Browsing by Subject "Risk management"
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Item A case study of the risk and crisis communications used in the 2009 salmonella outbreak in peanut products(2012-05) Fry, Jessica; Irlbeck, Erica; Meyers, Courtney; Chambers, ToddCrisis management is a tool designed to fight a crisis; minimize the inflicted damage; and protect the organization, stakeholders, and industry from harm. Crisis management processes include preventative measures, crisis management plans, and post-crisis evaluations (Coombs, 2010a, 2007b). The 2009 Salmonella outbreak in peanut products was the second outbreak caused by contaminated peanut butter and created a period of negative publicity for the food and peanut industry. It was one of many large food outbreaks that the United States has seen in the past six years, all of which negatively impacted the food industries and agriculture. The public assumed that tainted peanuts might have entered into peanut butter and other food items (Smith, 2009). It is important for the various channels of distribution and public relations practitioners in the food and agriculture industry to be able to work together to uphold the strong reputation of the organization and agriculture in the midst of a crisis. Public relations practitioners worked to communicate with consumers to increase their confidence in the peanut industry. Organizational crisis communication messages play a vital role in crisis situations; they provide information for those affected by the crisis and assist in reducing the damage and impact of the crisis on the organization (Coombs, 2010b; Fediuk, Coombs, & Botero, 2010).Item A Tool for the Analysis of Real Options in Sustainability Improvement Projects(2012-10-19) Boonchanta, NaponThe major challenges in sustainable implementation are the financial issue and uncertainties. The traditional financial budgeting approach that is commonly used to evaluate sustainable projects normally neglects future decisions that might need to be made over the course of a project. The real options approach has been suggested as a tool for strategic decision making because it can provide flexibility which can increase the project value. Researchers have been trying to identify the potential of the real options approach, and provide the frameworks for a real options evaluation and flexible strategy in sustainability improvement. However, some important variables and financial impacts explanation of real options are missing. Models can be improved to show the variation of possible project values along with its behavior. This work aims to improve the real options model in sustainable projects to provide understanding about the financial impacts of flexible strategy to sustainable improvement projects and to be used as a tool to assist decision making. The results showed that real options can have a positive financial impact to the project. The extension of this model can assist the analysis and development of decision policies.Item Applying the PDRI in project risk management(2002) Wang, Yu-ren; Gibson, G. Edward (George Edward), 1958-Research conducted by the Construction Industry Institute (CII) shows that adequate pre-project planning benefits project in the areas of cost, schedule, and operational characteristics. Pre-project planning is the project phase encompassing all the tasks between project initiation to detailed design. The development of a project scope definition packages is one of the major tasks in the pre-project planning process. Project scope definition is the process by which projects are defined and prepared for execution. It is at this crucial stage where risks associated with the project are analyzed and the specific project execution approach is defined. Development of the Project Definition Rating Index (PDRI) in 1996 provided an effective and easy-to-use tool for project scope development for industrial projects. A complementary PDRI was developed for building projects in 1999. Since introduction, the PDRI (both versions) have been widely used by the construction industry and serve as an important tool for measuring project scope definition. The PDRI helps a project team to quickly analyze the scope definition package and predict factors that may impact project risk. However, since its introduction, little additional analyses have been conducted looking at the PDRI. Data from 140 capital projects representing approximately $5 billion in total construction cost were used for this research analysis. The relationship between good scope definition and enhanced project performance were demonstrated. Analysis of PDRI scores identified poor definition scope elements and quantified their potential impact to project outcomes. Risk control procedures were examined and recommended to mediate high risk areas, such as poorly defined scope elements. A systematic risk management approach was proposed and explained in detail. Research limitations, conclusions and recommendations are also discussed in this dissertation. This research effort extends the use of PDRI as a project management tool in the process of capital facility projects delivery.Item Bank risk-taking, regulations and market discipline : three essays(2002-08) Lee, Taekyu; Freeman, Scott; Wilson, Paul W.In the first chapter, I analyze how early corrective actions affect bank risk taking and welfare of agents in an economy. Early corrective actions considered in this paper are classified into two categories: early closure and (early) recapitalization. It is shown that early closure might be preferable to save government expenses (explicit costs), but it causes inefficient bank risk-taking (implicit costs). It is not obvious whether the resolution costs and inefficiency in bank risk taking are smaller under recapitalization. However, there is a type of recapitalization in which not only does the government incur no resolution costs, but also recapitalization might reduce inefficiency. This type of recapitalization gives better ex ante expected returns so that there is Pareto improvement. The second chapter examines market discipline in the Korean banking system. Evidence of strong market discipline is essential to justify the cession of government regulatory control to the market. Two types of markets are tested: (i) the market for uninsured liabilities, and (ii) the market for bank equity. I find week evidence of market discipline in the market for uninsured liabilities in Korea. In the case of the market for bank equity, no evidence of market discipline is found. Overall, the estimation results in the two markets do not provide strong evidence of market discipline in the Korean banking system during the sample periods. In the third chapter, I examine the relationship between bank size, diversification and risk in Korean banks. Recent mergers in the Korean banking industry show that the government encourages and supports banking consolidation in various ways as a part of restructuring the financial sector. This policy trend is based on the presumptions that bigger banks are better diversified than smaller banks, and that diversification can potentially reduce the probability of failure. I test this conventional wisdom. The estimation results provide strong evidence of the positive relationship between bank size and diversification; bigger banks are better diversified than small banks. However, the results show that bigger banks’ diversification, at least in bank loans, does not generate enhanced safety in Korean banks. This suggests the possibility of the “too-big-to-fail” (TBTF) moral hazard incentives that could drive large banks to hold diversified but riskier asset portfolios.Item Can strategic reasoning prompts improve auditors' sensitivity to fraud risk?(2008-08) Bowlin, Kendall Owen; Kachelmeier, Steven J. (Steven John), 1958-The basic premise of risk-based auditing is that more (fewer) audit resources should be allocated to accounts that are more (less) likely to be misstated. However, financial reporting managers can exploit such allocations by intentionally misstating balances that are less likely to draw auditor attention. If auditors do not recognize this strategic implication of risk-based auditing, undetected misstatements among ostensibly low-risk accounts could be much more common than traditional risk assessment procedures suggest. The purpose of this study is to examine whether prompting auditors to form beliefs about managers’ expectations of, and responses to, audit strategies can enhance auditors’ sensitivity to the strategic risk of fraud among accounts typically considered low-risk. Using a multi-account audit game, I find that auditors do not naturally attune to strategic risks but instead tend to focus resources on “highrisk” accounts. However, when auditors are prompted to reason strategically, they utilize more resources and devote that increase almost entirely to “low-risk” accounts. I also find that, although increasing available resources does result in an overall increase in the amount of utilized resources, the relative effect of the strategic prompt is robust to the level of available audit resources.Item Disruption managment for project scheduling problem(2005) Zhu, Guidong; Yu, Gang; Bard, Jonathan F.Item Economic analysis on information security and risk management(2007) Zhao, Xia, 1977-; Whinston, Andrew B.This dissertation consists of three essays that explore economic issues on information security and risk management. In the first essay, we develop an economic mechanism which coordinates security strategies of Service Providers (SPs). SPs are best positioned to safeguard the Internet. However, they generally do not have incentives to take such a responsibility in the distributed computing environment. The proposed certification mechanism induces SPs to voluntarily accept the liability of Internet security. SPs who take the liability signal their capability in conducting secure computing and benefit from such recognition. We use a game-theoretic model to examine SPs' incentives and the social welfare. Our results show that the certification mechanism can generate a more secure Internet communication environment. The second essay studies the impact of cyberinsurance and alternative risk management solutions on firms' information security strategies. In the existing literature, cyberinsurance has been proposed as a solution to transfer information risks and