Energy Risk Management Policy ENERGY RISK MANAGEMENT POLICY VERSION:

ENERGY RISK MANAGEMENT POLICY VERSION: 02272013 Glendale Water & Power 0 Created November 2003

TABLE OF CONTENTS 1. INTRODUCTION 3 2. GLENDALE WATER & POWER 4 2.1 Authority 4 2.2 GWP Business Objectives 5 2.2.1 Purpose 2.2.2 Goals 2.3 Risk Tolerance 6 3. ORGANIZATION & GOVERNANCE 7 3.1 City Council 8 3.2 City Manager 8 3.3 GWP General Manager 8 3.4 Energy Risk Management Committee (ERMC) 9 3.4.1 Energy Risk Management Committee Structure 3.4.2 Meeting Timing,Frequency and Voting Procedures 3.4.3 Member Vacancies 3.4.4 Energy Risk Committee Responsibilities 3.5 GWP Assistant General Manager of Power Supply 11 3.6 Energy Marketers, Schedulers & Real Time Traders 11 3.7 Finance Administrator 12 3.8 GWP Finance/Accounting Division 13 3.9 Audit 13 3.10 Legal 14 3.11 Conflict of Interest and Compliance 14 3.12 Risk Management Philosophy 14 4. MARKET RISK POLICIES 15 4.1 Forward Hedging Strategies and Plans 16 4.1.1 Strategies 4.1.2 Hedge Plans 4.2 Delivery Points 18 4.3 Authorized Transaction Types 18 4.4 New Products and Transaction Types 21 Glendale Water & Power 1 Created November 2003

4.5 Transaction Limits 4.5.1 Bilateral Electric Power and Transmission Transaction Limits 22 4.5.1.1 Bilateral Electric Power and Transmission Transaction Limits Matrix Explanation 4.5.2 CAISO Transaction Limits 24 4.5.2.1 CAISO Transaction Limits Matrix Explanations 4.5.3 Emission Allowances Transaction Limits 25 4.5.3.1 Emission Allowance Transaction Limits Matrix Explanation 4.5.4 Renewable Energy Credits & Carbon Allocation Transaction Limits 26 4.5.4.1 Renewable Energy Credits & Carbon Allocation Transaction Limits Matrix Explanation 4.6 Changing Limits 27 5. CREDIT RISK MANAGEMENT PHILOSOPHY 27 5.1 Credit Policies 27 6. REPORTING 28 6.1 Reporting Requirements 28 7. POLICY REVIEW 29 8. PROCEDURES 29 APPENDICES 30 A. Definitions 30 B. Acknowledgement of Energy Risk Management Policy 33 Glendale Water & Power 2 Created November 2003

1. INTRODUCTION Glendale Water & Power (GWP) is in the business of generation, transmission, and distribution of electricity for the benefit of the City of Glendale. The Power Supply Division s main objective is to provide reliable and cost effective power to meet load requirements and secondarily to monetize surplus owned resources through sales of surplus energy, capacity, and other wholesale energy services. This Energy Risk Management Policy (the Policy) has been developed to help ensure that GWP operates in the manner described above. The Policy is designed to establish the framework for GWP to manage the risks that are inherent in the wholesale energy markets it participates in. The Policy specifies: a set of rules to guide decisions concerning the sale and purchase of energy and related products in the spot and forward markets; a clear statement of roles and responsibilities of GWP s Divisions and personnel, and a process for establishing and managing hedge plans. The Policy: Provides a framework for establishing a risk management culture at GWP; Reflects the goals and risk tolerance of GWP; Establishes guidelines for GWP to plan, execute, and control the risks inherent in generation, purchases, sales, and transmission of energy; Is necessary with energy portfolio transactions and other activities; because unnecessary risks could be created in the absence of appropriate monitoring and control of these activities; Focuses on stabilizing the cost of energy and associated risk while maintaining reliable energy supplies for retail customers; Provides specific controls (e.g., segregation of duties, oversight, etc.) for the management of operational risks; and Will help strengthen GWP s ability to provide reliable energy to its retail customers while managing risk. The Policy is designed for the specific requirements and constraints of GWP. The resulting program shall govern GWP s energy portfolio activities and provide a framework through which GWP management and personnel will identify, capture, measure, manage, control, monitor, and report financial and other risks. The program specifically addresses management of energy portfolio risk and provides a framework to maintain proper controls over portfolio activities as they change over time. The results of the risk management program must be continually evaluated in relationship to GWP s objectives to ensure effective performance. Glendale Water & Power 3 Created November 2003

