HomeMy WebLinkAboutRESO 9272Resolution No. 9272
Resolution of the Council of the City of Palo Alto Approving Revisions
to the City of Palo Alto Energy Risk Management Policy
A. The City of Palo Alto (the "City") has adopted a policy governing the
management, monitoring and hedging of risks associated with electric and natural gas
commodity transactions effected by the Department of Utilities. That policy is
memorialized in the document entitled "Energy Risk Management Policy" (the "Policy"),
which the City intends to updated annually.
B. As of May, 2012, the Policy has been amended to account for general
updating of language in the Policy, including clarifications and streamlining. The Policy
has been updated to more specifically address risk. It now includes references to the
Utilities Strategic Plan, Gas Utility Long-term Plan, and the Long-term Electric Acquisition
Plan, the conflict of interest provision has been updated, and the time periods in which
the Energy Risk Manager must report information has been clarified.
C. On June 6, 2012, the Utilities Advisory Commission recommended
approval of the Policy, as amended, and also recommended the Council's adoption of
the Policy.
NOW, THEREFORE, the Council of the City of Palo Alto hereby RESOLVES, as
follows:
SECTION 1. The Council hereby approves the City of Palo Alto Energy Risk
Management Policy, as amended, which is attached to this Resolution~
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City of Palo Alto
Energy Risk Management
Policy
July 2012
CITY OF
PALO
ALTO
City of Palo Alto Energy Risk Management Policy
Table of Contents
A. 0 BJECTlVE ....................................................................................................................•..••... 1
B. APPLICABILITY ..........................................................................................................•...••... 1
C. RISK MANAGEMENT ROLES, RESPONSIBILITES, AND ORGANIZATION ..•.••... 2
1. CITY COUNCIL .............................................................•....................................................•.... 2
2. UTILITIES ADVISORY COMMISSION .................... : ..........................................................•....•... 2
3. CITY MANAGER ..................................................................................................................... 3
4. UTILITIES RISK OVERSIGHT AND COORDINATING COMMITTEE .............................................. 3
5. MANAGEMENT OVERSIGHT .................................................................................................... 3
a. Front' Office -Planning and Procurement ..................................................................... 3
b. Middle Office -Risk Management Controls and Reporting ........................................... 4
c. Back Office -Settlement and Recording ........................................................................ 5
D. TRANSACTING POLICY ...........................•.....................................................................•... 5
1. ANTI-SPECULATION ........................................................................................................ 5
2. MAXIMUM TRANSACTION TERM ............................................................................................ 5
3. COMPETITIVE PROCESS .......................................................................................................... 6
E. COUNTERP ARTY CREDIT POLICY ...........................................................................••... 6
F. RISK MANAGEMENT REPORTING POLICY ................................................................ 6
G. AUTHORIZED PRODUCTS POLICy ..........................................................................••...• 7
H. TRANSACTING AUTHORITY POLICY .....................•..................................................... 8
I. CONFLICT OF INTEREST POLICY ..•....•••••.•••.•••••.•..•••...••••••••••••.••••.....•.••••••••••••.•...•..••... 8
GLOSSARY OF. TERMS .•..••••••••••••........•.••..•••••••.•..•.......•....•.••••••••••••.•••.•....•.••••••••.....•••...•..••••••• 9
CPA Energy Risk Management Policy July 2012
A. OBJECTIVE
The City of Palo Alto (City), Department of Utilities (CPAU) purchases and sells gas and
electricity to meet the needs of its customers. The City's Energy Risk Management
(ERM) Policy (ERM Policy) describes the management organization, authority, and
processes to monitor, measure, and control market risks, which include price risk, credit
risk, and operational risk, to which the City is exposed in the normal course of managing
the gas and electric utilities.