reduce security spending. However, we show that cyberinsurance by itself is deficient in addressing the overinvestment issue. We find that the joint use of cyberinsurance and risk pooling arrangement optimizes firms' security investment. In the case with a large number of firms, we show that firms will invest at the socially optimal level. The third essay examines the information role of vendors' patching strategies. Patching after software release has become an important stage in the software development cycle. In the presence of quality uncertainty, we show that vendors can leverage the patch release times to signal the quality of their software products. We define a new belief profile and identify two types of separating equilibria in a dynamic setting.Item Essays in financial economics and risk management(2009-05-15) Zou, LinItem Essays on derivatives pricing in incomplete financial markets(2007-12) Su, Qimou, 1979-; Zariphopoulou, Thaleia, 1962-This dissertation is a contribution to the valuation and risk management of derivative securities in incomplete financial markets. It consists of two parts dedicated to two distinct valuation methodologies. In the first part, we develop a valuation approach based on equilibrium arguments from the perspective of option market makers and financial intermediaries. This approach produces a new pricing concept that we call the competition-based price. We analyze such prices in both a semimartingale and a diffusion setting. The emerging pricing measure is characterized as the minimal entropy martingale measure (MEMM) with respect to a new prior. This new prior depends on the aggregate demand and inventory of the derivatives and is characterized as an Esscher transform of the historical measure. In a diffusion setting, the pricing measure is explicitly constructed. We show that the competitive price of a derivative is an increasing function of the demand of any derivative in the market. The increasing rate is proportional to the covariance between the unhedgeable parts of the associated derivative payoffs, calculated under the competition-based pricing measure. This result may contribute to the resolution of some of the well known option-pricing puzzles. We further compare our approach to existing pricing methodologies, such as the marginal-utility pricing and indifference valuation. In addition, we apply our approach to price a family of volatility derivatives. We develop numerical schemes based on Monte Carlo simulations for a Heston-type stochastic volatility model. In the second part, we apply the well established indifference approach to value options with staging structure and sequential decisions, such as installment options and venture capital contracts. In a diffusion market setting, we analyze the underlying stochastic optimization problems via the associated Hamilton-JacobiBellman equations. We deduce a quasilinear PDE for the indifference price and analyze it probabilistically. We also obtain an explicit pricing formula under appropriate market restrictions and characterize the indifference price as a nonlinear expectation under the MEMM. The associated hedging and risk monitoring strategies are investigated. We further develop numerical schemes based on regression techniques to value the ASX Installments and the staged financing of venture capital. Moreover, a foresighted valuation framework is introduced to incorporate the investors’ private information into their valuation and hedging strategies. Such information may include both their ex-ante risk exposure and ex-post investment opportunities. Finally, we adopt the recently developed dynamic performance criteria to price volatility derivatives. We develop numerical schemes for the computation of the forward and backward indifference prices in models of Heston and reciprocalHeston type.Item Essays on the effective integration of risk management with operations management decisions(2009-08) Tanriseve, Fehmi; Morrice, Douglas J. (Douglas John), 1962-In today's marketplace, firms' exposure to business uncertainties and risks are continuously increasing as they strive to meet dynamically changing customer needs under intensifying competitive pressures. Consequently, modern supply chains are continuously evolving to effectively manage these uncertainties and the allied risks through both operational and financial hedging strategies. In practice, firms extensively use operational hedging strategies such as operational flexibility, capacity flexibility, postponement, multi-sourcing, supplier diversification, component commonality, substitutability, transshipments and holding excess stocks as operational means for risk management. On the other hand, financial hedging which involves buying and selling financial instruments, carrying large cash reserves or adopting conservative financial policies, changes the cash flow stream of the firms and may help to reduce the firms exposure to business risks and uncertainties. Overall, in this dissertation we explore how risk management can be integrated with operating decisions so as to improve the firm value creating more wealth for the shareholders. In the first essay, we focus on capacity flexibility as a means of operational