2. GLENDALE WATER & POWER 2.1 AUTHORITY The Glendale City Charter (the Charter), Article VI, Section 9, generally requires competitive bidding for contracts for the purchase of materials or products equal to or greater than $50,000. However, Article VI, Section 9 of the Charter authorizes the City to dispense with competitive bidding where the City Council determines it is in the best interest of the city to do so and acts by resolution setting forth the reason for such action. It is in the City's best interest to dispense with competitive bidding for energy, natural gas, and renewable attribute transactions as they must be completed in a rapidly changing market that is not structured to accommodate public entity bidding requirements. On an annual basis, the General Manager requests that the City Council authorize the City Manager, or his designee, to dispense with competitive bidding for energy, natural gas, and renewable attribute transactions on the grounds that it is in the City s best interest in accordance with Article VI, Section 9 of the Charter. Glendale Municipal Code Section 1.04.080 states: Whenever a power is granted to or a duty is imposed upon a city officer by this code or any other ordinance of the city, the power may be exercised or the duty performed by an assistant or a deputy of the officer or by a person authorized pursuant to law by the officer, unless this code expressly provides otherwise. The Transaction Limits set forth in Section 4.5 of the Policy specify who (by job title) within the City of Glendale organization has authority to engage in which type of transaction. Section 4.5 of the Policy sets forth the approved transaction limits, duration, lead time, volume, and maximum dollar amounts for each product and each job title. It is the practice of the General Manager to annually submit a memorandum (the Delegation of Authority Memorandum) to the City Manager listing the names of those individuals authorized to transact on behalf of Glendale pursuant to Section 4.5 of the Policy. The General Manager typically submits the Delegation of Authority Memorandum to the City Manager for his approval on an annual basis following the City Council s adoption of a resolution dispensing with competitve bidding for energy, natural gas, and renewable transactions. However, the General Manager may submit revisions to the Delegation of Authority Memorandum more frequently as warranted. Additionally, the City Manager or his designee may adjust transaction limits, upward, as specified in Section 4.6 of the Policy. Glendale Water & Power 4 Created November 2003

2.2 GWP BUSINESS OBJECTIVES An effective energy risk management policy better equips a utility to achieve its energy portfolio objectives. This Policy is focused on helping GWP achieve these business objectives: Provide reliable, low cost energy and related services to retail customers; Manage energy resource expenses; Manage the energy portfolio to stabilize rates; Allow for hedging to protect against adverse changes in energy market prices and minimize the risk to customers of significant rate increases; Allow for providing price and risk differentiated energy products to customers as appropriate; Monetize surplus resources should market opportunities arise, through wholesale activities; and Support the transfer to the General Fund. Given these objectives, GWP defines itself as a cost hedger and, therefore, has defined the purpose and goals of this Policy as follows: 2.2.1 Purpose The purpose of the Policy is to formally establish an energy risk management program and document the organizational structure (Figure 3.1) utilized by GWP to meet the electricity needs of its customers, and provide guidelines for GWP to plan, execute, and control the management of a variety of risks associated with energy portfolio activities. This Policy describes GWP s energy risk management roles and responsibilities and delegations of authority that govern how GWP conducts business in the wholesale energy markets.this Policy is not intended to deal with the mitigation of risk of catastrophic events, or environmental impacts. It does take into account the developing energy market regulatory requirements. The Policy mandates that GWP will participate in the marketplace only for those commodities in which it has a physical and financial market exposure and will buy and sell approved commodities only within pre-defined transaction limits approved by GWP management as defined in Section 4.5. The Policy formalizes the process and the delegation of authority for energy and credit risk management. The specific operating processes and procedures that support this Policy: Address energy portfolio management; Establish guidelines for managing risk of energy purchases and sales; Establish internal controls and approval procedures; Define appropriate internal reporting for management oversight purposes and external reporting for compliance with existing accounting standards; Glendale Water & Power 5 Created November 2003

Establish limitations on transacting and hedging activities and instruments; and Provide a process for the approval of new products or transactions that may enhance or bring new risks into Glendale s energy portfolio or create new complexities in valuing the portfolio. 2.2.2 Goals The primary goal of this Policy and resulting risk management activities is to strengthen GWP s ability to provide reliable, low cost energy to its retail customers while managing risk. This goal is best achieved by enabling GWP to transact business in different energy markets while simultaneously monitoring and minimizing associated risk. Other goals of risk management activities are to: Help stabilize and reduce, over time, the cost of energy and associated risk while maintaining reliable energy supplies for customers; Manage a portfolio of physical and financial positions; Identify and quantify market risks; Maintain control over the market and credit risk management activities of GWP such that limits established by this Policy are not exceeded; Modify or work within the existing organizational structure to implement the Policy; Remain flexible to accommodate the changing needs of Glendale s energy portfolio while maintaining control of the overall risk position; and Operate a disciplined program to manage cash flows and transaction execution. 2.3 RISK TOLERANCE GWP has established its risk tolerance in terms of minimizing unfavorable variance to its operating budget. The purpose of doing this is to ensure alignment of its objectives and its participation in the wholesale energy markets. To accomplish this, the risk management policy defines strategy and planning requirements and acceptable limits on transaction type, term, volume, price uncertainty, and counter-party credit. Given its business objectives, GWP has a low-to-moderate risk tolerance. GWP s low-to-moderate risk tolerance: Prohibits speculative trading; Encourages efforts to monetize surplus assets; and Enables GWP to achieve and possibly exceed its objectives while mitigating its existing level of risk. Glendale Water & Power 6 Created November 2003

3. ORGANIZATION & GOVERNANCE This Policy is designed for implementation within GWP s existing organization structure and by existing staff. This requires the integration of new responsibilities for the necessary risk management of energy transactions. The following sections identify and describe the levels within the organization with oversight or direct responsibility for the implementation of this Policy and the resulting program. ASSIGNMENT OF RESPONSIBILITIES Figure 3.1 - Organization Chart for Risk Management Activities The following organization chart identifies the levels with oversight or direct responsibility for implementation of the Policy: City Council City Manager GWP General Manager Energy Risk Management Committee Operations - GWP AGM of Supply - Energy Marketers - Energy Scheduler - Power Systems Analyst - Alliance Partner Administration - GWP Finance Administrator - GWP Finance Advisory - City Attorney Rep - Internal Audit Rep - Consultants Glendale Water & Power 7 Created November 2003

