HomeMy WebLinkAboutAgenda Report - January 18, 2006 K-02AGENDA IT E M �N* OL
Oft CITY OF LODI
COUNCIL COMMUNICATION
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AGENDA TITLE: Receive reporton risk management policies and adopt resolution approving
policy entitled, "City of Lodi Energy Risk Management Policies"(EUD)
MEETING DATE: January 18,2006
PREPARED B Y Interim Electric Utility Director
RECOMMENDED ACTION: That the City Council receive the report on Risk Management
Policies in use by comparison municipal utilities and adopt, by
Resolution, the attached City of Lodi Energy Risk Management
Policies.
BACKGROUND INFORMATION: The City Council has implemented series of measures over the
last three months, addressing the financial condition of the electric
utility. The first effort was to secure sufficient energy supplies at a
known cost in order to meet Lodi's load serving obligations to its customers and to ensure stable costs
through the balance of the fiscal year. The second effort was to increase rates through an interim Market
Cost Adjustment mechanism in order that sufficient revenues would be recovered from Lodi's customers
to coverthe costs of providing those services. The third step, which is in process, will be to transform the
interim and temporary Market Cost Adjustment into a permanent rate structure that reflects Lodi's
ongoing projected costs of operations. The fourth and final major element of activities addressing the
financial condition of Lodi Electric is the preparation of a Risk Management Plan.
Issue:
Lodi Electric procures significant portions of its energy needsthrough market purchases. These market
purchases include gas, which is converted to energy through Lodi's ownership interests in gas turbine
projects and direct purchases of electricity from the market to fulfill Lodi's load serving obligations to its
customers. Lodi has also sold surplus energy and capacity from time to time wipen it has found itself in a
surplus condition.
Reliance on the market for a large percentage of Lodi's load serving obligations and the absence of
comprehensive procurement strategies have lead to the need to procure energy in highly volatile markets
and increased costs for purchased power. As a result, the City Council has requested that Lodi Electric
prepare a Risk Management Policy and Procedure document that can be used to begin reducing the
uncertainty and volatility that Lodi has experienced regarding its energy market transactions.
To Will that request, staff has accumulated Risk Management Policy and Procedure (RMPP) documents
from the cities of Santa Clara, Palo Alto and Roseville as being representative of effective policies and
procedures and has compared and contrasted the policies of those agencies in a white paper attached to
this council communication. Based on this analysis, and review of the applicability of the policies of these
agencies to Lodi's operations, staff has prepared the attached "Energy Risk Management Policies"for
City Council review and approval.
APPROVED: iQ
BI ' , City Manager
Receive report on risk management policies and adopt resolution approving policyent#ded, "City of Lodi Energy Risk
Management Policies"(EUD)
January 18,2006
Page 2 of 2
Discussion:
The Energy Risk Management Policy addresses the following items:
• A description of the purpose and scope of the policy
• Discussion of the risk management strategy and objectives
• Identificationof risks the policy is intended to address
• Specification of allowed and prohibited transaction types
• Identification of the roles and responsibilities of oversight bodies and responsible staff
• Specification of reporting and transacting measures and controls
• Compliance criteria
Ideally, city staff charged with responsibility for transacting underthis policy andlor charged with
responsibility for acting in an oversight role underthis policy would have been given significantly more
time to review and participate in the development of this document than was able to be provided. As a
result, should the City Council approve this policy, Council should direct that the Risk Oversight
Committee (ROC) continue to review and refine this policy document and return to City Council with
recommended changeswithin six months, or earlier if determined necessary by the ROC.
FISCAL IMPACT: No immediately measurable direct fiscal impact. Adoption of this policy will provide
greater certainty of wholesale power supply costs and reduce exposure to a variety
of energy procurement cost risks.
FUNDING: Not applicable
David Dockham
Interim Electric Utility Director
DDAst
Attachments (3)
cc: City Attomey
City of Lodi
Energy Risk Management Policies
January 7, 2006
Purpose:
The purpose of the Risk Management Program is to ensure that risks associated with
Lodi's bulk power procurement program are properly identified, measured and
controlled.
Scope:
The policies are to be applied to all aspects of Lodi's wholesale procurement and sales
activities, long-term contracting associated with energy supplies, capital projects and
associated financing documents related to generation, transmission, transportation or
storage, and participation in Joint Powers Agencies (JPA's).
These policies do not address the following types of general business risk, which are
treated separately in other official policies, ordinances, and regulations of the city: fire,
accident and casualty, health, safety, workers compensation and other such typically
insurable perils.
Risk Management Program Strategies:
1. Identify, measure and control risks that would have an adverse affect on retail rate
stability
2. Assign risk management responsibilities to appropriately qualified individuals and
committees
Risk Management Program Objectives:
1. Maintain a regularly updated inventory of Lodi's Bulk Power Procurement
Program risks
2. Establish risk metrics and reporting mechanisms that provide both quantitative
and qualitative assessments of potential impacts to rate stability
3. Adopt business practices that encourage development of appropriate levels of
operating reserve funds, contribute to retail rate stability and maintain appropriate
security for established funds
Risk Inventory:
Lodi Electric must inventory and address the following categories of risk as a component
of the monitoring and reporting under the risk management program:
• Price Risk
• Credit Risk
• Operational Risk
• Contingent Liabilities
Price Risk — Price risk is the risk that wholesale prices may increase relative to open
position needs and/or long term supply contracts may move "out of the money", or
become unprofitable or costly in comparison to prevailing price levels.
2
Credit Risk — Credit risk is the risk associated with entering into any type of transaction
with another counterparty and is generally segmented into the following five categories:
1. Trading Counterparties and retail customers fail to pay for energy delivered
2. Trading counterparties and/or wholesale suppliers fail to deliver contracted for
energy
3. Trading counterparties fail to take delivery of energy sold to them, necessitating a
quick resale elsewhere, likely at a loss
4. Counterparties, may refuse to extend credit or charge a premium for credit risks
5. Counterparty transactions are too concentrated among a limited number of
suppliers
Operational Risk — Operational risk consists of the potential to effectively plan, execute
or control business activities. Operational risk includes the potential for:
1. Inadequate organizational infrastructure, i.e., the lack of sufficient authority to
make and execute decisions, inadequate supervision, absence of internal checks
and balances, incomplete and untimely planning, incomplete and untimely
reporting, failure to separate incompatible functions, etc.
2. Absence, shortage or loss of key personnel
3. Lack or failure of facilities, equipment, systems and tools such as computers,
software, communications links and data services;
4. Inability to finance capital projects or meet financial obligations incurred in the
course of wholesale operations;
5. Exposure to litigation or sanctions as a result of violating laws and regulations,
not meeting contractual obligations, failure to address legal issues and/or receive
competent legal advice, not drafting contracts effectively, etc.
6. Errors or omissions in the conduct of business, including failure to execute
transactions, violations of guidelines and directives, etc.
Contingent Liabilities — contingent liabilities consist of liabilities that Lodi could incur in
the event of the failure of other parties to discharge their obligations. At present, these
consist of three principle categories:
1. Guarantees and step up provisions in the enabling agreements for the Joint Powers
Agencies (JPAs) of which the city is a member
2. Project closure, decommissioning, environmental remediation and other
obligations which result from Lodi's own activities and from JPA projects and
activities;
3. Provisions for take or pay, termination payments and/or margin calls in the city's
long-term electric power supply agreements.
Prohibited and Authorized Transaction Types:
Prohibited Transaction Types
Speculative buying and selling of energy products is prohibited. Speculation is defined as
buying energy that is not needed for meeting forecasted load, selling energy that is not
owned and/or selling energy that is not surplus without simultaneously replacing that
energy at a lower cost. In no event shall transactions be entered into to speculate on
market conditions.
Approved Transaction Types
1. Purchase energy to serve load above what is expected to be generated or
purchased from existing resources.
2. Sell existing capacity or energy that is expected to be in excess of Lodi's load
serving obligations
3. Purchase gas that is expected to be needed to fuel owned plants
4. Sell surplus gas if more economic energy is available for purchase
5. Execute financial transactions to fix the price of variable commodity purchases or
sales
6. Purchase simple call options to limit price exposure on short gas or electricity
positions
7. Sell simple call options or tolling agreements on capacity that is expected to be in
excess of Lodi's load serving obligations
8. Purchase emissions allowances deemed necessary for efficient operations of
owned generating facilities
9. Purchase or sell firm transmission rights to manage congestion price risk
10. A purchase/sale of energy at the California Oregon Border and a sale/purchase of
energy at NP 15 to take advantage of Lodi's transmission capacity
11. A purchase of natural gas and a sale of energy to take advantage of excess gas
fired peaking capacity
12. A sale of natural gas and a purchase of electricity to take advantage of market
heat rates below NCPA gas fired generation.
Transactions that are not included in the Approved Transactions Type list are prohibited,
unless explicitly approved by the City Council.
Energy Risk Management Roles, Responsibilities and Organization:
City Council
The City Council is responsible for making high-level, broad policy and strategy
statements as contained in the Energy Risk Management Policy document. The City
Council adopts the Energy Risk Management Policies as developed and recommended by
the Risk Oversight Committee and delegates the City Manager to execute it. The City
Council will review the Energy Risk Management Policy every year. Additionally, the
City Council shall receive reports quarterly from the City Manager regarding risk
management activities. These reports will be provided to the Council within six weeks
after the end of each calendar quarter.
