HomeMy WebLinkAboutRESO 9808Resolution No. 9808
Resolution of the Council of the City of Palo Alto Approving Revisions to the City
of Palo Alto Energy Risk Management Policy
RECITALS
A. In 1998, t
management, monitoring and hedging of risks associated with electric and natural gas
commodity transactions effected by the Utilities Department.
B. The policy is memorialized in the document enti
M
C. Staff has identified opportunities to update and clarify the Policy including:
a. Extending the mandatory for review by Council to every three years
instead of every two years;
b. Adding Low Carbon Fuel Standard (LCFS) credits to the list of
Authorized Products; and
c. General language clean up and clarification.
NOW, THEREFORE, the Council of the City of Palo Alto RESOLVES as follows:
SECTION 1. The Council hereby approves the City of Palo Alto Energy Risk
Management Policy (Attachment C), as amended.
SECTION 2. Adoption of this Resolution is not subject to California Environmental
Quality Act review, under Public Resources Code Section 21065 and CEQA Guidelines Section
/ /
/ /
/ /
/ /
/ /
/ /
DocuSign Envelope ID: 041EEDAE-B241-45FF-96C7-E72AA0A49F0B
DocuSign Envelope ID: 041 EEDAE-8241-45FF-96C7-E72AAOA49FOB
15378{b) (5), because it is an administrative governmental activity that will not result in any
direct or indirect physical change in the environment as a result.
INTRODUCED AND PASSED: December 17, 2018
AYES: DUBOIS, FILSETH, FINE, HOLMAN, KNISS, KOU, SCHARFF, TANAKA, WOLBACH
NOES :
ABSTENTIONS:
ABSENT:
ATIEST:
~~
City Clerk
APPROVED AS TO FORM:
Assistant City Attorney
G-... ~ ... ,
£.t StvoJ-.a.t ..
F\:lDC6 19ccc9p4;Q
City Manager
Director of Administrative Services G __ ,,,
£ .! Stv').a.la
Fi!BS ... 19EE€ll94F9 _
General Manager of Utilities
City of Palo Alto
Energy Risk Management
Policy
Xxxxxx 2018
(SGY7MKR)RZIPSTI-( ))(%)&** ')%%% *&
1City’s Energy Risk Management Policy Approved by City Council on Staff Report #
City of Palo Alto Energy Risk Management Policy
Table of Contents
A. OBJECTIVE AND SCOPE.................................................................................................... 2
B. APPLICABILITY................................................................................................................... 2
C. RISK MANAGEMENT ROLES, RESPONSIBILITES, AND ORGANIZATION ......... 4
1. C ITY COUNCIL ....................................................................................................................... 4
2. UTILITIES ADVISORY COMMISSION........................................................................................ 4
3. C ITY MANAGER ..................................................................................................................... 4
4. UTILITIES RISK OVERSIGHT AND COORDINATING COMMITTEE (UROCC)............................... 4
5.CPAU/ASD OVERSIGHT ........................................................................................................... 5
a. Utilities Resource Management Front Office – Planning and Procurement.................. 5
b. ASD Middle Office – Risk Management Controls and Reporting .................................. 5
c. Back Office – Settlement and Recording ........................................................................ 5
6. NORTHERN CALIFORNIA POWER AGENCY (NCPA)..................................................5
D. TRANSACTIONS................................................................................................................... 6
1. ANTI-SPECULATION........................................................................................................ 6
2. MAXIMUM TRANSACTION TERM............................................................................................ 6
3. C OMPETITIVE PROCESS .......................................................................................................... 6
E. COUNTERPARTY CREDIT ................................................................................................ 6
F. RISK MANAGEMENT REPORTING................................................................................. 7
G. AUTHORIZED PRODUCTS................................................................................................ 7
H. TRANSACTING AUTHORITY ........................................................................................... 8
I. CONFLICT OF INTEREST..................................................................................................8
J. DODD-FRANK APPLICABILITY AND COMPLIANCE.................................................8
GLOSSARY OF TERMS............................................................................................................. 9
(SGY7MKR)RZIPSTI-( ))(%)&** ')%%% *&
2City’s Energy Risk Management Policy Approved by City Council on Staff Report #
OBJECTIVE ANDSCOPE
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)
Organizational structure for risk management controls to include the front,
middle, and back offices (Section C)
Transacting (Section D)
Counterparty credit (Section E)
Reporting (Section F)
Permitted transaction and product types (Section G)
Conflict of interest (Section I)
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.