3.1 CITY COUNCIL The City of Glendale City Council shall: Approve, annually, transaction authorities established according to the Energy Risk Management Policy; and Keep informed on the status of Hedge Strategy and Hedging Plans. 3.2 CITY MANAGER The City Manager is responsible for providing the oversight of and support for energy risk management philosophies and principals. The City Manager shall: Require adequate management involvement, financial controls, and systems to monitor, report, and ensure the integrity of this Policy at all levels; and Keep informed on the status of Hedge Strategy and Hedging Plans. 3.3 GWP GENERAL MANAGER The GWP General Manager is responsible for the overall direction, structure, conduct, control, and reporting of GWP s risk management activities. The GWP General Manager shall: Establish a risk management culture throughout the organization; Set a clear strategy and goals for hedging market price risk; Establish the scope of energy portfolio and risk management activities, the purpose for engaging in transactions, and the appropriate risk tolerances; Periodically assess the adequacy and functioning of the system of controls over market, credit, and operational risks; Establish the strategic direction and risk threshold for retail load energy needs and wholesale transactions; Ensure that risk tolerances are consistent with strategic direction; Ensure that all risk control activities (position monitoring, portfolio assessment, credit, etc.) are independent of energy purchases and sales; Approve individuals authorized to commit GWP to energy sales or purchases; Periodically review the Policy with the Energy Risk Management Committee; and Report to City Council and City Manager annually on the risk profile of GWP s energy portfolio and on the results of risk management activities. Glendale Water & Power 8 Created November 2003

3.4 ENERGY RISK MANAGEMENT COMMITTEE (ERMC) As approved by the City Council, the ERMC has the responsibility for managing the target risk profiles and leading GWP s energy risk management efforts on a path of continuous improvement. The ERMC will provide direction and oversight to GWP concerning Power Supply planning, transacting, reporting, and related internal controls; and the development and implementation of operating procedures consistent with this Risk Policy. 3.4.1 Energy Risk Management Committee Structure Voting Membership: The ERMC shall be comprised of five voting members and two non-voting members. The five voting members are: 1. GWP General Manager (Chair); 2. AGM of Power Supply; 3. City Manager Representative; 4. Director of Finance; and 5. GWP Finance Administrator. The two non-voting members are the: 1. City Auditor or his or her designee; and 2. City Attorney or his or her designee. 3.4.2 Meeting Timing, Frequency and Voting Procedures The ERMC shall meet no less than once per calendar month. Member attendance shall be recorded in the ERMC meeting minutes. Any member of the ERMC can request an emergency meeting of the ERMC to address circumstances or issues that may require immediate attention. In the event any member is unable to attend an ERMC meeting in person or by telephone, that member may designate an alternate to attend in his or her absence. Each of the five voting members shall each have a single vote on matters that come before the ERMC and a voting member, or his or her designee, must participate in the ERMC meeting in order to vote and approve a proposed action.if a voting member is unable to attend an ERMC meeting in person or by telephone, the member may designate an alternate to vote in his or her absence. If any two of the voting members, or their designees, are not present at an ERMC meeting, a vote on a proposed action cannot take place. The ERMC will make decisions and take actions by a simple majority vote. If the ERMC reaches an impasse that cannot be addressed through a vote, the GWP General Manager will make a final decision by the end of the next business day. Glendale Water & Power 9 Created November 2003

3.4.3 Member Vacancies In cases where a member of the ERMC leaves the employ of GWP, the GWP General Manager will resolve the ERMC vacancy by making an interim appointment at his discretion. The representative from the Office of the City Attorney will act as Secretary to the ERMC and will document all meetings and actions taken by the ERMC in meeting notes that will be distributed to ERMC members for their review and acceptance. Meeting notes approved by the ERMC will be distributed by the Office of the City Attorney to the ERMC members and the City Manager. 3.4.4 Energy Risk Management Committee Responsibilities The ERMC is responsible for: Monitoring compliance with this Policy and associated procedures; Reviewing and approving risk management strategies and hedging plans to be implemented by the Power Supply Division; Providing oversight and direction for specific projects including new markets, RFP development and RFP responses for physical and financial energy, fuel, related transportation transactions, and tools and systems needed to manage the risks of participation in energy markets; Reviewing and approving expected, recurring, and material changes to all modeling inputs used by the ERMC to ensure that market operational and credit risks are sufficiently assessed; Reviewing and approving the methodologies used to establish counterparty credit limits by the GWP Finance Administrator; Discussing and pre-approving limit exceptions when appropriate; Discussing Policy violations or exceptions and taking corrective action to minimize related losses or increased risks as appropriate; Discussing elements of energy risk management best practices and developing a GWP opinion of their specific practicality; Oversee the implementation and regular review of a Procedures Manual and changes to it; Conducting other activities relevant to the implementation and oversight of this Policy and related procedures; Providing a timely summary of ERMC accomplishments for the past year and setting of goals for the upcoming year to the City Manager. This summary will also be provided to the GWP Commission and City Council; and Reviewing this Policy on an annual basis and recommending changes to the City Manager. Glendale Water & Power 10 Created November 2003

