HomeMy WebLinkAbout2020-11-19; Clean Energy Alliance JPA; ; Approved Clean Energy Alliance Energy Risk Management PolicyClean Energy Alliance
JOINT POWERS AUTHORITY
Staff Report
DATE: November 19, 2020
TO: Clean Energy Alliance Board of Directors
FROM: Barbara Boswell, Interim Chief Executive Officer
ITEM 2: Approved Clean Energy Alliance Energy Risk Management Policy
RECOMMENDATION:
Approve Clean Energy Alliance Energy Risk Management Policy.
BACKGROUND AND DISCUSSION:
At its regular meeting October 15, 2020, the Clean Energy Alliance (CEA) Board received a presentation
on the draft Energy Risk Management Policy (ERMP or Policy).
As a load serving entity, CEA will be transacting in the wholesale energy market. These transactions
include procurement of energy products needed to fulfill customer needs and meet regulatory
compliance requirements, the negotiation of contracts for those products, review and validation of
related invoices, payments of invoices, resolution of disputes and management of credit concerns.
These transactions have inherent risks that CEA will be required to manage. The ERMP provides a
framework and related guidance, intended to establish procedures for administration of the tasks and
responsibilities related to risk management, including identification of necessary roles and
responsibilities assigned to those individuals and groups who will be involved in the energy transactions
process and risk management activities. The ERMP as proposed reflects similar policies adopted by
operating CCAs.
Energy market risks that the ERMP is intended to assist CEA in addressing include:
•Market Price Risk— exposure to changes in wholesale energy prices
•Counterparty Credit and Performance Risk — inability or unwillingness of a counterparty to
perform according to its contractual obligations
•Load and Generation Volumetric Risk — inaccuracies in load forecasts resulting in over- or
under-procurement of energy and/or customer rate revenues that deviate from projections
•Operational Risk — potential for failure to execute and control business activities relative to
plan
•Liquidity Risk — risk that CEA will be unable to meet its financial obligations
•Regulatory/Legislative Risk— shifting state and federal regulatory policies, rules, and
requirements that could negatively impact CEA
To mitigate CEA's exposure to such risks, the Policy has been drafted to focus on the following key
principles:
November 19, 2020
Energy Risk Mgmt Policy
Page 2 of 4
•Risk Management Goals and Principles
o CEA will manage its energy portfolio with the purpose of reducing energy-related
greenhouse gas emissions, promoting electric rate stability and fostering local
economic benefits while contemporaneously minimizing risks.
•Internal Control Principles
o Internal control principles consist of business practices designed to prevent errors
and improprieties, ensure accurate and timely reporting of operational results and
information pertinent to management, and facilitate attainment of business
objectives. Key principles include the segregation of duties between front, middle
and back office functions, and delegation of authority related to procurement
activities.
•Risk Management Business Practices
o A key component of the Policy is the requirement to regularly report risk metrics
such as open positions, value-at-risk, and credit exposure.
•Risk Management Policy Governance
o After the Board approves the Policy, it will oversee Policy administration until a Risk
Oversight Committee is formed.
As proposed, the ERMP recommends:
•Internal controls whereby certain responsibilities/functions will be segregated;
•CEA's Board will oversee initial implementation of the ERMP and adopt future amendments
as necessary;
•A Risk Oversight Committee (ROC) be created to include:
o One CEA Board Member
o Chief Executive Officer
c Chief Financial Officer
o General Counsel
c Chief Operating Officer/Procurement Director (If/When Hired)
c Technical Consultants will serve an advisory role
The Policy recommends the ROC:
•Meet beginning in late 2020 or early 2021;
•Meet a minimum of once per quarter;
•Provide updates to the Board regarding its meetings at least once per quarter;
•Adopt/adapt risk management guidelines;
•Specify permitted transactions and set related risk limits;
•Report any material violations of the Policy to the Board;
•Periodically review the ERMP and recommend updates.
Delegation of Authority
Delegations of Authority (DOAs) allow for timely and efficient participation in energy transactions.
Unlike most other transactions that agencies enter into, energy transactions frequently require quick
approval, sometimes within a matter of hours. Included in the ERMP is a proposed DOA to guide CEA
energy transactions execution.
November 19, 2020
Energy Risk Mgmt Policy
Page 3 of 4
The proposed DOA:
•Shall be set at amounts commensurate with expected procurement levels and inclusive of
designated executive staff and leadership;
•Allows for timely authorization to procure products that require quick responses;
•Executed transactions will be reported at the next Board meeting.