The ERM Policy describes the key policies and control structures for prudent energy risk
management processes. This occurs while ensuring adherence to financial requirements
set forth by the Council and the Director of Administrative Services as well as all
pertinent legal requirements. The control structures and policies are focused on the
following areas:
• Segregation of duties and delegation of authority
• Organizational structure for risk management controls to include the front,
middle, and back offices
• Transacting
• Counterparty credit
• Reporting
• Permitted transaction and product types
• Conflict of interest
The ERM Policy serves as the key policy level document on energy risk management.
This Policy is supported by policy/implementation-level and operations-level documents,
including, the Energy Risk Management Guidelines (ERM Guidelines), Energy Risk
Management Procedures (ERM Procedures) for the Front, Middle, and Back Offices, and
the Long-Term Electric Acquisition Plan (LEAP), Gas Utility Long-Term Plan (GULP),
and the Utilities Strategic Plan. Together these three documents serve to meet the
requirements set forth in the Palo Alto Municipal Code Chapter 2.30 Contracts and
Purchasing Procedures ("PAMC") as they relate to Wholesale Commodity Contracts,
Authority, and Transactions.
B. APPLICABILITY
The ERM Policy applies to all City employees engaged in the decision-making process
for transacting in the energy markets. It is critical that all members of the City are aware
that participation in the City's energy procurement business entails a host of risks and
CPA Energy Risk Management Policy July 2012
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that all members participating in the process must have knowledge of the ERM Policy
and use it during such participation.
The ERM Policy applies to the electric and natural gas supply business units. The
electric and natural gas supply business units are the part of the electric and natural gas
enterprise funds that deal with the acquisition of energy supply resources.
The ERM Policy describes the management, organization, authority, processes, tools and
systems to monitor, measure, and control risks to which CPAU is exposed related to the
acquisition and management of wholesale electric and gas commodity products and
services to meet load.
The City is a member of the Northern California Power Agency (NCPA), which executes
transactions on the City's behalf. The NCPA Commission approves its own energy risk
management policies and procedures for the acquisition of energy supply resources. The
City's energy risk management staff, however, will be actively involved in NCPA's Risk
Oversight Committee and meetings to monitor possible risk exposures resulting from the
City's membership in the NCPA Joint Powers Agency even where the City is neither a
project nor a program participant and to ensure best practices are observed.
The ERM Policy does not address general CP AU business risks such as fire, accident,
casualty, worker health and safety, and general liability. Neither does the policy cover
the water fund, the electric and natural gas distribution business units, nor the
telecommunications business unit.
c. RISK MANAGEMENT ROLES, RESPONSmILITES, AND
ORGANIZATION
1. City Council
The Council reviews and adopts the ERM Policy as developed and recommended by the
Utilities Risk Oversight and Coordinating Committee and delegates its implementation to
the City Manager. The Council will, at a minimum, review the Policy annually.
Additionally, the Council shall receive quarterly updates from the City Manager
regarding energy risk management activities.
2. Utilities Advisory Commission
The Utilities Advisory Commission (UAC) is responsible for advising the Council on
long-range planning and policy matters relating to the electric and gas utilities. While it
has no formal responsibility in energy risk management, the UAC shall receive copies of
the quarterly reports sent to the Council regarding energy risk management activities.
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CPA Energy Risk Management Policy July 2012
3. City Manager
The City Manager has overall responsibility for executing and ensuring compliance with
policy adopted by the Council. The City Manager reports quarterly to the City Council
regarding energy risk management activities.
4. Utilities Risk Oversight and Coordinating Committee
The Utilities Risk Oversight and Coordinating Committee (DROCC) consists of the
following four voting members: the Director of Utilities (designated as the Chairperson),
the Director of Administrative Services, the Director of Public Works, and a
representative from the City Manager's Office. The staff City Attorney assigned to
Utilities and the City Auditor serve as non-voting advisors to the UROCC. In
accordance with 2007 Government Auditing Standards, the City Auditor's participation
as an advisor to the UROCC is not considered an audit service and does not impair the
City Auditor's objective ability to audit CPAU. The Energy Risk Manager serves as the
Secretary to the UROCC. A quorum, consisting of at least three voting members of the
UROCC, may take action on any matter within the subject matter jurisdiction of the
UROCC.
