HomeMy WebLinkAboutRESO 9454Resolution No. 9454
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") 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 has previously updated on an
annual basis.
B. Staff has carefully reviewed the Policy, including with the help of a consultant, to
identify opportunities to update, clarify, and streamline the language of the Policy.
C. In addition to changes throughout the Policy that would accomplish that objective,
Staff specifically recommends that the Policy be updated to:
(1) Identify two new authorized products (purchase and sale of emission
allowances and purchases of carbon offsets) and modify one existing product
(purchases of resource capacity products);
(2) Cross-reference the City's Conflict of Interest Code in the Conflict of Interest
section of the Policy;
(3) Add a new section concerning compliance with Dodd-Frank legislation and
regulation; and
(4) Enhance the Policy's Glossary with definitions for relevant term used in the
Policy.
D. At its August 6, 2014 meeting, the Utilities Advisory Commission (UAC)
recommended that the City Council approve the amendments to the Policy proposed by staff, with
two additional changes:
(1) The requirement that Council review the Policy be changed from an annual
to biennial (every two years) review; and
(2) The term "resource adequacy capacity products" be added to the Policy's
-glossary.
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· E. The Council has reviewed staffs analysis, the resulting staff report, and the UAC's
recommendation.
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.
SECTION 2. The Council finds that the adoption of this resolution does not constitute a
project under the California Environmental Quality Act and no environmental assessment is
required.
INTRODUCED AND PASSED: October 6, 2014
AYES: BERMAN, BURT, HOLMAN, KNISS, PRICE, SCHARFF, SHEPHERD
NOES: SCHMID
ABSENTIONS:
ABSENT: KLEIN
ATTEST:
APPROVED:
=c::~~
~~City Clerk
APPROVED AS TO FORM:
Director f U 1es
u-~e -~
lo, Director of Administrative Services
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Attachment B
City of Palo Alto
Energy Risk Management
Policy
August 2014
CITY OF
PALO
ALTO
City of Palo Alto Energy Risk Management Policy
Table of Contents
A. OBJECTIVE AND SCOPE •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• l
B. APPLICABILITY ••.•••••••..•••.•...••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 3
C. RISK MANAGEMENT ROLES. RESPONSIBILITES. AND ORGANIZATION ......... 4
1. CITY COUNCIL ........................................................................................................................ 4
2. UTILITIES ADVISORY COMMISSION •••••••••••••••••••••••••• ~····························································· 4
3. CITY MANAOER •••••••••••••••••••••••••••••••••••••••••••••••••.••••••••••••.•••••••.•...•••••••••••..••••••••••.•••...•••••••••••• 4
4. UTILITIES RISK OVERSIGHT AND COORDINATING COMMITTEE (UROCC) ............................... 4 s. CPAU/ASD OVERSIGHT ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 5
a. Utilities Resource Management Front Office -Planning and Procurement ................. 5
b. ASD Middle Of}ice -Risk Management Controls and Reporting .................................. 5
c. Back Orlice-Settlement and Recording ........................................................................ 5
6. NORTHERN CALIFORNIA POWER AGENCY (NCPAl ....................................... S
D. TRANSACTIONS ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 6
I. ANTI-SPECULATION ........................................................................................................ 6
2. MAXIMUM TRANSACTION TERM ••••••••••••••••••••••••••••••••••••••••••••.••••••••••••••••••••••••••••••••••••••••••••••• 6
3. COMPETITIVE PROCESS •••••••••••••••••••••••••••••••••••••••••••••••.••.••••••••.•••••••••••••••••••••••••••••••••••••••••••••• 6
E. COUNTERPARTY CREDIT ................................................................................................. 6
F. RISK MANAGEMENT REPORTING •••••••••••••••••••••••••..•••••••••••••••••••••••••••••••••••••••••••••••••••••• 7
G. AUTHORIZED PRODUCTS ••••••••••••••••••••••••••••••••••••••••.••••.•••....••••••••.•••••..••••.••.•.••.•••••••••••••• 7
H. TRANSACTING AUTHORITY •••••••••••••••••••••.•••••..•.•••.•.••••••••••..•••••••••••••••••••••••••••••••••••••••••• 8
I. CONFJ..,ICT OF INTEREST .•.••..••...•.••..•.••••••••.•.••..•••••...••••••••.••••••••••••••••••.•••••.•.••••••••••••.•••••• 8
J. DODD-FRANK APPLICABILITY AND COMPLIANCE ...................................... 8
GLOSSARY OF TERMS ........................................................................................................... 10
CPA Energy Risk Management Policy August2014
A. OBJECTIVE AND SCOPE
The City of Palo Alto's (City) Department of Utilities (CPAU) purchases and sells
electricity and gas to meet the needs of its customers. The City's Energy Risk
Management 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 its energy portfolio to meet the needs of the City's electric and gas utility
customers.