The chart below reflects anticipated energy transactions, anticipated volumes and notional values of the
transactions, which have been used to develop the proposed DOA:
DRAFT EXAMPLE
Estimated average transaction sizes and terms for individual
confirmations
CEA estimated annual power supply costs are =$65 million
annually
Resource Type Typical Annual
Total MWh or MW
Usual
Term
Term Used
for
Calculation
Price
($/MWh or
WkW-mo)
Notional
Value
System Power 400,000 1-3 years 3 $36.00 $43,200,000
Resource Adequacy 1,200 1-3 years 3 $7.50 $27,000,000
Short-term Renewables 200,000 1-3 years 3 $16.00 $9,600,000
GHG-free 100,000 1-3 years 3 $5.00 $1,500,000
Long-term Renewables (fixed
price) 250,000
10 years
+ 15 $35.00 $131,250,000
Long-term Renewables (index
plus) 250,000
10 years
+ 10 $14.00 $35,000,000
System Power (for launch, 2
counterparties) 500,000 1-3 years 3 $36.00 $54,000,000
The proposed DOA is shown below:
Delegation of Authority: Title/Governing 1
Body Product Type Tenor Limit Volumetric Limit Notional Value
Limit
Chief Executive Officer
System Power Up to 1 year 400,000 MWh. $ 15,000,000
Resource Adequacy Up to 1 year 1,500 MW $ 10,000,000
Renewables Up to 1 year 200,000 MWh $ 3,500,000
GHG-free 1 Up to 1 year 200,000 MWh $ 1,000,000
Chief Executive Officer ÷ CEA Board Chair All Products 1 to 5 years Unlimited $ 75,000,000
CEA Board All Products Any Unlimited Unlimited
The adoption of the ERMP will set the course for CEA's effective and efficient operations in the energy
market while providing controls and establishing procedures to mitigate and minimize the associated
risks.
November 19, 2020
Energy Risk Mgmt Policy
Page 4 of 4
FISCAL IMPACT
There is no fiscal impact by this action.
ATTACHMENTS:
Clean Energy Alliance Energy Risk Management Policy
CEA-13
CLEAN
ENERGY
ALLIANCE
Energy Risk Management Policy
Version: 1.0
Approval Date: 11/19/20
CEA-13
Energy Risk Management Policy
Table of Contents
1.0 General Provisions 3
1.1 Background and Purpose of Policy 3
1.2 Scope of Business and Related Market Risks 3
1.3 Policy Administration 4
1.4 Policy Distribution and Acknowledgment 4
1.5 Policy Interpretation 4
2.0 Risk Management Goals 4
3.0 Risk Management Principles 5
3.1 General Risk Management Principles 5
3.2 Conflicts of Interest 5
3.3 Adherence to Statutory Requirements 5
3.4 System of Records 6
4.0 Definitions of Market Risks 6
4.1 Market Price Risk 6
4.2 Counterparty Credit and Performance Risk 7
4.3 Load and Generation Volumetric Risk 7
4.4 Operational Risk 8
4.5 Liquidity Risk 8
4.6 Regulatory/Legislative Risk 9
5.0 Internal Control Principles 9
6.0 Risk Management Business Practices 10
6.1 Risk Measurement Metrics and Reporting 10
6.2 Market Price Risk 11
6.3 Counterparty Credit and Performance Risk 12
6.4 Load and Generation Volumetric Risk 12
6.5 Operational Risk 12
6.6 Liquidity Risk 13
6.7 Regulatory/Legislative Risk 13
7.0 Risk Management Policy Governance 13
7.1 CEA Board of Directors 13
7.2 Risk Oversight Committee (ROC) 14
2
CEA-13
Energy Risk Management Policy
1.0 General Provisions
1.1 Background and Purpose of Policy
Clean Energy Alliance (CEA) participates in energy markets for purposes of fulfilling its role as a Community
Choice Aggregator serving retail electricity customers located within the San Diego region. This Energy
Risk Management Policy (Policy) has been developed to facilitate the achievement of CEA's organizational
objectives while adhering to policies established by CEA's Board of Directors (Board), power supply and
related contractual commitments, good utility practice, and applicable laws and regulations.
This Policy defines CEA's general energy risk management framework and provides management with the
authority to establish processes for monitoring, measuring, reporting, and controlling market and credit
risks to which CEA is exposed in its normal course of business.