The UROCC is responsible for monitoring compliance with the ERM Policy. The
UROCC is the primary body responsible for approving and implementing the ERM
Guidelines consistent with the Council-approved ERM Policy.
5. Management Oversight
Risk management oversight at an operational level is accomplished through supervisory
review and approval and appropriate separation of duties. The separate functions of the
Front Office, Middle Office, and Back Office are described in the ERM Guidelines. Risk
management functions are separated, as follows:
a. Front Office -Planning and Procurement
In reporting to the Director of Utilities, the Front Office representative is primarily
responsible for resource planning and procuring energy supplies and services. The Front
Office, by delegation of the City Manager, has a critical role in risk management through
its transacting operations. The Front Office has the authority to commit the financial
capital of the City to energy transactions with counterparties. As such, the Front Office is
a central clearing point for risk assumption and risk mitigation.
The Front Office's roles in energy risk management include:
• Developing and implementing the Utilities Director-approved Front Office
procedures consistent with the Council-approved ERM Policy and the
UROCC-approved ERM Guidelines;
CPA Energy Risk Management Policy July 2012
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• Developing and implementing energy portfolio management plans,
strategies and guidelines in support ofCPAU's objectives and in
accordance with the City's ERM Policy and legal and regulatory
requirements;
• Developing and recommending for annual approval retail rates and financial
plans, including appropriate levels, of gas and electric utility reserves in
support ofCPAU's objectives;
• Ensuring adherence to the ERM Policy, the ERM Guidelines and the ERM
Procedures, including the proper recording of transactions, monitoring, and
valuation of risk;
• Reporting position, valuation and market conditions, and energy portfolio
risk to the UROCC; and
• Ensuring the proper reporting of contractual commitments in the City's
financial reporting system.
The Front Office's Procedures are developed by staff, approved by the Utilities Director,
and provided to the UROCC for information.
b. Middle Office -Risk Management Controls and Reponing
In reporting to the Director of Administrative Services, the Middle Office representative
provides the primary independent oversight role. The Middle Office consists of the Risk
Manager, and she or he shall institute, supervise, and review all energy risk management
activities, including portfolio exposure, credit exposure, transaction compliance, and
ongoing approval of counterparties and transacting limits.
The Middle Office's energy risk management responsibilities include:
• Monitoring CPAU's risk exposures and ensuring compliance with the ERM
Policy, the ERM Guidelines, and the ERM Procedures;
• Reporting to the UROCC on risk management issues, and making
recommendations which may relate to the temporary or permanent cessation of
transactions with one or more counterparties, citing exceptions to rules and
procedures, other operational exceptions, or any other topic the Risk Manager
believes represents an unacceptable risk exposure; and
• Recommending, as necessary, updates to the ERM Policy, the ERM
Guidelines, and the ERM Procedures.
The Middle Office's Procedures are developed by staff, approved by the Director of
Administrative Services, and provided to the UROCC for information.
CPA Energy Risk Management Policy July 2012
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c. Back Office -Settlement and Recording
The Back Office is primarily responsible for settlement of bills, recording transactions,
bookkeeping and accounting, and contract administration. Functions within the Back
Office are performed by both Administrative Services Department (ASD) and CPAU
staff and are detailed in the ERM Guidelines.
The Back Office roles in risk management oversight include:
• Ensuring that bills reflect trade orders;
• Independently monitoring and recording transactions into a tracking database;
and
• Verifying and reporting on compliance with procedures as reflected in the deal
tracking documentation.
Back Office Procedures are collectively developed by ASD and CPAU staff,jointly
approved by the Director of Administrative Services and the Utilities Director, and
provided to the UROCC for information.