3.5 GWP ASSISTANT GENERAL MANAGER OF POWER SUPPLY The GWP Assistant General Manager of Power Supply reports directly to the GWP General Manager; has responsibility for GWP s Power Supply and shall: Develop and maintain retail load forecasts and retail fuel and purchase power budgets; Assure daily compliance with the Energy Risk Management Policy by the Energy Marketers, Schedulers and Real Time Traders involved in risk management activities; Establish a review and approval process to provide timely responses to issues arising from day-to-day operations; Oversee the development of hedge plans; Recommend hedge plans to the ERMC; Oversee the development of procedures for Energy Marketers, Schedulers and Real Time Traders as needed; and Lead and assist in the preparation of reports listed in Section 6.1, Reporting Requirements. 3.6 ENERGY MARKETERS, SCHEDULERS AND REAL TIME TRADERS OR AUTHORIZED AGENTS The Energy Marketers, Schedulers and Real Time Traders shall: Assure daily compliance with the Energy Risk Management Policy and timely responses to issues arising from day-to-day operations; Execute and manage energy transactions (purchases, sales, and hedges) in accordance with approved hedge plans and within the limits specified herein; Understand the types of transactions individuals may engage in to manage the energy portfolio; Adhere to the transaction approval process; Communicate transacting efforts to the Finance Division daily to ensure accurate position reporting and accounting; Actively acquire and analyze market intelligence and assist the AGM of Power Supply in developing Hedge Plans; Communicate market intelligence within GWP s risk management organization; Follow approved credit policy; Identify individuals within approved counter-parties authorized to represent the counter-parties in transactions with GWP and obtain from counterparties a documented list of individuals authorized to commit to transactions and sign confirmations; and On sale transactions from GWP to Counterparty, GWP shall generate and send confirmations, if confirmation is required. Glendale Water & Power 11 Created November 2003

3.7 FINANCE ADMINISTRATOR GWP s Finance Division is led by the Finance Administrator (FA) and, among FA responsibilities, leads the middle office in GWP s energy risk management organization. For the purposes of this Policy, these responsibilities include preparing or directing contracted experts to prepare reports covering GWP s energy portfolio position, credit exposures, and Risk Policy and Procedure Manual compliance. The FA also leads the development of business process and internal control improvements throughout the energy transaction lifecycle; provides settlement services; documents the required accounting treatment of forward transactions; provides the related valuation of these transactions to enable the preparation of invoices and reporting of forward transactions in GWP s financial statements in accordance with prevailing accounting rules. The FA will provide risk assessment input to the hedge planning and transacting activity, but will maintain a strict separation of duties. The FA will brief City Council and GWP Commission as requested regarding recent GWP risk management activities. The FA will serve as facilitator of the ERMC. In addition, the FA shall: Ensure that risks for all transactions have been identified and can be valued; Monitor the portfolio and risk management activities of the organization through a Mark-to-Market Position Report or equivalent; Calculate the financial exposure of GWP s energy portfolio by applying standard risk measurement and valuation standards; Provide or utilize expertise on financial products and pricing and structuring of physical contracts with embedded financial features; Provide periodic reports, to GWP General Manager and ERMC, on the risk profile of GWP s energy portfolio and on the results of risk management activities; Develop and recommend credit policy and procedures; Follow approved credit policy and procedures; Review credit scoring and analysis of GWP s existing and proposed counterparties; Set credit limits for counterparties; Oversee the negotiation and manage counterparty credit enhancements; Provide to transaction originators a pre-approved credit list containing the names and financial limits of approved counter-parties; Ensure that the pre-approved credit list is current; Prepare or contract for preparation of counter-party credit reports as necessary; Report periodically on credit exposures against pre-defined limits and report any violations immediately; Glendale Water & Power 12 Created November 2003

Halt future trading activity with a particular counter-party when that counterparty is deemed less than creditworthy; and Upon request, provide written documentation to approved counter-parties listing individuals in GWP authorized to initiate transactions and sign confirmations. 3.8 GWP FINANCE/ACCOUNTING DIVISION The responsibilities of Finance include: Develop and apply accounting policies to financial transactions; Settle transactions (verification, accounts payable/receivable); Maintain controls over cash or other assets in custody, including investment decisions on funds in trading and hedging accounts; Correctly classify and report transactions. (Certain transactions may differ in their reporting requirements, depending on whether they qualify as existing assets, liabilities, and firm commitments or anticipated transactions for hedge accounting. Finance shall determine how transactions are classified for reporting purposes and ensure that hedges are accounted for in accordance with generally accepted accounting principles.); Provide appropriate funding. (Finance shall maintain control procedures over electronic funds transfer for payments and collections. This is intended to ensure that cash payments are properly disbursed and authorized trades are independently confirmed and processed.); Assess and monitor compliance with the Policy and procedures; Report violations or exceptions of Policy or procedure limits and recommend remediation as necessary; and Monitor market and counterparty events in order to anticipate changes in GWP s risk profile. Evaluate cash flow implications of stress test scenarios; and Under no circumstances will members of the Finance/Accounting Division be given the authority to enter into wholesale energy transactions on behalf of the utility. 3.9 AUDIT The City Auditor shall: Verify proper segregation of external and internal reporting, risk management, accounting, treasury, and trading duties and maintenance of files; Sample and review activities for compliance with this Policy and related procedures; Glendale Water & Power 13 Created November 2003

