POWER RESOURCES RISK MANAGEMENT POLICIES. Board of Public Utilities January 18, 2013

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1 POWER RESOURCES RISK MANAGEMENT POLICIES Board of Public Utilities January 18, 2013

commodity price volatility Regulatory/legislative risk RPU is a

2 INTRODUCTION RPU'S supply portfolio is exposed to several risks Load variability Cost variability Counterparty risk Energy commodity price volatility Regulatory/legislative risk RPU is a cost-hedger Primary object to manage cost of serving its customers

3 HISTORY 1996 The Electric Utility Industry Restructuring Act (AB 1890) becomes law 1998 RPU Power Resources Financial Risk Management Policy and Procedures approved by City Council 2009 CAISO Market Redesign and Technology Upgrade goes live 2010 City Council approves the revised Power Resources Risk Management Policies (PRRMP) 2013 Proposed revisions to PRRMP to better fit needs and organizational structure of RPU

4 PRRMP COMPONENTS The PRRMP is made up of three Policies Energy Risk Management Policy Wholesale Counterparty Risk Management Policy Authorized Transactions Policy

5 ENERGY RISK MANAGEMENT POLICY Introduction to risk management objectives Risk governance structure and responsibilities Delegations of authority Segregation of duties Hedging program

6 WHOLESALE COUNTERPARTY RISK MANAGEMENT POLICY Analytical procedures for Assessing risk limits Open lines of counterparty credit Managing counterparty exposure Approval authorities Internal Assessment of Risk Management Controls For California Wholesale Electric Markets

7 AUTHORIZED TRANSACTIONS POLICY Defines types of authorized transactions Sets forth contract terms and conditions Approval process for new products Addresses transaction management and speculation

8 SCOPE OF PRRMP Eighty-five percent of RPU's wholesale power portfolio is managed through long-term contracts PRRMP provides oversight for power and natural gas short-term transactions to Cover resource outages Provide additional summer peaking energy needs Meet regulatory requirements Represents $15 million in FY

9 GOVERNANCE Risk Management Committee is responsible for approving procedures to ensure compliance Members: Public Utilities General Manager Assistant General Manager/Resources Assistant General Manager/Finance Energy Risk Manager

10 PROPOSED CHANGES to PRRMP Aligns the delegations of authority under Front-, Middle-, or Back-Office Front-Office Planning Market operations and trading Long-term contracts Middle-Office Risk management Counterparty credit Back-Office Transaction settlement activities

11 PROPOSED CHANGES to PRRMP Reformatting of the Wholesale Counterparty Risk Management Policy Provides for reporting as directed by the RMC Updates Authorized Transactions Policy for today s markets and regulatory environment Dodd-Frank Wall Street Reform and Consumer Protection Act FERC Order 741 Credit Reforms in Organized Wholesale Electric Markets California's Greenhouse Gas (GHG) Cap-and-Trade Program

12 PROPOSED CHANGES to PRRMP Amendments to the Authorized Transactions Policy i. Selling Forecasted Surplus System Resource Adequacy Capacity under Forward Power Sales ii. Green House Gas Allowances iii. Reclaim Trading Credits iv. Requirements as may be established under Emission Credits Purchases/Sales (forward and after-the-fact)

13 PROPOSED CHANGES to PRRMP Added Delegations of Authority i. AGM/Resources shall review and has the authority to approve the Transaction strategy ii. RPU Administration has the authority to approve any nonsubstantive modifications or amendments to the PRRMP iii. Front-Office may enter into emissions Transactions to meet regulatory requirements iv. Middle-Office may have the authority to add new counterparties to the Approved Counterparty list with a credit limit not to exceed the approval authority as delegated in the PRRMP v. Middle-Office is responsible for reporting the addition of new counterparties under the authority of the Energy Risk Manager and all credit limit changes with justification to the RMC

14 RECOMMENDATION The Board of Public Utilities recommend that the City Council approve the revised Public Utilities Power Resources Risk Management Policies, which include the Energy Risk Management Policy, the Wholesale Counterparty Risk Management Policy and the Authorized Transactions Policy

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