BURBANK WATER & POWER
ENERGY RISK MANAGEMENT
POLICY
ATTACHMENT 1
A1-1
Burbank Water and Power
Energy risk management policy
Burbank Water and Power
Energy risk management policy
Foreword
This energy risk management policy (“risk policy”) document is intended to provide purpose, objectives, and guidelines for prudent power supply risk management. It is complemented by the credit risk policy (“credit policy”) and the energy risk management hedging plan and procedures (“hedging plan). This risk policy is not intended to substitute for exercising sound employee judgment in order to manage Burbank Water and Power’s power supply portfolio.
ATTACHMENT 1
A1-2
Burbank Water and Power
Energy risk management policy
Burbank Water and Power
Energy Risk Management Policy
Table of Contents
1.0 INTRODUCTION
2.0 RISK EXPOSURES
3.0 ORGANIZATIONAL STRUCTURE
3.1 Governance
3.2 Segregation of duties
3.3 Roles and responsibilities
4.0 TRANSACTION CONTROLS
5.0 RISK ANALYSIS
5.1 Portfolio analysis
5.2 Mitigation strategies
6.0 HEDGING AND RISK MITIGATION
7.0 AUTHORIZED INSTRUMENTS
8.0 AUTHORIZED LIMITS
8.1 Energy and capacity
8.2. Wholesale transactions
9.0 AUTHORITY LEVELS
10.0 REPORTING
10.1 Counterparty risk exposure
10.2 Mark-to-Market Report
10.3 Power supply portfolio exposure
10.4 Limit violation report
11.0 PROGRAM EFFECTIVENESS REVIEW
12.0 CONFLICT OF INTEREST
13.0 BWP STAFF ACCOUNTABILITY
ATTACHMENT 1
A1-3
Burbank Water and Power
Energy risk management policy
ATTACHMENTS
1 Employee compliance form
2 Glossary of terms
ATTACHMENT 1
A1-4
Burbank Water and Power
Energy risk management policy
Burbank Water and Power
Energy risk management policy
1.0 INTRODUCTION
Burbank Water and Power (“BWP”) is a public owned utility with a fundamental mission to provide reliable, sustainable and affordable electric and water services to the citizens of Burbank.
This energy risk management policy (“risk policy”) plays an important role in supporting BWP’s mission by providing objectives and guidelines for prudent power supply risk management. This risk policy was initially adopted in 2003 to address energy risks related to operation, price, excess asset monetization, and credit. As the energy industry undergoes changes and faces new risks, this policy will be updated.
Any revisions to this policy are implemented in a risk management framework that includes the following seven elements i) organizational structure; ii); transaction controls; iii) risk analysis; iv) hedging plan; v) authorized instruments; vi) authorized risk limits; and vii) reporting. The detailed processes and procedures to implement this policy are included in the hedging plan and and the credit policy.
The objectives of this policy are to: i) manage price risk ii) manage physical delivery risks in the power supply portfolio; iii) efficiently dispatch resources; iv) integrate intermittent resources; v) manage deficiency and excess capacity as appropriate; and vi) comply with regulations impacting power and gas supply operations.
The policy strictly prohibits speculative trading of any kind.
2.0 RISK EXPOSURES
As an integrated utility serving customers with energy and distribution services, BWP has identified, and will continue to manage, the following risk in its power supply portfolio:
• Price risk - the price risk associated with the cost of energy supply and delivery. • Locational risk – the risk of pricing dislocation between two locations (may include basis or congestion risk).
• Capacity risk - the risk of not having adequate firm energy to reliab ly meet retail load requirements.
• Volumetric risk – the risk of volumetric uncertainty associated with load requirements , ramping capability of take-or-pay projects, and intermittent resource availability. • Operational risk – the risk of power transmission curtailment, natural gas supply risks, and generation outage risks.
ATTACHMENT 1
A1-5
Burbank Water and Power
Energy risk management policy
• Credit risk - the risk of counterparty non-performance, either physically or financially, is addressed in more detail in BWP s credit policy.