Document audit findings, including compliance with and discrepancies from this Policy as well as any other irregularity which could expose Glendale to financial or operational risk; and Serve on the ERMC. 3.10 LEGAL Glendale s City Attorney shall: Review the Energy Risk Management Policy for compliance with the City Charter and applicable law; Negotiate master/enabling agreements with counter-parties as directed by the AGM of Power Supply; Assess legal enforceability of contracts with applicable laws and regulations; and Serve on the ERMC. 3.11 CONFLICT OF INTEREST AND COMPLIANCE Potential conflict of interest by persons directly affected by this Policy is covered by Glendale s Citywide Conflict of Interest Code. All Glendale employees who hold positions mentioned in this Policy or perform functions described herein shall not enter into, or direct others to enter into, any electricity, natural gas, renewable attribute or other related transactions other than on behalf of GWP, the City of Glendale, or its authorized agents. All Glendale employees who hold positions mentioned in this Policy or perform functions described herein shall at all times adhere to the provisions herein. Each employee shall acknowledge annually in writing that he or she has read this Policy and that he or she is in full compliance with this Policy. 3.12 RISK MANAGEMENT PHILOSOPHY GWP s combined owned generation output from Grayson and Magnolia Power Plants accounts for approximately 35% of expected energy for retail load on an annual basis. Other long term supply contracts including those for renewable energy account for approximately 52%. The remaining needs must be procured. The planning and acquisition of these resources is complicated and certain factors to be considered are the comparative cost of fuel vs power, contractual output rights at Magnolia and other long term agreements, variation in retail demand, and energy market price trends and forecasts. Glendale Water & Power 14 Created November 2003

To manage these issues and thereby protect the interests of the ratepayers, GWP hedges its energy market risk exposure by buying and/or selling physical energy and associated products in the wholesale energy market up to 36 months prior to, and all the way up to, and including the hour of delivery. While GWP s principal objective is to ensure that it meets its retail customer demand obligation, it tries to do so in a way that generates additional value from its generation portfolio, with due consideration of risk. By participating in the wholesale energy markets, GWP is exposed to, and needs to manage, a variety of risks including: Market price risk the risk of variance in actual vs planned costs due to wholesale price changes; Credit/performance risk the risk of loss due to default or failure by counterparties to perform on contracts; Volumetric risk the risk of loss due to unpredictable variations in the output of the generation fleet or in retail demand; Modeling risk the risk of loss due to a model s failure to match reality sufficiently well; Operations risk the risk of loss due to physical assets failing to perform; Operational (Commercial) risk the risk of loss due to flawed or inadequate business processes; and Regulatory risk the risk of fines,penalties and compliance costs due to changes and clarifications in rules and regulations. 4. MARKET RISK POLICIES The following market risk policies shall govern GWP s participation in wholesale energy markets. Specific limits, methodologies, reports, operational procedures, and approval processes will be detailed in a Procedures Manual. GWP will meet its native retail customer demand obligation with a high level of certainty; GWP shall not engage in any transactions that are purely speculative in nature or that cannot be tied directly to managing its underlying purchase power agreements, generating plant, transmission asset positions, or price risk; GWP will ensure that it has full knowledge of its position in all transacted products and the resulting exposure, and understands the implications of its hedging activities; Only personnel authorized by the General Manager pursuant to a written Delegation of Authority Memorandum can transact on behalf of GWP in the wholesale energy market; GWP may only transact in wholesale energy-market products approved by the ERMC; Glendale Water & Power 15 Created November 2003

GWP may only transact within limits approved and defined in this Risk Policy and the Procedure Manual; All wholesale energy transactions will be carried out on recorded phone lines, electronic trading platforms, or other media that can be recorded and documented ;Metrics for assessing GWP s market risk exposure will be specified, measured, monitored, and reported on a regular basis; On a daily basis, all wholesale transactions will be captured in the official system of record; Models and inputs for valuation and risk measurement shall be subjected to a validation and change control process. The models employed and associated processes shall be described in detail in the Procedures Manual; and Periodic risk and Policy compliance reports will be delivered to the ERMC, City Manager, GWP Commission, and City Council. 4.1 FORWARD HEDGING STRATEGIES AND PLANS Successful management of the price and volumetric risks faced by GWP requires analysis, monitoring, and communication. Analysis of published weather forecasts and market price data serve as key inputs to models used for planning and ensures that the appropriate data is converted into useful information. Consistent with market risk policies defined herein and the risk limits defined below, the Power Supply Division, in concert with the ERMC, will develop annual hedging strategies (Hedging Strategies) with underlying hedging plans (Hedging Plans) as a means to manage the volumetric and price risks faced by the utility. The following two sections describe the requirements for formal written communication of GWP s Hedging Strategies and detailed Hedging Plans. 4.1.1 Strategies Prior to February 1, of each year, the AGM of Power Supply shall submit an initial written Hedging Strategy for the upcoming next two full calendar years to the ERMC for review and approval. The Hedging Strategy will include: A timeline for presenting specific Hedging Plans for managing the expected retail fuel and power supply costs; A timeline for presenting specific Hedging Plans for managing the expected surplus fuel and power supply (if any); A write-up of the likely usage of structured transactions (approved transaction types other than forward purchases and sales) including probable time periods and volumes; and Price targets and triggers, and transaction types anticipated to be used in the Hedging Plans. The ERMC will approve the Hedging Strategy by the end of February each year. Glendale Water & Power 16 Created November 2003

