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City of Vernon Energy Risk Management Policy Page 23 of 57 iii. Credit Enhancement Requirements
Any credit enhancement or guaranty entered into for the purpose of protecting the financial interests of Vernon shall contain the following provisions:
a. A statement that the guaranty is one of payment and not of collection. b. A statement that the guaranteed obligations are unconditional, irrespective of value, genuineness, validity, waiver, release, alteration, amendment, or enforceability of the guaranteed obligations. c. A statement that the guarantor agrees to pay the guaranteed obligations on the date due and waives demand, notice, marshaling of assets, or any comparable requirements.
d. A statement that the guarantor waives its right to subrogation until the guaranteed obligations are paid in full.
e. A statement that the guaranty shall reinstate if any guaranteed obligation made by the primary obligor is recaptured as a result of the primary obligor’s bankruptcy or insolvency.
f. A statement that the guaranty is binding on successors of the guarantor. g. A statement restricting the guarantor’s right to terminate the guaranty with less than thirty (30) days’ notice.
4. Prepayment
For sale transactions, counterparties may provide a prepayment or a cash margin deposit in an amount that is sufficient to cover the related transactions. Discounts for prepayment, consistent with industry standards, may be applied to the sum owed as authorized by the City Administrator, or as delegated to VPU’s General Manager.
5. Credit Controls
Controls over counterparty inputs and systems operations are of particular importance in ensuring the integrity of data used in counterparty credit risk control and management. In all cases, the Planning and Analysis Manager will be responsible for managing the wholesale counterparty review and rating process, monitoring credit risk and wholesale counterparty reporting.
The Planning and Analysis Manager shall notify the ERMC in the event that the counterparty is determined to be an unacceptable credit risk. The Planning and Analysis Manager may reduce the counterparty credit limit as a result of public news pertaining to credit events including, but not limited to, press announcements, mergers, acquisitions, business sale, reorganizations, and name changes.
Intentionally entering into unsecured transactions with a wholesale counterparty that has total credit exposure in excess of its credit limit is not allowed under this Risk Policy unless otherwise approved. VPU staff’s delegated authority to transact with approved counterparties is discussed in Appendices C and D.
VPU’s Front Office and/or other employees or officers responsible for transacting activities shall not be involved in the counterparty underwriting process. The underwriting process shall have complete independence from all transacting activities and VPU’s staff.
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City of Vernon Energy Risk Management Policy Page 24 of 57
6. Margin Calls
A margin call may be necessary when counterparty credit exposure exceeds an established credit limit. Timing of a margin call is not dictated by this Risk Policy, but factors to consider include financial capacity, volume of business, overall portfolio concentration and market conditions. Calling margin may include a request for cash collateral or other credit enhancement. The Planning and Analysis Manager is responsible for implementing a margin call.
In the normal course of business, the City does not expect to post collateral or margins for trading activity. Any such requirements, including any requirements for trading platforms, such as the ICE, shall be recommended by the Planning and Analysis Manager and approved by the ERMC.
7. Credit File Documentation
Credit analysis, approvals and denials must be documented in writing and all counterparty information shall be contained in formal credit files that are maintained by the Planning and Analysis Manager. These credit files are expected to contain audited financial statements and a credit review analysis report. These files should also contain as much of the following as possible:
i. At least the two most recent years of audited financial statement information.
ii. Rating information as published by a NRSRO.
iii. Other market intelligence or relevant information related to the counterparty. iv. General industry information.
8. Waivers
A limited number of Vernon’s potential counterparties may be counterparties identified as small-scale power producers, limited liability entities, or special purpose entities, or there may be extenuating circumstances whereby a waiver of the standards is necessary to avoid anticipated regulatory penalties. Based upon a recommendation of the Planning and Analysis Manager, the ERMC may waive the credit standards on a case-by-case basis for term transaction with such entities. The waiver of these transactions shall be documented by the Planning and Analysis Manager and kept in the credit file of the counterparties.
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City of Vernon Energy Risk Management Policy Page 25 of 57 Section 6
Risk Measurement, Monitoring, Reporting
Key to energy risk management is the evaluation and monitoring of risks, and the accurate and timely information gathering and dissemination. The ERMC will establish a riskreporting framework that serves the needs of each level of the parties involved in any aspects of energy risk management to allow them to perform their functions appropriately.
The Middle Office will provide or cause the risk reports to be provided to the ERMC on a periodic basis (typically quarterly) via electronic mail. The ERMC will receive the periodic risk reports. A sample risk report is contained in Appendix G, which shall contain but not be limited to the following information:
1. Summary report showing compliance with the Risk Policy, including hedging requirements, and the following:
i. Report of the power and gas resources and volumes showing net short/long actual positions versus forecasted requirements. ii. Transaction log identifying all executed transactions, including volume, term, and price for natural gas and energy portfolios.
iii. List of counterparties, credit limits and balance of available capacity pursuant to credit limits.
iv. Exceptions that were executed in connection with the Risk Policy, including any transactions that required City Council’s approval. v. Violations of this Risk Policy and details what responses were made.
2. Variance to budget report for current operating year and projections for the balance of the year.
3. Summary report that identifies RPS compliance status.
4. Summary report that identifies GHG compliance status.
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City of Vernon Energy Risk Management Policy Page 26 of 57 Section 7
Control Exception Reporting
If, at any time, VPU staff contemplates the possibility of a transaction exceeding authorities, authorized transaction limits or approved procurement strategies under the Risk Policy, prior to the transaction execution, an approval to that transaction must be obtained from City Council.
To obtain City Council’s approval, a summary should be written up to describe the transaction, deal economics, rationale as to why VPU staff believes the transaction is important to Vernon, identify any risks, and a summary of how the transaction does not comply with the current policies and limits. The summary will be sent to ERMC for their approval, prior to being sent to City Council. VPU staff may not execute the transaction with the potential counterparty, until a formal City Council approval has been obtained.
