ATTACHMENT A
PASADENA WATER AND POWER
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ENERGY AND CREDIT RISK
MANAGEMENT POLICY
January 20180ctober 2025
Pasadena Water and Power
Energy and Credit Risk Management Policy
TABLE OF CONTENTS
1.0 2.0
2.1 2.2
2.3 3.0
4.0 4.1
4.2 4.3
4.4 INTRODUCTION.
PURPOSE and SCOPE.
Purpose
Scope
Effective Date
POLICY OBJECTIVES.
TRANSACTION POLICY AND LIMITS.
Anti-Speculation,
Counterparty Limitations,
Transaction Types...
Transaction Authorizations and Limits.
4.4.1 Maximum Transaction Temi,
4.5 Trade Execution and Authorized Personnel.
5.0 RISK GOVERNANCE STRUCTURE AND RESPONSIBILITIES,
5.1 City Council.
5.2 Municipal Services Committee.
5.3 General Manager
5.4 Energy and Credit Risk Management Committee..
5.5 Management Oversight/S eparation of Duties
5.5.1 Front Office.
5.5.2 Middle Office.
5.5.3 Backoffice
6.0 POLICY MONITORING AND COMPLIANCE...
6.1 Monitoring and Reporting
6.2 Compliance Exceptions
6.3 Reporting of Exceptions
6.4 Assessment
7.0 CONFLICT OF INTEREST
..3
..3
..3
..3
..4
..4
...4
.5
..5
...6
.7
...8
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.10
.11
.11
.12
.12
.12
.13
.13
.13
.13
APPENDICES
Appendix A - Transaction Type Authority: City Council Resolutions Appendix B - Acknowledgement and Employee Compliance Form Appendix C - Glossary of Energy and Credit Risk Management Terms
Pasadena Water and Power
Energy and Credit Risk Management Policy
1.0 INTRODUCTION
It is the geat-nuss^n_of the^Pasadena Water and Power DeEartment^QPWP^) to provide superior cuGtomcr ocrvicc, reliable electricity and quality water at reasonable, competitive and stable rates to its customers in an environmentally sustainablc manncrsafe and reliable water and power with superior customer service at competitive rates.
PWP's electric utility core business is to meet the load requirements of its residential, comnicrcial and industrial and institutional customers and deliver reliable electric service in a safe and environnientally sustainable manner while optimizing the value of its assets. PWP recognizes that certain risks are inherent in the energy business environment.^ PWP's energy and credit risk management philosophy is that no activities related to energy purchase and sales should expose the City to the possibility of large financial losses in relation to the size of the energy roGcrvc fundsEnergy Cost Adjustment Fundr which is currontly about t\vo months of energy
2.0 PURPOSE and SCOPE
2.1 Purpose
The Energy and Credit Risk Management Policy (^Policy^) details the key control structures and policies utilized to manage risks associated with PWP's power supply portfolio.
It establishes a defined level of tradino; authority granted by the City Council to the City Manager and the PWP General Manager as well ao prudent risk management processes based on sound utility risk management principles, while ensuring adherence to financial requirements set forth by th^City Council as well as all pertinent legal requirements. The controls^ structures and policies are focused on the following issues:
Clearly defined segregation of duties and delegation of authority Organizational structure for risk management controls
Policies relating to setting acceptable risk parameters and risk limits Policies for risk reporting
.Permitted transaction and product types
Defined level of trading authority granted bv City Council to the City Manager and the PWP GeneralJ^Ianager
2.2 Scope
The Policy applies only to activities related to PWP's power supply portfolio. It prescribes the management, organization, authority, processes, tools, and systems to monitor, measure, and control market and credit risks to which PWP is exposed in its normal course of business, including wholesale and retail operations, capital projects, and participation in the
Pasadena Water and Power
Energy and Credit Risk Management Policy
California Independent System Operator (CAISO) market.
The Policy does not cover electa-ic distribution, information systems, customer services, or any aspect of the water system. It docs notNeither does it address the mitigation of risk of catastarophic failure, environmental/ or regulatory exposures. Neither nor does it address general business risks such as fire, accident/ and general liability. It is intended solely for mitigation of energy-powor supply riskrelated risk.
Pasadena Water and Power
Energy and Credit Risk Management Policy
2.3 Effective Date
The Policy is effective immediately upon its adoption by the City Council and replaces the 19992018 Policy adopted by the City Council.
3.0 POLICY OBJECTIVES
The objective of the Policy is to limit financial risks associated with procuring and optimizing the power supply portfolio used to meet PWP's retail electric demands in order to provide rate stability to its retail customers and a stable financial rcturncontribution to the City s General Fund. The basic prcmiQC underlying PWP's energy and credit riok management philosophy is that no activiticH related to energy purchaGc and Galco should cxpooc the City and PWP to the poGoibility of large financial IQ£3CH in relation to the size of the energy reserve funds/ which io currently about two months of energy coot.