• Regulatory risk – the risk of not meeting compliance obligations and risk of new (unknown) regulation.
BWP recognizes that it is impossible to envision all future risks, and therefore will use the above risk management framework to identify and mitigate future risks.
3.0 ORGANIZATIONAL STRUCTURE
The risks will be managed through an organizational structure with a clear governance structure, internal controls, and segregation of duties. The detailed description of the Risk Oversight Committee (“ROC”), front office and back office compositions and responsibilities is outlined in the hedging plan.
3.1 Risk Oversight Committee (ROC)
ROC is a management committee responsible for overseeing and managing BWP’s risk management program. The ROC oversees BWP‘s energy procurement practices and trading activities consistent with this p olicy. The ROC will grant approval or denial of proposed strategies and transactions outside of the front office’s authorized limits. The ROC will monitor the potential risk exposures consistent with this policy. The ROC will monitor the appropriate segregation of duties given any continuing organizational changes. It will also approve h edging plan and credit policy as part of a comprehensive energy risk management program.
ATTACHMENT 1
A1-6
Burbank Water and Power
Energy risk management policy
ROC voting members will include BWP General Manager and other senior managers .
There may be non -voting ROC members, or ROC meeting attendees , that could include BWP employees, a board liaison, and/or a city government representative. The ROC will meet at least quarterly to fulfill its responsibilities. ROC decisions and approvals will be memorialized. The composition of the ROC, frequency of its meetings, decisional materials, and process for reviewing risks are in the Hedging Plan and procedures. The ROC charter is included in the Attachment 1 of the Hedging Plan and procedures.
3.2 Segregation of Duties
Appropriate segregation of duties will be established and maintained by the ROC.
Industry best practices call for the separation of the front office, mid office and back office functions, where the group that enters into spot fuel and power transactions (the front office), is separate from the group confirming and settling the transactions (the mid office), and the group reporting financial results and potential risk exposures (the back office).
3.3 Roles and Responsibilities
3.3.1 Front office
The front office manages BWP’s power supply portfolio and transacts in the spot energy markets. The detailed procedures and limits to be used by the front office are outlined in the hedging plan and credit policy. The front office is responsible for hedging strategy development, trading, scheduling, generation dispatch, resource management, power system operations, and resource optimization. Front office personnel may commit BWP to purchase and sale of authorized instruments, schedule energy, balance load and resources, and monetize excess energy , transmission and capacity when prudent. They must ensure transactions are Authorized Instruments that comply with the credit policy, fall within the Authorized limits and Authority Levels , and comply with current laws and regulations.
ATTACHMENT 1
A1-7
Burbank Water and Power
Energy risk management policy
3.3.2 Mid and back office
The mid and back office ensures the accuracy, timeliness, and integrity of energy risk reporting. The middle office is responsible for energy settlements, confirmation and reconciliations. The back office is responsible for invoicing and reporting transactions executed by the front office and settled by the middle office.
The back office confirms that transactions meet policy guidelines and are within the established limits. The back office reports any violations of authorization limits, following the guidelines in the hedging plan. The back office is responsible for the independent analy sis of financial risks and reporting its findings to the ROC. The back office monitors the financial exposure associated with th e risk exposures in the power supply portfolio. This risk exposure monitoring and reporting will be independent of the front office.
The back office is also responsible for the independent evaluation and review of the creditworthiness of BWP’s counterparties as outlined in the credit policy. The back office procedures for maintaining the risk management system, conducting risk analysis, transaction controls, and risk reporting are included in the hedging plan.
4.0 TRANSACTION CONTROLS
BWP implements transaction controls to manage transactions from inception to closing. The steps to manage transactions are : (i) verification of authorized instruments, authorized limits , and authority levels; ii) contract negotiation and counterparty credit risk assessment; iii) transaction capture; iv) deal confirmation; v) transaction valuation; vi) credit limit monitoring; vii) processing invoices for payments and creating invoices. The detailed processes are outlined in the hedging plan and credit policy. All energy related transactions will be in compliance with this policy, the hedging plan, the credit policy, and existing laws and regulations.