hedging for risk management in an MTO production environment under demand uncertainty. We demonstrate that capacity flexibility may not only be used to hedge against the demand uncertainty, but may also be employed to effectively protect against possible suboptimal operating decisions in the future. In the second essay, we focus on operational hedging in financially constrained startup firms when making short-term production and long-term investment decisions. We provide an analytical characterization of the optimal investment and operating decisions and analyze the impact of market parameters on the operations of the firm. Our findings highlight an interesting operational hedging behavior between the process investment decisions and the short-term production commitments of the firm when they are faced with financial constraints. Our third essay focuses on the value of integrated financial risk management activities by publicly traded established firms under the risk of incurring financial distress cost. Different from the existing operations management literature, we study the risk management by a public corporation within the value framework of finance; hence our findings do not require any specific assumptions about the investors' utility functions. Moreover, we contribute to the operations management research by examining the impact of the costs of financial distress on hedging and operating plans of the firm. Overall, in this dissertation, we examine the effective integration of operational and financial risk management so as to improve the firm value creating more wealth for the shareholders.Item Evidence on the fundamental determinants of investors' expectations of risk(2003-05) Lawson, Andreas Uwe; Magee, Stephen P.; Tse, Senyo YawoPrevious research shows that a number of firm characteristics explain the crosssection of common stock returns. These characteristics either (i) are functions of stock prices, or (ii) are not functions of stock prices and hence depend only on accounting disclosures. Characteristics in the first class reflect and summarize investors’ risk opinions while characteristics in the second class contribute to the determination of investors’ risk opinions. This study draws a distinction between these two classes in order to parsimoniously characterize the accounting disclosures that determine investors’ opinions of risk and to evaluate the importance of accounting disclosures for determining investors’ opinions relative to non-accounting information. The results show that: (1) Investors’ opinions about systematic risk are determined by profitability, firm size and the growth of firm size. (2) There are strong seasonal patterns in the expected return premia of the accounting determinants of opinions. Specifically, between January and September, the premia for profitability, size and size growth are negative. Between October and December, the premia for profitability and size are positive and the premium for growth continues to be negative. (3) Between January and September, accounting determinants explain 81% to 91% of the variation in the cross-section of average returns. Between October and December, accounting determinants explain 77% to 88% of the variation in returns. This suggests that, although investors’ opinions depend on nonaccounting information, investors’ opinions are determined primarily by accounting disclosures. (4) The cross-sectional variation that accounting determinants do not explain has implications for risk measurement; its magnitude indicates that accounting disclosures do not contain sufficient information about investors’ opinions to effectively measure the risk of equities with extreme exposure to non-accounting determinants.Item Forecasting project progress and early warning of project overruns with probabilistic methods(2009-05-15) Kim, Byung CheolForecasting is a critical component of project management. Project managers must be able to make reliable predictions about the final duration and cost of projects starting from project inception. Such predictions need to be revised and compared with the project?s objectives to obtain early warnings against potential problems. Therefore, the effectiveness of project controls relies on the capability of project managers to make reliable forecasts in a timely manner. This dissertation focuses on forecasting project schedule progress with probabilistic methods. Currently available methods, for example, the critical path method (CPM) and earned value management (EVM) are deterministic and fail to account for the inherent uncertainty in forecasting and project performance. The objective of this dissertation is to improve the predictive capabilities of project managers by developing probabilistic forecasting methods that integrate all relevant information and uncertainties into consistent forecasts in a mathematically sound procedure usable in practice. In this dissertation, two probabilistic methods, the Kalman filter forecasting method (KFFM) and the Bayesian adaptive forecasting method (BAFM), were developed. The KFFM and the BAFM have the following advantages over the conventional methods: (1) They are probabilistic methods that provide prediction bounds on