1.2 Scope of Business and Related Market Risks
Beginning in May 2021, CEA will provide electric energy to retail customers within its service territory,
which requires completion of the following business activities: bilateral purchases and sales of electricity
under short-, medium- and long- term contracts; scheduling of load and generation of electricity into
California Independent System Operator (CAISO) markets; retail marketing of electricity to consumers
within its service territory; compliance with voluntary objectives and regulatory requirements that relate
to carbon-free and Renewables Portfolio Standard (RPS) compliance; participation in the CAISO-
ad ministered Congestion Revenue Rights ("CRRs") market; management of the balance between load and
generation over the short-, medium- and long-term planning horizons; and compliance with California
Public Utilities Commission (CPUC) Resource Adequacy (RA) requirements. Participation in such activities
expose CEA to certain risks, which include, but are not limited to, the following:
•Market Price Risk
•Counterparty Credit and Performance Risk
•Load and Generation Volumetric Risk
•Operational Risk
•Liquidity Risk
•Regulatory/Legislative Risk
To mitigate CEA's exposure to such risks, this Policy has been drafted to focus on the following areas of
concern:
•Risk Management Goals and Principles
•Definitions of Risks
•Internal Control Principles
•Risk Management Business Practices
•Risk Management Governance
This Policy does not address the following types of general business risk, which should be treated
separately in other policies, ordinances and regulations pertaining to CEA: fire, accident and casualty;
health, safety, and workers' compensation; general liability; and other such typically insurable perils. The
3
CEA-13
term "risk management," as used herein, is therefore understood to refer solely to market risks as defined
herein, and not those other categories of risk.
1.3 Policy Administration
This version of the Energy Risk Management Policy was adopted by the CEA Board of Directors on
November 19, 2020. This Policy may be amended as needed by CEA's Board.
1.4 Policy Distribution and Acknowledgment
This Policy shall be distributed to all CEA employees and third-party contractors who are engaged in the
planning, procurement, sale and scheduling of electricity on CEA's behalf and/or in other CEA departments
providing oversight and support for these activities. All such employees and contractors are required to
confirm in writing on an annual basis that they:
•Have read CEA's Risk Management Policy
•Understand pertinent terms and requirements of the Policy
•Affirm the intent to comply with the Policy
•Understand that any violation of the Policy shall be subject to employee discipline up to and
including termination of employment.
1.5 Policy Interpretation
Questions about the interpretation of any matters related to the Policy should be referred to the Risk
Oversight Committee (ROC) or, if the ROC has not yet been formed, CEA's Board. All legal matters
stemming from this Policy will be referred to General Counsel.
2.0 Risk Management Goals
The goals of CEA's energy risk management practices are to:
[1]assist in achieving the business objectives of retail rate stability and competitiveness;
[2]avoid losses and excessive costs, which would materially impact the financial condition of CEA;
[3]establish the parameters for energy procurement and sales activity to minimize costs while
ensuring compliance with approved risk limits and policy objectives;
[4]assist in assuring that market activities and transactions are undertaken in compliance with
established procurement authorities, applicable laws, regulations and orders; and
[5]encourage the development and maintenance of a corporate culture at CEA in which the proper
balance is struck between control and facilitation and in which professionalism, discipline, technical
skills, and analytical rigor come together to achieve CEA objectives.
4
CEA-13
3.0 Risk Management Principles
3.1 General Risk Management Principles
CEA manages its energy resources and transactions with the objectives of reducing greenhouse gas
emissions, supporting local economic development and providing customers with stable, competitive
electric rates while contemporaneously minimizing risks. CEA's risk management principles include the
identification of relevant risks, systematic risk measurement and reporting, and strict adherence to
established risk policies. CEA will not engage in transactions without proper authorization or if such
transactions are determined to be inconsistent with this Policy.
It is the policy of CEA that all personnel, including the Board, management, and agents, adhere to
standards of integrity, ethics, conflicts of interest, compliance with statutory law and regulations and
other applicable CEA standards of personal conduct while employed by or affiliated with CEA.
3.2 Conflicts of Interest
All CEA Directors, management, employees, consultants, and agents participating in any transaction or
activity within the coverage of this Policy are obligated to give notice in writing to CEA of any financial
interest such person has in any counterparty that seeks to do business with CEA, and to identify any real
or potential conflict of interest such person has or may have with regard to any existing or potential
contract or transaction with CEA. Further, all persons are prohibited from personally participating in any
transaction or similar activity that is within the coverage of this Policy, or prohibited by California
Government Code § 1090, and that is directly or indirectly related to the trading of electricity and/or
environmental attributes as a commodity.