If, at any time, there is a suspicion that a transaction has violated the Risk Policy or has been concluded that exceeds a particular individual’s authorities or one or more of the risk control policies, procedures, authorized transaction limits, or approved strategies under the Risk Policy, the Planning and Analysis Manager must be informed. Planning and Analysis Manager will review the transaction in question, to check whether any control limits (at an individual or company level) have been exceeded.
In the event that a transaction is found to have violated the Risk Policy, including but not limited to, the established limits or authorities, the process for handling control exception will depend on whether the violation was caused by intentional unauthorized or inappropriate transaction activity or negligence (“Active Violation”) or whether the violation was caused by changes in market or system factors impacting the portfolio (“Passive Violation”). In cases where both conditions apply, the control exception shall be treated as an active violation. Active violations represent a serious breach of the Risk Policy.
Person(s) responsible for active violations may be subject to action in accordance with Vernon’s Human Resource (HR) policies.
For active violations, the Planning and Analysis Manager shall promptly notify the ERMC, the City Administrator and VPU’s General Manager and the supervisor and the staff responsible for the active violation(s). Such notification shall be both verbal and written and shall take place as soon as practicable after the control exception is detected.
The Planning and Analysis Manager will prepare a Control Exception Report. The report will identify the transaction details, the nature and result of the violation of the Risk Policy, the process by which the transaction was allowed to proceed without the relevant authorities, any steps that were taken in response, any mitigating circumstances, and any proposals to amend procedures to prevent a similar circumstance from arising in the future.
The Middle Office and the Front Office shall review and analyze alternatives or other required mitigation steps in response to a violation of the Risk Policy to determine the optimal action to return any position to within limits and the requirements of the Risk Resolution No. 2022-40
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City of Vernon Energy Risk Management Policy Page 27 of 57 Policy. The Middle Office shall coordinate with the Back Office to provide analysis regarding any impact to financial statements resulting from the limit violation or as a result of potential hedging activities. Any risk reduction or mitigation transactions shall normally be executed by the close of business day. If, Front and Middle Office agree it is preferable to wait until the next business day to execute such transactions, execution may be delayed by up to one business day.
Although the Risk Policy defines internal controls and procedures that are applicable to all energy risk management activities, there could be exceptions to internal controls that are not directly associated with the transaction execution process and its authorization limits (at individual or company level). The reporting process to the ERMC for this type of exceptions will be at the discretion of the Planning and Analysis Manager in consultation with the City Administrator and VPU’s General Manager. If the internal control exception is unintentional and there is no transaction impact, the Planning and Analysis Manager will review, document, and discuss the exception with the employee’s supervisor to avoid recurrence and will inform VPU’s General Manager of the occurrence.
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City of Vernon Energy Risk Management Policy Page 28 of 57 Section 8
Conflict of Interests
Vernon employees or officers responsible for directly supporting, reviewing, or authorizing transaction activities shall not enter into, or direct others to enter into, any energy, natural gas, or related transactions other than on behalf of Vernon. As stated on Vernon’s Conflict of Interests Code, all designated Vernon employees and officers shall file no later than April 1 an annual Statement of Economic Interests in order to disclose any financial interest in Vernon’s trading approved counterparties.
It is Vernon’s intent to have its employees and officers with assigned responsibilities under the Risk Policy to be fully knowledgeable of conflict of interest and market manipulation issues in carrying out their duties and responsibilities under the Risk Policy.
Vernon may require its employees and officers to undertake periodic trainings in conflict of interests and market manipulation issues.
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City of Vernon Energy Risk Management Policy Page 29 of 57 Section 9
Review, Authorization and Revision Process
Due to the dynamic nature of markets, it is important to recognize that Vernon’s risk management programs will evolve over time as market conditions and business factors change. A mechanism will be implemented for amending elements of the risk management program, including the Risk Policy, in order to reflect such changes. This section specifies a process for revising and implementing the Risk Policy, as follows:
1. Vernon City Council shall approve the Risk Policy no less than annually.
2. Requests for amendments to this Risk Policy are to be sent to the ERMC in writing based on the recommendation of the Planning and Analysis Manager, for ERMC review and possible approval, prior to being sent to the City Council for approval. i. The Risk Policy amendment proposal shall include the section to be amended, a draft of the amendment language, the reason for the proposed amendment, technical analysis, and financial, risk and credit implications, if any and as applicable.
ii. The ERMC will review the Risk Policy amendment proposal and produce final drafts of the amendment language.
iii. Any amendment shall be reviewed by the City Attorney’s office, and this process will involve review by other functional areas in Vernon, at the ERMC’s discretion.
3. The ERMC is responsible for recommending amendments to the Risk Policy to the Vernon City Council, and Vernon City Council shall review, and as appropriate, approve amendments to the Risk Policy.
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City of Vernon Energy Risk Management Policy Page 30 of 57 Appendix A
Glossary of Terms
Arbitrage: The risk-free exploitation of temporary market price anomalies in related commodities or instruments, generally by the purchase of a commodity or instrument that is relatively low in price and the sale of the commodity or instrument that is relatively high priced. In order to be market neutral, the purchase and sale of the commodities or instruments should be simultaneous.
CARB - California Air Resources Board
CCO - California Carbon Offsets
CAISO - California Independent System Operator
Call Option: An option that gives the buyer (holder) the right, but not the obligation, to buy a futures contract (enter into a long futures position) for a specified price within a specified period of time in exchange for a one-time premium payment. It obligates the seller (writer) of an option to sell the underlying futures contract (enter into a short futures position) at the designated price, should the option be exercised.
Collar: A financial instrument used to guarantee a maximum and minimum price paid for natural gas or energy.