The key objectives of this Policy are to:
1. Provide stable retail electric rates to retail customers by managing energy cost and credit risks that are inherent in optimizing the power supply portfolio used to meet forecasted customer loads. This is accomplished by limiting forecast exposure to unexpected costs to within acceptable limits.
2..Provide competitive rates by optimizing the power supply portfolio and ensuring that the best available price is obtained while complying with the requirements of this Policy and City codes/ regulations, and policies.
SrS.Establishing, measuring and managing authorizations and trading& limitstransactional authority limits associated with optimizing PWP's portfolio_gf energy, fuel and related products to ensure adequate mitigation of risks associated with necessary participation in market transactions.
4.0 TRANSACTION POLICY AND LIMITS
All executed ta'ansactions shall conform to the Policy as described in this document/ as well as in the risk management program procedures, guidelines and controls manuals as developed and adopted by PWP's Energy and Credit Risk Management Committee (^_RMC_), which is further defined in Section 5.4 below.
Authority to execute transactions shall be subject to City Council approved enabling agreements and contracts or contractual forms approved by the City Councils. In all cases the Pasadena Municipal Code provides the final authorization rules and regulations for energy purchases.
Failure to observe the Transaction Policy and Limits when executing transactions is a violation Page5
Pasadena Water and Power
Energy and Credit Risk Management Policy
of the Policy and is subject to disciplinary action. The key requirements and limitations for transactions are as follows:
Pasadena Water and Power
Energy and Credit Risk Management Policy
4.1 Anti-Speculation
Speculative buying and or and/or selling of energy products is prohibited. In no event shall transactions be entered into to speculate on niarket conditions. Speculation is definesdd as any of the following transaction types:
• Buying energy products that are not needed for meeting forecasted retail load or wholesale obligations; and,
Selling energy products that are not owned and excess to forecasted retail load.
The simultaneous purchase of an energy product and sale of a corresponding energy product shall be permitted provided that the net value (proceeds) from the transaction is derived from the utilization of owned and excess transmission or generation capacity.
Credit or contract sleeving transactions arc otrictly prohibited. Credit sleeving is an arrangement where a more financially reputable entity acts as an middleman intermediary for a smaller undercapitalized entity in the execution of a transaction. Contract sleeving is an arrangement where an entity acts as an middleman intermediary between two entities to bridge a contract gap that exists between the two entities. PWP may not act as the intermediary in either a credit or contract sleeve. However, PVVP may -tmmtcntionaUy participate in a sleeving transaction provided that the intermediary sleeving the transaction is an approved counterparty in accordance with the Counterparty Credit Evaluation and Procedures Manual and the transaction is otherwise in compliance with delegated authority.
4.2 Counterparty Limitations
Under normal operating conditions, all Ttransactions must be with counterparties approved by the Energy Risk Manager in accordance with the Counterparty Credit Evaluation and Procedures Manual approved/ creditworthy countorpartics with available credit. Any transactions with counterparties that do not have approved and/or executed enabling agreements in place with PWP must be contingent upon the approval of a stand alone contract or long form confirmation governing the terms of such applicable transactions.cnabling agreements for such transaction.
Regardless of potential credit concerns with the CAISO, PWP may continue to transact with the CAISO to the extent necessary to meet retail loads, wholesale obligations, utilize existing resources/ and/or as required by the CAISO Tariff or any statutory or regulatory requirement.
During a system emergency or a market emergency, a limited number of short-term transactions with non—approved counterparties may be required, and may require exceeding established credit limits, in order to meet retail loads and/or maintain power system stability.
A system emergency is defined as a natural disaster, weather-related incident, major equipment failure, gas supply curtailment or operational flow order requiring immediate response, or CAISO failure to deliver power for any reason that affects PWP's ability to provide power to rptail 1nad nr mpet nh1ipratinns A markpt pmprp-pnrv is definprl as a nntificatinn nf a declared
Pasadena Water and Power
Energy and Credit Risk Management Policy
emergency from the CAISO or an Operational Flow Order from a Pipeline Operator such as SoGCalAL Gas and supply cannot be obtained from PWP's current list of approved counterparties. If an emergency situation occurs. Under ouch conditions, if the PWP General Manager declares an emergency, the PWP General Manager shall have the authority to obtain resources on a short-term basis (up to 30 days) from non-approved counterparties and/or to exceed established credit limits. In addition, the General Manager shall notify the City Manager within 48 hours of declaring an emergency .-^As soon as is practically possible e? at the next regularly meeting ofochcdulod or special mooting of the Municipal Services Committee ("MSC") and the City Council, the PWP General Manager shall seek appreval-fe^file a full report of the circumstances of any such emergency transactions, or such additional transactions as may be necessary to provide resources on a continuing basis to retail customers from the MSC and the City Council.
Specific details for counterparty credit risk management shall be prescribed in the Counterparty Credit Evaluation and Procedures Manual as developed by the RMC and revised from time to time.