If there is any doubt as to whether a prohibited condition exists, then it is the employee's responsibility
to discuss the possible prohibited condition with her/his manager or supervisor.
3.3 Adherence to Statutory Requirements
Compliance is required with rules promulgated by the state of California, California Public Utilities
Commission, California Energy Commission, Federal Energy Regulatory Commission (FERC), Commodity
Futures Trading Commission (CFTC), and other regulatory agencies.
Congress, FERC and CFTC have enacted laws, regulations, and rules that prohibit, among other things,
any action or course of conduct that actually or potentially operates as a fraud or deceit upon any person
in connection with the purchase or sale of electric energy or transmission services. These laws also
prohibit any person or entity from making any untrue statement of fact or omitting to state a material
fact where the omission would make a statement misleading. Violation of these laws can lead to both
civil and criminal actions against the individual involved, as well as CEA. This Policy is intended to comply
with these laws, regulations and rules and to avoid improper conduct on the part of anyone employed
by CEA. These procedures may be modified from time to time by legal requirements, auditor
recommendations, requests from the CEO and/or ROC, and other considerations.
In the event of an investigation or inquiry by a regulatory agency, CEA will provide legal counsel to
employees. However, CEA will not appoint legal counsel to an employee if CEA's General Counsel and
Chief Executive Officer determine that the employee was not acting in good faith within the scope of
employment. CEA employees are prohibited from working for another power supplier, CCA or utility in a
5
CEA-13
related position while they are simultaneously employed by CEA unless an exception is authorized by the
Board. For clarity, this prohibition is not intended to prevent CEA staff from performing non-CCA activities
on behalf of CEA in the normal course of its business.
3.4 System of Records
CEA will maintain a set of records for all transactions executed in association with CEA's procurement
activities. The records will be maintained in US dollars and transactions will be separately recorded and
categorized by type of transaction. This system of record shall be auditable.
4.0 Definitions of Market Risks
The term "market risks," as used herein, refers specifically to those categories of risk which relate to CEA's
participation in wholesale and retail markets as a Load Serving Entity (LSE) as well as CEA's interests in
certain long-term contracting opportunities. Market risks include market price risk, counterparty credit
and performance risk, load and generation volumetric risk, operational risk and liquidity risk, as well as
regulatory and legislative risk. These categories are defined and explained as follows.
4.1 Market Price Risk
Market price risk is defined as exposure to changes in wholesale energy prices. Market price risk is a
function of price volatility and the volume of energy that is contracted at fixed prices over a defined period
of time. Prices in electricity markets exhibit high volatility, and appropriate forward procurement and
hedging approaches are necessary to manage exposure to pricing volatility within the CAISO or bilateral
energy markets.
Market price risk is also impacted by market liquidity, which may be an issue for certain energy or capacity
products that CEA procures. Illiquid markets are characterized by relatively few buyers or sellers, making
it more difficult to buy or sell a commodity and often resulting in higher premiums on purchases or deeper
discounts on sales.
Another dimension of market price risk is congestion or "basis" risk. Congestion risks arise from the
locational differences in prices between the point of delivery of CEA's load (meaning, power consumed
by customers) and its contracted supply.
For CEA, market price risk manifests in two types of exposure. The first type of market price risk exposure
is the potential for variations in power costs that are related to CEA's "open positions", meaning the
volume of energy that will ultimately be required for delivery to CEA customers but that has not yet been
purchased. Increases in market prices will increase CEA's costs when those open positions are eventually
filled at the higher prices. Incurrence of higher than anticipated power costs can reduce funds available
for financial reserves or other planned uses and can lead to the need for rate increases. Market price risk
exposure related to open positions are monitored through net open position valuations and value at risk
metrics as described in Section 6.1 of this Policy.
The second type of market price risk exposure is the potential for wholesale trading positions, long-term
supply contracts and generation resources to move "out of the money," that is, become less valuable
when compared to similar positions, contracts or resources obtainable at present prices. These same
positions can also be "in the money" if such positions become more valuable when compared to similar
positions, contracts or resources obtainable at present market prices. This valuation methodology is
6
CEA-13
commonly referred to as "Mark to Market." Transaction valuation and reporting of positions shall be
based on objective, market-observed prices. If CEA is "out of the money" on a substantial portion of its
contracts, it may have to charge higher retail rates relative to competitors. Such a situation could erode
CEA's competitive position and market share if other market participants Direct Access providers
or SDG&E) are able to procure power at a lower cost and offer lower retail electric rates.