5.0 RISK ANALYSIS
BWP will conduct periodic risk analysis to understand the major risk exposures in the power supply portfolio to support decision -making. Additionally, risk analysis will be conducted on new contracts, resources, and risk mitigation strategies to understand what risks are being mitigated and what new risk exposures may emerge. The hedging plan include details regarding the type of risk analysis that will be conducted, the data and modeling tools used, and the frequency at which it is conducted. For detailed power supply portfolio risks analysis and mitigation strategies, see Section 4.0 of the hedging plan.
ATTACHMENT 1
A1-8
Burbank Water and Power
Energy risk management policy
6.0 HEDGING AND RISK MITIGATION
Since BWP’s load and resources will continue to evolve and change as a result of new technologies, changing market design, and new compliance requirements, it is important that the hedging strategies are able to evolve and change as well. BWP will develop hedging strategies to manage the overall power supply costs to serve electric ratepayers consistent with customer rate guidance provided to the Burbank City Council.
The hedging plan defines risk mitigation objectives and provides guidelines for energy risk mitigation. It provides guidance on risk tolerance, hedging strategies, risk exposures, mitigation strategies, authorized instruments, authorized limits, and authority levels. The ROC may approve additional or alternative hedging strategies that are not in the hedging plan, based upon newly available information regarding operational requirements and changing market conditions.
BWP may also hedge to meet the Mandatory Reporting Rule (MRR) for greenhouse gas (GHG) mandates as defined and updated in the California Code of Regulations, sections 95100-95163 (or functionally equivalent regulation s), in order to meet annual compliance requirements. In addition, BWP may hedge, to the extent possible for the California Energy Commission (CEC) Renewable Portfolio Standard (RPS), in order to meet the Portfolio Content Category (PCC) requirements the Long -Term Requirement (LTR), and other requirements, as defined and updated in Public Utilities Code section 399.13 (or functionally equivalent regulations).
7.0 AUTHORIZED INSTRUMENTS
The front office is authorized to enter into authorized instruments listed in the hedging plan that are approved by the ROC.
Authorized instruments will be consistent with the types of risks BWP manages, which would include, but are not limited to, power, fuel, capacity, transmission, natural gas transportation and storage, ancillary services, carbon allowances, renewable energy credits an d other products related to BWP business as listed in the Attachment 3 of the h edging plan. Authorized instruments may include physical and financial instruments. The ROC m ust approve the use of new authorized instruments.
ATTACHMENT 1
A1-9
Burbank Water and Power
Energy risk management policy
8.0 AUTHORIZED LIMITS
BWP sets and monitors authorized retail transaction limits, minimum capacity levels, and wholesale transaction limits, as detailed in Section 7.0 of the Authorized limits and Attachments 4 and 5 of the hedging plan. The purpose of these limits is to provide guidelines for managing and mitigating power supply risks. In general, fulfillment of retail load requirements takes full precedence over any other off-system trading activity. Authorized transactions must also comply with the credit policy.
ATTACHMENT 1
A1-10
Burbank Water and Power
Energy risk management policy
8.1 Retail energy and capacity
BWP will plan for adequate energy to meet customer load requirements for current fiscal year. In order to minimize spot market price volatility, BWP manages deficit positions with hedging strategies. At times, BWP will purchase energy to meet load requirements, while at other times BWP will maximize the value of its assets through marketing excess energy and transmission.
BWP will monitor forward load and resources to evaluate whether there is adequate capacity to meet customer load requirements. BWP will develop mitigation strategies, which may include , but are not limited to , forward selling surplus positions (when applicable); efficiently dispatch ing resources; acquiring additional capacity for deficit periods , and/or implement ing new customer strategies to help sh ift load to different hours. ROC will approve any deviations from the Attachment 4 of the hedging plan.