predictions; (2) They are integrative methods that make better use of the prior performance information available from standard construction management practices and theories; and (3) They provide a systematic way of incorporating measurement errors into forecasting. The accuracy and early warning capacity of the KFFM and the BAFM were also evaluated and compared against the CPM and a state-of-the-art EVM schedule forecasting method. Major conclusions from this research are: (1) The state-of-the-art EVM schedule forecasting method can be used to obtain reliable warnings only after the project performance has stabilized; (2) The CPM is not capable of providing early warnings due to its retrospective nature; (3) The KFFM and the BAFM can and should be used to forecast progress and to obtain reliable early warnings of all projects; and (4) The early warning capacity of forecasting methods should be evaluated and compared in terms of the timeliness and reliability of warning in the context of formal early warning systems.Item Modeling and optimization for disruption management(2003-08) Qi, Xiangtong, 1970-; Yu, Gang; Bard, Jonathan F.Disruption management is about how to deal with uncertainties in the execution period of an operational plan. While it has been successfully applied in airlines scheduling, the research of disruption management in manufacturing and logistics is still in its infancy. In this disertation, we study several dsiruption management problems in machine scheduling, production planning, supply chain coordination, and class scheduling for pilot training. We address various disruptions, propose mathematical models, and present solution schemes. This research is one of the first attempts to systematically study disruption management in manufacturing and logistics, and has both important theoritical and practical contributions.Item Multistage stochastic programming models for the portfolio optimization of oil projects(2011-08) Chen, Wei, 1974-; Dyer, James S.; Lasdon, Leon S., 1939-; Balakrishnan, Anantaram; Lake, Larry W.; Jablonowski, Christopher J.Exploration and production (E&P) involves the upstream activities from looking for promising reservoirs to extracting oil and selling it to downstream companies. E&P is the most profitable business in the oil industry. However, it is also the most capital-intensive and risky. Hence, the proper assessment of E&P projects with effective management of uncertainties is crucial to the success of any upstream business. This dissertation is concentrated on developing portfolio optimization models to manage E&P projects. The idea is not new, but it has been mostly restricted to the conceptual level due to the inherent complications to capture interactions among projects. We disentangle the complications by modeling the project portfolio optimization problem as multistage stochastic programs with mixed integer programming (MIP) techniques. Due to the disparate nature of uncertainties, we separately consider explored and unexplored oil fields. We model portfolios of real options and portfolios of decision trees for the two cases, respectively. The resulting project portfolio models provide rigorous and consistent treatments to optimally balance the total rewards and the overall risk. For explored oil fields, oil price fluctuations dominate the geologic risk. The field development process hence can be modeled and assessed as sequentially compounded options with our optimization based option pricing models. We can further model the portfolio of real options to solve the dynamic capital budgeting problem for oil projects. For unexplored oil fields, the geologic risk plays the dominating role to determine how a field is optimally explored and developed. We can model the E&P process as a decision tree in the form of an optimization model with MIP techniques. By applying the inventory-style budget constraints, we can pool multiple project-specific decision trees to get the multistage E&P project portfolio optimization (MEPPO) model. The resulting large scale MILP is efficiently solved by a decomposition-based primal heuristic algorithm. The MEPPO model requires a scenario tree to approximate the stochastic process of the geologic parameters. We apply statistical learning, Monte Carlo simulation, and scenario reduction methods to generate the scenario tree, in which prior beliefs can be progressively refined with new information.Item New aspects of product risk measurement and management in the U.S. life and health insurance industries(2012-05) Shi, Bo; Baranoff, Etti G.; Sager, Thomas W.; Brockett, Patrick L.; Shively, Thomas S.; Kendrick, David A.Product risk is important to firms’ enterprise risk management. This dissertation focuses on product risk in the U.S. life insurance and health insurance industries. In particular, we add new dimensions to the measurement of product risk for these industries, and we explore how these industries manage product risk in a context of other enterprise risks. In this dissertation, we identify new product risks, propose new measures, and study the management of these risks. In the life insurance industry, we identify a new type of product risk, the guarantee risk, caused by variable