D. TRANSACTING POLICY
The Transacting Policy ensures transactions executed under the Electric Master
Agreements and the Gas Master Agreements (collectively, Master Agreements) are
executed in a manner consistent with the authority granted by the Council to the City
Manager to transact under these contracts and the PAMC. The Transacting Policy also
ensures such transactions are carried out to manage risk inherent to the electric and gas
supply portfolio without exposing the City to unnecessary risk. The policy has three key
elements:
1. Anti-speculation
Speculative buying and selling of energy products are prohibited. Speculation is defined
as buying energy not needed for meeting forecasted load or selling energy that is not
owned. Additionally, in no event shall transactions be entered into in order to speculate
on market conditions. The ERM Guidelines shall prescribe volume and sales dollar
amount limits for forward purchases and sales.
2. Maximum Transaction Term
The maximum term of any supply resource transaction (purchase or sale) is three years,
unless approved by the City Council.
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3. Competitive Process
CPAU will endeavor to obtain three or more quotations from eligible counterparties and
select the best price. The ERM Guidelines include trade capture guidelines to ensure the
proper execution of transactions.
E. COUNTERPARTY CREDIT POLICY
The Counterparty Credit Policy is designed to minimize the potential adverse financial
impacts, and credit exposure to the City in the event of a defaulting counterparty.
Specifically, the policy seeks to minimize credit exposure related to wholesale
commodity transactions by:
• Establishing a credit risk management governance and oversight structure within
the existing ERM program;
• Providing a framework to enable the City to qualify energy suppliers and transact
with eligible counterparties;
• Providing counterparty transacting parameters (limits) to control and measure the
City's exposure to anyone supplier;
• Implementing a mechanism to monitor and report on supply portfolio-related
counterparty credit exposures; and
• Managing counterparty credit requirements from the City.
Furthermore, the P AMC Section 2.30.340 sets forth creditworthiness standards and
certain contractual provisions applicable to contracts for wholesale utility commodities.
As such, transactions carried out under the Master Agreements are limited to
counterparties with a Standard and Poor's issuer rating ofBBB-or better, or a Moody's
Investor Services issuer rating of Baa3 or better. Only the Council can approve
exemptions to this requirement.
The ERM Guidelines shall set forth specific counterparty credit limits for volume, term
and credit exposure, and counterparty reporting requirements.
F. RISK MANAGEMENT REPORTING POLICY
Key to ERM is the monitoring of risks and the accurate and timely information that must
be provided to all parties involved in any aspects of energy risk management to allow
them to perform their functions appropriately. Quarterly reports will be distributed to the
UROCC, the UAC, and the Council; those reports shall provide sufficient details on the
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CPA Energy Risk Management Policy July 2012
City's forward contract purchases, market exposure, credit exposure, counterparty credit
ratings, transaction compliance, and other relevant data.
The Front and Middle Offices' staffs shall prepare performance reports containing an
) analysis of physical and financial positions of all electric and gas commodity' contracts.
The frequency and content of performance reports for each oversight body shall be
prescribed in the ERM Guidelines. Should the risks associated with the portfolio or a
specific transaction within the portfolio fall outside of the risk limits prescribed in the
ERM Guidelines, the Risk Manager will report this fact to the UROCC within one
business day via email and will evaluate the risk of holding any of the contracts in the
portfolio to delivery along with reporting to the Council in the next quarterly energy risk
management report.
G AUTHORIZED PRODUCTS POLICY
The Council has delegated to the City Manager the authority to transact under Council-
approved Master Agreements. The purpose of the Authorized Products Policy is to
ensure that products transacted under the Master Agreements are consistent with the
needs ofCPAU and fall within the authority granted by the Council to the City Manager.