The ERM Policy describes the key policies and control structures for prudent energy risk
management processes, in accordance with the City's municipal code, financial
requirements set forth by the City Council and the Director of Administrative Services,
and applicable law. The ERM Policy focuses on the following areas:
• Segregation of duties and delegation of authority (Section C, pp. 4-5)
• Organizational structure for risk management controls to include the front,
middle, and back offices (Section C, pp. 4-5)
• Transacting (Section D, p. 6)
• Counterparty credit (Section E, pp. 6-7)
• Reporting (Section F, p. 7)
• Permitted transaction and product types (Section G, pp. 7-8)
• Conflict of interest (Section I, p. 8)
The ERM Policy sets forth the City's objectives, policies and control structures for
prudent 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. The ERM Policy
does not address general CPAU 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 gas distribution business units, nor the telecommunications business unit.
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CPAEnergy Risk Management Policy August2014
Energy Risk Management Policy, Guidelines, and Procedures Diagram
Energy Risk Management Policy (Highest Level)
Approved by: City Council
Energy Risk Management Guidelines (Guiding Principles)
Approved by: Utilities IUsk Oversight Coordinating Committee (UI~OCC)
Energy Risk Management Procedures-(Dctailed instructions on how to perform the
procedures.) Front Office (approved by Utilities Director) Middle Office (approved
by Administrative Services Department (ASD) Director, Back Office (approved by
Utilities and ASD Directors)
B. APPLICABILITY
The ERM Policy applies to all City employees engaged in transacting in the electric and
gas markets. All members participating in the energy procurement process must have
knowledge of the ERM Policy and adhere to it during such pm1icipation.
The electric and gas supply business units are part of the electric and natural gas
enterprise funds that deal with the acquisition and potential sale of energy supply
resources.
The relevant business units arc required to follow the ERM Policy regarding these topics:
management, organization, authority, processes, tools and systems to monitor, measure,
and control risks to which CPAU is exposed. This is in relation to the acquisition and
management of wholesale electric and gas commodity products and services to meet
load.
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CPA Energy Risk Management Policy August 2014
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C. RISK MANAGEMENT ROLES, RESPONSIBILITES, AND
ORGANIZATION
This section defines the overall roles and responsibilities for the City's implementation of
the ERM Policy. Additionally, the ERM Guidelines and Procedures contain more
specific infonnation describing these roles and responsibilities within the energy risk
management program structure at the City.
1. City Council
The City Council reviews and adopts by resolution the ERM Policy as developed and
recommended by the Utilities Risk Oversight and Coordinating Committee (UROCC)
and delegates its implementation to the City Manager. The Council will, at a minimum,
review the Policy biennially (every 2 years). Additionally, the City Council shall receive
quarterly updates from the City Manager regarding energy risk management activities.
l. Utilities Advisory Commission
The Utilities Advisory Commission (UAC) is responsible for advising the City Council
on long-range planning and policy matters relating to the electric and gas utilities. While
it has no fonnal responsibility in energy risk management, the UAC shall receive
infonnational copies of the quarterly reports sent to the Council regarding energy risk
management activities.
3. City Manager
The City Manager has ovemll responsibility for executing and ensuring compliance with
policy adopted by the City Council. The City Manager reports quarterly to the City
Council regarding energy risk management activities.
4. Utilities Risk Oversight and Coordinating Committee (UROCC)
The UROCC is an advisory board which governs by the UROCC Roles and Purpose
document. UROCC consists' of city management and staff. It is comprised of the
Director of Utilities (designated as the Chairperson}, the Director of Administrative
Services/Chief Financial Officer, 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. The Energy Risk Senior
Management Analyst serves as the Secretary to the UROCC. A quorum, consisting of at
least three (3) voting members of the UROCC, may take action on any matter within the
subject matter jurisdiction of the UROCC. The UROCC Roles and Purpose document
was unanimously adopted by the UROCC on July 18,2013.
