Item 11
VALLEY CLEAN ENERGY ALLIANCE
Staff Report – Item 11
______________________________________________________________________________ TO: Board of Directors
FROM: Mitch Sears, Interim General Manager
Edward Burnham, Director of Finance & Internal Operations SUBJECT: Bi-annual Enterprise Risk Management Report
DATE: March 10, 2022
RECOMMENDATION
Accept the Bi-annual Enterprise Risk Management Report – March 2022.
BACKGROUND & DISCUSSION
In 2018, the Board approve VCE’s Enterprise Risk Management (ERM) Policy. The policy is centered on energy best practices and is adapted from the SMUD risk management policy. In summary, the VCE ERM policy contains the following sections:
• Introduction: This section introduces the value of ERM as a structured approach to managing risk and uncertainty. It lays out the objectives of VCEA’s ERM function, providing the framework for evaluating and managing risk in the organization’s decision-making process. • ERM Roles and Responsibilities: The ERM roles are consistent with the Board-approved Wholesale Power Procurement & Risk Management Policy. The Enterprise Risk Oversight Committee (EROC) has primary responsibility for the implementation of ERM. The policy lays out the scope of the EROC’s risk management authority.
• Business Practices: This section identifies the steps of risk management and the basic process associated with each step. The intent is to provide a high-level framework. Specific tools and techniques for implementing enterprise risk management will be recommended by the portfolio manager following approval of the policy.
• Management Reporting and Metrics: The policy defines an enterprise risk report that will be provided bi-annually to the Board.
Staff has used the consistent framework described in the ERM policy to identify various risks and related mitigations, and to ensure effective mitigation and communication across all levels of the organization. The attached ERM bi-annual report describes the activities that took place since the last Item 11
bi-annual update in September 2021 and the actions VCE is and will be taking to manage the top risks that have been identified.
Prior to this report, staff most recently presented the bi-annual update in September 2021 to the Board, describing progress on the ERM plan since inception. Bi-annual updates are provided in March and September of each year.
ATTACHMENT
1. Bi-annual Enterprise Risk Management Report – March 2022 Valley Clean Energy
Enterprise Risk
Management Report
March 2022
PURPOSE:
The purpose of the biannual ERM Report is to update VCE's Board and the public regarding the activities that took place since the last update on September 2021. 1 Executive Summary
Introduction and Background
In 2018, the Valley Clean Energy (VCE) Board adopted an Enterprise Risk Management (ERM) framework to provide the Board with insight into risks that could impact the ability to execute VCE's mission, build credibility and sustain confidence in VCE's governance and stakeholders, enhance the understanding of significant risks to VCE, and develop the capacity for continuous monitoring, periodic reporting of risks, and responding to changing risk circumstances. This report is the first of VCE's biannual risk reports for FY 2022; the prior ERM biannual Report was issued on September 2021.
ERM is a strategic approach to risk management that supports the achievement of organizational objectives through the management of integrated impacts of risks as an interrelated risk portfolio. ERM is a coordinated effort by management to treat all risks effectively, thereby reducing the overall cost of risk to the organization. The General Manager has charged functional leaders to oversee the treatment of known major risk categories and provide a risk overview to the Enterprise Risk Oversight Committee (EROC).
ERM Philosophy
VCE's ERM philosophy includes the following principles:
1. Identify, assess, prudently manage, monitor, and report on a variety of business-critical risks;
2. Provide enterprise risk context and linkage to existing core business processes to improve the allocation of limited resources; ERM Approach
Staff has applied a multi-perspective approach to evaluate and estimate the trade-off between risk and cost of mitigation across VCE business functions. This approach addresses the following issues:
• Roles and responsibilities
• Definitions and language
• Risk heat map and risk exposure inventory
• Risk exposure monitoring, updating, and reporting
• Integration of ERM with key business processes
• Integration of risk awareness within corporate culture 2 • This framework supports the Board in exercising its overall responsibility to:
• Regulate opportunities and risks for VCE;
• Develop a better understanding of appropriate opportunities and risks for VCE; • Promote active management of risk exposure down to acceptable levels; and • Assist VCE in its achievement of business plan objectives and operational performance.