4.2 Counterparty Credit and Performance Risk
Performance and credit risk refer to the inability or unwillingness of a counterparty to perform according
to its contractual obligations. Failure to perform may arise if an energy supplier fails to deliver energy as
agreed. There are four general performance and credit risk scenarios:
[1]counterparties and wholesale suppliers may fail to deliver energy or environmental attributes,
requiring CEA to purchase replacement products elsewhere, possibly at higher costs;
[2]counterparties may fail to take delivery of energy or environmental attributes sold to them,
necessitating a quick resale of the product elsewhere, possibly at a lower price;
[3]counterparties may fail to pay for delivered energy or environmental attributes; and
[4]counterparties and suppliers may refuse to extend credit to CEA, possibly resulting in higher
collateral posting costs, which could impact CEA's cash position and/or bank lines of credit.
An important subcategory of credit risk is concentration risk. When a portfolio of positions and resources
is concentrated with one or a very small number of counterparties, generating resources, or geographic
locations, it becomes more likely that major losses will be sustained in the event of non-performance by
a counterparty/supplier or as a result of unexpected price fluctuations at one location.
4.3 Load and Generation Volumetric Risk
Energy deliveries must be planned in consideration of forecasted load. CEA forecasts load over the long
and short term and enters into long- and short-term fixed price energy contracts to hedge its load
consistent with the provisions of its Integrated Resource Plan (IRP).
Load forecasting risk arises from inaccurate load forecasts and may result in the over- or under-
procurement of energy and/or customer rate revenues that deviate from approved budgets. Energy
delivery risk occurs if a generator fails to deliver expected or forecasted energy volumes. Variations in
wind speed and cloud cover, for example, can also impact the respective amount of electricity generated
by wind and solar resources. Furthermore, the occasional oversupply of power on California's electric
grid can lead to curtailment of energy deliveries or reduced revenue resulting from low or negative prices
at certain energy delivery points. In general, weather is an important variable that can result in higher or
lower electricity usage due to its impact of customer electricity usage (heating and cooling needs, for
example) as well as energy production (by generators that are commonly impacted by ambient weather
conditions).
In the CAISO markets this situation can result from both the oversupply and undersupply of electricity
relative to CEA's load as well as the over- or under-scheduling of generation or load into the day ahead
market (relative to actual energy consumed or delivered in the real-time market). Load and generation
volumetric risk may result in unanticipated open positions and imbalance energy costs, which are assessed
7
CEA-13
when actual and scheduled loads do not align. More specifically, imbalance energy costs result from
temporal pricing differences that often exist in the day-ahead and real-time energy markets during
discrete scheduling intervals. For example, if CEA's actual load is higher than scheduled in the day-ahead
market, and real-time prices are comparatively high during such instances, then CEA bears the risk of
higher-than-anticipated energy costs due to such variation.
4.4 Operational Risk
Operational risk consists of the potential for failure to execute and control business activities relative to
plan. Operational risk includes the potential for:
[1]organizational structure that proves to be ineffective in addressing risk, i.e., the lack of sufficient
authority to make and execute decisions, inadequate supervision, ineffective internal checks and
balances, incomplete, inaccurate and untimely forecasts or reporting, failure to separate incompatible
functions, etc.;
[2]absence, shortage or loss of key personnel or lack of cross-functional training;
[3]lack or failure of facilities, equipment, systems and tools, such as computers, software,
communications links and data services;
[4]exposure to litigation or sanctions resulting from violating laws and regulations, not meeting
contractual obligations, failure to address legal issues and/or receive competent legal advice, not
drafting and analyzing contracts effectively, etc.; and
[5]errors or omissions in the conduct of business, including failure to execute transactions, violation
of guidelines and directives, etc.
4.5 Liquidity Risk
Liquidity Risk is the risk that CEA will be unable to meet its financial obligations. This can be caused by
unexpected financial events and/or inaccurate pro forma calculations, rate analyses, and debt analyses.
Some unexpected financial events impacting liquidity could include:
[1]breach of CEA credit covenants or thresholds — CEA has credit covenants included in its banking
agreements and may, eventually, have similar covenants within its energy contracts. Breach of credit
covenants or thresholds could result in the withdrawal of CEA's line of credit or may trigger the
requirement to post collateral;
[2]contractual requirements to post collateral (with counterparties) due to a decline in market prices
below the contract price; and
[3]from time to time CEA may be the subject of legal or other claims arising from the normal course
of business. Payment of a claim by CEA could reduce CEA's liquidity if the cause of loss is not covered
by CEA's insurance policies.
