1 STAFF REPORT
DAT
E: October 17, 2023
T
O: Justin Hess, City Manager
F
ROM: Dawn Roth Lindell, General Manager, Burbank Water and Power VIA: Joseph Lillio, Chief Financial Officer, Burbank Water and Power BY: Evilia Waloejo, Financial Planning and Risk Manager S
UBJECT: Update to Burbank Water & Power’s Energy Risk Management Policy RE
COMMENDATION
Note and file.
BACKG
ROUND
Burbank Water and Power’s (BWP’s) Energy Risk Management Policy ( risk policy) was initially adopted in 2003 to provide guidelines for prudent power supply risk management.
The risk policy was developed to address issues and situations caused by the California energy crisis in the early 2000s. The policy has been updated periodically , with the last update occurring in fiscal year 2022-23. Staff is incorporating current best practices to bring this policy up to date as the energy industry evolves and is faced with new risks.
Staff has updated the risk policy , which sets high- level goals, and has separated and updated the hedging plan and procedures (hedging plan) and the credit risk policy (credit policy). The hedging plan and credit policy are two subset policies of the risk policy and are intended to be upda ted more frequently. This update was presented to the BWP Board on September 1, 2022. A periodic review and update of these polic ies and procedures are needed to continue supporting BWP’s fundamental mission of providing reliable, affordable, and sustainable electric services to the citizens of Burbank.
DI
SCUSSION
The Risk Policy
Similar to the previous version of the risk policy, this updated policy provides a framework to identify and mitigate various risks within power supply resources , such as price, physical delivery, volumetric, capacity, regulatory compliance, and operational and credit risks. This policy defines the roles and responsibilities of the Risk Oversight Committee (ROC) personnel . The seven voting members are the General Manager, Assistant General Manager of P ower Supply , Chief Financial Officer, Energy Control Center Manager, P ower Resources M anager, Power Production Manager, and Financial Planning and Risk Manager.
WATER AND
POWER
2 The ROC establishes and monitors appropriate segregation of duties of the front, middle, and back offices. The front office is responsible for hedging development, trading, scheduling, generation dispatch, resource management, and power system operations.
The middle office , with the assistance of the front office, is responsible for energy settlements and trading confirmations. The b ack office is responsible for invoicing, reporting, and monitoring compliance with the policy. The back office is also responsible for performing risk analysis and generating financial risk reports to monitor potential risk exposures in the power supply portfolio, including counterparty risk exposure, mark -to- market, and power supply risk exposure, as outlined in the hedging plan.
An authority-level table by position that includes a time horizon for each position’s authorities to transact on behalf of BWP was added to the risk policy . The table can be found in the Energy Risk Management Policy (see Attachment 1) , page A1-12, under section 9.0 (authority levels). This table summarizes the authority extended by the Burbank City Council under Resolution Number 21- 29,285 to BWP’s G eneral Manager and their designee(s) to undertake short-term sales and purchases of up to five years in duration and begin delivery up to five years from the date of contract signing for energy and natural gas and related products and services necessary for the operation of the city’s electric utility. Some examples of the necessary products and services are R enewable Energy Credits (RECs), Green House Gas (GHG), Low Carbon Fuel Standard (LCFS), and Reclaim Trading Credits (RTC).
In addition to complying with the risk policy authority levels, all transactions must comply with authorized instruments and limits, as outlined in the hedging plan and credit policy.
Hedging Plan and Procedures
BWP, like other utilities, is subject to gas and power price volatility. To maintain price stability, BWP employs an energy hedging strategy as a means of price protection. BWP locks in gas prices by entering into contracts for future delivery at a fixed price (hedging) for Magnolia Power Project (MPP) and Lake 1 generating unit (Lake) usage and/or power prices in the summer when demand is high.
BWP’s load and resources have evolved due to new technologies and new compliance requirements, making it important that the hedging strategies adapt. The ROC periodically reviews and approves the hedging plan but may also approve alternative strategies and limits.
The hedging plan provides a roadmap for risk mitigation, including defining risk tolerance, establishing hedging objectives and guidelines, managing load and resources efficiently, mitigating risk exposures, and understanding the impact of retail customer programs on fuel and power costs. It also outlines risk analysis, reporting, and mitigation strategies to aid in the decision-making process.
The front office uses t he authorized instruments and authorized limits included in the hedging plan. There are three retail transaction limits for hedging: time -driven, opportunistic, and stop-loss limits. The time -driven limit set s a minimum hedging target requirement before a new fiscal year starts . The opportunistic limit provides hedging guidance under favorable market conditions and when market opportunit ies arise by 3 setting a maximum hedging level. The stop-loss limit is defined as a 10% risk tolerance level. This limit will trigger retail hedging when the current projected fuel and power cost exceeds 10% of the current fiscal year budget. The back office will prepare the related analysis and provide recommendations to the ROC.
The hedging plan addresses risks associated with serving retail load and establishes the desired minimum energy capacity requirement before the start of the fiscal year. Setting a minimum capacity level is intended to help BWP develop strategies, such as acquiring the additional capacity for deficit positions and/or implementing new customer strategies, to help shape load to mitigate any hourly energy surplus and deficit positions.
Credit Policy
BWP’s credit policy aims to establish a consistent process to mitigate counterparty credit risks, including failure to pay or deliver. The ROC will approve the credit policy developed by the Financial Planning and Risk Manager. The back office will perform the initial credit review, set up new trading counterpart ies, and set credit limits independently from the front office.
A credit evaluation methodology that incorporates long-term credit ratings from two major rating agencies, Standard and Poor’s and Moody’s, is outlined in th e credit policy. The credit evaluation methodology can be found in the credit policy (see Attachment 3), page A3-6, under section 4.2, as well as appendix 1 on pages A3- 11 t hrough A3- 12. A maximum credit limit and duration of the transaction are assigned to each credit rating at or above investment grade. Additionally, each rating has an assigned risk category level with a maximum aggregate credit limit for each risk level. ROC will approve exceptions to the credit policy on a limited basis, including emergencies or if there is limited availability of the product/resource. The exception to the policy would ensure BWP w ould continue to deliver electricity to our ratepayers while maintaining reliability with the high customer service standards BWP is known for , as well as meeting sustainability goals . With the assistance of the City Attorney’s Office, the back office will negotiate master agreements and customized bilateral agreements along with credit support , if needed, for new counterparties. Credit remedy techniques have been used to support weak credit or mitigate credit limit violations , such as parental guarantees, letter s of credits, advanced payment arrangements, and cash collaterals.
FISCAL IMPACT
There is no direct fiscal impact on the City of Burbank. I mplementation of these best management policies and procedures has resulted in business efficiencies and risk mitigation, which may, in turn, result in indirect budgetary savings.
CONCLUSION
BWP’s risk policy, hedging plan and procedures, and credit policy have been updated by staff in accordance with best management and industry practices. These policies and procedures were presented to the BWP Board. Staff is requesting City Council to note and file this report.
4 ATTACHMENTS
Attachment 1 – Burbank Water and Power Energy Risk Management Policy Attachment 2 – Burbank Water and Power Hedging Plan and Procedures Attachment 3 – Burbank Water and Power Credit Policy