PageS
Pasadena Water and Power
Energy and Credit Risk Management Policy
Specific dctailo for counterparty credit riok management ohall bo prcocribcd in the Counterparty Credit Evaluation and Proccdurco Manual ao developed by the RMC and rcviocd from time to time.
4.3 Transaction Types
All transactions must be Approved Transaction Types/ as authorized by the City Council and thethis Policy.
The City Council must provide authorization for all transactions via approval of the Policy. In general/ the City Council authorizes the City Manager and/or PWP General Manager to enter into contracts for various types of energy-related products (e.g7., energy, capacity, transniission, natural gas, environmental and emission credits, etc.) by way of adopting an "Authorizing Resolution". Appendix A, which shall be updated and maintained by the RMC:, summarizes applicable Authorizing Resolutions adopted by the City Council. PWP is required to conduct a comprehensive review of the Authorizing Resolutions at least once every three years and make recommendations to update the Authorizing Resolutions as necessary.
This The Policy may further limit the use of the Authorizing Resolutions/ but cannot expand upon the transaction authority granted by the City Council. For specific transactions that are not covered by an Authorizing Resolution or exceed the scope of this Policy, the City Council may also provide authorization for the contaract or transaction by motion pursuant to a staff recommendation.
In addition to trading the various energy related products in their "physical" form, these products may also be traded as financial or dorivati\rc products to the extent authorized by City Council resolutionT, up to the authorization limits of the General Manager^ Such transactions rffe-would be used to only manage (hedge) financial risks associated with PWP's open positions (retail load or wholesale sales commitments) by set price caps and floors.
Examples include:
Over the Counter Financial Swaps (fixed/index) for Natural gas and/or Power • Financial Commodity Swaps for Natural Gas and/or Powers Financial Comniodity Options and Swaptions
Natural Gas or Electric Exchange-Traded Products (Futures and Options) Natural Ggas or Electric Options
Emission Allowances
Renewable Energy Credits
Carbon Products
J^ .Unit ContingcncyCapacity Products
-Firm and Non-Firm Transmission
Pasadena Water and Power
Energy and Credit Risk Management Policy
Any financially-settled schedules or transactions with the CAISO of otherwise approved physical transaction types (e.g., energy or transmission products including, but not limited to CAISO Auctioned Congestion Revenue Rights) are expressly permitted by this Policy.
The RMC, with the approval of PWP General Manager, will have the responsibility to maintain a list of Approved Tranoaction Types consistent with City Council authorization.
Pasadena Water and Power
Energy and Credit Risk Management Policy
4.4 Transaction Authorizations and Limits
The authorized transactions and limits for authorized personnel are shown below.
Transaction Authorizations and Limits
Real Time
Schedulers
Pre-
Schedulers
Energy
Trading
Manager
Assistant
General
Manager—^
Power
SupplyPSBU
General
Manager
General
Manager
with City
Manager's
Approva
1 TypePurchases to
meet load,
covered sales
Purchases to
meet load,
covered sales
Purchases to
meet load,
covered sales,
hedges
Purchases to
meet load,
covered sales/
hedges
Purchases to
meet load,
covered sales,
hedges
Purchases to meet
load, covered sales,
hedges
Term^1 Day< 1 Week< 1 Month< 3 Months<1 Year> 1 year ^ 3 Years Lead
Time
^1 Day
Hourly to
balance of day
Same-day
transactions or
day-ahead
activities
perforined on
weekends and
holidays
< 1 Week
Day ahead to
balance of week
Transaction can
be executed
within one-
week period
prior to the
transaction
effective date or
initial delivery
date
< 1 Month
Week ahead to
month ahead
Transaction can
be executed
within one-
month period
prior to the
transaction
effective date
or initial
delivery date
< 3 Months
Month ahead
to quarter
ahead
Transaction can
be executed
within the
three- month
period prior to
the transaction
effective date
or initial
delivery date
<1 Year
Up to 1 year.
Transaction can
be executed
within the
frwelve-month
period prior to
the transaction
effective date
or initial
delivery date
< ^2-1-5 Years
Upto^2.^-5-years
Transaction can be
executed within the
eighteen-month
period prior to the
transaction
effective date or
initial delivery date
Total
Volume
|Up to 100%
lestimated
[requirement
[available
available
of
or
|Up to 100%
[estimated
[requirement
[available
available
of
or
[Up to 100%
lestimated
|requirement
[available
available
of
or
[Up to 115% of
lestimated
[requirement
lavailable
or
available
|Up to 115% of
lestimated
|requirement or_
[available
available
|Up to 115% of
lestunated
|requirement oi_
lavailable f
available
counter
-party
Credit
From pre-
approved.