(SGY7MKR)RZIPSTI-( ))(%)&** ')%%% *&
3City’s Energy Risk Management Policy Approved by City Council on Staff Report #
APPLICABILITY
The ERM Policy applies to all City employees within business units engaged in
transacting in the electric and gas markets. All employees participating in the energy
procurement process must have knowledge of the ERM Policy and adhere to it during
such participation.
The electric and gas supply business units are part of the electric and natural gas
enterprise funds and employees within these business units are responsible for the
acquisition and potential sale of energy supply resources.
Employees within the relevant business units are required to follow the ERM Policy
regarding these topics: management, organization, authority, processes, tools and systems
to monitor, measure, and control risks to which the City is exposed.
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 Risk Oversight Coordinating Council (UROCC)
Energy Risk Management Procedures-(Detailed 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)
(SGY7MKR)RZIPSTI-( ))(%)&** ')%%% *&
4City’s Energy Risk Management Policy Approved by City Council on Staff Report #
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
information 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 every three years. Additionally, the City 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 City 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
informational copies of the quarterly reports sent to the Council regarding energy risk
management activities.
3. City Manager
The City Manager has overall 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 Utilities
General Manager (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. 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 (CPAU, 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.
(SGY7MKR)RZIPSTI-( ))(%)&** ')%%% *&
5City’s Energy Risk Management Policy Approved by City Council on Staff Report #
a. Utilities Resource Management Front Office – Planning and Procurement In
reporting to the Utilities General Manager, the Front Office 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 has 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 exposure, transaction compliance, and ongoing approval of
counterparties and transacting limits. In reporting to the Director of Administrative
Services/Chief Financial Officer, the Middle Office provides the primary independent
oversight of the energy procurement practices.
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 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 on a daily, hourly, and sub-hourly basis.
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, is 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, to ensure that NCPA observes best practices in its
energy risk management program as it relates to the City.
TRANSACTIONS
Transactions under the Electric Master Agreements and the Gas Master Agreements
(collectively, Master Agreements) must be executed as described in this section and in a
manner consistent with the authority granted by the Council to the City Manager and the
Palo Alto Municipal Code (PAMC). Such transactions will be carried out to manage risk
inherent to the electric and gas supply portfolios without exposing the City to
unnecessary risk. There are three key elements:
(SGY7MKR)RZIPSTI-( ))(%)&** ')%%% *&
6City’s Energy Risk Management Policy Approved by City Council on Staff Report #
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. In no event shall transactions be entered into for the purpose of speculating 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 five years, as
stated in PAMC Section 2.30.210(k), unless approved by the Council.
3. CompetitiveProcess
The Front Office will endeavor to obtain three or more quotations from eligible electric
and gas supply counterparties and select the best price. The ERM Guidelines outline the
trade capture process.
COUNTERPARTYCREDIT
Credit exposure related to wholesale commodity transactions and potentially defaulting
counterparties shall be minimized by:
1. 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
5. Managing counterparty credit requirements.
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, term,
credit exposure, and counterparty reporting requirements.
(SGY7MKR)RZIPSTI-( ))(%)&** ')%%% *&
7City’s Energy Risk Management Policy Approved by City Council on Staff Report #
RISK MANAGEMENTREPORTING
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 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 shall prepare performance reports containing an analysis of
physical and financial positions. 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 quantify the risk, identify and recommend a remedy, if any, and report to the
UROCC within one business day via email. The event and remedy, if any, will be
reported to the Council in the next quarterly energy risk managementreport.