CFTC - Commodity Futures Trading Commission
Cost VaR (Value at Risk): Cost VaR summarizes the expected maximum “cost” exposure over a target horizon with a given confidence level. For example, if trends indicate that an expected (or average) cost is $100 but volatility indicates that this cost may fluctuate wildly, VaR will capture the magnitude of this volatility as a summary number. This number, or estimate, can then be added to average or expected cost in order to measure the impact of volatility on potential cost.
Counterparty: A party on either side of a transaction (i.e., purchasing counterparty as opposed to a selling counterparty). External transacting parties such as the CAISO and NYMEX are not included in calculating counterparty credit exposures.
Counterparty VaR: The dollar estimates of the risk that subsequent changes in market price will result in increased counterparty credit exposure.
Credit VaR: The statistical estimate of potential losses in a portfolio due to changes in counterparty credit ratings.
Derivative: Any financial instrument, such as a futures contract, swap, or option, which derives its value from the value of an underlying security or physical commodity.
Discretionary Resource: Resources that are flexible in their dispatch and, as a result, are often managed as options in the sense that they may or may not be scheduled for Resolution No. 2022-40
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City of Vernon Energy Risk Management Policy Page 31 of 57 dispatch. Discretionary resources contain less contractual scheduling limitations than must-take resources.
Displacement: The replacement of one generation resource with the matching amount of another competitively priced resource. Displacements provide for economic optimization of discretionary resources.
Emission Allowances: Tradable compliance instrument that grants authorization to emit up to one metric ton of carbon dioxide equivalent.
ERC - Emission Reduction Credits
Energy Capacity: The maximum amount of electric power available for generation or use, usually expressed in kilowatts (kW) or megawatts (MW).
Electrical Energy: The generation or use of electric power over some period, usually expressed in megawatt hours (MWh), kilowatt hours (kWh) or gigawatt hours (GWh).
Exercise Price: Also known as the strike price. The price at which futures are bought or sold if an option is exercised.
GHG - Greenhouse Gas
Hedge Book: The portfolio of long and short positions as they relate to load balancing.
The hedge book differs from the trade book in that it is a collection of transactions initiated for the sole intent of achieving load balance. While the hedge book can share similar characteristics with the trade book (i.e., futures and options positions can exist in both books) the hedge book is not designed to maximize profits. The hedge book is designed to mitigate exposure to risk associated with load variability and volatility in cost.
ICE - Intercontinental Energy Exchange
ISDA - International Swaps and Derivatives Association
Least Cost Supply Portfolio: The mix of resources which optimizes the cost/risk profile of the utility. For example, if the utility is risk averse, a least-cost supply mix may have a higher cost than a supply mix that exposes the utility to greater fluctuations in volatility and reliability.
Load Balancing: Meeting fluctuations in demand for power.
Load Management: Economic reduction of electric energy demand during a utility’s peak generating periods. Load management differs from conservation in that load management strategies shift the use of energy while conservation programs reduce the demand for energy.
Malburg Generating Station (MGS): City of Vernon natural gas generating station.
Mandatory Reporting Requirements (MRR’s): Emissions reporting requirements as promulgated by the CARB.
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City of Vernon Energy Risk Management Policy Page 32 of 57 Nationally Recognized Statistical Rating Organizations (NRSRO): Standard & Poor’s (S&P), Moody’s Investor Services (Moody’s), and/or Fitch Ratings (Fitch).
NAESB - North American Energy Standards Board
OATI - Open Access Technology International
Optimization: The process of utilizing strategies and instruments to optimize the economic benefits associated with load and resource management. Optimization differs from trading in that the strategic rationale for a transaction is the driver rather than the economic benefit alone. Trading functions are designed to form a commodity position with the intent of speculating on market arbitrage opportunities.
Option: A contract that gives the holder the right, but not the obligation, to purchase or sell the underlying commodity at a specified price during a specified time period.
Participating Transmission Operator (PTO): Transmission operator participating in the CAISO.
Payment Risk: The potential loss from the failure of a counterparty to make a payment on a contract.
Performance Risk: The potential loss from the failure of a counterparty to deliver or take delivery on a contract.
Portfolio Content Category (PCC): Grandfathered RPS resource categories 1, 2, or 3 for the RPS compliance period.
Premium: Amount paid to have the right or obligation to exercise an option.
Prompt Month: The month following the current operating month.
Put Option: An option that gives the buyer, or holder of the contract, the right but not the obligation to sell a futures contract at a specific price during a specific time period in exchange for a one-time premium payment. It obligates the seller, or writer, of the option to buy the underlying futures contract at the designated price should the option be exercised at that price.
Renewable Energy Credits (REC): Non-tangible energy commodities that are tradable and represent proof that 1 megawatt-hour (MWh) of electricity was generated from an eligible renewable energy resource. The owners of the REC can claim to have purchased renewable energy.
RTC - Reclaim Trading Credits
Renewable Portfolio Standards (RPS): Renewable resource requirements as promulgated by the State of California.
Speculation: The taking of an unhedged position (short or long) with the intent of holding the position in anticipation of changes in market prices.
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City of Vernon Energy Risk Management Policy Page 33 of 57 Supply Requirements: Those requirements related to reliability and reserve standards mandated by the requirements of regulatory agencies of competent jurisdictions.
Swap: A custom-tailored, individually negotiated transaction designed to manage financial risk. In a typical commodity or price swap parties exchange payments based upon the change in the price of a commodity or market index while fixing the price they effectively pay for the physical commodity. The transaction enables each party to manage exposure to commodity price or index values. Settlements are made in cash.
Transaction Limits: Maximum allowable transaction as authorized under the Risk Policy as specified in Appendix D.