^Gounterparty_
credit list
From pre-
approved
Counterparty.
credit list
From pre-
approved
Counterparty_
credit list
From pre-
|approved_^
|€ounterpa
rty credit
From pre-
approved
counterparty
credit list or_
with credit
From pre-approved
counterparty credit
Ust or with credit_
facility
Pasadena Water and Power
Energy and Credit Risk Management Policy
Ust
* NoteL_Enere-v sales and purchases are limited to sales from capacity and purchases to meet load requirements for to replace hisher cost resources or limited enerev/hydro'). lcrcdit listcredit Hotcredit listcredit Uotwith credit
Pasadena Water and Power
Energy and Credit Risk Management Policy
* Note: Energy oalco and purchaoco arc limited to oalco from capacity and purchaoc; meet load rcquircmcnta (or to replace higher coot rcoourcco or limited cnorg}"/hydro). -4.-4.7 Maximum Transaction Term
=te=
The maximum term of any transaction term for purchases and sales of energy and related products is limited to three years unless otherwise approved by the City Council.
Transactions with a term up to three years can be executed within the eighteen monthtwo 3 year period prior to the transaction effective date or initial delivery date with the approval/concurrence of the City Manager. The RMC, with the approval of PWP General Manager, will have the responsibility to establish transaction term authority limits of up to six months for various personnel involved in the Front Office functions.
4.5 Trade Execution and Authorized Personnel
All transactions must be committed confirmed over recorded phone lines or via electronic media (e.g. counterparty/exchange software application).
Only authorized PWP staff in the Energy Trading Group within the Power Supply Business Unit may conduct energy purchase and sale transactions. The RMC, with the approval of PWP General Manager, will have the responsibility to delegate specific transaction authority to designated Energy Trading Group personnel, not to exceed the limits of the PWP General Manager as delegated in the Policy. Such authorizations are maintained in the Energy Trading, Risk and Settlements Procedures and Controls Manual as developed^, and adopted and updated from time-to-time by the RMC. Authorized personnel in the Energy Risk and Credit Group of PWP's Finance/ and Administration and Customer Service Business Unit shall be responsible for informing counterparties of such approved authorizations, including transacting authority and restrictions, along with product types and/or term and dollar limits.
All personnel with designated responsibility for energy risk and credit control functions and settlement and processing functions are strictly prohibited from executing transactions.
5.0 RISK GOVERNANCE STRUCTURE AND RESPONSIBILITIES
This section defines the overall roles and responsibilities for implementation of this Policy. Specific details of the roles and responsibilities of the oversight and operational divisions within the energy and credit risk management program at PWP are outlined in the Energy Trading, Risk, and Settlements Procedures and Controls Manual as developed by the RMC and revised from time to time.
5.1 City Council
The City Council is responsible for adopting high-level broad policiesy and providing strategic direction as contained in this Policy document. The City Council adopts the Policy based upon its review of the recommendations made by the RMC, as reviewed by the MSC,
Pasadena Water and Power
Energy and Credit Risk Management Policy
and directsclcgatcs the General Manager of PWP to execute theJP^U^y^. The City Council will review the Policy every two yearsannually and approve new^he enabling agreements under which wholesale energy agreements can be made.
5.2 Municipal Services Committee
The City Council Municipal Services Committee ("MSC") provides direction to PWP on long- term planning and policy matters relating to utility operations. The Municipal Services Committee ("MSC^ will receive and review semi annual management energy and credit risk reports prepared by the RMC, as needed or upon request, and make recommendations consistent with the Policy to the City Council.
5.3 General Manager
The General Manager reports to the City Manager and has overall responsibility for executing and ensuring compliance with the Policy adopted by the City Council. The General Manager provides regular annual updates to the City Manager on the energy portfolio risk management activities_as_a_^CTn£. In addition, the General Manager provides semi annual reports as needed or upon request to the Municipal Scrvicos CommittcoMSC on the energy portfolio risk management activities and annual reports to the City Council on the adequacy of the Policy, including any necessary changes to the Policy.
5.4 Energy and Credit Risk Manasement Committee
The Energy and Credit Risk Management Committee (//RMC//) is responsible for overseeing compliance with the Policy/ and reviewing and recommending changes to the Policy as necessary. The RMC is also responsible for authorizing all products and comniodity types as further detailed in the Energy Trading, Risk and Settlements Procedures and Controls Manual as developed and adopted by the RMC. In addition/ the RMC is responsible for creating and implementing a_sound approach to managing risk consistent with the business strategy and risk tolerance of the organization as defined by the City Council. As such, the RMC is critical to overseeing and reviewing the risk management process and infrastructure and managing PWP's risk exposure.
The RMC will consist of the following City staff:
PWP General Manager (RMC Chairperson);
PWP Assistant General Manager and Chief Deputy;
PWP Assistant General Manager - Power Supply;
PWP Assistant General Manager - Finance 7and -Administration- Customer Service;
Wholesale Operations Manager / Energy Trading Manager;
Wholesale Operations Manager / Energy Settlements Manager; Power Resources Planning Manager and,
•
Pasadena Water and Power
Energy and Credit Risk Management Policy
•Wholesale Operations IManager / Energy Risk and Credit Manager (RMC Secretary).
The Assistant City Manager (or designee). The City Finance Director of Finance -(or designee)/ the Internal Audit Manager (or designee), and the_Assistant City Attorney (or designee) will act as advisors to the RMC.