AUTHORIZED PRODUCTS
The Council shall delegate to the City Manager the authority to transact under Council-
approved Master Agreements. Products transacted under the Master Agreements (listed
below) must be consistent with the needs of CPAU 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:
1. 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;
2. Sale of physical fixed price or index-based price energy, gas, capacity, storage, and
transmission incidental to load;
3. Purchase of electric heat rate products to meet load;
4. Purchase and sale of renewable energy credits (RECs) with or without bundled
energy;
5. Purchase of gas storage;
6. Purchase and sale of electric ancillary services;
7. 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 adequacyobligation;
8. Fixed price or index-priced purchases and sales to substitute the use of higher
cost resources with lower cost market alternatives;
9. Fixed price or index-priced forward purchases and sales of transmission and
transmission rights to meet contractual obligations or to dispose of surplus
capacity;
10. Purchase of physical call options and physical collars;
(SGY7MKR)RZIPSTI-( ))(%)&** ')%%% *&
8City’s Energy Risk Management Policy Approved by City Council on Staff Report #
11. 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;
12. Purchases of carbon offsets to supply voluntary programs and/or to satisfy
GHG emission compliance; and
13. Sales of Low Carbon Fuel Standard (LCFS) credits.
TRANSACTINGAUTHORITY
In accordance with PAMC section 2.30.210(k), the City Manager has the authority to
purchase and sell wholesale energy commodities for terms of up to five 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.
CONFLICT OFINTEREST
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.
DODD-FRANK APPLICABILITY AND COMPLIANCE
Congress adopted the Dodd-Frank Act1 in 2010, which includes a variety of federal
regulations largely affecting financial institutions. Certain types of “swap” transactions
are subject to disclosure, registration and reporting requirements under Dodd-Frank,
depending on the details of each individual transaction and the characteristics of the
transacting parties. Since Dodd-Frank’s enactment, City utility transactions have fallen
below applicable Dodd-Frank compliance triggers and have meet the Act’s exemptions
from the definition of “swaps”.
1Pub. L. 111-203, 124 Stat. 1376 (2010).
(SGY7MKR)RZIPSTI-( ))(%)&** ')%%% *&
9City’s Energy Risk Management Policy Approved by City Council on Staff Report #
GLOSSARY OF TERMS
Back Office A set of positions in the Utilities and Administrative Services
Departments whose responsibilities include trade confirmation,
accounting, and other processes that support commodity transactions
California Independent
System Operator (CAISO)
A non-profit public benefit corporation that oversees the operation
of California's bulk electric power system,transmission lines,
and electricity market generated and transmitted by its member
utilities.
Call Options An option that allows the owner the right to purchase energy at the
specified price
Cap Price A structured product that contains a strip of multiple call option
contracts with identical but staggered expirations
Carbon Offsets A reduction in emissions of greenhouse gases (GHGs) made in order
to compensate for or to offset an emission made elsewhere.
Credit Risk The probable change in the value of a contract due to a counterparty
defaulting
Electric Ancillary Services The services (e.g., scheduling and dispatch) 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, spare generating capacity that