Transaction Liquidity: The existence of sufficient volume of transactions of a particular product and commodity that generally assures a party’s ability to locate counterparty that is willing to either buy or sell the product in question.
Uncovered Option: An option on an underlying asset for which the seller is not long (in the case of a call option) or short (in the case of a put option) the underlying commodity.
Underlying Commodity: The commodity upon which the value of a derivative is dependent.
Volatility: The magnitude and frequency of changes in prices over time. Standard deviation is a measure of volatility.
Wheeling: In the energy market wheeling refers to the interstate or intrastate sale of power or the transmission of power from one system to another.
WECC: The Western Electric Coordinating Council a regional reliability council created and recognized by the North America Electric Reliability Council is responsible for establishing guidelines and procedures related to the reliable electric operation of the 11 western U.S. states as well as parts of Canada and Mexico.
WREGIS: Renewable energy tracking system for the region covered by WECC under which renewable energy credits (REC) are created for registered generating units.
WSPP: The Western Systems Power Pool is an organization comprised of most western utilities and power marketers. A significant development of this group is the WSPP agreement, a standardized enabling agreement, or master contract, utilized by over 200 utilities, marketers, and other entities across the U.S.
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City of Vernon Energy Risk Management Policy Page 34 of 57 Appendix B
Risk Policy Acknowledgement Form
I hereby acknowledge the receipt of the City of Vernon's Energy Risk Management Policy, approved by Resolution 2022-XX. I understand that it is my responsibility to read and comply with the policies contained in this policy.
Signature:
___________________________________ Date: ____________________________ Print Name: __________________________________
Employee ID#: ________________________________
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City of Vernon Energy Risk Management Policy Page 35 of 57 Appendix C
Authorized Transactions
Vernon Authorized Transactions
Vernon’s procurement strategy, pursuant to Appendix E, shall be documented for transactional strategies and related transactions. Required master or enabling agreements must be in effect prior to any transactions. Authorized Transactions shall include:
1. Forward Power Purchases/Sales
i. Purchase or Sale of forecasted surplus energy or natural gas ii. Purchase or Sale of forecasted surplus system, local or flexible Resource Adequacy capacity
iii. Cover a forecasted supply shortage
iv. Economic displacement power purchase of existing physicalresources v. System, local and flexible RA capacity, including the ability to enter into RA swaps that if executed simultaneously shall be calculated at the net exposure to Vernon for purposes of the Transaction limits outlined in Appendix D.
2. Purchases/Sales Transaction in the CAISO Markets (Day-Ahead, HASP, Real Time and Congestion Management)
i. Energy (including Imbalance Energy)
ii. Capacity (system, local and flexible RA capacity)
iii. Ancillary Services (reg up, reg down, spin and non-spin) iv. Inter SC Trades
v. Congestion Revenue Rights
3. Hedging Costs with Purchased Physical Transactions
i. Physical Call (purchase only)
ii. Physical Put (buying a Put when long on energy)
iii. Physical Collars (simultaneous purchase of a call option and sale of a put option to bound the commodity prices within a specified price range) iv. Heat Rate Options (purchase only)
4. Physical Natural Gas Products Purchases/Sales
i. Gas commodity (purchases and sales)
ii. Transportation
iii. Storage
iv. Puts/Calls (purchase only)
v. Physical Swap (fixed/index) for Gas/Power to hedge particular delivery price risks, e.g., basis swap between SoCal Border and SoCal City Gate for the delivery of natural gas products
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City of Vernon Energy Risk Management Policy Page 36 of 57 vi. Collars (simultaneous purchase of a call option and sale of a put option to bound the commodity prices within a specified price range) vii. Balancing
Short term Transactions (hourly) authorized under the CAISO Tariff, are within the delegated authority of Appendix D. CAISO market functionality such as convergence bidding in which Vernon is not mandated to participate, must be approved by the ERMC, and will be added to this list of CAISO Approved Transactions. Such approval must occur prior to Vernon initiating and participating in new products or functionalities that are currently in or may be subsequently added to the CAISO markets.
Vernon shall ensure that any gas purchased under firm contracts is for the anticipated forecasted operation and intended to be consumed at delivery when economic.
5. Renewable Energy Credits
To comply with RPS
6. Emission Credits Purchases/Sales (forward and after-the-fact) i. GHG Allowances (purchases and sales)
ii. Reclaim Trading Credits (RTC’s) (purchase only)
iii. Emission Reduction Credits (ERC’s) (purchase only) iv. California Carbon Offsets (CCO’s) (purchase only)
Purchases to meet the applicable compliance obligations and sales of GHG allowances in compliance with CARB GHG regulations or in excess of Vernon’s need to meet regulatory compliance are authorized. The applicable procurement strategy pursuant to Appendix F, shall be documented for transactional strategies and related transactions.
7. Hedging Costs with Financial Instruments
Vernon, nor any of the employees, shall enter into hedging instruments using financial instruments without adequate professional training, which shall include, but not be limited to, risk, operational and compliance requirements. Any such instruments for VPU are subject to the approval of the ERMC and shall be governed by Appendix D (Energy and Natural Gas Transaction Limits).
i. Financial Call (purchase only)
ii. Financial Put (buying a put option when long on energy) iii. Financial Collars (simultaneous purchase of a call option and sale of a put option to bound the commodity prices within a specified price range) iv. Financial Swap (fixed/index) for Gas/Power to hedge particular delivery price risks, e.g., basis swap between SoCal Border and SoCal City Gate for the delivery of natural gas products
v. Weather Derivatives (purchase only)
vi. Gas Options, Futures (purchase only)
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City of Vernon Energy Risk Management Policy Page 37 of 57 Appendix D
Energy and Natural Gas Transaction Limits
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APPENDIX E
Vernon Procurement Strategies
Appendix E describes the essential elements of the various procurement strategies, including the Hedging Requirements, that Vernon is expected to engage in its role as electric and natural gas service providers to ensure stable electric and natural gas rates to end users by ensuring budget certainty, preserving supply cost advantages through developing a least cost power and gas supply portfolios that meet load requirements, state renewable energy and GHG regulations while capturing revenues from the sales of surplus energy, capacity, renewable energy, GHG allowances and natural gas.