The RMC shall meet regularly, but at a minimum monthly, to discuss risk management, operating processes, trading controls and authorizations. The RMC meetings can be conducted in person or virtually „_ through telephone conference calls, and/or using electronic media. A quorum of at least 4§ e^committee voting members must be present.
5.5 Management Overset/Separation of Duties
Risk management oversight at an operational level is accomplished through supervisory review and approval with appropriate separation of duties. PWP's risk management functions shall be segregated into Front Office, Middle Office and Back Office as outlined below to maintain effective system of controls over financial and operational risks.
Front Office
(Transactions)
Middle Office
(Control)
Back Office
(Processing)
Power Supply Business
Unit
PWP Finance? and
Administration-afi4
Customer Service
Business Unit
PWP Finance and,
Administration a»d-
Customer Service
Business Unit and the
City Finance Department
Energy Trading ManagerEnergy Risk and Credit
Manager
Energy Settlements
Manager
>- Demand forecast and
portfolio position
^ Portfolio optimization
and hedging strategy_
adhering to Hedge
Policy
>^ Marketing contact
^ Customer contact
>- Transaction structure
>- Pricing/negotiation
^ Transaction execution,
booking, scheduling,
and nominations
>• Master Agreement /
Contract Negotiations
>^ Independent control
>^ Risk identification
>• Risk measurement
^ Risk monitoring
>" Mark-to-market
> Risk limits
>- Risk metrics
>^ Hedge Policy
compliance
monitoring
>- Credit emergency
shutdown
^ Management reporting
>> Counter-party credit
-authorization
Master
^reement-A-
)> Confirmations
>^ Reconciliations
>- Energy Accounting
>- Shadow, Initial,
Final, True-up, and
CAISO Settlement
>^ Contract management
and compliance
>- Approve invoices
(accounts payable)
>^ Issue invoices
>• Manage ESODW
Accounts
Pasadena Water and Power
Energy and Credit Risk Management Policy
Contract Review
The Middle and Back Offices shall be independent from the Front Office functions, and shall provide oversight of the risks assumed by the Front Office in the course of transacting tef either ronowablo and non renewable energy and energy related products and services.
Pasadena Water and Power
Energy and Credit Risk Management Policy
Some of the front, middle^ and back office functions may be contracted to a third party vendor. PWP has currently engaged Alliance for Cooperative Energy Services Power Marketing LLC ("ACES") to perform its real-time trading activities, along with limited Middle and Back Office functions. Additional support functions such as Legal, Treasury/Finance/Audit, and Information Technology will be drawn upon as needed to support the segregated structure.
5.5.7 Front Office
The Front Office is primarily responsible for resource planning and procuring resources to meet the physical, financial and contractual requirements of PWP's energy and fuel portfolio. The Front Office shall maintain an integrated and balanced portfolio of resources to cover retail forecasted load requirements, and shall establish minimum coverage requirements for capacity and energy.
The Front Office is responsible forte ensurmge that the procedures and processes needed to transact business within the Policy are in place and shall perform all duties related to actual transacting in the wholesale natural gas and energy markets. PWP Assistant General Manager - Power Supply is responsible for managing the Front Office. The Front Office is the primary interface with potential wholesale transacting counterparties. Detailed responsibilities of the Front Office are outlined in the Energy Trading, Risk and Settlements Procedures and Controls Manual.
5.5.2 Middle Office
The Middle Office is primarily responsible for providing risk oversight and controls.
The Middle Office will monitor, verify and report on the compliance with the Policy and risk management program, review all risk management activities, determine portfolio and credit exposure, transaction conipliance and on-going approval of counterparties. The Middle Office will be responsible for reporting to the RMC on risk nianagement issues, and recommending to the RMC when changes in policy or operating procedures are required. These recommendations may relate to the temporary or permanent halting of transactions with one or more counterparties, exceptions to rules and procedures, other operational exceptions, and any other topic the Middle Office believes represents an unacceptable risk exposure. The Energy Risk and Credit Manager will be responsible for managing the middle-office functions and will report to PWP Assistant General Manager - Finance and7 Administration-aftd Customer Sendee.
The Middle Office adopts enforces and updates as necessary the Policy andjd^yel^s and updates related procedures and controls manuals so that portfolio management functions occur in compliance with the City Council-adopted Policy and RMC adopted procedures, guidelines and controls. The functions of the Middle Office can be broadly defined as
Pasadena Water and Power
Energy and Credit Risk Management Policy
Quantitative
Reporting.
Analysis, Compliance Review, Credit Administration/ and Management
Pasadena Water and Power
Energy and Credit Risk Management Policy
Quantitative Analysis
The Middle Office performs necessaryrigorous risk analysis to evaluate the risk exposure on a faransactional and portfolio basis.
Compliance Review
The Middle Office monitors all transactions to ensure compliance of transactions with the RMC Policy procedures, guidelines and controls.