The following products and/or transactions are approved to be executed under the Master
Agreements:
A. Purchase of physical fixed price, index-based price, call options, capped-price or
collar-priced energy, natural gas, capacity, transportation, basis and transmission
products to meet load requirements;
B. Sale of physical fixed price or index-based price energy, natural gas, capacity,
storage, and transmission incidental to load;
C. Purchase of electric heat rate products to meet load;
D. Purchase and Sale of Renewable Energy Credits with or without bundled energy;
E. Purchase of Gas storage;
F. Purchase and Sale of Electric Ancillary Services;
G. Purchase and sale of local and system capacity to meet the City's resource adequacy
requirement;
H. Fixed price or index-priced purchases and sales to substitute the use of higher cost
resources with lower cost market alternatives;
1. Fixed price or index-priced forward purchases and sales of transmission and
transmission rights to meet contractual obligations or to dispose of surplus capacity;
and
J. Purchase of physical call options and physical collars.
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He TRANSACTING AUTHORITY POLICY
In accordance with P AMC section 2.30.270(a), the City Manager has the authority to
purchase and sell wholesale energy commodities for terms of up to three years under
open purchase contracts. PAMC section 2.30.270(b) governs the City Manager's
delegation of authority. Delegation of authority for and on behalf of the City Manager
shall be established in the ERM Guidelines. The City Clerk maintains the list ofCPAU
individuals who are authorized to engage in wholesale utility commodity transactions.
Ie CONFLICT OF INTEREST POLICY
In accordance with Chapter 2.09 of the PAMC and applicable California law, the City's
personnel who are involved in transacting and exercising oversight ofCPAU's supply
resource acquisition, contract negotiation, risk management, and back office programs
may not participate in decisions in which they have a conflict of interest. Should an
employee become aware of a conflict of interest during the course of fulfilling his or her
responsibilities, he or she shall report it, without delay, to the Director, or her or his
designee, who shall resolve the conflict.
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GLOSSARY OF TERMS
Back Office A set of business functions in Utilities and Administrative Services
Departments including trade confirmation, accounting, and other
processes that support the transaction of commodities.
Call Options An option that allows the owner the right to purchase energy at the
specified strike price.
Cap Price A structured product that contains a strip of multiple call option
contracts with identical,·but staggered expirations.
Carbon Offsets A way for a company or person to reduce the level of carbon dioxide
for which they are responsible by paying money to an organization
that works to reduce the total amount produced in the world.
Collar A combination of a price with a maximum and minimum value.
Congestion Revenue Rights A hedging tool or a financial instrument that entitles the holder to a
(CRRs) CRR payment. This occurs when congestion (a characteristic of the
transmission system produced when constraints on the system
prevent the optimum economic dispatch of generation to meet
demand) is in the direction of the CRR Source (a node or a trading
hub where generation is scheduled into the electric grid) to the CRR
Sink (a node or a trading hub specified as the point of withdrawal
for consumption).
Credit Risk The probable change in the value of a contract due to a counterparty
defaulting.
Electric Ancillary Services Those services necessary to support the transmission of electric
power from seller to purchaser given the obligations of control areas
and transmitting utilities within those control areas to maintain
reliable operations of the interconnected transmission system.
Electric Heat Rate Product A contract based on how efficiently a generator uses heat energy in
fuel (Le., natural gas) to generate electricity.
Front Office The sector of energy procurement operations in utilities where
trading (purchasing or selling of a commodity) occurs.
Hydro Risk The risk that altered precipitation patterns result in less than normal
hydro electric generation.
Index-based Price A price that varies based on published index prices.
Market Risk The probable change in value of (or sensitivity to) a contract,
position, or portfolio due to Keneral changes in market conditions.
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CPA Energy Risk Management Policy July 2012
Master Agreement A standardized agreement for the purchase and sale of energy .
Middle Office The set of business functions in Administrative Services Department
that carries out energy risk management activities.
Physical Fixed Price A contract for a fixed price which settles when one counterparty
delivers the commodity to another counterparty and pays a cash
settlement.
Physical Position The volumetric sum of all physical transactions.
Portfolio Exposure The monetary sum of all positions that are subject to change.
Risk Management The set of skills and processes for measuring, controlling, and
hedging risk.
Supply Portfolio The composition and amount of all purchased power.
Transmission Product The sale or purchase of a non-energy asset to transport energy.
Volume Risk The risk of the volume of a contract or position changing from
current expectations.
Weather Risk The risk of weather changing from current expectations and causing
changes to expected load or generation.
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