which are not isolated to any one
continent but are global in scope. It includes a lengthy
introduction that effectively frames risk management
progress, advancements and innovations that started
in the oil markets in the 1970's and migrated to the
natural gas and most recently expanding to the
electricity industry.

Managing Energy Price Risk is comprised of 15
chapters, all of which include an introduction, which
minimises the disjointedness that you may expect from
a book written by a large number of authors. Other
improvements in this second edition include expanded
graphics, highlighted panels, detailed appendices and a
separate glossary, which provides the reader with
additional reference material.

In particular the chapter on energy options written by
Michael Hampton is a useful primer and provides the
reader with a concise explanation of option theory,
pricing, basis risk, delta hedging as well as practical
guidelines for distinguishing between hedging and pure
speculation. For the more advanced reader, the
chapter on Energy Exotic Options, written by Vince
Kaminski, Stinson Gibner and Krishnarao Pinnamaneni is
particularly strong as it outlines the challenges
associated with the exotics and effectively documents
the latest methods used by leading practitioners in
pricing such instruments.

Additionally, the chapter on Accounting for Derivative
Contracts in the Energy Environment by three
consultants from Arthur Anderson, is a well written
summary which addresses the numerous tax related
issues including a timely discussion on the US Financial
Accounting Standards Board's Statement 133 (see
EPRM October 1999, page 22). Having this tax
information housed in one concise chapter is of great
value.

The second edition however is not without flaws. In
particular, it would have been useful to have more
information on the current challenges risk managers
are confronted with in the power industry including
latest advancements in volatility and correlation
estimation techniques. Additional attention could have
also been placed on the shortcomings of the current
market structure and methods in finding and applying
appropriate hedging strategies and instruments. In the
fledgling power market, this continues to be one of the
primary challenges.

In summary, this second edition of Managing Energy
Price Risk builds upon the sentinel work laid out in the
prior edition and is a valuable reference book for the
new recruit or seasoned veteran. It is a welcome
edition to any risk management library.