can quickly increase its energy output if the grid needs additional
energy is an ancillary service
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 A set of positions in the Utilities Department whose responsibilities
include energy procurement operations
Index-based Price A price that varies based on published index prices.
Low Carbon Fuel Standard
(LCFS) Credit
A product that can be bought or sold under the California Air
Resource Board’s program to reduce the carbon intensity of
transportation fuels
(SGY7MKR)RZIPSTI-( ))(%)&** ')%%% *&
10City’s Energy Risk Management Policy Approved by City Council on Staff Report #
Market Risk The probable change in value of (or sensitivity to) a contract,
position, or portfolio due to general changes in market conditions
Master Agreement A standardized agreement for the purchase and sale of wholesale
energy commodities
Middle Office A set of positions in the Administrative Services Department whose
responsibilities include 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
Resource Adequacy (RA)A regulatory construct developed to ensure that there will be
sufficient resources available to serve electric demand under all but
the most extreme conditions
Resource Adequacy
Qualifying Capacity
Products from a generation unit located in the CAISO control area
that meet RA requirements
Risk Management The set of skills and processes for measuring, controlling, and
hedging risk
Supply Portfolio The composition and amount of all purchased energy
Transmission Product The sale or purchase of a non-energy asset to transport energy
(SGY7MKR)RZIPSTI-( ))(%)&** ')%%% *&
11City’s Energy Risk Management Policy Approved by City Council on Staff Report #
(SGY7MKR)RZIPSTI-( ))(%)&** ')%%% *&
'IVXMJMGEXI3J'SQTPIXMSR
)RZIPSTI-H ))(%)&** ')%%% *& 7XEXYW 'SQTPIXIH
7YFNIGX 4PIEWI(SGY7MKR 6)73 6IZMWMSRWXS)RIVK]6MWO1EREKIQIRX4SPMG]HSG\6)73 %XXEGLQIR
7SYVGI)RZIPSTI
(SGYQIRX4EKIW 7MKREXYVIW )RZIPSTI3VMKMREXSV
'IVXMJMGEXI4EKIW -RMXMEPW /MQ0YRX
%YXS2EZ )REFPIH
)RZIPSTI-H7XEQTMRK )REFPIH
8MQI>SRI 98'
4EGMJMG8MQI 97
'EREHE
,EQMPXSR%ZI
4EPS%PXS'%
OMQFIVP]PYRX$GMX]SJTEPSEPXSSVK
-4%HHVIWW
6IGSVH8VEGOMRK
7XEXYW 3VMKMREP
%1
,SPHIV /MQ0YRX
OMQFIVP]PYRX$GMX]SJTEPSEPXSSVK
0SGEXMSR (SGY7MKR
7IGYVMX]%TTPMERGI7XEXYW 'SRRIGXIH 4SSP 'MX]SJ4EPS%PXS
7XSVEKI%TTPMERGI7XEXYW 'SRRIGXIH 4SSP 'MX]SJ4EPS%PXS 0SGEXMSR (SGY7MKR
7MKRIV)ZIRXW 7MKREXYVI 8MQIWXEQT
%Q]&EVXIPP
%Q]&EVXIPP$'MX]SJ4EPS%PXSSVK
7IRMSV(ITYX]'MX]%XXSVRI]
'MX]SJ4EPS%PXS
7IGYVMX]0IZIP )QEMP%GGSYRX%YXLIRXMGEXMSR
2SRI
7MKREXYVI%HSTXMSR 4VIWIPIGXIH7X]PI
9WMRK-4%HHVIWW
7IRX %1
:MI[IH %1
7MKRIH %1
)PIGXVSRMG6IGSVHERH7MKREXYVI(MWGPSWYVI
%GGITXIH %1
-( H IGFHIJ G HIE
)H7LMOEHE
IHWLMOEHE$GMX]SJTEPSEPXSSVK
%WWMWXERX'MX]1EREKIV
'MX]SJ4EPS%PXS
7IGYVMX]0IZIP )QEMP%GGSYRX%YXLIRXMGEXMSR
2SRI
7MKREXYVI%HSTXMSR 4VIWIPIGXIH7X]PI
9WMRK-4%HHVIWW
7IRX %1
:MI[IH 41
7MKRIH 41
)PIGXVSRMG6IGSVHERH7MKREXYVI(MWGPSWYVI
2SX3JJIVIHZME(SGY7MKR
/MIP]2SWI
OMIP]RSWI$GMX]SJTEPSEPXSSVK
(MVIGXSV3JJMGISJ1EREKIQIRX
&YHKIX -RXIVMQ
'*3
'MX]SJ4EPS%PXS
7IGYVMX]0IZIP )QEMP%GGSYRX%YXLIRXMGEXMSR
2SRI
7MKREXYVI%HSTXMSR 9TPSEHIH7MKREXYVI-QEKI
9WMRK-4%HHVIWW
7IRX 41
:MI[IH 41
7MKRIH 41
)PIGXVSRMG6IGSVHERH7MKREXYVI(MWGPSWYVI
2SX3JJIVIHZME(SGY7MKR
)H7LMOEHE
IHWLMOEHE$GMX]SJTEPSEPXSSVK
%WWMWXERX'MX]1EREKIV
'MX]SJ4EPS%PXS
7IGYVMX]0IZIP )QEMP%GGSYRX%YXLIRXMGEXMSR
2SRI
7MKREXYVI%HSTXMSR 4VIWIPIGXIH7X]PI
9WMRK-4%HHVIWW
7IRX %1
:MI[IH %1
7MKRIH %1
)PIGXVSRMG6IGSVHERH7MKREXYVI(MWGPSWYVI
2SX3JJIVIHZME(SGY7MKR