City Manager
The City Manager has overall responsibility for executing and ensuring compliance with
policy adopted by the City Council. The City Manager reports quarterly to the City
Council regarding energy risk management activities.
Risk Oversight Committee (ROC)
El
The ROC shall include as voting members, the City Manager, Assistant City Manager,
City Attorney and the Electric Utility Director; or in the case of their absence, their
designees. The City Manager shall appoint the chair of the ROC. Additional non-voting
members may be invited to participate on the ROC based on supporting expertise
required by the ROC.
The ROC shall meet not less than once per month, or as otherwise called to order by the
City Manager or City Council. The ROC shall keep minutes of all meetings and business
transacted and shall appoint one of its members to perform this task. A quorum for the
ROC to do business shall consist of all members or their designees. The ROC shall
request attendance at its meetings by, and/or reports from, other persons as appropriate.
The City Manager shall make regular reports to the City Council regarding business
transacted by the ROC at such intervals and/or upon such occasions as the Council shall
direct.
The ROC shall have the responsibility for ensuring that business is conducted in
accordance with the Energy Risk Management Policies (ERMP). The ROC shall from
time to time, adopt and bring current risk management business practices, defining in
detail the internal controls, strategies and processes for managing risks associated with
the adoption of those business practices. The ROC shall recommend to the City Council
the categories of transactions permitted and set risk limits for those transactions. The
ROC, with the approval of the City Manager, shall confirm the assignment of authority to
execute wholesale trading transactions, and administer retail accounts, supply contracts,
capital projects and JPA relationships.
Electric Department
The Electric Department shall participate on the ROC through the Electric Utility
Director. The Electric Utility Director shall provide load forecast information and
coordinate the receipt and dissemination of relevant market and transactional information
undertaken on Lodi's behalf through NCPA.
Finance Department
The Finance Department shall participate on the ROC through the Assistant City
Manager and provide accounting and cash flow information to the ROC.
Legal Department
The Legal Department shall participate on the ROC through the City Attorney and
provide legal advice and representation and ensure that business is carried out in
compliance with all applicable laws, regulations and executive court orders.
Reporting
Quarterly reports shall be provided to the City Council, which provide detail on the
City's forward purchases, market exposure, credit exposure, transaction compliance and
other relevant data.
Quarterly Reports shall include:
• Load and Resource balances as forecast and adopted in the current operating years
budget
• Load and Resource balances as adjusted due to operating conditions or purchases
occurring during the quarter
• An assessment of market exposure
• An assessment of the quarterly change in power supply cost from budget
• Credit Exposure by counterparty
• A summary of any purchases made during the quarter
• An assessment of any counterparty credit problems
Transaction Limits and Controls
For transactions executed on behalf of Lodi through NCPA, trade authorization levels,
counterparty credit limits and minimum counterparty rating criteria shall be as described
in NCPA's "Trade and Risk Management 1999 Interim Policies, Processes and
Procedures (RMPP)", which are made a part of this document, and attached hereto.
Material changes to NCPA's RMPP shall be reported to the City Council as part of the
quarterly reporting under Lodi's Energy Risk Management Policy.
For transactions executed on behalf of Lodi through NCPA, the City Manager and the
Electric Utility Director shall have the authority to direct NCPA to enter into purchase
agreements under authority granted by the City Council, by Resolution. The Resolution
shall specify the limits of the authority delegated, including the maximum dollar amount
of the authority and the duration of the contracts and/or transactions that may be executed
under the delegation of authority.
Because NCPA cannot enter into agreements on behalf of pooling members for longer
than one year, power supply contracts that have terms longer than one year, or that begin
delivery more than one year into the future must be executed directly by Lodi.
For transactions executed directly by Lodi, the City Manager and the Electric Utility
Director shall have the authority to enter into purchase agreements under authority
granted by the City Council, by Resolution.
The Resolution shall specify the limits of the authority delegated, including the maximum
dollar amount of the authority and the duration of the contracts and/or transactions that
may be executed under the delegation of authority.
Any resolution delegating authority to the city manager to contract for electricity shall
specify generally at least the following terms and conditions and the description of
energy and energy services to be procured, including, but not limited to, on -peak and off-
peak energy and ancillary services; term, specifying a not -to -exceed period of time;
period of delivery denoted in years or months; and point of delivery on the locus on the
interstate transmission system on which the delivery is made.
,:61
Any delegation of authority to contract for gas shall specify generally at least the
following terms and conditions; quantity and the description of gas services to be
procured, including but not limited to scheduled gas and gas transportation services,
specifying a not -to exceed period of time; period of delivery denoted in years or months
or years and months; and point of delivery of the locus on the interstate transmission
system at which the transfer of title is made.
For contracts executed directly by the City, the City shall use standardized form contracts
for the procurement of gas and electricity, as practicable, including, but not limited to
form contracts created and copyrighted by the Edison Electric Institute, the Western
States Power Pool, and the North American Energy Standards Board. Unless waived by
resolution of the City Council, a counterparty shall obtain and maintain during the term
of the contract, the minimum credit rating established as of the date of award of the
contract of not less than a BBB- credit rating established by Standard and Poor's and a
Baa3 credit rating established by Moody's Investors Services.
All procurement of gas and electricity by contract shall conform to the requirements of
the Energy Risk Management Policies.
Compliance
Compliance exceptions are actions, which violate the authority limits, requirements or
directives set forth in the Energy Risk Management Policy. All exceptions shall be
reported immediately to the City Manager and quarterly to the City Council in the
quarterly exception report.
Willful violations of the Energy Risk Management Policy will be subject to review and
may be cause for discipline or dismissal.
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Attachment 2
Risk Management White Paper for Lodi Electric
Background:
The city council has implemented a series of measures over the last three months,
addressing the financial condition of the electric utility. The first effort was to secure
sufficient energy supplies at a known cost in order to meet Lodi's load serving
obligations to its customers and to ensure stable costs through the balance of the fiscal
year. The second effort was to increase rates through an interim Market Cost Adjustment
mechanism in order that sufficient revenues would be recovered from Lodi's customers
to cover the costs of providing those services. The third step, which is in process, will be
to transform the interim and temporary Market Cost Adjustment into a permanent rate
structure that reflects Lodi's ongoing projected costs of operations. The fourth and final
major element of activities addressing the financial condition of Lodi Electric is the
preparation of a Risk Management Plan. This white paper is intended to a) identify the
key elements of a Risk Management Plan b) compare and contrast the Risk Management
policies and procedures in use at other municipal utilities, c) to suggest an initial and
preliminary set of Risk Management Policies and Procedures that could be put in place
by Lodi Electric, d) to identify future actions that should be considered by the city
council in order to migrate from an initial, preliminary set of Risk Management Policies
and Procedures to a more permanent set of Risk Management Policies and Procedures,
and e) assist the council as it considers which Risk Management Policies and Procedures
would be useful for Lodi.
Issue:
Lodi Electric procures significant portions of its energy needs through market purchases.
These market purchases include gas, which is converted to energy through Lodi's
ownership interests in gas turbine projects and direct purchases of electricity from the
market to fulfill Lodi's load serving obligations to its customers. Lodi has also sold
surplus energy and capacity from time to time when it has found itself in a surplus
condition.
Reliance on the market for a large percentage of Lodi's load serving obligations and the
absence of comprehensive procurement strategies have lead to the need to procure energy
in highly volatile markets and increased costs for purchased power. As a result, the City
Council has requested that Lodi Electric prepare a Risk Management Policy and
Procedure document that can be used to begin reducing the uncertainty and volatility that
Lodi has experienced regarding its energy market transactions.
Staff has accumulated Risk Management Policy and Procedure (RMPP) documents from
the cities of Santa Clara, Palo Alto and Roseville as being representative of effective
policies and procedures. A key feature of these policies and procedures is that they were
originally developed through a committee structure (meaning several key personnel were
involved in the drafting, review and approval process) and they have been continually
updated and refined over time based on experience (both good and bad). A major benefit
of the committee drafting method is the education and increased level of understanding
that occurs throughout the organization regarding all aspects of the Risk Management
Program criteria as opposed to the knowledge being vested with a single person when
drafted in singular fashion. While this white paper will attempt to set forth a compelling
first draft of recommended policies and procedures, a committee of individuals
throughout the organization should ultimately be assembled to refine, critique, understand
and update the document.
A second major feature of these documents is that they are written with the
acknowledgement that these cities will be entering into transactions on their own account,
meaning they will directly negotiate deals with counterparties and execute the
transactions, which requires an organizational risk management structure that can support
these activities. In Lodi's case, it is anticipated that NCPA would negotiate the deals,
execute the agreements and have the appropriate organizational infrastructure and staff in
place to support this element of a risk management program, however, Lodi would still
need to have an organizational structure in place that was sufficient to review and
approve the actions taken by NCPA or to provide direction to NCPA to enter into a
particular transaction on Lodi's behalf. Even though these cities take a more active role in
initiating and consummating energy transactions than Lodi is likely to experience, the
Risk Management Policies and Procedures prepared by these cities can provide
significant guidance to Lodi as Lodi develops its own program, and associated policies
and procedures.