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CPA Energy Risk Management Policy August2014
The UROCC is responsible for monitoring compliance with the ERM Policy. The
UROCC is also responsible for approving and implementing the ERM Guidelines
consistent with the City Council-approved ERM Policy.
5. CPAU/ASD Oversight
City Staff (CPAUt ASD) implements and oversees ERM Policy, the ERM Guidelines,
and ERM Procedures at the operational level in the City's Front Office, Middle Office
and Back Office.
a. Utilities Resource Management Front 0/flce -Planning and Procurement In
reporting 'o 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. Front Office staff have the authority to commit the financial
capital of the City to energy transactions with counterparties up to the limits designated in
the ERM Guidelines.
b. ASD Middle Office-Risk Management Controls and Reporting
The Middle Office consists of the Energy Risk Senior Management Analyst, and he or
she shall institute, supervise, and review all energy risk management activities, Including
portfolio exposure, credit exposuret transaction compliance, and ongoing approval of
counterparties and transacting limits. In reporting to the Director of Administrative
Services/Chief Financial Officer, the Middle Office representative provides the primary
independent oversight of the energy procurement role.
c. Back 0/flce-Settlement and Recording
The Back Office is primarily responsible for settlement of billst recording transactions,
bookkeeping and accounting, and contract administration. Functions within the Back
Office are performed by both the Administrative Services Department (ASD) and CPAU
staff and are detailed in the ERM Guidelines.
6. NORTHERN CALIFORNIA POWER AGENCY (NCPA)
NCPA balances the City of Palo Alto•s portfolio. 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,
howevert will be actively involved in NCPNs 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,
to ensure that NCPA observes best practices in its energy risk management program as it
relates to the City.
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CPA Energy Risk Management Policy August 2014
D. TRANSACTIONS
Transactions executed under the Electric Master Agreements and the Gas Master
Agreements (collectively, Master Agreements) must be executed as described in this
section in a manner consistent with the authority granted by the Council to the City
Manager to transact under these contracts and the PAMC. Such transactions should also
be carried out to manage risk inherent to the electric and gas supply portfolio without
exposing the City to unnecessary risk. There are three key elements:
1. Anti-speculation
Speculative buying and selling of energy products is 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 tenn of any supply resource transaction (purchase or sale) is three years,
as stated in PAMC Section 2.30.21 0(1), unless approved by the City Council.
3. Competitive Process
CPAU will work with Purchasing to issue a Request for Proposal (RFP) to obtain three or
more quotations from eligible electric and gas supply counterparties and select the best
price. The ERM Guidelines include the trade capture process to ensure the proper
execution of transactions.
E. COUNTERPARTY CREDIT
Credit exposure related to wholesale commodity transactions and potentially defaulting
counterparties shall be minimized by:
I. Establishing a credit risk management governance and oversight structure within
the existing ERM program;
2. Providing a framework to enable the City to qualify energy suppliers and transact
with eligible counterparties;
3. Providing counterparty transacting parameters (limits) to control and measure the
City's exposure to any one supplier;
4. Implementing a mechanism to monitor and report on supply portfolio-related
counterparty credit exposures; and
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CPA Energy Risk Management Policy August 2014
5. Managing counterparty credit requirements.
Furthennore, PAMC 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 of BBB-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, tenn,
credit exposure, and counterparty reporting requirements.
F. RISK MANAGEMENT REPORTING
Reporting of critical information to relevant parties is a key component of energy risk
management. Quarterly reports will be distributed to the UROCC, the UAC, and the
Council; those reports shall provide sufficient details on the City's forward contract
purchases, market exposure, credit exposure, counterparty credit ratings, transaction
compliance, and other relevant data.
The Front and Middle Offices' staff 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 Energy Risk Senior Management Analyst will work with the City
Attorney's Office to 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 and
report to the Council in the next quarterly energy risk management report.