4.1.2 Hedge Plans As a Hedging Strategy is finalized by the end of February it will remain in effect until such time as it is modified and approved by the ERMC. Due to the complexity of the wholesale energy markets and the energy regulatory environment, the Hedging Strategy document will require approximately three to four Hedging Plans to be developed and approved during each year. Hedging Plans are designed to contain specified effective dates and cover a particular transacting period of time in the future. Each Hegding Plan will: Refer to the specific Hedging Strategy document it is applicable to; Be labeled or numbered consistent with the applicable Hedging Strategy; Have a specified start and end date; Cover a clearly specified forward time period; Document a volumetric limit for purchases and sales; Document transaction types to be used to carry out the Hedging Plan; and List price triggers that will enable hedging activity within the Hedging Plan s limits to be completed earlier than that which is contained in the AGM of Power Supply s purchase and sales orders to the Power Supply staff. The AGM of Power Supply may, at any time, request that the ERMC consider changes to the current Hedging Strategy or Hedging Plan. Any approved changes to the Hedging Strategy or Hedging Plan shall be recorded in the ERMC meeting minutes and an updated written Hedging Strategy or Hedging Plan document will be prepared as soon as practical incorporating such changes. On occasion, it will become apparent to Power Supply management that additional transactions to reshape expected monthly forward positions are necessary given changes in generation forecasts, market conditions, and load forecasts. The AGM of Power Supply may direct Power Supply staff to enter into and execute such transactions to rebalance the forward position as long as the net energy position resulting from these transactions is close to zero. These transactions will be discussed in ERMC meetings ahead of time if conditions allow, or reported after the fact and documented in the ERMC meeting minutes. Glendale Water & Power 17 Created November 2003

4.2 DELIVERY POINTS In order to optimize energy and energy-related transactions, and increase the likelihood of Glendale providing low cost, reliable energy to its customers, GWP must be authorized to transact business in all markets and with all instruments appropriate to its business needs. Regardless of the market in which GWP participates, the risks of participation shall be controlled by adhering to the procedures, authorizations, and limits specified in this Policy. Authorized Markets GWP is authorized to transact in the following markets: Physical Electricity in the Western Electricity Coordinating Council (WECC) CAISO Physical Power and Generation Capacity Physical Natural Gas at SoCal Border, San Juan Basin, Permian Basin, AECO, SoCal Citygate and PG&E Citygate Financial Natural Gas o New York Mercantile Exchange (NYMEX) o Natural Gas Contracts traded Over-the-Counter (OTC) o NYMEX ClearPort o IntercontinentalExchange (ICE) Emissions, Allowances and Offsets Renewable Energy Credits Weather Derivatives 4.3 AUTHORIZED TRANSACTION TYPES The following list describes and identifies the authorized products for Power Supply. For day-ahead and longer term transactions, the intent of the transaction will be clearly documented on a daily recap report. Physical Electrical Energy - The purchase or sale of physical electric energy with the following general attributes: a fixed commodity quantity; a defined commodity price (fixed or index); and, a point of delivery or reference within WECC. Reserve Transactions The purchase or sale of capacity with the right to delivery of energy up to the amount of the capacity reserved during the period covered by the contract. The commodity price is either fixed or indexed to locations in WECC. Transmission - The purchase or sale of rights to transmission capacity of which Glendale has ownership rights on. These transactions have a fixed capacity, a fixed price per unit of capacity, and fixed path. Glendale Water & Power 18 Created November 2003

Physical Basis Transactions - The simultaneous purchase and sale of energy with one or more counterparty but at different points of delivery. The intent of the transaction is to either move a position from point A to point B or to lock in the spread between the two points where GWP has access to and is indifferent as to which location the position is located. Financial Basis Transactions (Options/Futures) - The simultaneous purchase and sale of energy financial futures with one or more counterparty but at different points of delivery. The intent of the transaction is to either move a position from point A to point B or to lock in the spread between the two points where GWP has access to and is indifferent as to which location the position is located. Additionally, we can use options on the basis swaps to protect directional price exposure. Delivery Point Swaps: Purchase Delivery Point Swaps for fixing the price of natural gas transportation from one delivery point to another. Transmission Losses Provider - Providing transmission losses for a counterparty in return for a fee plus payment for the energy required to meet the obligation. Purchase/Sale of Financial Futures The purchase or sale of a financial futures contract where one party agrees to buy an asset from another party as some specific time in the future at some specific price. Purchase/Sale of Physical Options - Forward physical transactions, contracted under the WSPP enabling agreement, that give the buyer a right, but not an obligation, to perform and give the seller the obligation to perform. Purchase/Sale of Financial Options - Forward financial transactions, contracted under an enabling agreement or an exchange cleared product, that give the buyer a right, but not an obligation, to perform and give the seller the obligation to perform. Capacity - Energy that is committed to be available relative to a forward schedule. The energy may not be purchased by the counterparty so a fee is charged for making the commitment of resources (capacity fee). Should the energy be needed, a price per megawatt hour will be charged. The contract will state a capacity fee and an energy price. The transaction will be with a single counterparty. The delivery of energy may be less than the amount of capacity purchased. The buyer has the choice of determining the amount (up to a stated maximum volume) and timing (within stated parameters) of when the energy deliveries will be made. Maximum deliveries and receipts are set by contract. Acceptable variations to the general terms of this transaction are: Glendale Water & Power 19 Created November 2003