8.2 Wholesale transactions
BWP may take advantage of arbitrage transactions as opportunities present themselves. These activities can produce some risk, both credit and market. The intent of o ff-system transactions is to monetize excess assets to benefit retail ratepayers. Parameters for off-system transactions are described in the hedging plan.
ATTACHMENT 1
A1-11
Burbank Water and Power
Energy risk management policy
9.0 AUTHORITY LEVELS
Authority levels define the position and time horizon that certain individuals are authorized to transact on behalf of BWP. The back office will monitor transactions to ensure they are within the Authority levels.
Position/Title Authority levels or
duration (up to)
Lead time
(up to)
Source
Real-time traders 5 days 5 days Delegation memo
from the GM
Energy traders Monthly 1 month Delegation memo
from the GM
ECC and Power
resource manager
Quarterly 3 months Delegation memo
from the GM
Assistant General
Manager Power
supply
Twelve months 6 months Delegation memo
from the GM
General Manager Five years 5 years City council
ATTACHMENT 1
A1-12
Burbank Water and Power
Energy risk management policy
10.0 REPORTING
BWP uses a number of financial risk reports to monitor potential risk exposures in the power supply portfolio. These reports include, but are not limited to, counterparty risk exposures, mark to market analysis, and power supply risk exposures. These reports will be produced to support decision-making and are typically distributed at the ROC meetings. However, these reports can be distributed at any time, as needed. Reporting mechanics and preparation details are in the hedging plan.
10.1 Counterparty risk exposure
Counterparty credit limit reports are available for the front office. The back office is responsible for making sure the counterparty credit limit report is updated. The front office may only enter into new transactions with approved counterparties and where there is adequate credit capacity . The credit policy explains counterparty set up, credit risk assessment, credit risk limits, credit risk monitoring, and credit risk reporting that is to be conducted.
10.2 Mark-to-Market report
The mark -to-market analysis is performed to appropriately reflect the current forward market value of long-term transactions of three months of longer . The back office is responsible for preparing and verifying the validity and accuracy of the market data used in mark-to-market calculations of this report. The front office will assist in obtaining market data used to mark-to-market forward products.
10.3 Power supply portfolio exposure
The back office and front office will coordinate to prepare exposure reports for the ROC illustrating the risk exposures in the power supply portfolio. R eports will include volumetric positions and financial risks.
10.4 Limit violation report
The back office will report immediately to the ROC any material limit violations, and explore the cause of violations, in any authorized risk limits or activity defined in the risk policy, hedging plan, and/or the credit policy. The ROC will determine what actions, if any, will be taken.
ATTACHMENT 1
A1-13
Burbank Water and Power
Energy risk management policy
11.0 PROGRAM EFFECTIVENESS REVIEW
The effectiveness of BWP’s energy risk management program will be assessed periodically. This risk policy, the hedging plan, and the credit policy will be reviewed as needed by the back office and recommended changes must be approved by the ROC.
12.0 CONFLICT OF INTEREST
BWP requires that ROC, front office, and back office employees disclose potential conflicts of interest to managing power supply portfolio for the benefit of BWP’s customers. E xamples of conflicts of interest include, but are not limited to : inappropriate gifts or services provided to BWP employees from counterparties, personal energy trading accounts in similar instruments or markets in which BWP transacts, or personal interest in companies with whom BWP has a contractual relationship or is in negotiations. If an employee is unsure about a potential conflict of interest, he/she should share the matter and obtain guidance from the back office or ROC.
13.0 BURBANK WATER AND POWER STAFF ACCOUNTABILITY
All BWP employees who hold position s described in Section 3.3 of this policy, or perform a function described in this risk policy, the hedging plan, and/or the credit policy, shall at all times adhere to the provisions contained herein. Each employee shall acknowledge in writing that he or she has read this risk policy, the hedging plan, and the credit policy that he or she will adhere to their provisions, and that he or she understands that a violation of the policies or procedures set forth herein shall constitute grounds for disciplinary action according to respective bargaining units’ Memorandum of Understanding (MOUs), including up to termination of employment. The acknowledgment shall be in the form and manner set forth in Attachment 1.