Credit Administration
The Middle Office monitors counterparty creditworthiness. The Middle Office objectively measures and inonitors credit limits and credit histories, and without approval of the RMC^may teniporarily halt trading or, with the approval of the RMC, permanently halt trading upon approval by the RMCwith the concurrence of the RMC, with an approved counterparty because of credit exposure or credit condition. Upon approval by the RMC to permanently suspend tradin^In the event of any trading suspensions, the Middle Office will communicate with Front_Qffice in writing or via email the term of suspension.
M-anagement Reporting
The Middle Office administers reports to the RMC related to risk management, and performance in alignment with the Policy and related procedures, guidelines and controls and the requests of the RMC.
5.5.3 Back Office
The Back Office is primarily responsible for energy accounting and settlements, settlement and£ayment_of bills, recording and reconciling transactions, contract management and compliance. The Back Office is also responsible for accurate transactions records and settlements/ independently monitoring and recording ta-ansactions into a tracking database, and verifying and reporting on compliance with procedures as reflected in deal tracking documentation. The Back Office functions are detailed in the Energy Trading/ Risk and Settlements Procedures and Controls Manual. The Back Office is managed by the Wholesale Operations Manager/Energy Settlements Manager who reports to PWP Assistant General Manager - Finance_and7 Administration and Customer Service.
6.0 POLICY MONITORING AND COMPLIANCE
6.1 Monitoring and Reportins
PWP shall prepare risk management reports containing an analysis of physical and financial positions of all energy resources in its energy portfolio and any potential risks associated with its energy portfolio. Such reports shall be prepared by the Middle and Back Office staff, and reviewed by the_RMC. The frequency and content of the risk management reports for each oversight body shall be prescribed in the Energy Trading, Risk and Settlements Procedures and Controls Manual.
Pasadena Water and Power
Energy and Credit Risk Management Policy
6.2 Compliance Exceptions
Compliance exceptions are actions which violate the authority limits or directives set forth herein or in the risk nianagement program procedures and controls manuals as developed and adopted by the RMC.
6.3 Reporting of Exceptions
Exceptions to mandated policies, procedures and regulations shall be reported to the RMC within 48 hours after they are identified as provided in the risk management program procedures and controls manuals as developed and adopted by the RMC.
6.4 Assessment
Compliance with the Policy and with the specific procedures, guidelines and controls as developed and adopted by the RMC shall be subject to a review every three years-^eview by an independent consulting firm that the RMC, with concurrence of the Director of €ity-Finance Director, may appoint to evaluate the effectiveness of mandated controls. The hired firm will also verify that stated objectives are being carried out, and that internal controls are in place for processes to comply with the Policy. The firm will also identify any recent changes in industry best practices that may warrant program revisions. Upon completion of the assessment, the report shall be provided to the RMC/ City Manager and Director of€ity Finance Director. The RMC will review any recommended changes or enhancements to the Energy and Credit Risk Management program, and update the risk management procedures and controls manuals as required. The RMC will also recommend updates to the Policy and make a recommendation to the City Council on the adequacy of the Policy and necessary changes.
7.0 CONFLICT OF INTEREST
In accordance with the Pasadena Municipal Code and California law, personnel involved in transacting and oversight of PWP's supply resource acquisition programs may not engage in financial conflict of interest, unless the City is duly informed and it elects to waive such conflicts. All such personnel are: (1) strictly forbidden from directly investing in any business entity that could potentially enter into energy transactions with PWP; and, (2) required to complete, on an annual basis, the Employee Qualifications and Code of Conduct and Form 700 Disclosures forms and submit these forms to the City Clerk; and, (3) required to provide written acknowledgement of compliance with this Policy by completing the Energy Risk Management Policy Acknowledgement and Employee Compliance Form at least once each year after Risk Policy training is provided by the Energy Risk and Credit Manager.
The PWP Energy Risk and Credit Manager is responsible for routinely reviewing the Form 700 of each personnel engaged in the supply resource decision-niaking process for the purpose of identifying potential financial conflicts of interest. The City Attorney's Office will assist the
Pasadena Water and Power
Energy and Credit Risk Management Policy
PWP Energy Risk and Credit Manager in reviewing these forms and providing legal advice in connection with such reviews.
The Energy Trading, Risk and Settlements Procedures and Conta-ols Manual, which is developed and adopted by the RMC^-contains additional detailed requirements for personnel conflict of interest disclosure and prohibitions as to acquiring or maintainingmaintain financial interest in energy farading counterparties.
Pasadena Water and Power
Energy and Credit Risk Management Policy
Appendix A
Transaction Type Authority: City Council Resolutions
This table summarizes the City Council resolutions authorizing various transaction types to be carried out by PWP. A list of Authorized Transaction Types shall be updated and maintained by the RMC/ consistent with the Energy and Credit Risk Management Policy and approved City Council Resolutioi^s.