o Buyer may be restricted as to amounts of delivery and which hours may be chosen for deliveries and/or seller may be allowed some choices. o May be combined with a Basis Transaction or Exchange or Transmission deal. Exchange Capacity Service - Seller will exchange energy with the Buyer by delivering energy during defined hours in exchange for energy returned during other hours; within each stated time period these transactions will be energy neutral with the amount of energy delivery to the purchaser equal to the energy returned to Seller. Energy Exchanges - Transactions of energy with a single counterparty at two different points in time and possibly location. The implicit price is defined by the ratio of quantity delivered to quantity received and the forward price differential at the time of transaction entry. Dynamic Scheduling Service - The selling or buying of ancillary services through the dynamic transfer of energy through a common communications protocol to allow participants to exchange dynamic schedules with any number of participants simultaneously for both short-term and long-term transactions. Scheduling Services - A transaction where the seller provides the service required to schedule the movement of power through, out of, within, or into a Balancing Authority Area. Physical Natural Gas Purchase/sale of physical gas deliverable at any location. Gas Transportation Purchase/ sale ofpipeline capacity, in order to reduce costs associated with transporting gas for generation, and facilitate movement of gas for generation or storage. Storage - gas and storage to economically serve native load, manage physical risks, and balance gas deliveries to meet operational constraints. RECS/TRECS Purchase or sell RECS/TRECS to manage Glendale s obligations in the most economical manor. Carbon/Offsets (Credits, Futures, Forwards, Options) The authorization to assign allocated carbon credits into appropriate venues in order to manage Glendale s obligations in the most economical manor. Glendale Water & Power 20 Created November 2003

Variable to Fixed Price Swaps: Purchase swaps for fixing the price of natural gas at specified delivery points. GWP will pay the fixed price of the contract. These contracts will be matched with corresponding physical gas purchases at index price. The index price will be the same in both physical and financial transactions. Basis: Purchase Basis contracts at a fixed price to lock in the locational price difference between the NYMEX futures contract and the desired location for fixing the gas price. Ceiling Purchases: Purchase ceilings for establishing a maximum price for natural gas. These can be: 1. NYMEX futures contracts. These contracts will have a corresponding Basis contract or Delivery Point Swap to hedge the corresponding locational price difference. 2. Exchange transacted call options. Collar Purchases: Purchase a call option and simultaneously selling a put option for the purpose to establish a ceiling and floor price on natural gas. 4.4 NEW PRODUCTS AND TRANSACTION TYPES A new product is a derivative instrument or participation in a commodity market that is sufficiently different from the instruments and markets previously approved, such that it includes new or a different combination of existing products, requires different systems, operational procedures, or accounting treatment. Examples of new products would include entry into different products or market lines, the use of derivatives with different risk characteristics (e.g. precipitation derivatives), or the use of derivatives to implement different business strategies or goals. The purpose of defining a process for the introduction of a new product or instrument is to ensure that the exposures associated with it are thoroughly reviewed and understood by GWP management. The ERMC must recommend the use of all new products or the entry into different commodity markets before execution of any such transaction. Any new products would be added to the list in 4.3, above. Glendale Water & Power 21 Created November 2003

4.5 TRANSACTION LIMITS A vital control element in the management of risk is the development of and adherence to transaction limits. Limits ensure that trading and hedging activity is appropriate and controlled at various levels of position aggregation and duration of transactions. The limits are established in consideration of overall portfolio strategies, market conditions, and risk tolerance levels. These limits are to be reviewed by the ERMC and revised by the City Manager as appropriate (See Section 4.6 Changing Limits). 4.5.1 BILATERAL ELECTRIC POWER AND TRANSMISSION TRANSACTION LIMITS The following outlines transaction limits, definitions, and procedural requirements for power and transmission transactions. Title Product Term City Council City Manager and GWP General Manager Electric Power, Capacity and Trans Electric Power, Capacity and Trans No Limit Per Transaction Limits (up to) Lead MW Time Size No Limit. $/ MWH. > 2 Years < 5 Years < 3 100 $150 Years < 2 Years.. Assistant General Manager of Supply Term Energy Trader /Marketer Day Ahead Energy Marketer/ Trader APM Electric Power, Capacity and Trans Electric Power, Capacity and Trans Electric Power, Capacity and Trans Electric Power, Trans and Capacity > 1 Year < 2 Years < 2 100 $150 < 1 Year Years.. > 1 Month < 4 Months > 1 Week < 1 Month < 18 Months 50 $400 100 $400 < 1 Week 200 $400 > 1 Week < 1 100 $400 Month < 1 Month < 1 Week 200 $400 < 1 Day < 1 Day 100 $400 Glendale Water & Power 22 Created November 2003

4.5.1.1 Bilateral Electric Power and Transmission Transaction Limits Matrix Explanations Transaction Limits represent the MW volume per hour and dollars/mwh for each transaction executed. Lead time represents the time period from the date a trade is executed to the start of the trade. The dollar limits are based upon electric power only and do not include transmission, however, the Term, Lead Time, and Quantity limits do apply to transmission. Authorized products include electric power and transmission, including both physical and financial derivatives, as well as capacity and ancillary services. Financial derivatives may be Over-the-Counter Electric Forwards and Options or Exchange Traded Products. Authority for CAISO products is defined in the authority matrix below. Glendale Water & Power 23 Created November 2003