ATTACHMENT 1
A1-14
Burbank Water and Power
Energy risk management policy
ATTACHMENTS
ATTACHMENT 1
A1-15
Burbank Water and Power
Energy risk management policy
ATTACHMENT 1 – EMPLOYEE'S ACKNOWLEDGMENT OF DOCUMENTS
The back office will be responsible for the initial collection , and on-going issuance, of the Accountability form in Attachment 1 whenever significant changes are made to the policy and procedures.
This Energy risk management policy (“risk policy”) document is intended to provide guidelines for what is considered prudent power supply risk management. BWP’s goal is to provide reliable, affordable, and sustainable energy and energy services to its customers. BWP’s ROC, front office, and back office staff are responsible for acting in good faith to deliver on this vision.
While, t he risk p olicy, the energy risk management hedging plan and procedures (“hedging plan”), and the credit risk policy (“ credit policy”) are designed to provide guidelines for s afe, reliable and cost-effective management of power supply portfolio, they are not intended as a substitute for exercising sound employee judgment in order to reduce BWP’s power supply cost.
The undersigned hereby certifies that he/she has received, read, and understands the risk policy, the hedging plan and the c redit policy; and that if there are any questions, he/she can contact his/her supervisor , or the Financial p lanning and e nergy risk manager, to address those questions. The undersigned agrees to adhere to all provisions contained in the risk policy, the hedging plan and the credit policy. The undersigned further acknowledges and understands that any violation of p olicy and/or p rocedures shall be considered grounds for progressive disciplinary action according to respective bargaining units’ MOU.
Signature
Type or Print Name
Title
Date
ATTACHMENT 1
A1-16
Burbank Water and Power
Energy risk management policy
ATTACHMENT 2 - GLOSSARY OF RISK MANAGEMENT TERMS
Arbitrage – The simultaneous purchase and sale of similar or identical commodities in two different markets.
Basis – The differential that exists at any time between the futures or forward price for a given commodity and the comparable cash or spot price for the commodity. Basis can reflect different time periods, product qualities, or locations.
Counterparty – The person or institution standing on the opposite side of a transaction.
Credit risk – The risk of default by either counterparty in a transaction.
Financial hedge – a transaction that is settled in cash and used to offset exposure that arises from physical requirements.
Forward contract – Standardized contract for the purchase or sale of a commodity, which is traded for future delivery not under the provisions of an established exchange.
Hedging – Using a market instrument in order to lock in a value that would otherwise be variable.
Hedging is employed as a form of financial protection against adverse price moves in the cash market.
Marking-to-Market (MTM) – The process of valuing a position or portfolio against a market clearing or settlement price.
Physical hedge – an energy purc hase or retail/wholesale sale transacted to meet physical requirements.
ATTACHMENT 1
A1-17
Burbank Water and Power
Energy risk management policy
Power supply portfolio – Overall power supply, including fuel, power and all other instruments listed in Attachment 3-Authorized Instruments of the Hedging plan and procedures.
Retail load – The amount of electricity required to meet end-users demand within the city limit. It is Net Energy to Load minus distribution losses.
Speculative trading – The opposite of hedging, when the traders (buyer and seller) hold no offsetting cash market position and deliberately incurs price risk in order to reap potential rewards.
Wholesale transaction – transactions in energy, capacity or transmission to optimize, with the use of prudent risk limits, the value of BWP assets through marketing temporary excess capacity, energy, or transmission. Arbitrage transaction opportunities are included in this transaction classification.
Spot energy transactions – Purchases or sales of energy, including power, fuel, transmission, and other energy related transactions, to meet retail load and wholesale transactions with third party.
ATTACHMENT 1
A1-18