8
CEA-13
4.6 Regulatory/Legislative Risk
Regulatory risk encompasses market structure and operational risks associated with shifting state and
federal regulatory policies, rules, and requirements that could negatively impact CEA. An example is the
potential increase in exit fees for customers served by Community Choice Aggregators that could result in
higher overall electricity costs for CEA customers (relative to SDG&E or DA service options).
Legislative risk is associated with actions by federal and state legislative bodies, which may impose adverse
changes or requirements that could infringe upon CEAis autonomy, increase its costs, or otherwise
negatively impact CEA's ability to fulfill its goals and objectives.
5.0 Internal Control Principles
Internal controls are based on proven principles that meet or exceed the requirements of financial
institutions and credit rating agencies while also being considerate of good utility practice. The required
controls shall include all customary and usual business practices designed to prevent errors and
improprieties, ensure accurate and timely reporting of results of operations as well as information
pertinent to management, and facilitate attainment of business objectives. These controls shall remain
fully integrated in all activities of the business and shall be consistent with stated objectives. There shall
be active participation by senior management in risk management processes.
The required controls include the following:
[1] Segregation of duties and functions between front, middle, and back office activities. In general
terms, the designation of responsibilities shall be organized as follows:
•Front office is responsible for planning (e.g. preparation of the IRP and other planning activities)
and procurement (e.g. solicitation management, contract negotiation, structuring and pricing as
well as contract execution), contract management, compliance and oversight of scheduling
coordinator functions with the CAISO;
•Middle office is responsible for controls and reporting (e.g., risk monitoring, risk measurement,
risk reporting, procurement compliance, counterparty credit review, approval and monitoring);
and
•Back office is responsible for settlements and processing (e.g., verification, validation,
reconciliation and analysis of transactions, tracking, processing and settlement of transactions).
[2]Delegation of authority as defined in section 6.5 (below) that is commensurate with responsibility
and capability, and relevant training to ensure adequate knowledge to operate in and comply with
rules associated with the markets in which such personnel may transact (e.g., CAIS0). Contract
origination, commercial approval, legal review, invoice validation, and transaction auditing shall be
performed by separate staff or contractors for each transaction. No individual staff member shall
perform all of these functions on a single transaction.
[3]Defining authorized products and transactions. In general terms, authorized and prohibited
transactions are defined as follows:
9
CEA-13
•Authorized transactions are those transactions directly related to the procurement and/or
administration of electric energy, reserve capacity, transmission and distribution service, ancillary
services, congestion revenue rights, renewable energy, renewable energy credits, scheduling
activities, tolling agreements, and bilateral purchases of energy products. All transactions must
be consistent with this Policy and the Board approved IRP.
•It is the expressed intent of this Policy to prohibit the acquisition of risk beyond that encountered
in the efficient optimization of CEA's generation portfolio and execution of procurement
strategies. Prohibited transactions are those transactions that are not related to serving retail
electric load and/or reducing financial exposure. Speculative buying and selling of energy products
or maintenance of open positions that do not conform with agreed upon thresholds is prohibited.
Speculation is defined as buying energy in excess of forecasted load plus reasonable planning
reserves, intentionally under procuring energy relative to minimum load hedging targets or selling
energy or environmental attributes that are not yet owned by CEA. In no event shall speculative
transactions be permitted. Any financial derivatives transaction including, but not limited to
futures, swaps, options, and swap options are also prohibited. If any questions arise as to whether
a proposed transaction(s) constitutes speculation, CEA shall conduct an analysis of the transaction
and the Board shall review the transaction(s) to determine whether the transaction(s) would
constitute speculation and document its finding in the meeting minutes.
[4]Defining proper process for executing power supply contracts. CEA will ensure power supply
contracts are approved by pertinent technical personnel. Legal review will be required of various
forms of agreement used by CEA.
[5]Accurately capturing transactions and other data, with standardization of electronic and hard copy
documentation.
[6]Summarizing and reporting of transactions and other activity at regular intervals.
[7]Measuring risk and performance in a timely manner and at regular intervals.
[8]Regularly reviewing compliance to ensure that this Policy and related risk management guidelines
are adhered to, with specific guidelines for resolving instances of noncompliance.
[9]Ensuring active participation by senior management in risk management processes.
6.0 Risk Management Business Practices
6.1 Risk Measurement Metrics and Reporting
A vital element of this Policy is the regular identification, measurement and communication of risk. To
effectively communicate risk, all risk management activities must be monitored on a frequent basis
using risk measurement methodologies that quantify the risks associated with CEA's procurement-
related business activities and performance relative to stated goals.