Summary of Activities through March of 2022
From an implementation perspective, progress continues on multiple fronts. Significant effort has been invested in creating an enterprise risk register. Risks to VCE have been identified, categorized, and rated. Existing risk controls and risk treatment measures implemented/proposed have also been identified. The risk register provides VCE's management with a consolidated view of risks being faced by VCE, the potential impact of those risks, mitigation actions, and assessment of short-term risk trends (i.e., higher/lower/steady).
Staff is using a consistent framework to identify various risks and related mitigations, and to ensure effective communication across all levels of the organization. In doing so, staff has completed the following developmental tasks:
1. Established Interim General Manager as Chief Risk Officer and Director of Finance & Internal Operations as risk process owner, focusing on day-to-day monitoring and coordination.
2. Developed ERM framework and tools
3. Conducted a risk survey
4. Developed VCE's top risk portfolio
5. Surveyed staff and management for ongoing risk input
6. Held monthly EROC meetings
Key Steps Taken Since the Last Biannual Update
Some actionable steps that VCE has taken since the last Board update in September 2021 include:
1. Have actively engaged from a regulatory and legislative standpoint, supporting regulatory statewide proceedings and settlements, meeting with key CPUC staff, and continuing progress on the annual VCE legislative platform, including SB 612 and AB 843.
2. Reduced the 2020 and 2021 RPS targets to maintain VCE's current rate policy and partially mitigate use of reserve funds during the transition to long-term power purchase agreements savings of ~$3.75M. 3 3. Adopted a cost recovery-based customer rate policy and adopted 2022 Rates and Budget that returns to net positive income and building back reserves for stabilization and support of establishing a credit rating.
4. Secured a short-term $5M line of credit with the County of Yolo and extension of line of credit with River City Bank for 2022 cash flow requirements.
5. Approval and development of AgFIT pilot program that provides growers with incentives for irrigation automation and uses scheduling software, to better manage energy costs.
Key Risks
Key risks are those risks that, given VCE's current position, could negatively impact VCE's business model, future performance or prospects, solvency, liquidity, reputation, or prevent it from delivering on its local control commitment. These key risks are updated on an ongoing basis and look forward over a 5-year horizon to identify the:
• Nature and extent of risks facing VCE
• Likelihood and velocity of the risks and potential impacts • VCE's ability to reduce or control such risks
Key Priorities for Risk Management in 2022:
1. Maintain the operational risk management process
2. Provide regular updates to the Board
3. Continue to take specific actions to mitigate risks as outlined in this document
4. Begin to develop contingency plans for unexpected and emergent events Risk Portfolio
Top 5 Risks for VCE:
1. Power Charge Indifference Adjustment ("PCIA") increases
2. Commodity procurement
3. Regulatory & Policy risk
4. Capital availability/cash flow
5. Economic Uncertainty
The following tables outline current risks (Table 1) and summarize VCE's top risk response plan (Table 2). 4 Table 1: Risk Description/Level
Risk Description
Current
Residual
Risk
Target
Residual
Risk
PCIA The PCIA rate for 2022 are decreased. Continued uncertainty around PCIA and the impacts to bundled rates remains for future years.
Commodity
Procurement
Risk of extreme fluctuations associated with commodity prices, including energy prices, resource adequacy, and other components of the energy portfolio, remain.
Regulatory & Policy
risk
Risk of additional regulatory requirements increasing complexity and cost of operations
Capital
availability/cashflow
Risk that VCE is unable to secure affordable financing as VCE uses reserves for rate stabilization as VCE transitions to the long-term PPAs. Risk has been slightly reduced through the adoption of the new cost recovery rate policy and debt covenants for cost recovery.
Economic Uncertainty Risk that the ongoing Covid-19 pandemic increases chances of impacting customers, the economy, and associated revenue forecasts.
Rate structure
Risk of rate design for cost of service (non-time of use (TOU), PCIA, demand charges, varying generation rates) has been reduced. VCE will continue to develop rate option(s) support risk reductions.
Cyber security & data
privacy
Risk of a data breach as a result of a cyber breach or physical attack Financial Markets
Volatility
Swings in global energy markets, financial markets, and currencies due to current geopolitical events (e.g. Russian invasion of Ukraine) may create significant challenges that VCE will have to address.