The Risk Policy requires that a Procurement Strategy be developed and presented to the ERMC not less than annually, with periodic adjustments made as needed based on changing circumstances, including but not limited to the energy needs of the City, the operating profile of any owned generation and changes in customers, and/or prevailing market conditions.
There are four elements that must be considered in connection with the development of the annual Procurement Strategy for the electric utility and two related to VPU’s gas utility that needs to be developed and approved by the ERMC. The procurement strategies must include:
VPU’s Electric Utility:
• Procurement strategy related to energy resources for retail electric load to meet specified annual energy percentage targets to hedge against market volatility and ensure budget certainty and supply reliability.
• Procurement strategy related to the annual CAISO RA plan; • Procurement strategy related to the annual CARB GHG compliance obligations.
• Procurement strategy related to the annual RPS compliance obligations.
VPU’s Gas Utility:
• Procurement strategy related to natural gas resources for retail gas load to meet specified annual energy percentage targets to hedge against market volatility and ensure budget certainty and supply reliability.
• Procurement strategy related to natural gas resources for owned generation, including the MGS, in order to serve Vernon’s electric load and meet any regulatory requirements.
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City of Vernon Energy Risk Management Policy Page 39 of 57 VPU’s Electric Utility:
1. Procurement Strategy for Energy to Meet Specific Energy Procurement Targets Established by the ERMC
In order to achieve the goal of hedging Vernon’s power and natural gas price risks to serve VPU’s retail electric load, VPU’s staff shall prepare a multi-year energy Procurement Strategy not less than annually for approval by the ERMC, with a periodic updated as needed. Before executing transactions to implement the hedging strategy, the Procurement Strategy shall be approved by the ERMC. The multi-year energy Procurement Strategy shall contain the following elements:
i. Forecast Monthly Energy Requirements
A tabulation of monthly forecast energy requirement in MWhs using generally accepted forecasting methodologies/techniques shall be provided for a twoyear period, commencing the upcoming fiscal year and thru fiscal year two years out. The forecast energy requirements will serve as the basis for the energy procurement strategy.
ii. Percentage of Energy Already Hedged
A tabulation of monthly energy requirements already hedged under long term, short term or ownership arrangements expressed in percent of monthly energy requirement shall be provided for a two-year period, commencing the upcoming fiscal year and thru the fiscal year two years out. iii. Hedging Requirements
The Risk Policy also acknowledges that there will be a transition period in FY2023 as the Risk Policy is implemented, including but not limited to, the Hedging Requirements. It is intended that the City will begin implementing the Hedging Requirements no later than June 30, 2023.
In order to ensure budget certainty, default monthly (or yearly) hedging bands will be established with a targeted minimum and maximum monthly energy hedging percentage, which will be differentiated by season (summer and nonsummer). Hedging bands will be reviewed by the ERMC and shall be adjusted based on the energy needs of Vernon, the operating requirements of any power generation, including but not limited to MGS, changes in the customer profile of Vernon, including the addition or subtraction of any customers during a fiscal year, and prevailing market conditions. Any such changes shall be taken into consideration in any amendment to the Risk Policy, which shall be approved by City Council not less than annually.
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City of Vernon Energy Risk Management Policy Page 40 of 57 Non-Summer (November - April)
Minimum
%
Maximum
% (*)
One Fiscal Year
Out
60%
100%
Two Fiscal
Years Out
20%
100%
(*) maximum percentage may be exceeded due to pre-existing legacy contracts and generation ownership or due to regulatory requirements, e.g., RPS mandates.
Summer (May - October)
Minimum
%
Maximum
% (*)
One Fiscal Year
Out
60%
100%
Two Fiscal
Years Out
20%
100%
(*) maximum percentage may be exceeded due to pre-existing legacy contracts and generation ownership or due to regulatory requirements, e.g., RPS mandates.
iv. Forward Energy Products to Meet the Hedging Requirements and the Not-to-Exceed Prices to Transact
The energy procurement strategy shall identify and document the energy (power and gas) products that are commercially available that can be used to bring the energy requirement hedging within the established hedging bands as described above. For each of the products, the energy Procurement Strategy will also document forward market prices that the products can be transacted at and the price bounds that VPU Front Office staff are authorized to transact these products.
The Procurement Strategy shall determine a Targeted Price for the projected energy hedging requirements, taking into consideration current market pricing forward pricing curves, and a reasonable expectation for volatility. Such price shall be used for purposes of developing the Vernon Annual Budget. The Targeted Price shall be used to determine price bounds for purposes of authorizing transactions under the hedging requirements. The price bounds should provide reasonable leeway for VPU Front Office staff to transact given that forward market prices for the products can fluctuate from the time energy procurement strategy is approved to the time transaction is consummated.
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City of Vernon Energy Risk Management Policy Page 41 of 57 Unless otherwise modified by ERMC, the price bound shall be 30% in excess of the Targeted Price for the product, e.g., if the product to be procured is a fixed price energy product at current forward market price of $60/MWh, then the price bound for this product that VPU Front Office staff can transact without further authorization from the ERMC will be $78 per MWh. Without additional approval of the ERMC as specified below, transaction shall not be executed in excess of the price bounds.