CEA measures and updates its risks using a variety of tools that model programmatic financial
projections, market exposure and risk metrics, as well as through short-term budget updates. The
following items are measured, monitored and reported:
10
CEA-13
11] Mark-to-Market Valuation — marking to market is the process of determining the current
value of contracted supply. A mark-to-market valuation shall be performed at least once per
quarter.
[2]Exposure Reporting — calculates the notional dollar risk exposure and value at risk of open
portfolio positions at current market prices. The exposure risk calculations shall be performed
at least once per quarter.
[3]Open Position Monitoring— on a monthly basis, CEA shall calculate/monitor its open positions
for all energy and capacity products. If energy open positions for the month following the then
current month (prompt month) exceed 10% of load, CEA will solicit market energy to close open
positions and make a commercial decision to close the position. Open positions for terms
beyond the prompt month will be monitored monthly and addressed in accordance with CEA's
planning models and related policies.
[4]Counterparty Credit Exposure — calculates the notional and mark-to-market exposure to each
CEA counterparty by deal and in aggregate. Counterparty credit exposure shall be reported on
a quarterly basis. Counterparty exposure reporting includes contingent collateral posting risks
arising from changes in market prices and other factors.
[5]Reserve Requirement Targets — no less than once per year, CEA staff will monitor CEA's
reserves to ensure that they meet the targeted thresholds.
Consistent with the above, the Middle Office will develop reports and provide feedback to the Risk
Oversight Committee. If a limit or control established by this Policy is violated, the Middle Office will
send notification to the responsible party and the Risk Oversight Committee. The Risk Oversight
Committee will discuss the cause and potential remediation of any violation to determine next steps for
curing the violation.
Risk measurement methodologies shall be re-evaluated on a periodic basis to ensure CEA adjusts its
methods to reflect the evolving competitive landscape.
6.2 Market Price Risk
CEA manages market price risk using its planning models which define forecasted load, energy under
contract and CEA's open positions across various energy product types including renewable energy
(Portfolio Content Category I and II; CEA does not anticipate procuring Portfolio Content Category III
products), carbon-free energy and system power relative to CEA's procurement targets.
CEA determines the quantity of energy it intends to place under contract each year through the use of its
planning models and in consideration of stated procurement targets. The planning models include an
outline of the delivery term and quantity of each energy product that CEA intends to fill in the upcoming
year. The planning models inform CEA's solicitation planning, including solicitation timing and strategy as
well as the person/team responsible for related solicitations.
In general, CEA will seek to purchase some long-term renewable energy each year for purposes of
diversifying market exposure while also avoiding potential "planning cliffs", which can occur when a
significant portion of long-term contracts expire at or near the same point in time.
11
CEA-13
For products generally purchased through short- and medium-term contracts, CEA follows a similar
temporal diversification strategy, with multiple procurement cycles occurring throughout the year.
Congestion risk is managed through the contracting process with a preference for day-ahead energy
delivery at the SP 15 trading hub. Once energy is procured, CEA manages congestion risks through the
application of CRRs consistent with its Congestion Revenue Rights Risk Management Guidelines. CRRs are
financial instruments used to hedge against transmission congestion costs encountered in the CAISO day-
ahead market. CEA uses a third-party scheduling coordinator to manage its CRR portfolio. CEA primarily
uses CRRs to reduce its exposure to congestion charges.
6.3 Counterparty Credit and Performance Risk
CEA shall evaluate and monitor the financial strength of its suppliers in consideration of adopted Credit
Guidelines. Generally, CEA manages its exposure to energy suppliers by exhibiting a preference for
counterparties with Investment Grade Credit ratings as determined by Moody's or Standard and Poor's
and through the use of security requirements in the form of cash and letters of credit. CEA measures its
mark-to-market counterparty credit exposure consistent with industry best practices.
6.4 Load and Generation Volumetric Risk
CEA manages energy delivery risks by ensuring that contracts include appropriate contractual penalties
for non-delivery, acquiring energy from a geographically and technologically diverse portfolio of
generating assets (with a range of generation profiles that are generally complementary to the manner in
which CEA's customers use electric power). Due to known production variability and supply uncertainty
related to renewable and other carbon-free energy products, CEA includes planning margins in its
procurement of such products to ensure that related targets/mandates are achieved.