5 Risk Description
Current
Residual
Risk
Target
Residual
Risk
Changing customer
expectations
Risk that customer's changing expectations as a result of innovation may result in reduced customer revenue and loyalty
Opt-out rate
Risk of higher than expected opt-out level has increased with rising rates in both electricity and gas that could adversely affect opt-out rates. VCE will continue monitor opt-out activity and perform outreach as necessary.
Business model Ability to quickly identify and respond to business risks that have the potential to impact the ability to achieve VCE goals.
Media & community Risk of unfavorable public communications or events; spillover customer dissatisfaction related to PG&E's PSPS
Unknown risks Business and utilities attempt to identify and adapt to known risks but some potential events outside of VCE’s control could have a debilitating impact on utilities in general and VCE in particular.
High Risk
High/Moderate Risk
Low/Moderate Risk
Low Risk
6 Table 2: Summary of VCE top risk response plan
Risk Event Response Trend1 Plan Trigger/Control Owner
PCIA
Monitor risk &
actively engage
and respond
1) Continue direct involvement
with CalCCA task groups to seek
favorable rulings and
settlements in the PCIA, ERRA,
and other filings, such as SB
612.
2) Work towards the potential
long-term goal of attaining an
option for a PCIA buy-out and
sunset date.
3) Work towards stabilization
and reduction of the PCIA from
a regulatory and legislative
standpoint
Risk of PCIA rate
increases in the 2023
ERRA proceeding.
CPUCs annual approval
of PG&E's PCIA rate
within the Energy
Resource Recovery
Account (ERRA) forecast
Director of
Finance
Commodity
Procurement
Reduce &
manage risk
1) Continue to pursue long-term power purchase
agreements to reduce the
average cost of power in future
years
2) Pursue regulatory and
legislative avenues in
Execution of PPA
contracts
Regulatory rulings that
affect commodity
procurement cost and
RA cost
Director of
Power
Procurement
1 Current trend of risk for VCE- increasing , no change or decreasing 7 Risk Event Response Trend1 Plan Trigger/Control Owner addressing the extreme swings
in pricing and requirements of
Resource Adequacy (RA) costs.
3) Take an active role in
regulatory proceedings at the
CPUC, including appeals, on
various regulations that impact
the cost of electricity along
with support from the CalCCA
Regulatory Committee
4) Follow the guidelines and
recommendations of VCE's
Wholesale Energy Risk Manual
Regulatory &
policy risk
Monitor risk &
actively engage
and respond
1) Take an active role in
legislative sessions (contract
with lobbyist and engage Board
members for
support/opposition on bills)
along with support from CalCCA
legislative committee
2) Follow and continue to
update the annual VCE
Legislative Platform
3) Take an active role in
regulatory proceedings at the
CPUC, including appeals, on
Weekly CalCCA
Regulatory and
Legislative Committee
meetings
Regulatory rulings
Legislative actions
General
Manager
8 Risk Event Response Trend1 Plan Trigger/Control Owner various regulations that impact
VCE and CC's that increase cost
or bureaucracy without any
significant safety or cost
benefits to VCE and its
customers along with support
from CalCCA Regulatory
Committee
Capital
Availability/ Cash
Flow
Monitor risk &
actively engage
and respond
1) Continue towards onserving
cash, reduce debt, and
lowering cash requirements.
2) Evaluate reserve policy
changes.
3) Work towards the 2024 goal
of securing an investment-grade credit rating.
Line of credit
agreements & renewals
Develop & Implement
VCE Collections Policy
Director of
Finance
Rate Structure Reduce &
manage risk
1) Monitor and update Board
based on analyst forecasts for
ERRA proceeding.
2) Identify and mitigate risks
outside of VCE control to limit
impacts and frequency of rate
changes.
3) Review and update rate
policy for cost -recovery based
model
Economic outlook and
Rate forecasts
Monitor Regulatory
proceedings that impact
PCIA, RA, and ERRA.
Monitor cash short-term
and long-term impacts to
reserve funds, credit
lines, commercial
negotiations, and PPA
covenants.
Director of
Finance