annuities with guaranteed living benefits (VAGLB). We propose a value-at-risk type measure inspired by the risk-based capital C3 Phase II to quantify the guarantee risk. In the health insurance industry, where the degree of uncertainty varies for different types of health insurance policies, we develop four exposure-based risk measures to capture health insurers’ product risks. Then we study how life and health insurers manage product risks (and asset risks) by using capital in the context of other risks and appropriate controls. We add to the literature in the life insurance industry by examining the relationship between capital and risks when the guarantee risk is accounted for. In the health insurance industry, to our knowledge, no similar research on the relationship between capital and risks has been conducted. In view of the current topicality of health insurance, our research therefore adds a timely contribution to the understanding of health insurer risk management in an era of health care reform. Capital structure theories, transaction cost economics, and insurers’ risk-taking behaviors provide the theoretical foundation for our research. As to methodology, we implement standard capital structure models for the life and health insurance industries using data from the National Association of Insurance Commissioners (NAIC) annual filings of life/health insurers and health insurers. Simultaneous equations modeling is used to model life and health insurers’ enterprise risk management. And the estimation is conducted by the generalized estimation equations (GEE). We find that both U.S. life/health insurers and health insurers prudently build up capital as they experience more product risk and asset risk controlling for the other enterprise risks. We also find that life/health insurers may be using derivatives as a partial substitute for capital when managing new product risk caused by VAGLB, the guarantee risk.Item Perceived risk and Internet banking(Texas Tech University, 2002-05) Bauer, Keldon JBankers and consumers are both interested in the potential for Internet banking. Individuals have been adopting die Internet in large numbers, with more than half of all American households having some form of Internet access by 2000. Banks too have been developing their infrastructure to address what they perceive as a growing demand for online services, with 84% of all accounts offering some form of Internet banking by 1999. However, the adoption rate has not followed the hype. By 2000, the proportion of households using Internet banking was less than 10%. This research looks at the critical factors needed to promote banking adoption from the consumer's perspective. We use a consumer utility maximization framework, and include in the consumption bundle the possibility of using conventional, phone-banking and/or Internet banking. Phone-banking is added because it could be seen as a substitute for Internet banking. Many of the same services are available on both, and many of die restrictions are the same, i.e., no cash can be withdrawn from either. Using the utility maximization approach, we are able to conclude that adoption depends on marginal utility gain, marginal cost and a risk premium; where risk premium is the product of subjective probability of adverse outcomes from the technology and the utility of each adverse outcome. We use logistic regression to explore what factors are important to consumers adopting Internet banking in general. A conditional logit model is used to estimate the sensitivity of different decision factors to the marginal propensity of phone-bank customers adopting Internet banking and vice-versa. The overall utility maximization model is consistent with our results from these logistic regressions. The results presented in this research also support the hypothesis that the subjective probability of security problems experienced by Internet bank customers is not the same for all customers, and that it depends on their level of education. Varying subjective probability means that the risk premium can be affected by exogenous factors, in this case education. In other words, banks could affect the risk premium of their customers, thereby affecting adoption rates.Item Predictability of contract failure in the U.S. financial futures markets(Texas Tech University, 1998-08) Suh, Jeong HoDerivatives markets have seen a great deal of changes for the last few decades. Many new contracts have been introduced to the public. Many new exchanges have been established worldwide. More than anything else, the number of participants in derivatives markets has increased in a dramatic fashion probably because of the potential capability of risk management and attractive speculative opportunities that exist in those markets. In the midst of this fastgrowing trend, futures exchanges have been very active in introducing new contracts to meet investor's needs for hedging and speculation. However, it is quite surprising that only one quarter to one third of new innovations have achieved economically viable trading volume in the following years, whereas exchanges commonly spend $300,000 to $2,000,000 for development and marketing of a new contract. The main