CEA manages load forecasting and related weather risks by contracting with qualified data management
and scheduling coordinators, which independently or jointly provide the systems and data necessary to
forecast and schedule load using good utility practice. Load variability is also considered in establishing
appropriate planning margins for renewable and other carbon free energy sources.
CEA's load scheduling strategy, as executed by its scheduling coordinator, shall be in accordance with
adopted Load Bidding/Scheduling Guidelines. This strategy shall ensure that price risk in the day-ahead
and real-time CAISO markets is managed effectively and is consistent with good utility practice.
6.5 Operational Risk
Operational risks are managed through:
•Adherence to this Policy, and oversight of procurement activity including delegation of
authority;
•Conformance with applicable human resources policies and guidelines;
•Staff resources, expertise and/or training reinforcing a culture of compliance;
•Use of qualified, highly experienced contractors on an as-needed basis in the event that
necessary expertise does not exist within CEA's own organization;
•Ongoing and timely internal and external audits; and
•Cross-training amongst staff
12
CEA-13
To ensure proper controls for executing energy transactions and to facilitate the efficient operation of
CEA in its ordinary course of business, the Board delegates transactional authority that is commensurate
with responsibility and capability. Accordingly, by approving this Policy, the Board delegates the following
energy procurement authorities by product type, tenor, volume and notional value to its Chief Executive
Officer and the ROC:
Delegation of Authority: Title/Governing
Body Product Type Tenor Limit Volumetric Limit Notional Value
Limit
Chief Executive Officer
System Power Up to 1 year 400,000 MWh $ 15,000,000
Resource Adequacy Up to 1 year 1,500 MW $ 10,000,000
Renewables Up to 1 year 200,000 MWh $ 3,500,000
GHG-free Up to 1 year 200,000 MWh $ 1,000,000
Chief Executive Officer + CEA Board Chair All Products 1 to 5 years Unlimited $ 75,000,000
CEA Board All Products Any Unlimited Unlimited
Any changes to the delegation of authority will require Board approval.
6.6 Liquidity Risk
CEA manages liquidity risk through adherence to its loan and power purchase agreement credit
covenants; limiting commitments to provide security consistent with adopted Credit Guidelines; ensuring
it has adequate loan facilities, prudent cash and investment management; and adherence to any
applicable reserve policies. CEA monitors its liquidity (defined as unrestricted cash, investments, and
unused bank lines of credit) no less than weekly. CEA utilizes scenario and sensitivity analyses while
preparing budget, rate, and pro forma analyses to identify potential financial outcomes and ensure
sufficient liquidity under adverse conditions.
6.7 Regulatory/Legislative Risk
CEA manages its regulatory and legislative risk through active participation in working groups and
advocacy coalitions such as the California Community Choice Association. CEA regularly monitors and
participates in, as necessary, regulatory rulemaking proceedings and legislative affairs to protect CEA's
interests.
7.0 Risk Management Policy Governance
7.1 CEA Board of Directors
The CEA Board is responsible for adopting this Policy. The Board also approves CEA's annual budget,
contracting authorities and delegated responsibilities for the management of CEA's operations to its Chief
Executive Officer and staff. The Board is responsible for reviewing and recommending approval of
substantive changes to this Policy, as needed, and for initiating and overseeing a review of the
implementation of this Policy as it deems necessary. The Chief Executive Officer and Risk Oversight
Committee (described below) may make reports and seek approval for any substantive changes to this
Policy, and any such changes would be subject to Board approval.
13
CEA-13
7.2 Risk Oversight Committee (ROC)
To ensure the implementation of and compliance with this Policy, the Board will establish a Risk Oversight
Committee prior to the commencement of retail electric service by CEA. Members of the ROC will be
selected by the Chief Executive Officer, who will serve as the ROC's Chair. The ROC will have authority to:
•Meet at least once per quarter, or as otherwise called to order by the ROC's Chair.
•No less than once per quarter, provide a report to the Board regarding its meetings, deliberations
and any other areas of concern.
•From time to time, adopt and/or adapt risk management guidelines defining internal controls,
strategies and processes for managing market risks incurred through or attendant upon
wholesale trading, retail marketing, long-term contracting, CRR trading and load and generation
scheduling.
•Specify the categories of permitted transactions and set risk limits for wholesale trading. The
ROC will receive and review information and reports regarding risk management, wholesale
trading transactions, and the administration of supply contracts.
•Have direct responsibility for enforcing compliance with this Policy. Any material violations of
this Policy, as determined by the ROC, shall be reported to the Board for appropriate action.
14