If time elapses without consummating the transactions contemplated in the energy procurement strategy and forward market prices increase to exceed the price bounds, then either (a) a revised energy procurement strategy will be prepared and approved by the ERMC with the updated Targeted Price and price bounds before VPU Front Office staff can transact for the particular product, or (b) in the alternative, the City Administrator or VPU’s General Manager may exercise their transaction limits specified in Appendix D. v. Timing to Prepare the Multi-Year Energy Procurement Strategy and to Execute Transactions to Stay Within the Hedging Band Requirement:
A two-year energy Procurement Strategy shall be prepared with sufficient lead time, but no later than January 31 of each year for review and approval by the ERMC. The Procurement Strategy shall be updated and approved by the ERMC on a periodic basis as needed through the adoption of the Annual Budget.
Unless modified by the ERMC and beginning on June 30, 2023, the timing to complete the transactions for energy products contemplated in the approved energy procurement strategy is as follows:
Timing Requirement
One Fiscal Year Out June 30
Two Fiscal Years Out June 30
A sample energy Procurement Strategy can be found in Appendix F.
2. Procurement Strategy for CAISO Annual RA Plan
Currently, VPU’s staff prepares annual CAISO RA plans documenting the capacity resources that Vernon intends to utilize in the coming calendar year to fulfill Vernon’s RA obligations with the CAISO.
Once the annual CAISO RA plan is prepared, VPU’s staff seeks the approval of Vernon City Council before the plan is officially filed with the CAISO. The existing process to prepare and approve RA plan comports with the spirit and intent of this Risk Policy and should be continued and not be upended/duplicated by the procurement strategy described herein.
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City of Vernon Energy Risk Management Policy Page 42 of 57 Rather, the elements of the procurement strategy for CAISO annual RA plan described below will serve as the backstop to the extent the existing RA plan preparation and approval process is modified or eliminated.
1.1. Backstop to the Existing CAISO Annual RA Plan Preparation and Approval Process In order to comply with the annual CAISO RA requirements, VPU’s staff shall prepare an annual RA plan for approval by the ERMC before executing transactions to implement the RA plan. The annual RA Plan shall be prepared with sufficient lead time for review and approval by the ERMC and timely execution of RA transactions. The execution of RA transactions shall occur after ERMC approval of the procurement strategy and before the annual RA Plan is due to the CAISO. The RA plan shall contain the following elements:
i. Forecast Monthly Peak Capacity Requirements
A tabulation of forecast monthly peak capacities in MW for the RA compliance period 1 using generally accepted forecasting methodologies/techniques shall be provided.
ii. The Monthly CAISO system, local and flexible RA Capacity Requirements
A tabulation of monthly CAISO system, local and flexible RA capacity requirements for the RA compliance period shall be provided. iii. System, local and flexible RA capacity already procured A tabulation of monthly CAISO system, local and flexible RA capacity already procured for the RA compliance period shall be provided. iv. Analysis of system, local and flexible RA Capacity Positions An analysis of monthly system, local and flexible RA capacity positions (long and short) for the RA compliance period shall be provided. v. Recommended Procurement Strategy
A recommended procurement strategy to purchase additional RA capacity to cover RA shortfalls, to sell excess RA capacity or to exchange or otherwise swap RA capacity in the various categories shall be prepared in connection with the RA Plan and including an analysis of cost implications. The recommended procurement strategy shall be approved by the ERMC before the execution of RA transactions take place. The recommended procurement strategy shall 1 The RA compliance period refers to the calendar year that Vernon is expected to submit an RA plan to the CAISO.
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City of Vernon Energy Risk Management Policy Page 43 of 57 include not-to-exceed prices for RA capacity for procurement purposes, which unless specified otherwise and approved by ERMC, shall be the prevailing market prices for the applicable RA capacity product (system, local or flexible RA) plus up to 30% addition for purchases to account for market price volatility. There is no restriction on any sales price with the objective to maximize the achievable price based on prevailing market conditions.
The RA procurement strategy also recognizes the RA transaction need to take place in real time and may be executed in connection with the simultaneous purchase and sale of RA capacity as long as such transaction are within the authorized Transaction Limits of the Risk Policy. Such transaction shall be viewed collectively and shall constitute an exchange or swap whereby Vernon shall evaluate the net exposure for purposes of complying with the Transaction Limits.
The RA procurement strategy also recognizes that while the immediate annual requirements must be met for regulatory purposes, it is prudent to evaluate the needs over the full regulatory compliance period, which currently does not exceed three years. To the extent that there are market opportunities to procure RA capacity during the compliance period, such forward purchase opportunities shall be presented to the ERMC for approval but shall not exceed the term of the existing compliance period.
3. Procurement Strategy to Meet Annual CARB GHG Compliance Obligations for both energy and natural gas
In order to meet the annual CARB GHG compliance obligations, VPU’s staff shall prepare an annual GHG allowance/offset procurement strategy for approval by the ERMC before executing transactions to implement GHG procurement strategy. The annual GHG procurement strategy shall be prepared with sufficient lead time for review and approval by the ERMC. The execution of GHG allowance/offset transactions shall occur after ERMC approval of the annual GHG procurement strategy and before the annual GHG compliance showing needs to be made to CARB.