Resolution
(Dated)
To Contract for Energy Products1
7452
02-16-1996)
Air emissions credits fNOx and SOx)
(10 22 2007)
Physical Electrical energy
• — Physical Electrical capacity
The transmission of electrical energy or capacity or both 75492
(10-20-1997)
~J
Electric generation and transmiscion capacity for
planning purpoGcs (e.g., ^A)
Contracts for products <$25/000 may be authorized by
the General Manager
Products <$75,000 may be authorized by the City
Manager
8243
(5-12-2003)
Physical Natural gas commodity
Physical Petroleum products
• Gas transaction master enabling agreements (e.g.,
NAESB, bilateral)
7453
(12 16 1996)
Air emissions credits (NOx and SOx)
4184-2
{10-22-200718343
(5 12 2003)
Physical Electrical energy
• Physical Electrical capacity
• The transmission of electrical energy or capacity or both • — Electric generation and transmission capacity ior
planning purposes (e.g., RA')Hwsical Natural gas
:ommodi^i
•J
Physical Petroleum products
c.Gas transaction master enabling agrccmonto (c.g
MAESB, bilateral)
^WT
8965
(8-3-2009)
• Congestion revenue rights (CRR's) for use in CAISO
operated transmission markets
Pasadena Water and Power
Energy and Credit Risk Management Policy
9063
(10-4-2010)
9216
(7-9-2012)
9221
(7-30-2012)
9959
01-14-2022)
y5-193
(10 20 1997)
Environmental attributes such as RECs/ green tags,
carbon credits, and any other environmental attributes
as may be defined in the future
Carbon-related permits, credits, allowances, certificates, offsets and similar instruments
Designates the General Manager as the City's
"Authorized Account Representative" and the Assistant
General Manager as "Alternative Authorized Account
Representative" to conduct transactions related to the
California Cap and Trade
Authorizes The City Manager or General Manger of
Water and Power Department to execute and
implement agreements with CAISO
Designates formally Water and Power Department
authorities as Authorized/Designated Representatives
to execute transactions or submit reporting; in regulated compliance programs
• Supersedes Resolution 9216 (7-9-2012) designed
specifically for Cap and Trade
r"contracts for products <$25,000 may be authorized by
the General Manager
Products <$75,000 may be authorized by the City
Manager
Pasadena Water and Power
Energy and Credit Risk Management Policy
Appendix A (Continued)
* Notes: 1. Council resolutions authorize the General M.anager to enter into agreements for the purchase, sale, exchange, storage, transportation, transfer, and/or participation in auctions, as may be applicable for the authorized energy products.
2. The use of Resolution 7549 cxcludco restricts the use of financial derivatives.
Pasadena Water and Power
Energy and Credit Risk Management Policy
Appendix B
Acknowledgement and Employee Compliance Form
The purpose of this form is for the individual PWP employee involved with energy risk and credit management activities, including but not limited to. Front Office, Middle Office or Back Office activities associated with transactions, energy trading, risk management and other related activities to acknowledge in writing that they have received, read and understood the Energy and Credit Risk Management Policy (Policy) and related procedural documents. And for the employee to acknowledge the confidential and proprietary nature of the information used in energy risk management activities7 and agree to maintain such information as confidential.
recognizes that violating the Policy and related policies and proceduralThe employee documents can lead to disciplinary actions or constitute grounds for progressive disciplinary action, which may include termination of employment.
The undersigned hereby certifies that he/she has received, read and understood the Policy and related procedural documents.
Employee Name
Title
Department
Manager/ Supervisor
Control Office() Front Office
() Middle Office
() Back Office
() Other
SignatureDate
Pasadena Water and Power
Energy and Credit Risk Management Policy
Appendix C
Glossary of Energy and Credit Risk Management Terms
The following are definitions of terms used in energy and credit risk management:
Authorized Counterparty List: A list that indicates the approved counterparties and their specific credit limit and current credit rating.
California Independent System Operator (CAISO): A state chartered, California non-profit public benefit corporation that is responsible for ensuring the efficient use and reliable operation of the electric transmission grid (system) in the state of California.
Collateral: An obligation or security linked to another obligation or security to secure its performance.
Congestion: Physical constraints at certain points on electricity transmission networks.
Congestion Revenue Rights (CRRs): CRRs are financial instruments niade available through the CAISO's allocation process where a certain amount of CRRs are provided at no cost to load serving entities (such as PWP), the CAISO's auction process and a secondary market that enable CRR holders to manage the variability in congestion cost based on Locational Marginal Pricing.
Counterparty: A participant in a physical or financial contract.
Counterparty Risk: This is the risk that a counterparty to a transaction or contract will default or fail to perform) on its obligation under the contract.
Credit Limit: Pre-established dollar valued trade limit set for each counterparty based upon their financial strength, trading and payment history.
Day-Ahead Market: The market trading for the day before the operating day.
Derivative: Any financial insfarument, such as a futures contract. Swap or Option, which derives its value from the value of an underlying security or physical commodity.
Energy Portfolio: The collective term for PWP's generation assets/ short and long term power supply contracts for natural gas and power, transmission assets/ transactions or trades, and retail load obligation.