Elements of the Risk Management Program:
In comparing the Risk Management Programs from the three cities, all have the following
elements as features of the overall program:
• A description of the purpose and scope of the policy
• Discussion of the Risk Management strategy and objectives
• Identification of risks the policy is intended to address
• Specification of allowed and prohibited transaction types
• Identification of the Roles and Responsibilities of oversight bodies and
responsible staff
• Specification of reporting and transacting measures and controls
• Compliance criteria
Comparison of Purpose and Scope Descriptions
Santa Clara
The Risk Management program is intended to be applied to all areas of Santa Clara's
business including wholesale trading, retail marketing, long-term contracting, capital
projects and participation in Joint Powers Agencies (JPA's). The regulations are intended
to address market risks consisting of price risk, credit risk, regulatory risk, and contingent
liabilities arising from Santa Clara's participation in the electricity markets in the western
United States. The regulations explicitly exclude other general business risks such as fire,
accident and health, workers compensation and other typically insurable perils.
Palo Alto
The Risk Management program is intended to detail the key control structures and
policies for a sound risk management process based on sound utility risk management
principles. The policies are applied to the electric, natural gas and telecommunications
7
business units. The policies are developed to address risks associated with wholesale and
retail operations, capital projects related to generation, transportation, transmission or
storage (not distribution projects), and participation in joint powers agencies. The policy
specifically excludes general business risks such as fire, accident, casualty, workers
comp, general liability and expressly excludes the electric and natural gas distribution
business units.
Roseville
Roseville takes a slightly different angle in describing its purposes and scope, stating the
Risk Management program is designed to ensure that general enterprise risks are properly
identified, measured and controlled and that it is the general philosophy of Roseville to
avoid unnecessary risks and to limit, to the extent practicable, risks assumed or retained
to those with measurable outcomes that are within Roseville's risk tolerance.
Discussion of similarities and differences
There is little difference between the agencies in terms of defining the purpose and scope
of their individual risk management programs. All have focused on bulk power program
related risks to the organization as the primary purpose of the policy and Lodi should
adopt the same approach.
Suggested Lodi Purpose and Scope Statements
Purpose: The purpose of the Risk Management Program is to ensure that risks associated
with Lodi's bulk power procurement program are properly identified, measured and
controlled.
Scope: The policies are to be applied to all aspects of Lodi's wholesale procurement and
sales activities, long-term contracting associated with energy supplies, capital projects
and associated financing documents related to generation, transmission, transportation or
storage, and participation in Joint Powers Agencies (JPA's).
These policies do not address the following types of general business risk, which are
treated separately in other official policies, ordinances, and regulations of the city: fire,
accident and casualty, health, safety, workers compensation and other such typically
insurable perils.
Comparison of Risk Management Strategies and Objectives
Santa Clara
Santa Clara identifies the following five strategies:
1. Maintaining an integrated and balanced portfolio of resources and obligations
with built in hedges
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2. Matching the resource position to market trends, i.e. long during periods of
growth and rising prices and short in times of shrinkage and falling prices
3. Knowing and being an active participant in the electricity market place
4. Instituting and applying state of the art management techniques and processes
5. Assigning risk management responsibility to appropriately qualified people
Objectives are expressed through the following mission statements:
1. Assist in achieving the business objectives in the strategic plan
2. Discharge fiduciary responsibilities for assets of the City which are managed by
SVP
3. Avoid losses which would materially impact the financial condition of SVP and
the City
4. Sustain financial returns which are proportional to the risks taken and the capital
invested
5. Facilitate the judicious pursuit of market opportunities by SVP
6. Encourage the development and maintenance of a corporate culture at SVP 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 objectives.
Palo Alto
The city of Palo Alto expresses its Risk Management strategy as a philosophy by
indicating "the basic premise underlying the City's energy risk management attitude is
that no activities related to energy purchase and sales should expose the City to the
possibility of large financial losses in relation to the size of the electricity and gas reserve
funds. They then go on to describe the objectives as follows:
1. Retail Rate Stability — mitigate market and credit risk by managing the risks
inherent in the commodity markets in which CPAU participates and maintaining
the safety of gas and electric reserve funds.
2. Preserve a supply cost advantage — reduce exposures to potential adverse energy
price movements, enhance revenue by taking advantage of flexibility inherent in
CPAU contracts and resources and enhance revenues by offering commodity
products that address customer needs and adequately cover costs.
3. Efficient and Cost Effective Business Processes — staff will utilize business
practices and controls that are sufficient to identify, evaluate and manage risks
that are designed to streamline and minimize recording, analysis and reporting
requirements.
Roseville
Roseville does not explicitly state its strategies or objectives in its risk management
document, but does go into great detail on the tactics they will use to minimize risks.
Tactics will be compared and addressed later in this white paper.
Discussion of Similarities and Differences
Each of the agencies approaches the development of strategies and objectives quite
differently. In Santa Clara's case, they have established a dispatch center; have surplus
capacity in both generation and transmission and transmission connections to both the
11
southwest and the northwest. As a result, they want to be active participants in the market
such that they can take advantage of price differences between the three markets (Pacific
Northwest, California and Desert Southwest) themselves. Their strategy could be
characterized as an offensive strategy, where they want to minimize risk, but they are
willing to take some risk if there is an appropriate return associated with the risk. In order
to accomplish this, they have assembled a staff that is sufficient to allow them effectively
trade in the markets on a daily basis in addition to the capability to enter into short and
long-term contracts. Palo Alto, on the other hand, has more of a defensive strategy,
where their goal is to maintain preservation of rate stabilization fund balances and to
maintain rate stability. In order to do this, Palo Alto has taken a long-term perspective,
committing to series of short and long-term purchases at known prices, and does not
actively participate in daily market transactions. Palo Alto has assembled the necessary
staff that allows them to effectively plan, initiate and execute contracts for the short and
long term purchases. Roseville fits between the Santa Clara and Palo Alto models. They
are in the process of assembling staff that would allow them to move to more of the Santa
Clara model, but in the interim, have engaged in financial transactions, prohibited under
Palo Alto's defensive strategy, that in Roseville's view, have the appropriate risk to
return tradeoffs.
Lodi's financial position and limited staffing requires that Lodi operate more in line with
Palo Alto's defensive strategy by adopting practices that contribute to retail rate stability
and preservation of Lodi's limited fund balance.
Suggested Lodi Strategies and Obiectives
Strategies:
3. Identify, measure and control risks that would have an adverse affect on retail rate
stability
4. Assign risk management responsibilities to appropriately qualified individuals and
committees
Objectives:
4. Maintain a regularly updated inventory of Lodi's Bulk Power Procurement
Program risks
5. Establish risk metrics and reporting mechanisms that provide both quantitative
and qualitative assessments of potential impacts to rate stability
6. Adopt business practices that encourage development of appropriate levels of
operating reserve funds, contribute to retail rate stability and maintain appropriate
security for established funds
Comparison of Risk Inventories
Each of the documents go through a fairly extensive discussion of the utility specific risks
that each of the cities face under the particular category of risk described. Discussion and
development of these specific risks though a committee type setting is one of the most
valuable educational processes that committee members and individuals charged with
carrying out elements of the risk management program can undertake. The discussions
invariably lead to an improved understanding of all of the elements of risk and frequently
lead to improvements in the overall policies and procedures that would not have been
realized if written by one individual. As part of Lodi's Risk Management program
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development, additional committee work should continue to discuss and refine both the
broad and specific categories of risk that are suggested for Lodi in this white paper.
Santa Clara
Santa Clara identifies the categories and subcategories of risk, defining them in the
following fashion:
Market Risk:
Price Risk — wholesale trading positions, long — term supply contracts and generation
resources may move out of the money, or become unprofitable or costly in comparison
with similar positions, contracts or resources obtainable at present prices.
Credit Risk — any risk that SVP incurs as a result of selling to and buying from other
entities. For example, counterparties and customers may fail to pay for energy delivered.
Trading counterparties may fail to deliver contracted for energy. Counterparties may fail
to take delivery of energy sold to them. Counterparties and suppliers may refuse to
extend credit.
Regulatory Risk — risk that regulatory agencies, courts and legislatures may take which a)
result in fines, assessments or other unrecoverable costs b) adversely affect market prices
or liquidity, c) impairs the capability of trading counterparties, d) prevent SVP from
performing to its own contractual obligations, e) interfere with SVP's generation,
transmission or distribution operations or f) interfere with the City's ability to finance
capital projects
Operational Risk — consists of the potential for failure to act effectively to plan, execute
and/or control business activities.
Palo Alto
Palo Alto describes its risk inventory through its reporting mechanisms and the
responsibilities that have been assigned to functional areas created under the risk
management policies. For example Palo Alto has established the traditional "Front
Office", "Mid — Office" and "Back Office" organizational structure and assigned the
following responsibilities to individuals in those areas. The Front Office is responsible
for resource planning and procuring energy supplies and services. This would encompass
the "Operational Risk" and "Regulatory Risk" activities outlined in the SVP discussion
above. The Mid Office is responsible for Controls and Reporting, incorporating elements
such as review and reporting on portfolio exposure, credit exposure, transaction
compliance, ongoing approval of counterparty credit and ongoing monitoring of
compliance with policies, guidelines and procedures. This would encompass the "Market
Risk" element as outlined in the SVP discussion above.