The GHG procurement strategy shall contain the following elements:
i. The current balance of GHG allowances in Vernon’s GHG compliance account.
ii. The amount of Vernon’s freely allocated GHG allowances from CARB in the existing GHG compliance period.
iii. The amount of Vernon’s forecast GHG emissions for the GHG compliance period from Vernon’s own or contracted power supply resources that Vernon Resolution No. 2022-40
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City of Vernon Energy Risk Management Policy Page 44 of 57 has compliance obligations for.
iv. A recommended GHG allowance/offset procurement strategy to:
a. Sell/consign Vernon’s freely allocated GHG allowances into the four quarterly GHG allowance auctions administered by CARB in the GHG compliance period.
b. Buy GHG allowances needed by Vernon from the quarterly GHG allowance auctions administered by CARB or thru the secondary markets to meet Vernon’s GHG compliance obligations for the GHG compliance period. Not-to-exceed GHG allowance prices shall be specified unless waived by the ERMC.
c. Buy GHG offsets in the secondary market if Vernon intends to use GHG offsets to meet a portion of its GHG compliance obligations for the GHG compliance period. Not-to-exceed GHG offset prices shall be specified unless waived by the ERMC.
d. Sell excess GHG allowances (other than the freely allocated GHG allowances which must be consigned into CARB quarterly auctions) and/or offsets in the secondary markets to maximize the value of Vernon’s GHG compliance instruments. Floor prices for sales shall be specified unless waived by the ERMC, and
e. Devise applicable adjustment processes to the procurement strategy during the GHG compliance period if circumstances materially change.
The GHG procurement strategy also recognizes that while the immediate annual requirements must be met for regulatory purposes, it is prudent to evaluate the needs over the full regulatory compliance period, which currently does not exceed three years.
To the extent that there are market opportunities to procure GHG allowances/offsets during the compliance period, such forward purchase opportunities shall be presented to the ERMC for approval but shall not exceed the term of the existing compliance period.
While the GHG allowances/offsets may cover both energy and annual gas needs of Vernon, VPU shall keep separate accounting and books and records allocating the appropriate allowances/offsets and costs between the electric and gas utilities, respectively.
4. Procurement Strategy to Meet the Annual RPS Compliance Obligations In order to meet the annual RPS compliance obligations, VPU’s staff shall prepare an annual RPS procurement strategy for approval by the ERMC before executing transactions to implement RPS procurement strategy. The annual RPS procurement strategy shall be prepared with sufficient lead time for review and approval by the ERMC.
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City of Vernon Energy Risk Management Policy Page 45 of 57 The execution of RPS resources transactions shall occur after ERMC approval of the annual RPS procurement strategy and before the annual RPS compliance showing is made. The RPS procurement strategy shall contain the following elements:
i. The forecasted retail electric sales (in MWh) in the RPS compliance period2 using generally accepted forecasting methodologies/techniques. ii. The applicable annual RPS target as percentage (%) of the annual retail sales in accordance with CEC RPS regulations.
iii. Vernon’s forecasted annual RPS compliance obligations for the RPS compliance period which equals the MWh quantity in item 1 multiplied by the applicable annual RPS target above.
iv. A tabulation (in MWh) of the forecasted generation of Vernon’s RPS resources by RPS categories (grandfathered RPS resources, PCC 1, 2 and 3) for the RPS compliance period.
v. A tabulation of Vernon’s RPS resources carryovers (grandfathered and PCC 1 RPS resources only).
vi. A recommended RPS procurement strategy to:
a. Procure additional RPS resources by RPS categories if Vernon is short in RPS resources for the RPS compliance period. Not-to-exceed prices by RPS categories shall be specified unless waived by the ERMC. b. Optimize the utilization of Vernon’s RPS carryovers for the RPS compliance period.
c. If applicable, sell excess RPS resources not needed for compliance purposes to maximize the value of such excess. Floor prices for such sales shall be specified unless specifically waived by ERMC.
d. Devise applicable adjustment processes to the procurement strategy during the RPS compliance period if circumstances materially change.
The RPS procurement strategy also recognizes that while the immediate annual requirements must be met for regulatory purposes, it is prudent to evaluate the needs over the full regulatory compliance period, which currently does not exceed three years.
To the extent that there are market opportunities to procure RPS resources during the compliance period, such forward purchase opportunities shall be presented to the ERMC for approval but shall not exceed the term of the existing compliance period.
2 The RPS compliance period refers to the upcoming calendar year that Vernon will have RPS compliance obligations.
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City of Vernon Energy Risk Management Policy Page 46 of 57 VPU’s Gas Utility:
5. Procurement Strategy for Natural Gas to Meet Specific Gas Procurement Targets Established by the ERMC
In order to achieve the goal of hedging Vernon’s natural gas price risks to serve VPU’s retail gas load and to meet the projected requirements of the MGS as well as any other future owned assets using natural gas as fuel, VPU’s staff shall prepare a multi-year natural gas procurement strategy for annual approval by the ERMC. Such forecast shall be updated on a periodic basis as needed given changing circumstances or market conditions and presented to the ERMC for approval. The multi-year natural gas procurement strategy shall contain the following elements:
i. Forecast Monthly Natural Gas Requirements
A tabulation of monthly forecast natural gas requirement in MMBtus for retail load and MGS using generally accepted forecasting
methodologies/techniques shall be provided for a two-year period, commencing the upcoming fiscal year and thru fiscal year two years out. The forecast natural gas requirements will serve as the basis for the gas procurement strategy.
ii. Percentage of Natural Gas Already Hedged
A tabulation of monthly retail natural gas requirements already hedged under long term, short term or ownership arrangements expressed in percent of the monthly gas requirement shall be provided for a two-year period, commencing the upcoming fiscal year and thru fiscal year two years out. iii. Hedging Requirements
In order to ensure budget certainty, default monthly (or yearly) hedging bands will be established with a targeted minimum and maximum monthly gas hedging percentage, which will be differentiated by season (summer and nonsummer). Hedging bands will be reviewed by the ERMC and shall be adjusted based on the gas needs of Vernon, the operating requirements of any power generation, including but not limited to MGS, changes in the customer profile of Vernon, including the addition or subtraction of any customers during a fiscal year, and prevailing market conditions. Any such changes shall be taken into consideration in any amendment to the Risk Policy, which shall be approved by City Council not less than annually.
