Item 11
VALLEY CLEAN ENERGY ALLIANCE
Staff Report – Item 11
______________________________________________________________________________ TO: Board of Directors
FROM: Mitch Sears, Chief Executive Officer
Edward Burnham, Chief Financial Officer
SUBJECT: Bi-annual Enterprise Risk Management Report
DATE: April 10, 2025
RECOMMENDATION
Accept the Bi-annual Enterprise Risk Management Report – March 2025.
BACKGROUND & DISCUSSION
In 2018, the Board approved VCE’s Enterprise Risk Management (ERM) Policy. The policy is centered on risk management best practices and policies for the energy sector. 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 have taken place since Item 11
September 2024 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 to the Board in September 2024, 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 2025 Valley Clean Energy
Enterprise Risk
Management Report
March 2025
1 Executive Summary
Introduction and Background
In 2018, the Valley Clean Energy (VCE) Board adopted an Enterprise Risk Management (ERM) framework based on the best industry practices structure developed by SMUD. The objective was to provide the Board with insight into risks that could impact the ability to execute VCE's mission and build credibility and sustain confidence in VCE's governance. In addition, the framework and reports are designed to enhance the understanding of significant risks to VCE, develop the capacity for continuous monitoring, provide for periodic reporting of risks, and establish a platform for responding to changing risk circumstances. This report is the 1st of VCE's biannual risk reports for 2025; the prior ERM biannual Report was issued in September 2024.
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 Executive Officer 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
2 • 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 • This framework supports the Board in exercising its overall responsibility to:
o Regulate opportunities and risks for VCE;
o Develop a better understanding of appropriate opportunities and risks for VCE; o Promote active management of risk exposure down to acceptable levels; and o Assist VCE in its achievement of business plan objectives and operational performance.
Summary of Activities through March of 2025
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 the Executive Officer as Chief Risk Officer and Chief Financial Officer 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
3 Key Steps Taken Since the Last Biannual Update
Some actionable steps that VCE has taken since the last Board update in September 2024 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.
2. Increased 2025 VCE Rate Credits starting January 1 to 5% for all customers and 10% to CARE/FERA customers.
3. Executed Energy Prepayment Bond for power cost savings to further stabilize VCE’s financial standing, building reserves, and support affordability measures.
4. Adopted updates to the financial reserve policy and dividend program guidelines and initiated VCE’s initial investment grade credit rating process.
5. Approved Renewable Energy Credit Optimization approach for 2025 to balance emission reduction with cost competitive customer rates.
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 2025:
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:
4 1. 2025 PCIA proceeding and 2026 PCIA Increases
2. Rate Affordability and Stabilization
3. Legislative & Regulatory Policy Risk
4. Resource Adequacy (Planning Reserve Margin)
5. Commodity procurement
The following tables outline current risks (Table 1) and summarize VCE's response plan for it’s top identified risks (Table 2).
Table 1: Risk Description/Level
Risk Description
Current
Residual
Risk
Target
Residual
Risk
Power Charge
Indifference
Adjustment (PCIA)
The PCIA rate for 2025 remained neutral for the time being due to increased resource adequacy and renewable energy credit market price benchmarks.
The lower energy costs and usage are forecasted to be under collected and lower energy price forwards are expected to significantly increase the 2025 PCIA. Additionally, the CPUC is reviewing the market price benchmark formula that may generate higher long-term PCIA rates.
Resource Adequacy
(RA)
The supply of RA in the western US is tightening, and the regulatory slice of day framework is evolving. A combination of these two elements has resulted in an increased cost of RA and in some cases limited available supply. Due to battery permitting and testing requirements, the Willy Chap 9 project was partially delayed thus causing VCE to procure short-term RA.
Commodity
Procurement
The 2025 market is experiencing fluctuations associated with commodity prices, including energy prices, resource adequacy, and other components of the energy portfolio.
Regulatory & Policy
risk
Risk of additional regulatory requirements increasing complexity and cost of operations for VCE. Recently, the CPUC has taken positions and policy 5 Risk Description
Current
Residual
Risk
Target
Residual
Risk
changes that have resulted in cost shifts from the IOUs to the CCA community.
Capital
availability/cashflow
Capital / Cashflow Risk has remained low through VCE’s rate, auto rate adjustment, and reserve policies. Staff will be proposing additional revisions to rates and reserve policies to meet, obtain, and maintain credit rating agency requirements.
Economic Uncertainty
The risks from the ongoing geopolitical climate increases the chances of impacting natural gas prices, the general economy, and the renewable sector specifically through tax reform, trade agreements, war(s), and import tariffs.
Rate structure
The risk of rate design for cost of service has been reduced with an updated rate policy and additional implementation of the "Base Green” rate option.
VCE will continue to develop rate-setting options to minimize risks further.
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. Ukraine and trade tariffs) have created challenges that impact VCE's power costs.
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
The risk of higher than expected opt-out has normalized despite PG&E’s increases in both electricity transmission and distribution and gas rates. VCE implementation of "Base Green" product option should minimize opt-outs. 6 Risk Description
Current
Residual
Risk
Target
Residual
Risk
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 events and affordability.
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
///
7 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.
2) Work towards the potential
long-term goal of attaining an
option for a PCIA buy-out and
sunset date.
The 2026 PG&E PCIA
forecast is expected to
increase due to RA
Benchmark proceeding.
VCE will continue to
monitor Energy Resource
Recovery Account (ERRA)
and PCIA proceeding.
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
addressing the extreme swings
in pricing.
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
Execution of PPA
contracts
Regulatory rulings that
affect commodity
procurement cost
Monitor impacts and
market conditions
resulting from slice of
day resource adequacy
requirements.
Director of
Power
Procurement
1 Current trend of risk for VCE- increasing , no change or decreasing 8 Risk Event Response Trend1 Plan Trigger/Control Owner 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
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
Weekly CalCCA
Regulatory and
Legislative Committee
meetings
Regulatory rulings
Legislative actions
Executive
Officer
Capital
Availability /
Cash Flow
Monitor risk &
actively engage
and respond
1) Continue towards conserving
cash, reducing debt, and
lowering cash requirements.
2) Evaluate reserve policy
changes.
3) Work towards the 2025 goal
of securing an investment-grade credit rating.
VCE Line of credit
agreements & extension
to 2026.
VCE is working with
Financial Advisor (PFM)
to establish VCE’s initial
investment grade credit
rating by 2028.
Director of
Finance
9 Risk Event Response Trend1 Plan Trigger/Control Owner Implement VCE Rate
adjustment and
Collections Policy
Resource
Adequacy
Reduce &
manage risk
1) 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.
2) Monitor and participate in
CalCCA activities related to
regional developments in
RA.
3) Continue to develop
portfolio of resources that
satisfy various future RA
program scenarios.
Execution of PPA
contracts
Regulatory rulings that
affect RA cost, including
non-compliance penalty
structure
Annual review of VCE
PPA RA resources
Director of
Power
Procurement
10 Risk Event Response Trend1 Plan Trigger/Control Owner 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 rates for
rate adjustment policy.
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