Roseville
Roseville takes a slightly different approach in outlining its risk inventory, spending more
time on a narrative of the specific types of risks it is exposed to given its resource/fuel
mix and its location on the grid in California. The more detailed description of
Roseville's specific risks can also be segmented into the broad categories enumerated by
SVP:
• Price Risk
• Credit Risk
• Operational Risk
• Regulatory Risk
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Discussion of similarities and differences in the risk inventory
The categories of risk being considered by three agencies are virtually identical, and
would be the same for Lodi as well. Where the differences arise are in the level of
activity undertaken by the various agencies and resulting volumetric risk associated with
those undertakings. As an example, if Santa Clara is in the market on a daily basis, they
may interact with numerous counterparties and have a need to review credit risk with a
large number of counterparties frequently. Palo Alto, on the other hand, may transact
with fewer counterparties due to their use of longer-term contracts, and would therefore
need to monitor a smaller number of credit risks. NCPA, on behalf of Lodi would
perform the routine credit monitoring function as NCPA is in the market on a daily basis,
but Lodi would still want to be reviewing and be cognizant of the credit status of any
counterparty to a long term supply agreement with Lodi. Similarly, until Lodi is able to
close large open supply positions, Lodi will be subject to greater price risk than the three
comparison agencies and Lodi policy makers will want to know how that risk is being
managed over the course of the year. For purposes of the risk inventory, Lodi should
utilize the same broad categories of risk and focus its reporting and measurement on
those risk factors that have the greatest chance of preventing Lodi from meeting the
strategies and objectives of the risk management plan.
Suggested Lodi Risk Inventory Elements
• Price Risk
• Credit Risk
• Operational Risk
• Contingent Liabilities
Price Risk — Price risk is the risk that wholesale prices may increase relative to open
position needs and/or long term supply contracts may move "out of the money", or
become unprofitable or costly in comparison to prevailing price levels.
Credit Risk — Credit risk is the risk associated with entering into any type of transaction
with another counterparty and is generally segmented into the following five categories:
6. Trading Counterparties and retail customers fail to pay for energy delivered
7. Trading counterparties and/or wholesale suppliers fail to deliver contracted for
energy
8. Trading counterparties fail to take delivery of energy sold to them, necessitating a
quick resale elsewhere, likely at a loss
9. Counterparties, may refuse to extend credit or charge a premium for credit risks
10. Counterparty transactions are too concentrated among a limited number of
suppliers
Operational Risk — Operational risk consists of the potential to effectively plan, execute
or control business activities. Operational risk includes the potential for:
7. Inadequate organizational infrastructure, i.e., the lack of sufficient authority to
make and execute decisions, inadequate supervision, absence of internal checks
and balances, incomplete and untimely planning, incomplete and untimely
reporting, failure to separate incompatible functions, etc.
8. Absence, shortage or loss of key personnel
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9. Lack or failure of facilities, equipment, systems and tools such as computers,
software, communications links and data services;
10. Inability to finance capital projects or meet financial obligations incurred in the
course of wholesale operations;
11. Exposure to litigation or sanctions as a result of violating laws and regulations,
not meeting contractual obligations, failure to address legal issues and/or receive
competent legal advice, not drafting contracts effectively, etc.
12. Errors or omissions in the conduct of business, including failure to execute
transactions, violations of guidelines and directives, etc.
Contingent Liabilities — contingent liabilities consist of liabilities that Lodi could incur in
the event of the failure of other parties to discharge their obligations. At present, these
consist of three principle categories:
4. Guarantees and step up provisions in the enabling agreements for the Joint Powers
Agencies (JPAs) of which the city is a member
5. Project closure, decommissioning, environmental remediation and other
obligations which result from Lodi's own activities and from JPA projects and
activities;
6. Provisions for take or pay, termination payments and/or margin calls in the city's
long-term electric power supply agreements.
Comparison of allowed and prohibited transactions
Santa Clara
Santa Clara authorizes the purchase and sale of electricity subject to specific criteria. For
example, individual employees are assigned specific transaction limits and are prohibited
from trading on their own account. The authorities to transact are further limited in term
length and by aggregate credit exposure and volumetric limits with the transacting
counterparties. Subject to these qualifications, Santa Clara authorizes the following types
of transactions:
1. Contracts made for forward or real-time receipt or delivery of electricity
2. Contracts for the provision of electrical transmission and ancillary services, either
forward or real time
3. Simple options to sell (puts) and options to buy (calls) electricity directly to and
from SVP and trading counterparties at a future date, denominated by volume and
to commence not later than the fourth calendar month following the date of the
sale or purchase of the option; and
4. Swaps consisting of offsetting purchases and sales of electricity at different
delivery points, simultaneously, under two separate contracts
5. Purchase of fuels for operation of generating facilities or maintenance of fuel
storage as required to support the supply of power, maintain system reliability and
provide ancillary services, in order to meet customer needs or contractual or
regulatory obligations;
6. Resale of surplus fuels and transportation capacity
7. Price hedging of fuel supplies by the purchase or sale of forward or futures
contracts and simple put or call options for quantities commensurate with actual
operating requirements
15
8. Price hedging of fuel transportation by the purchase or sale of forward capacity
contracts, basis swaps, and simple put or call options for quantities commensurate
with actual operating requirements.
Palo Alto
Palo Alto prohibits speculative buying and selling of energy products where
"speculation" is defined as buying or selling energy not needed for meeting load or
selling energy that is not owned. Palo Alto provides further prohibitions against entering
into transactions to speculate on market conditions.
Products allowed for electric transactions include purchases of energy, capacity,
transmission and ancillary services. Products allowed for natural gas transactions include
energy, transportation, and storage. Only physical transactions are allowed. Palo Alto's
policy differs dramatically from both Santa Clara's and Roseville's policies in this
regard, where both Santa Clara and Roseville allow for financial transactions (e.g.
purchase and sale of options) to hedge risk.
Roseville
Roseville policies regarding approved transaction types are very consistent with Santa
Clara's, allowing for transaction types necessary to meet load serving obligations,
prohibiting transaction types that would be of a speculative nature and limiting financial
types of transactions to simple financial trades that lower costs or prevent increases in
costs. Specific approved transaction types are described below:
1. Purchase energy to serve load above what is expected to be generated or
purchased from existing resources.
2. Sell existing capacity or energy that is expected to be in excess of Roseville's load
requirements
3. Purchase gas that is expected to be needed to fuel owned plants
4. Sell surplus gas if more economic energy is available for purchase
5. Execute financial transactions to fix the price of variable commodity purchases or
sales
6. Purchase call options to limit price exposure on short gas or electricity positions
7. Sell call options or tolling agreements on capacity that is expected to be in excess
of Roseville's load serving obligations
8. Purchase a "floor" to limit price exposure on long gas or electricity positions
9. Sell call options or tolling agreements on capacity that is expected to be in excess
of RE's resource requirements
10. Purchase a "floor" to limit price exposure on long gas or power positions
11. Sell a "floor" to offset a portion of the price of the purchase of call options listed
above
12. Purchase emissions allowances deemed necessary for efficient operations of
owned generating facilities
13. Purchase or sell firm transmission rights to manage congestion price risk
14. A purchase/sale of energy at the California Oregon Border and a sale/purchase of
energy at NP 15 to take advantage of RE's transmission capacity
15. A purchase of natural gas and a sale of energy to take advantage of excess gas
fired peaking capacity
16
16. A sale of natural gas and a purchase of electricity to take advantage of market
heat rates below RE or NCPA gas fired generation.
Discussion of approved and prohibited transactions
There is little difference between the agencies in terms of what is allowed versus not
allowed. All agencies focus on providing the tools needed to meet the agency's load
serving obligation and prohibit transactions that are entered into for purely speculative
reasons. The one primary difference between the agencies is that Palo Alto prohibits any
type of financial transaction, including simple call and put options, whereas both of the
other agencies allow for the purchase and sale of simple puts and calls.
Suggested Lodi language for allowed and prohibited transactions
Prohibited Transaction Types
Speculative buying and selling of energy products is prohibited. Speculation is defined as
buying energy that is not needed for meeting forecasted load, selling energy that is not
owned and/or selling energy that is not surplus without simultaneously replacing that
energy at a lower cost. In no event shall transactions be entered into to speculate on
market conditions.
Approved Transaction Types
13. Purchase energy to serve load above what is expected to be generated or
purchased from existing resources.
14. Sell existing capacity or energy that is expected to be in excess of Lodi's load
serving obligations
15. Purchase gas that is expected to be needed to fuel owned plants
16. Sell surplus gas if more economic energy is available for purchase
17. Execute financial transactions to fix the price of variable commodity purchases or
sales
18. Purchase simple call options to limit price exposure on short gas or electricity
positions
19. Sell simple call options or tolling agreements on capacity that is expected to be in
excess of Lodi's load serving obligations
20. Purchase emissions allowances deemed necessary for efficient operations of
owned generating facilities
21. Purchase or sell firm transmission rights to manage congestion price risk
22. A purchase/sale of energy at the California Oregon Border and a sale/purchase of
energy at NP 15 to take advantage of Lodi's transmission capacity
23. A purchase of natural gas and a sale of energy to take advantage of excess gas
fired peaking capacity
24. A sale of natural gas and a purchase of electricity to take advantage of market
heat rates below NCPA gas fired generation.