objective of this dissertation is to examine the predictability of contract failure in futures markets. Motivated by the fact that the current literature disregards the time-series predictability of a model, we investigate whether we can predict failure of a contract using already existing information. In order to achieve this goal, we employ a survival analysis model which provides two major benefits. First, a survival analysis model can simultaneously deliver the information about the probability and timing of contract failure. This model is based on the dichotomous classification of the dependent variable, which has not been formally attempted for a general econometric model in this area. Second, a survival analysis model enables us to accommodate both time-series and crosssectional variations in a panel data set. Previous research is only concerned with the cross-sectional dimension of the relationship between contract success and "determinants."Item Risk management in energy markets(2005) Kolos, Sergey Pavlovitch; Ronn, Ehud I.Item Risk management of oil refinery(2014-05) Do, Hyunsoo; Lasdon, Leon S., 1939-; Butler, John C. (Clinical associate professor)Every business faces risks and the first step in managing risk is making an inventory of the risks that a business faces and getting measure of the exposure to each risk. There are several risks that can affect an oil refinery. Generally recognized risks related to refineries are as follows: crude oil price, crack spread, marketing margin, sales volume, exchange rate, costs, credit and counterparty risk, and hazard risk. In this thesis, among these risk factors, major market price variables, such as crude oil price and crack spread, are regarded as risks or simulation variables; some of the other risks, such as marketing margin, utilization rate, and energy cost, are treated as uncertainties; the others are excluded or fixed. This thesis develops a hypothetical refinery financial model that reasonably approximates real models encountered in practice. To measure the impacts of risk factors on the refinery, three criteria are adopted; present value of net income for ten years, present value of net cash flow, and return on capital employed (ROCE). For sensitivity analysis, five variables are selected: crude oil price, crack spread, marketing margin, utilization rate, and energy cost. In order to measure the risk exposure of an oil refinery, this thesis makes Monte Carlo simulation 10,000 times, by using @RISK software.Item Risk management strategies and portfolio analysis for electricity generation planning and integration of renewable portfolio standards(2010-05) Ritter, Stephanie Michelle; Spence, David B.; Groat, CharlesRenewable Portfolio Standards (RPS) require electricity providers to supply a minimum fixed percentage or total quantity of customer load from designated renewable energy resources by a given date. These policies have become increasingly prevalent in the past decade as state governments seek to increase the use of renewable energy sources. As a policy tool, RPS provide a cost-effective, market-based approach for meeting targets which promote greater use of renewable energy in both regulated and deregulated markets. To facilitate the obtainment of Renewable Portfolio Standards, most states allow the trading of Renewable Energy Credits (RECs). RECs represent the environmental attributes of renewable energy generation which are decoupled from the generated power. These credits are created along with the generation of renewable energy, decoupled from energy generation, tracked by regional systems, and eventually purchased by retail suppliers to fulfill their RPS obligations. As of April 2010, RPS have been passed into law in 29 states and Washington D.C. and an additional 6 states have non-mandatory renewable portfolio goals however the U.S. government has yet to enact a Federal Renewable Portfolio Standard. Although the final requirements and details of a Federal RPS are undecided, federal standards would be unlikely to preempt or override state programs which are already in place. A key concern regarding the passage of a federal RPS is that a national REC market would result in a shift of wealth from states with few renewable energy resources and limited resource potential to regions richer in renewable resources. Because of the implications that a federal renewable portfolio standard would have on the economy, the environment, and the equitable treatment of all the states, many issues and concerns must be resolved before federal standards will be passed into law. A theoretical case study for an electric utility generation planning decision that includes obligations to meet Renewable Portfolio Standard is presented here. A framework is provided that allows decision makers and strategic planning teams to: assess their business situation, identify objectives of generation planning, determine the relative weights of the objectives, recognize tradeoffs, and create an efficient portfolio using Portfolio Theory. The case study follows the business situation for Austin Energy as it seeks to meet Texas State RPS and mandates set by Austin City Council and prepares for potential National RPS legislation.