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City of Vernon Energy Risk Management Policy Page 47 of 57 Non-Summer (November - April)
Minimum %
Maximum % (*)
One Fiscal Year Out 60% 100%
Two Fiscal Years Out 20% 100%
(*) maximum percentage may be exceeded due to pre-existing legacy natural gas contracts.
Summer (May - October)
Minimum %
Maximum % (*)
One Fiscal Year Out 60% 100%
Two Fiscal Years Out 20% 100%
(*) maximum percentage may be exceeded due to pre-existing legacy natural gas contracts.
iv. Forward Natural Gas Products to Meet the Hedging Requirements and the Not-to-Exceed Prices to Transact
The natural gas procurement strategy shall identify and document the natural gas products that are commercially available that can be used to bring the gas requirement within the established hedging bands as described above. For each of the products, the natural gas procurement strategy will also document forward market prices that the products can be transacted at and the price bounds that VPU Front Office staff are authorized to transact these products.
The Procurement Strategy shall determine a Targeted Price for the projected natural gas requirements, taking into consideration current market pricing, forward pricing curves, and a reasonable expectation for volatility. Such price shall be used for purposes of developing the Vernon Annual Budget. The Targeted Price shall be used to determine price bounds for purposes of authorizing transactions under the hedging requirements. The price bounds should provide reasonable leeway for VPU Front Office staff to transact given that forward market prices for the products can fluctuate from the time energy procurement strategy is approved to the time transaction is consummated.
Unless otherwise modified by ERMC, the price bound shall be 30% in excess of the Targeted Price for the product, e.g., if the product to be procured is a fixed price natural gas product at current forward market price of $6/MMBtu, then the price bound for this product that VPU Front Office staff can transact without further authorization from the ERMC will be $7.80/MMBtu. Without additional approval of the ERMC as specified below, transaction shall not be executed in excess of the price bounds.
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City of Vernon Energy Risk Management Policy Page 48 of 57 If time elapses without consummating the transactions contemplated in the Procurement Strategy and forward market prices increase to exceed the price bounds, then either (a) a revised energy procurement strategy will be prepared and approved by the ERMC with the updated Targeted Price and price bounds before VPU Front Office staff can transact for the particular product, or (b) in the alternative, the City Administrator or VPU’s General Manager may exercise their transaction limits specified in Appendix D. v. Timing to Prepare the Multi-Year Natural Gas Procurement Strategy and to Execute Transactions to Stay Within the Hedging Band Requirement:
A two-year natural gas Procurement Strategy shall be prepared with sufficient lead time, but no later than January 31 of each year for review and approval by the ERMC. The Procurement Strategy shall be updated and approved by the ERMC on a periodic basis as needed through the adoption of the Annual Budget.
Unless modified by the ERMC and beginning on June 30, 2023, the timing to complete the transactions for natural gas products contemplated in the approved natural gas Procurement Strategy is as follows:
Timing Requirement
One Fiscal Year Out June 30
Two Fiscal Years Out June 30
A sample natural gas Procurement Strategy can be found in Appendix F.
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City of Vernon Energy Risk Management Policy Page 49 of 57 Appendix F
Sample Procurement Strategy
Sample procurement strategies for energy and natural gas are shown below.
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City of Vernon Energy Risk Management Policy Page 50 of 57 Appendix G
Sample ERMC Report
MEETING AGENDA AND REPORT
VERNON PUBLIC UTILITIES
ENERGY RISK MANAGEMENT COMMMITTEE
[Date]
[Time]
[Location]
The objective of the City of Vernon Public Utilities Department and the Energy Risk Management Committee is to manage price risk inherent with serving load, including risks associated with normal cost-hedging activities, those associated with participating in wholesale markets in general, and the California Independent System Operator (CAISO) in particular.
MEETING MINUTES
1. Regular meeting of the ERMC on [Date]
STANDING ITEMS FOR REVIEW AND APPROVAL
2. Forward Strategy Sheet/Market Update
3. Resource Adequacy
4. Greenhouse Gas
5. Transaction Summary
6. Authorized Counterparties and Maximum Credit Exposure
DISCUSSION
7. Additional Information and Action Items
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City of Vernon Energy Risk Management Policy Page 51 of 57 ITEM 1: MEETING MINUTES
[INSERT MEETING MINUTES FROM PRIOR MEETING]
Meeting of: Regular Meeting of the Risk Management Committee Date of Meeting: [Date]
Time of Meeting: [Time]
Place of Meeting: [Location]
Committee Members Present: [Name/Title]
Also in Attendance: [Name/Title]
1. _______
Prepared by: Richard Corbi
Planning and Analysis Manager
[Date]
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City of Vernon Energy Risk Management Policy Page 52 of 57 ITEM 2: FORWARD STRATEGY SHEET/MARKET UPDATE
[INSERT UPDATE ON LOAD FORECAST AND PERCENTAGE OF LOAD HEDGED] Resolution No. 2022-40
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City of Vernon Energy Risk Management Policy Page 53 of 57 ITEM 3: RESOURCE ADEQUACY
[INSERT UPDATE ON RA]
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City of Vernon Energy Risk Management Policy Page 54 of 57 ITEM 4: GREENHOUSE GAS
[INSERT UPDATE ON GHG]
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City of Vernon Energy Risk Management Policy Page 55 of 57 ITEM 5: TRANSACTION SUMMARY
[INSERT Transaction Log]
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City of Vernon Energy Risk Management Policy Page 56 of 57 ITEM 6: AUTHORIZED COUNTERPARTIES AND MAX.
CREDIT EXPOSURE
[INSERT Summary of Authorized Counterparties and Max. Exposure] Resolution No. 2022-40
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City of Vernon Energy Risk Management Policy Page 57 of 57 ITEM 7: ADDITIONAL DISCUSSION AND ACTION ITEMS
[INSERT Summary of Additional Information and Action Items] Resolution No. 2022-40
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