Transactions that are not included in the Approved Transactions Type list are prohibited,
unless explicitly approved by the City Council.
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Comparison of the roles and responsibilities of oversight bodies and responsible staff
Santa Clara
Santa Clara has established roles and responsibilities for the following committees and
individuals:
City Council
City Manager
Risk Oversight Committee (ROC)
Risk Management Committee (RMC)
Risk Management Sub Committees
Risk Management Divisions
Power Trading Division (Front Office Personnel)
Power Trading Division (Back Office Personnel)
Electric Marketing
Electric Generation and Transmission Project Management
Electric Contract Administration
Joint Action Coordination Division
A complete description of the roles and responsibilities of each committee and individual
can be found in the document "Market Risk Management Regulations Draft Rev 5 [5-9-
03]". For the purposes of this comparison, only the City Council, City Manager, Risk
Oversight Committee and Risk Management Committee will be discussed.
Under the Risk Management Policy, the City Council assigns the City Manager to
implement the Risk Management Program. The City Manager then has the overall
responsibility for implementing the Risk Management Program, including delegating
specific duties for carrying out the policy and ensuring compliance with it by all affected
City Employees and temporaries.
The Risk Oversight Committee is made up of voting members including: the City
Manager, Director of Finance, City Attorney and the Electric Utility Director. The ROC
meets at least quarterly, keeps minutes of its meetings and is charged with the following
responsibilities:
• Ensuring that business is conducted in accordance with Risk Management
Policies
• Updating/Modifying Risk Management Regulations
• Determining the type of permitted transactions
• Establishing authorization limits
The Risk Management Committee (RMC) is made up of eight members: the Assistant
Directors of the Electric Department for Marketing and Resources; the Assistant Director
of Finance; the Division Managers for Power Trading and Risk Analysis; the Division
Manager for Markets, Regulatory Affairs and Planning, the Back Office Manager and an
Attorney designated by the legal department. The RMC meets at least two times per
month, reviewing compliance with Risk Management Policies on a more frequent basis
and provides recommendations for modifications or updates to Risk Management
Regulations to the ROC for approval.
Palo Alto
IV
Palo Alto has established roles and responsibilities for the following committees and
individuals:
City Council
Utility Advisory Commission
City Manager
Risk Oversight Committee
Management Oversight
Front Office — Planning and Procurement
Middle Office — Controls and Reporting
Back Office — Settlement and Recording
Like Santa Clara, the Palo Alto City Council delegates authority for implementing the
Risk Management program to the City Manager. The City Council receives quarterly
reports from the City Manager regarding energy risk management activities and reviews
the total policy once each year.
The Risk Oversight Committee (ROC) consists of the Director of Utilities (chairperson),
Director of Administrative Services, and the Assistant City Manager. The Senior
Assistant City Attorney assigned to Utilities and the City Auditor act as non-voting
advisors to the ROC. The ROC is charged with overseeing and reviewing the risk
management process and infrastructure and managing the Utilities' risk exposure.
Roseville
Roseville's Risk Management Policies prescribe roles and responsibilities for:
Risk Oversight Committee (ROC)
Risk Management Committee (RMC)
The Risk Oversight Committee is comprised of appointees of the City Manager, among
whom, may include a member of the City Council, a member of the Public Utilities
Commission, the City Manager, Finance Director, City Attorney, Electric Utility Director
and Assistant Electric Utility Directors for Power Supply and Administrative and Retail
Services. The ROC meets quarterly and is responsible for:
• Establishing the budgeted power supply cost for the upcoming fiscal year and the
fiscal years ending 24 months 60 months and 120 months from the
commencement of the next fiscal year
• Adjusting credit limits up or down for qualified counterparties
• Recommending target unrestricted fund balances that can be used for the power
supply function
• Review and monitor compliance with the Risk Management Policies
The Risk Management Committee is comprised of the City Manager, Finance Director,
City Attorney, Electric Utility Director, and Assistant Electric Utility Directors for Power
Supply and Administrative and Retail Services. This committee may also include an
independent risk consultant. The RMC meets monthly and is charge with the following
responsibilities:
• Ensuring compliance with Risk Management Policies and Procedures
• Monitoring Roseville's cash flow and liquidity needs
• Discussing hedging strategies and making recommendations for non-standard
transactions to the ROC and City Council
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• Discussing counterparty credit and recommending any change in credit limits to
the ROC for approval
Discussion of Oversight Bodies and Responsible Staff
The primary similarity in the structure of the oversight bodies between the three agencies
is the commitment of senior executive staff from the entire city organization to the risk
oversight process. In all instances, the agencies include the city manager, finance
director, electric utility director and city attorney in regular meetings to review
compliance with risk management policies and procedures. Roseville takes the
commitment a step further by including a member of the city council and a member of its
advisory public utilities commission in the regular meetings of the risk oversight
committees. Also, in all instances, the city councils of the agencies delegate the
responsibility for implementing the policies to the city manager and then create a Risk
Oversight Committee of senior executive city staff (and in one case including policy
makers) to ensure that risk management policies and procedures are adhered to. Santa
Clara and Roseville have created both a Risk Oversight Committee (ROC) and a Risk
Management Committee (RMC). The Risk Oversight Committee meets quarterly, while
the Risk Management Committee meets monthly. In Roseville's case, the city manager,
finance director and city attorney (among other executive utility staff) sit on both the
ROC and the RMC. In Santa Clara's case, the ROC includes the City Manager, City
Attorney and Finance Director (among other utility executive staff) and meets quarterly,
while the RMC includes subordinate executive staff from city departments (asst
directors) and meets twice per month. Given the significantly greater number of staff
available at the comparison agencies versus Lodi, Lodi should start with a single
committee, the Risk Oversight Committee, and staff the committee with senior executive
staff from throughout the city. Given the number of issues to be considered and the "in
development" nature of the ROC, the committee should meet monthly.
Suggested Lodi Language for Oversight Bodies and Responsible Staff
City Council
The City Council is responsible for making high-level broad policy and strategy
statements as contained in the Energy Risk Management Policy document. The City
Council adopts the Energy Risk Management Policies as developed and recommended by
the Risk Oversight Committee and delegates the City Manager to execute it. The City
Council will review the Energy Risk Management Policy every year. Additionally, the
City Council shall receive reports quarterly from the City Manager regarding risk
management activities. These reports will be provided to the Council within six weeks
after the end of each calendar quarter.
City Manager
The City Manager has overall responsibility for executing and ensuring compliance with
policy adopted by the City Council. The City Manager reports quarterly to the City
Council regarding energy risk management activities.
Risk Oversight Committee (ROC)
The ROC shall include as voting members, the City Manager, Assistant City Manager,
City Attorney and the Electric Utility Director; or in the case of their absence, their
20
designees. The City Manager shall appoint the chair of the ROC. Additional non-voting
members may be invited to participate on the ROC based on supporting expertise
required by the ROC.
The ROC shall meet not less than once per month, or as otherwise called to order by the
City Manager or City Council. The ROC shall keep minutes of all meetings and business
transacted and shall appoint one of its members to perform this task. A quorum for the
ROC to do business shall consist of all members or their designees. The ROC shall
request attendance at its meetings by, and/or reports from, other persons as appropriate.
The City Manager shall make regular reports to the City Council regarding business
transacted by the ROC at such intervals and/or upon such occasions as the Council shall
direct.
The ROC shall have the responsibility for ensuring that business is conducted in
accordance with the Energy Risk Management Policies (ERMP). The ROC shall from
time to time, adopt and bring current risk management business policies, defining in
detail the internal controls, strategies and processes for managing risks associated with
the adoption of those business practices. The ROC shall recommend to the City Council
the categories of transactions permitted and set risk limits for those transactions. The
ROC, with the approval of the City Manager, shall confirm the assignment of authority to
execute wholesale trading transactions, and administer retail accounts, supply contracts,
capital projects and JPA relationships.
Electric Department
The Electric Department shall participate on the ROC through the Electric Utility
Director. The Electric Utility Director shall provide load forecast information and
coordinate the receipt and dissemination of relevant market and transactional information
undertaken on Lodi's behalf through NCPA.
Finance Department
The Finance Department shall participate on the ROC through the Assistant City
Manager and provide accounting and cash flow information to the ROC.
Legal Department
The Legal Department shall participate on the ROC through the City Attorney and
provide legal advice and representation and ensure that business is carried out in
compliance with all applicable laws, regulations and executive court orders.
Comparison of reporting and transacting measures and controls
Santa Clara
Santa Clara does not specify the reports required under the risk management policy, but
instead requires that meaningful summarization and accurate reporting of transactions
and other activities be provided at regular intervals. The policy goes on to dictate that
internal control measures adopted by the ROC shall be based on proven principles that
meet the stringent requirements of financial institutions and ratings agencies. Among
these requirements are segregation of duties between those individuals entering into a
transaction and those individuals responsible for settlement or monitoring of the
21
transaction; regular independent compliance reviews to make sure the Energy Risk
Management Policies are being followed; and a requirement of active participation by
senior executives in risk management processes.