G. AUTHORIZED PRODUCTS
The Council has delegated to the City Manager the authority to transact under Council-
approved Master Agreements. Physical products transacted under the Master
Agreements (listed below) must be 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, gas, capacity, transportation, basis and transmission products to
meet load requirements;
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CPA Energy Risk Management Policy August2014
•
B. Sale of physical fixed price or index-based price energy, 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 of resource adequacy capacity products to meet the City's resource
adequacy requirement and the sale of resource adequacy capacity products to reduce
cost associated with the City's resource adequacy obligation;
H. Fixed price or index-priced purchases and sales to substitute the use of higher cost
resources with lower cost market alternatives;
I. Fixed price or index-priced forward purchases and sales of transmission and
transmission rights to meet contractual obligations or to dispose of surplus capacity;
J. Purchase of physical call options and physical collars;
K. Purchase and sale of emission allowances from bilateral trades and from the
California Air Resources Board administered Cap and Trade Program auctions and
reserve auctions to satisfy actual and/or forecasted GHG emissions compliance
obligations; and
L. Purchases of carbon offsets to supply voluntary programs and/or to satisfy GHG
emission compliance.
H. TRANSACTING AUTHORITY
In accordance with PAMC section 2.30.210(1), the City Manager has the authority to
purchase and sell wholesale energy commodities for terms of up to three years and for a
price not to exceed $250,000 or more in any one year. 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 of CPAU staff authorized to engage in wholesale utility commodity
transactions.
I. CONFLICT OF INTEREST
In accordance with Chapter 2.09 of the PAMC and applicable California law, City
personnel who are involved in transacting and exercising oversight of CPAU'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.
J. DODD-FRANK APPLICABILITY AND COMPLIANCE
Certain elements of the ERM Policy may be subject to compliance with the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act," or "Dodd-
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CPA Energy Risk Management Policy August2014
Frank").1 Since Congress adopted the Dodd-Frank Act in 20 I 0, its applicability to
municipal utilities and the counterparties that engage in energy transactions with them
has been in a state of flux. Certain types of transactions may or may not be subject to
disclosure, recordkeeping and reporting requirements under Dodd-Frank, depending on
the details of each individual transaction and the characteristics of the transacting parties.
The City Attorney's Office is currently conducting a review of Dodd-Frank applicability
to City transactions, to determine the adequacy of the City's compliance with any
relevant Dodd-Frank provisions. When this review is complete, the City Attorney's
office will advise the UROCC, Utilities, and ASD Management staff on whether updates
to the ERM Policy are needed.
1 Pub. L. 111-203, 124 Stat. 1376 (20 1 0).
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CPA Energy Risk Management Policy August2014
GLOSSARY OF TERMS
Back Office Back office functions include a set of positions in the Utilities and
Administrative Services Departments. Their duties include 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.
Credit Risk The probable change in the value of a contract due to a counterparty
defaulting.
Electric Ancillary Services Electric Ancillary Services (e.g., scheduling and dispatch) are
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. For example, the ancillary
service of increasing energy output if the grid needs additional
energy and additional revenue for the City when excess power is
available.
Electric Heat Rate Product A contract based on how efficiently a generator uses heat energy in
fuel (i.e., natural gas) to generate electricity.
Front Office Front office functions include the sector of energy procurement
operations in utilities associated with purchasing or selling of a
commodity.
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 general chaJ!ges in market conditions.
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Master Agreement A standardized agreement for the purchase and sale of energy.
Middle Office Middle office functions include energy risk management activities
carried out by Administrative Services Department staff.
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.
Resource Adequacy Capacity. Products that provide the City with designated resource
Products adequacy capacity from a generation unit located in the
CAISO control area, and that provide resource adequacy
requirement (RAR) attributes or local area reliability
(LAR) attributes will fully qualify as resource adequacy
qualifying capacity. Products that provide the City with
designated resource adequacy capacity from a generation
unit located in the CAISO control area, that provides ·
resource adequacy requirement (RAR) attributes or local
area reliability.(LAR) attributes will fully qualify as
resource adequacy qualifying capacity. RAR and LAR are
acronyms defined by the City's Resource Adequacy
Program.
Risk Management The set of skills and processes for measuring, controlling, and
hedaing risk.
Supply Portfolio The composition and amount of all purchased power.
Transmission Product The sale or purchase of a non-energy asset to transport enef'gy.
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