4.5.2 CAISO TRANSACTION LIMITS The following outlines transaction limits, definitions, and procedural requirements for CAISO transactions. CAISO Per Transaction Limits (up to) Title Product Delivery Lead Time Term MW Size $/MWh City Council All CAISO Products No Limit No Limit City Manager and General Manager Assistant General Manager of Supply Energy Trader /Marketer APM Supplemental Energy Ancillary Services As required by CAISO < 1 Hour < 1 Operating Day Congestion Revenue Rights < 10 Years 25 $20 Supplemental Energy Ancillary Services As required by CAISO < 1 Hour < 1 Operating Day Congestion Revenue Rights < Seasonal 25 $15 Supplemental Energy Ancillary Services As required by CAISO < 1 Hour 100 $400 < 1 Operating Day 50 CAISO Price Cap Congestion Revenue Rights < 1 Month 25 $10 Supplemental Energy Ancillary Services As required by CAISO < 1 Hour 50 < 1 Operating Day 50 CAISO Price Cap CAISO Price Cap Congestion Revenue Rights None None None None 4.5.2.1 CAISO Transaction Limits Matrix Explanations Limits associated with Congestion Revenue Rights are effective with the implementation of MRTU. No maximum $/MWh authority given to Assistant General Manager of Supply and above is provided for emergency situations only Glendale Water & Power 24 Created November 2003

4.5.3 EMISSION ALLOWANCES TRANSACTION LIMITS The following outlines transaction limits, definitions, and procedural requirements for emissions transactions. Title Product Term City Council City Manager and General Manager AGM Supply, Term Energy Trader /Marketer, Day Ahead Energy Marketer/ Trader, APM Federal SO2 and NOx Emission Allowances Federal SO2 Emission Allowances Federal NOx Emission Allowances Federal SO2 and NOx Emission Allowances No Limit > 2 Years < 5 Years < 2 Years > 2 Years < 5 Years < 2 Years Per Transaction Limits (up to) Volume Lead Tons $/Ton (1) Time (2) No Limit < 3 Years Aggregate Limits (up to) Total Total $ Volume Tons (2) No Authority 4.5.3.1 Emission Allowance Transaction Limits Matrix Explanations Per Transaction Limits represent the total quantity in tons and dollars/ton for each transaction executed. Aggregate Limits represent the sum total quantity in tons and dollars for all forward transactions. Lead time represents the time period from the date a trade is executed to the start of the trade. The $/Ton and Total $ authority is provided for emergency compliance situations only Glendale Water & Power 25 Created November 2003

4.5.4 RENEWABLE ENERGY CREDITS & CARBON ALLOWANCES TRANSACTION LIMITS The following outlines transaction limits, definitions, and procedural requirements for renewable energy credit (REC) transactions and carbon (CO2e) allowances. Title Product Term City Council City Manager and General Manager RECs & CO2e RECs & CO2e Per Transaction Limits (up to) Total Lead Volume/ Time Hr No No Limit Limit > 2 Years < 5 Years < 3 Years < 2 Years $per REC/CO2e Aggregate Limits Total Volume MWH Total $...... Term Energy Trader /Marketer RECs & CO2e > 1 Month < 4 Months > 1 Week < 1 Month < 1 Week < 18 Months 50 100 200 $50/CO2e Allowance; $60/REC $50/CO2e Allowance; $60/REC $50/CO2e Allowance; $60/REC Set in Hedge Plans Set in Hedge Plans Set in Hedge Plans Set in Hedge Plans Set in Hedge Plans Set in Hedge Plans Day Ahead Energy Marketer/ Trader RECs & CO2e > 1 Week < 1 Month < 1 Month < 1 Week 100 200 $50/CO2e Allowance; $60/REC $50/CO2e Allowance; $60/REC Set in Hedge Plans Set in Hedge Plans Set in Hedge Plans Set in Hedge Plans APM RECs & CO2e < 1 Day < 1 Day 100 $50/CO2e Allowance; $60/REC Set in Hedge Plans Set in Hedge Plans Glendale Water & Power 26 Created November 2003

4.5.4.1 Renewable Energy Credits & Carbon AllowanceTransaction Limits Matrix Explanations The matrix above addresses authority for Renewable Energy Credits (REC s) and Carbon Allowances. Transaction Limits represent the total MWhs or allowances volume and dollars/mwh for each REC or Carbon Allowance transaction executed. Aggregate Limits represent the total MWh and allowance volume and dollars for all forward transactions. The $/MWh and Total $ authority are provided for emergency compliance situations only 4.6 CHANGING LIMITS Limits depend on evolving business needs and/or risk tolerance. Limits may be adjusted, upward, only by the City Manager or his designee. Energy Marketers are responsible for maintaining all limits. GWP Assistant General Manager of Supply and GWP Energy Risk Manager shall monitor the effectiveness of limits to control transaction activities and propose changes in limits as market conditions or operating circumstances warrant. 5. CREDIT RISK MANAGEMENT PHILOSOPHY To protect its financial integrity, GWP will actively manage its credit risk by making risk informed decisions regarding which counterparties to transact with and how much business it will conduct with them. Credit risk is defined as the risk of counterparty nonperformance, or failure to deliver its obligation (whether that is an energy product or payment of amounts owed). 5.1 CREDIT POLICIES GWP manages its credit risk by: Incorporating the expected transacting volumes, timing, and expected energy prices, when establishing a credit risk tolerance for a calendar year; Assessing counterparty creditworthiness and establishing credit limits for counterparties based on that assessment; Requiring a counterparty to be assigned a credit limit prior to transacting with it; Monitoring and assessing market and counterparty events to adjust credit limits as appropriate; Calculating and reporting counterparty credit exposures; and Glendale Water & Power 27 Created November 2003