Santa Clara then goes on to set trading authority limits for individuals in the organization
and aggregate credit limits for any one counterparty. The electric utility director is
authorized to enter into individual transactions for up to 100 MW (approximately one
quarter of Santa Clara's peak load) for a period not to exceed one year or for an
equivalent number of mwhrs to be delivered over a period not to exceed two years. All
larger and longer-term transactions require City Council approval.
Palo Alto
Palo Alto requires that quarterly reports be provided to the City Council, ROC and
Utilities Advisory Commission, which provide details of the City's forward purchases,
market exposure, credit exposure, transaction compliance and other relevant data. Palo
Alto addresses the transacting and control measures by assigning the functions of
quantitative analysis, compliance reviews, credit administration and management
reporting to a group defined as "middle office" and assigning the responsibility for
setting counterparty credit limits to the ROC. The City Manager has the authority to
purchase and sell wholesale energy commodities for terms up to three years under open
purchase contracts and the Director of Utilities is granted the authority to negotiate for
the purchase and sale of energy commodities with the purchase and sale authority subject
to the signature authority limits defined in the Municipal Code (currently $250,000 per
year). Separately, the City Manager is authorized to enter into transactions under master
agreements, the terms of which have been pre -approved by the city council, where the
authorizing resolution specifies the limits of the authority delegated, including the
maximum dollar amount of the authority and the duration of the contracts and/or
transactions that may be executed under the delegation of authority.
Roseville
Roseville specifies that reporting will done on a weekly and monthly basis as follows:
Weekly Reports to the Risk Management Committee:
Load and Resource Balance through the FY
Fixed Price Energy Report
Power Supply Cost Differential Report
Credit Exposure by Counterparty
Available Credit by Counterparty
Roseville Liability by Counterparty
Roseville Credit Available by Counterparty
Collateral Changes
Do Not trade Activity
Quarterly Reports to the Risk Oversight Committee
Summary of Market and Load Changes
Executed Transactions Summary
Most recent weekly position report
Most recent weekly credit report
The city manager and electric utility director are authorized to enter into qualified
standard contracts where the maximum daily quantity does not exceed 50 MW's
22
(approximately one sixth of Roseville's peak load), has an expected dollar value of not
more than $40,000,000 and has a termination date that does not exceed five years.
Roseville also establishes credit limits and minimum credit rating criteria for trading
counterparties.
Discussion of reporting, transacting measures and controls
All three agencies require regular reporting. Both Palo Alto and Roseville require similar
reports that detail forward purchases, market exposure and credit exposure and a
statement of transaction compliance. Santa Clara does not specify the required reports in
its policies, but it is known from discussions with Santa Clara staff that similar reports are
provided to their ROC and RMC as are provided by Palo Alto and Roseville.
All three agencies also establish minimum counterparty credit rating levels, maximum
credit exposure levels and maximum transaction level authorities for individuals within
the respective organizations. As has been mentioned previously in this white paper, these
three agencies initiate and execute transactions on their own account. Lodi on the other
hand, typically executes transactions through NCPA. As a result, Lodi staff would
typically be authorizing NCPA staff to enter into transactions on Lodi's behalf and those
transactions would be subject to NCPA's risk management policies, credit limits and
individual transaction authorization levels. NCPA and NCPA's counterparties would also
need to have assurance that Lodi staff direction to NCPA to enter into a transaction on
Lodi's behalf has been appropriately authorized by the City Council. That assurance is
currently embodied in Resolution No. 2001 — 34 under which the City Manager and
Electric Utility Director are authorized to approve energy purchase and sales transactions
for a period up to ten (10) years. There are no limits on the dollar value of the purchases
or sales or criteria specifying the credit requirements for counterparties. As a result,
Resolution 2001 — 34 should be rescinded and replaced with a new authorizing resolution
more reflective of the policies described above and Lodi should incorporate reporting,
transacting and control measures that augment and incorporate risk management
activities undertaken by NCPA on Lodi's behalf.
Suggested Lodi language for Reporting, Transacting Measures and Controls
Reporting
Quarterly reports shall be provided to the City Council, which provide details on the
City's forward purchases, market exposure, credit exposure, transaction compliance and
other relevant data.
Quarterly Reports shall include:
• Load and Resource balances as forecast and adopted in the current operating years
budget
• Load and Resource balances as adjusted due to operating conditions or purchases
occurring during the quarter
• An assessment of market exposure
• An assessment of the quarterly change in power supply cost from budget
• Credit Exposure by counterparty
• A summary of any purchases made during the quarter
23
• An assessment of any counterparty credit problems
Transaction Limits and Controls
For transactions executed on behalf of Lodi through NCPA, trade authorization levels,
counterparty credit limits and minimum counterparty rating criteria shall be as described
in NCPA's "Trade and Risk Management 1999 Interim Policies, Processes and
Procedures (RMPP)", which are made a part of this document, and attached hereto.
Material changes to NCPA's RMPP shall be reported to the City Council as part of the
quarterly reporting under Lodi's Energy Risk Management Policy.
For transactions executed on behalf of Lodi through NCPA, the City Manager and the
Electric Utility Director shall have the authority to direct NCPA to enter into purchase
agreements under authority granted by the City Council, by Resolution. The Resolution
shall specify the limits of the authority delegated, including the maximum dollar amount
of the authority and the duration of the contracts and/or transactions that may be executed
under the delegation of authority.
Because NCPA cannot enter into agreements on behalf of pooling members for longer
than one year, power supply contracts that have terms longer than one year, or that begin
delivery more than one year into the future must be executed directly by Lodi.
For transactions executed directly by Lodi, the City Manager and the Electric Utility
Director shall have the authority to enter into purchase agreements under authority
granted by the City Council, by Resolution.
The Resolution shall specify the limits of the authority delegated, including the maximum
dollar amount of the authority and the duration of the contracts and/or transactions that
may be executed under the delegation of authority.
Any resolution delegating authority to the city manager to contract for electricity shall
specify generally at least the following terms and conditions and the description of
energy and energy services to be procured, including, but not limited to, on -peak and off-
peak energy and ancillary services; term, specifying a not -to -exceed period of time;
period of delivery denoted in years or months; and point of delivery on the locus on the
interstate transmission system on which the delivery is made.
Any delegation of authority to contract for gas shall specify generally at least the
following terms and conditions; quantity and the description of gas services to be
procured, including but not limited to scheduled gas and gas transportation services,
specifying a not -to exceed period of time; period of delivery denoted in years or months
or years and months; and point of delivery of the locus on the interstate transmission
system at which the transfer of title is made.
For contracts executed directly by the city, the City shall use standardized form contracts
for the procurement of gas and electricity, as practicable, including, but not limited to
form contracts created and copyrighted by the Edison Electric Institute, the Western
States Power Pool, and the North American Energy Standards Board. Unless waived by
24
resolution of the City Council, a counterparty shall obtain and maintain during the term
of the contract, the minimum credit rating established as of the date of award of the
contract of not less than a BBB- credit rating established by Standard and Poor's and a
Baa3 credit rating established by Moody's Investors Services.
All procurement of gas and electricity by contract shall conform to the requirements of
the Energy Risk Management Policies.
Comparison of Compliance Criteria
Santa Clara
Santa Clara requires that exceptions to the policy be reported promptly and provides for
independent review of activities as determined necessary.
Palo Alto monitors all transactions to ensure compliance with Risk Management Policies
and requires reporting of any exceptions.
Roseville
Exceptions to policy are required to be reported immediately. Willful acts of non-
compliance may be cause for corrective action or dismissal. The Risk Oversight
Committee may recommend an independent review of compliance if it deems it
necessary or appropriate.
Suggested Lodi Language for Compliance Criteria
Compliance exceptions are actions which violate the authority limits, requirements or
directives set forth in the Energy Risk Management Policy. All exceptions shall be
reported immediately to the City Manager and quarterly to the City Council in the
quarterly exception report.
Willful violations of the Energy Risk Management Policy will be subject to review and
may be cause for discipline or dismissal.
25
NCPA Trade and Risk Management
1999 Interim Policies, Processes and Procedures
Backuround
The Commission of the Northern California Power Agency (NCPA) has instituted the adoption of
formalized trade and risk policies, processes and procedures (3Ps) to assign risks to its
Members and to minimize taking undue risks in the course of NCPA operations. To facilitate the
timely development and maintenance of the 3Ps, the NCPA Commission directed the creation
of a Risk Oversight Committee (ROC) to be comprised of NCPA Members and staff. The ROC
reports to the NCPA General Manager.
In order to develop formal policies, processes and procedures, a comprehensive evaluation of
existing NCPA agreements, processes, procedures and informal practices was performed. This
evaluation included a comprehensive operational audit to determine the function and
applicability of existing activities.
NCPA, as participant in the diverse larger electric market, is unique. The policies, processes
and procedures developed by NCPA need to recognize that NCPA, as a joint action agency,
necessarily has different operational objectives from the typical utility, consumer or marketer.
While NCPA is an amalgamation of utility, consumer and marketer functions, it also carries out
functions unique to those of a joint action agency.
A number of pooling Member -owners are developing their own Risk Management activities and
desire that NCPA create a structure that allows them to manage their own resources in order to
meet their individual financial objectives and minimize their net risk exposure.