Pasadena Water and Power
Energy and Credit Risk Management Policy
Energy Portfolio Open Position - The amount or percent of the load obligation that is not covered by available resources (power and/or natural gas). A negative or short portfolio position implies that available resources are less than the load obligation and a positive or long portfolio position implies that available resources exceed load obligation.
Energy Risk Management: The identification and management of PWP's energy portfolio risks to support achievement of its business objectives.
Estimated Available: The estimated available for a given period is equal to excess resources above the forecasted load and/or compliance/reliability obligation.
Estimated Requirenient: The estimated requirement for a given period is the forecasted load and/or compliance/reliability obligation less available resources.
Federal Energy Regulatory Commission (FERC): The U.S. government body that regulates interstate energy markets.
Hedge: A transaction that reduces price risk relative to a position that an organization has or intends to take in the physical or financial market.
Hedging: This is the use of energy-related transactions to limit or reduce the likelihood of financial loss due to fluctuations in market conditions. For example, buying or selling physical or financial energy-related products to offset short or long inventory positions.
Liquid Market: A market in which buying and selling can be performed with ease, due to the presence of a large number of buyers and sellers prepared to trade substantial quantities at small price differences. (The opposite is an illiquid market.) Locational Marginal Pricing (LMP): A method of pricing the cost of congestion into electricity prices.
Long: A position in which an asset or right is owned or a position that appreciates in value if the value of the underlying instrument or market price increases.
Market (Price) Risk: Risk due to changes in the market prices of energy commodities which can have an adverse impact on energy cost
Marking-to-Market (MTM): The process of valuing a position or portfolio against a market clearing-price.
North American Energy Standards Board (NAESB): NAESB serves as an industry forum for the development and promotion of standards which will lead to a seamless marketplace for
Pasadena Water and Power
Energy and Credit Risk Management Policy
wholesale and retail natural gas and electricity, as recognized by its customers, business community, participants, and regulatory entities.
North American Electric Reliability Corporation (NERC): A not-for-profit entity whose mission is to ensure the reliability of the bulk power system in North America.
Netting Agreement - A contingency agreement in which debit and credit positions are allowed to offset each other in the event of either counterparty defaulting.
Operational and Organizational Risk: The risk that deficiencies in internal control or information systems or failure to effectively execute business activities will result in unexpected economic loss.
Physical Hedge - an energy input purchase or retail/wholesale sale transacted to meet physical requirements.
Real-Time - To schedule for delivery of physical power on an hourly basis.
Regulatory and Legal Risks: The risk that contracts are not legally enforceable or documented correctly or that regulatory agencies or courts may take actions or adopt measures which may potentially impact the portfolio value
Risk: Refers to uncertainty about future cash flows and asset values, and it consist of an event that could potentially cause actual outcomes to differ from expected outcomes, either negatively or positively
Short: A position in which an asset or right is not owned or a position that increases in value if the value of the underlying instrument or market price decreases.
Sleeving: A transaction whereby two counterparties which do not have credit with each other/ ask a third party that has credit with both to be a middleman to facilitate a trade.
Speculative Trading: Taking positions in any commodity price with the expectation that prices will move in a particular direction, including buying power that is not needed with the intent to resell at a profit or selling power that is needed with the intent to repurchase it at a later date and make a profit.
System Emergency:
(i) A condition that exists when extraordinary events outside normal operating conditions occur that threatens system stability, such as the unplanned loss of a resource; or
(ii) A natural disaster, major equipment failure, gas supply curtailment or operational flow order requiring immediate response; or
Pasadena Water and Power
Energy and Credit Risk Management Policy
(iii) CAISO failure to deliver power for any reason that affects PWP's ability to provide power to retail load or meet obligations.
Transaction: All of the approved Transaction types defined in the Policy, including physical or financial obligations of PWP and one or more counterparties related to energy, capacity, ancillary services, transmission service, natural gas, renewable energy credits and greenhouse gasses.
Transaction Activities: The activities involved in the energy supply decision process involving Transactions as defined in the Policy.
Transaction Limits (or Authorized Transaction Limits) - Predefined parameters that restrict transactions. These can include limits on volume, duration, dollar amounts and approval authorities.
Volatility: A measure of the variability of a market factor, most often the price of the underlying instarument.
Volumetric Risk: The risk that fluctuations in load or resources will adversely affect net revenues
Western Electricity Coordinating Council (WECC): A North American Electric Reliability Council for the Western Interconnection.
Western System Power Pool (WSPP): WSPP is an agreement and an organization that creates power farading opportunities and allows WSPP members to manage power delivery and price risk. The-As of lanuary 1st, 2025, the c€urrent WSPP Agreement with effective date effective May 9, 20130ctober 21, 2024 , updated Juno 6, 2013, is the most commonly used standardized power sales contract in the electric industry. It is approved by the FERC and used by jurisdictional and non-jurisdictional entities. Once signed, the Agreement allows instant access to power trading within the membership.