Members who are developing their own Risk Management processes have also demonstrated a
desire to retain the ability to coordinate like functions with NCPA. Members have also
expressed concern about involuntary risk sharing among Member -owners.
This document contains the Interim policies, processes and procedure developed to cover
NCPA activities until the full comprehensive trade and risk policies, processes and procedures
(3Ps) are developed. The trade and risk policies, processes and procedures (3Ps) represents a
"best effort" by the ROC and NCPA staff to:
• State the policy objectives as set by the Commission and introduce the Interim Policy
— Section 1.
• Reflect the changes that have taken place in the procurement process to reduce
exposure to market risks — as directed by the NCPA General Manager — Section 2;
and establish a basis for a Member subscription process — Appendix 1.
• Formalize the delegation procedures and authority of the NCPA to trade on behalf of
its Members and adopt a new audit and reporting process (good paper trail) — as
recommended by the Operational Audit — Section 3.
• Manage credit risk — as recommended by the report on Trade and Risk Management
and produce a list of qualified counterparties — Section 4.
1.0 NCPA Interim Trade and Risk Management Policy
1.1 Commission Risk Management Policy
It is the policy of the NCPA Commission that appropriate controls, practices, procedures, and
reporting mechanisms be developed to assign risk to its Members and to minimize the taking of
undue risk in the course of NCPA operations.
The overall goal of NCPA's Trade and Risk Management activities is to:
• Serve Members' needs subject to Member direction and Member -provided risk tolerance
limits,
• Reduce the uncertainty of Member costs and revenue streams, and
• Enhance the value of NCPA assets to meet the financial requirements of participating
Members within risk tolerance limits.
To achieve these risk management objectives, the NCPA Commission directs the creation of a
Risk Oversight Committee (ROC) to be comprised of NCPA Members and staff. The ROC's
responsibilities shall include:
1. Developing energy trading processes, procedures and limits;
2. Assuring that individual Members may set specific risk management instructions to
be followed by NCPA;
3. Creating and administering a credit rating policy for business counterparties;
4. Approving the use and limits of specific financial risk management instruments;
5. Assuring that appropriate authority delegations are in place and followed;
6. Setting qualifying parameters and financial limits for business relationships with third
party business partners;
7. Instituting appropriate and timely risk monitoring and regular reporting for use by the
Commission and NCPA management; and
8. Identifying issues of interest to all or any NCPA Member and alerting Members of the
issues.
1.2 The Need for Interim Policy
The ROC has identified the need for interim trade and risk policies, processes and procedures
(3Ps) to guide NCPA's trading activities and until a full policy is developed, and particularly,
during the heavy trading period of the summer of 1999.
This Interim Policy will come into effect upon approval by the NCPA Commission. Where there
is a conflict between this policy and an existing practice or instruction this policy shall take
precedent.
NCPA Members will have 90 days to provide the NCPA with their respective Boards
authorization as required by Section 3.1.
NCPA staff will continue with the development of the full trade and risk policies, processes and
procedures (3Ps), in consultation with the ROC, for submission to the NCPA General Manager.
2
2.0 Trade and Procurement Process
2.1 Trade and Procurement Policy
The primary purpose of NCPA resources is to serve Member loads in economic coordination
with other power resources including the Members' Western entitlements and market
purchases.
The trading, procurement and delivery of capacity/energy/fuel shall be consistent with NCPA
Member physical and financial requirements and shall aim to enhance each Member's
economic and competitive position within the specific guidelines provided by that Member and
within the guidelines of this 3P document. The trade and procurement strategy will be identified
and approved by Members during the Planning Process.
The philosophy behind the trading strategy is to stabilize revenues and minimize costs in the
long-term and should not be directed or lead by short-term profit motives or opportunities.
The generating capability of an NCPA resource may be sold only when the capability is deemed
to be surplus to the physical and financial requirements of its owner(s) or at the direction of the
resource owner(s).
NCPA can only engage in Authorized Trading Activities with qualifying counterparties. The
intent of all transactions at the time of execution should be exclusively for meeting Members
physical, financial and hedging requirements.
With the exception of exchange traded (e.g. NYMEX, PX, ISO, etc.) transactions and real-time
trading, all transactions require market price sampling (more than a single offer from one
counterparty) from the market and qualifying counterparties. Alternatives are to be evaluated on
an equivalent basis (similar quality, volume, duration and options), adjusted for such factors as
transmission, losses, and other implementation costs as much as possible.
All forward transactions must have Member Subscription for the full transaction prior to
execution. All relevant trading information is to be provided to the Mid and Back Office
functions, as specified later in this document.
2.2 Guidelines for Implementation
2.2.1 Baseline Trading Strategy
The Planning Process aims at developing a Baseline Trading Strategy that reflects each
Member's specific trade, risk management and procurement profile for the coming year. The
process is iterative and requires coordination between NCPA and the staff of Member Utilities to
establish the baseline trading strategy.
The primary objective of the Baseline Trading Strategy is to optimize the overall system
operating cost of each Member relative to its Forward Price Curve while meeting the physical
and financial requirements of the Members, within Member defined risk tolerances.
3
2.2.2 Baseline Trading Strategy Updates
The Baseline Trading Strategy is updated monthly to reflect the changing market and resource
outlook, or more frequently as warranted by the changing conditions of the portfolio or risk
exposure. The level of short term and spot market exposure will be continuously monitored and
adjusted for Members' specific objectives and risk tolerance.
2.2.3 Authorized Trading Activities
1. Forward purchases and sales of capacity/energy/fuel to maintain Member energy balances,
within specified objectives.
2. Forward purchases and sales of capacity/energy/fuel and related structured transactions to
hedge system costs.
3. Forward purchases and sales of power/energy/fuel on behalf of other market participants
and buy -resell transactions for short-term profits.
4. Purchases and sales to substitute the use of Member -owners' higher cost resources with
lower cost market alternatives (if the transactions produce positive margin without exceeding
risk tolerance levels).
5. Forward purchases and sales of transmission and transmission rights, to meet contractual
obligations or dispose of surplus capacity.
6. Spot purchases and sales of capacity/energy/fuel to meet Members load.
Activities that are not included in the approved list of Authorized Trading Activities are
prohibited, unless approved explicitly by a participating Member(s) or the ROC.
2.2.4 Member Subscription Process
All NCPA transactions must have full subscription by Members prior to execution for forward
transactions. This subscription can be full or partial. Some Members may choose to delegate all
trade/transactions to the NCPA or may elect to participate in trades/transactions conditional to
prior approval on a trade -by -trade basis.
Appendix I describes the procedures for the subscription process.
4
3.0 Trade Authorization, Limits and Controls
A business process specifying the authority vested at various levels of NCPA is required to
prudently manage trading and procurement activities. The NCPA Commission, made up of
representatives from Member utilities, is vested with the overall authority of the organization.
The Commission establishes the overall limits and controls for the NCPA and delegates trade
and transaction authority through the General Manager who further delegates' trade and
transaction authority to staff.
Authority to transact power -related products is delegated by the NCPA Commission for the
express purpose of managing each Member's portfolio in accordance with the Member's
objectives and instructions. Trade and risk management staff is performing their daily activities
within the constraints and authorization given to them:
➢ By the NCPA Commission (delegated through the General Manager who further
delegates through staff);
➢ Guided by the ROC and the interim trade and risk policies, processes and
procedures (3Ps); and
➢ Subject to Individual Member utility's direction.
NCPA staff is authorized to execute transactions of power -related products in conformance with
this Interim 3P document including the procedures required by the Member Subscription
Process.
3.1 Members' Authority and Authorization
Authority for trading originally rests in the hands of a Member utility's governing board, council,
or other such responsible body. Each Member will receive delegated authorities and limitations
from their governing body. The extent and conditions of this authority and the individuals to
which this is delegated shall be communicated in writing to NCPA and include any delegation
limitations. Members will have 90 days to obtain such an authorization from the date this
Interim Policy is approved by the NCPA Commission.
For transactions conducted on behalf of Members directly or indirectly through the NCPA,
Members, through their authorized individuals, exercise their trading authority:
➢ through the Member Subscription process;
➢ by delegating their trading authority in writing to NCPA for specific types of
transactions and/or duration, or
➢ by choosing the full portfolio management service option from NCPA.
Members will be required to complete a Trade Authorization Form documenting their individual
authority and providing NCPA with the desired level of authorization.
3.2 Authorized Transacting Individuals
Appendix II, as updated from time to time by the General Manager lists personnel who are
authorized to execute power -related transactions on behalf of a participating Members in strict
conformance to the Member's objectives and/or specific direction provided by the Member.
5
3.5 Controls and Procedures
3.5.1 Functional Responsibilities
The auditing controls and procedures are structured on the premise that the following functional
responsibilities are being developed within NCPA's organization:
➢ Front Office Function: performs actual trading/transacting with counterparties and
is responsible for Control and Compliance Procedures and Processes together with
the Mid Office.
➢ Mid Office Function: responsible for management oversight including; risk
measurement, transaction verification, trade/risk review and reporting. The Mid
Office is responsible for Control and Compliance Procedures and Processes
together with the Front Office.
➢ Back -Office Function: provides the checks and balances of the risk management
program, keeps records and approves bills and invoices. The Back Office functions
include monitoring, documentation, trade/transaction execution and reporting.
➢ Portfolio Management Function: will be responsible for determining and executing
trading strategy, active trading management (focused on meeting Members' defined
objectives), ensuring activities meet all trading risk management measures and that
they proceed in accordance with the trade and risk policies, processes and
procedures (3Ps).
➢ Risk Management Function: represents the function that ensures that the
organization's trading activities remain within accepted tolerance levels and that the
risk management strategy is executed properly. This function tracks the corporate
portfolio, evaluates it against the changing market, and suggests counter measures
to balance corporate risk.
In the interim, the activities of the Front, Mid and Back Offices will not be distinctly separate
functions, rather, there will exist a large degree of overlap and sharing of responsibilities by the
staff involved. These functions will evolve into administratively and functionally separate
operations as NCPA trading and risk management needs increase.
Similarly, the function of Risk Management will be a shared responsibility between individuals
performing Portfolio Management and Risk Management functions and the ROC.
3.5.2 Record Keeping
NCPA Front and Back Offices are responsible for development, filing and maintenance of
transaction related records. Front Office staff is responsible for generating all documentation for
each transaction and forwarding such documentation to the Mid and Back Offices. Back Office
staff is responsible for maintenance and filing of such documentation.
3.5.3 Transaction Tracking
Whenever NPCA Front Office staff initiates and executes transactions on behalf of Members,
NCPA Front Office staff shall complete required transaction tracking forms as described in
Appendix IV. Completed forms, along with executed original contracts or other counterparty
confirmation documentation shall be forwarded to the NCPA Mid Office upon trade execution.
Whenever an NPCA Member initiates and/or executes transactions to be implemented by
NCPA, such NCPA Member shall complete required transaction tracking forms as described in
Appendix V. NCPA Members shall forward completed tracking forms along with executed
original contracts or other counterparty confirmation documentation to NCPA Front Office staff
6
for implementation. NCPA Front Office staff shall forward forms and original documentation to
the NCPA Mid Office upon trade execution.
NCPA Mid Office staff shall review daily -submitted transactions tracking forms, executed
contracts and counterparty confirmations for completeness, compliance with trading limits, and
to ensure transactions are with approved counterparties. Exceptions are to be reported
immediately to the NCPA Front Office and to the ROC weekly. Front Office staff shall be notified
whenever levels are within 90% of acceptable limits, or if the next transaction is expected to
exceed acceptable limits.
3.5.4 Transaction Implementation
NCPA Front Office staff shall implement, track, and account for physical and financial
transactions utilizing NCPA approved scheduling and Risk Management systems.
3.5.5 Transaction Verification
NCPA Mid Office staff shall verify executed physical transactions with counterparties.
Verifications of physical transactions shall be completed within five (5) business days following
the end of the month in which products were purchased or sold. Verifications shall include
monitoring of trades for trade and risk policies, processes and procedures (3Ps) compliance
with contractual commitments.
3.5.6 Transaction Billing and Payment
NCPA Mid Office shall provide verified transaction data to NCPA Back Office for billing and
payment of transactions with counterparties. The Back Office shall invoice or pay counterparties
only upon receipt of verified transaction data from the Mid Office.
➢ NCPA Accounts Receivable staff shall invoice counterparties within two (2) business
days of receipt of verified transaction data.
➢ NCPA Accounts Payable staff shall pay invoices received from counterparties in
accordance with executed counterparty agreements.
3.5.7 Failed/Disputed Transactions
Any transaction not verified within the time specified in the Transaction Verification Process
shall be reported as a failed transaction. Failed transactions shall include disputed amounts and
transactions that did not meet the terms of executed contracts. Industry standard dispute
procedures, such as WSPP arbitration procedures, should be utilized unless otherwise required
by contract. Failed transactions shall be reported to the ROC weekly by the Mid Office.
3.5.8 Reporting
NCPA Mid and Back Office staff shall prepare daily, weekly, and monthly reports for distribution
to the ROC, General Manager, Front, Mid and Back Office managers. Report formats shall be
approved by the ROC and, at a minimum; contain information adequate to update the credit
worthiness of counterparties, status of trades, and compliance with trading and risk limits.
4.0 Credit Risk
4.1 Credit Policy
NCPA will diversify its portfolio through engaging multiple trade partners or conducting trade
through the California Power Exchange or California Independent System Operator.
7
NCPA will not knowingly participate in long chain or sleeve transactions.
NCPA will use a risk adverse approach and avoid transacting with counterparties that are
receiving bad press or whose credit status is known to be on watch by any organization.
New contracts need to have a condition that allows the NCPA to terminate (be released from
future obligations) the transaction or to seek immediate payment for all outstanding and
expected future payments if a counterparty's credit situation falls below minimum standards. For
long-term contracts, the NCPA should secure a condition to allow it to determine how much
advance payment is required for it to continue to honor the contract at the lower credit rating.
At NCPA's sole discretion a counterparty may be required to provide some combination of
prepaid estimated billings, escrow deposits, minimum balance requirements, irrevocable letter
of credit, or a corporate guarantee.
4.2 Definition of Credit Risk
Credit risk is the risk of financial loss that results from the failure or unwillingness of a
counterparty to fulfill its obligation to make payment or delivery on a contract.
Credit default loss is the potential loss that may result from credit risk exposure; which is a
measure of the susceptibility of an organization to credit risk.
Credit risk is closely related to, and often dependent upon market risk. As market risk increases,
so too does credit risk.
For the NCPA, credit risk can arise from its trade relations with the following entities:
1. Counterparties — through an inability or unwillingness to fulfill financial or physical delivery
obligations with NCPA.
2. Members — through their individual contracts, counterparties or trading activities
3. Third parties — through a transference of market risk.
4.3 Predication of the Credit Risk Policy
The credit risk management function is predicated on the premise that both perceived contract
value and potential credit risk must be considered before achieving contract approval and are
based on the following principles:
1. Recognition that the NCPA is a public entity that represents Members who are also
public entities, who have unique legal and regulatory privileges and are encumbered
with specific obligations related to their individual operations;
2. Minimization of credit and administrative risks to the NCPA and its counterparties;
and
3. Providing services at the lowest cost consistent with minimization of credit and
administrative risks.
All transactions will be evaluated on their individual credit merits and on the integration of each
transaction into the total portfolio, i.e. that is the transactional credit risk and the aggregated
total portfolio credit risk.
Avoiding or mitigating credit risk has a monetary value and potential associated costs.
8
U Interim Guideline for Qualifying Trading Partners
Under no circumstance can a transaction be completed with a trading partner with a credit rating
below the approved level credit rating. Minimum approved credit ratings are at least one of the
following:
Private Entities
Public Entities and California Utilities"
Dun &
Fitch IBCA
Standard &
Moody's
2A BBB
Bradstreet
BBa
Poor's
Current trading partners
3A
A
A
A
with no ill histo *
New partners* and
4A
AA
AA
Aa
previous counterparties
Short term transactions
2A
BBB
BBB
BBa
less than one month
Public Entities and California Utilities"
* Counterparties with whom the NCPA has not transacted business in the past 12 month are
considered "new partners"
** NCPA Pooling Members who own resources are deemed to meet the minimum credit
requirements.
Where a trading partner does not meet the minimum credit requirements; a security or
performance bond, escrow deposit (example one -month's expected average billing), an
irrevocable letter of credit, a corporate guarantee from an acceptable parent holding company or
some combination of the above will be required.
Staff may recommend that counterparties not meeting the required credit rating be given special
consideration by the ROC if such counterparties have resources, market history, stature or
financial position that justifies treatment outside of these guidelines.
New counterparty transactions should be limited in term and amount until comfort is built with
respect to performance for at least the first twelve months of trading.
All new counterparties must supply bank references and three (3) client references.
Maximum credit risk exposure should not exceed $100,000 for each trading partner.
Because of the nature of electricity sales, and the dollar value of typical NCPA purchases and
sales, the NCPA must exercise caution and predispose itself to deal only with entities with very
high credit ratings. When a counterparty is not highly rated, caution should be used and
purchases or sales should be of minimum quantities. Actual approval of quantities, terms and
prices will be based on a decision-making matrix that allows for:
➢ Trading partner credit rating;
➢ Contract terms and conditions;
➢ Contract length; and
➢ Contract cost.
9
Dun & Fitch IBCA
Bradstreet
Standard &
Poor's
Moody's
All Transactions
2A BBB
BBB
BBa
* Counterparties with whom the NCPA has not transacted business in the past 12 month are
considered "new partners"
** NCPA Pooling Members who own resources are deemed to meet the minimum credit
requirements.
Where a trading partner does not meet the minimum credit requirements; a security or
performance bond, escrow deposit (example one -month's expected average billing), an
irrevocable letter of credit, a corporate guarantee from an acceptable parent holding company or
some combination of the above will be required.
Staff may recommend that counterparties not meeting the required credit rating be given special
consideration by the ROC if such counterparties have resources, market history, stature or
financial position that justifies treatment outside of these guidelines.
New counterparty transactions should be limited in term and amount until comfort is built with
respect to performance for at least the first twelve months of trading.
All new counterparties must supply bank references and three (3) client references.
Maximum credit risk exposure should not exceed $100,000 for each trading partner.
Because of the nature of electricity sales, and the dollar value of typical NCPA purchases and
sales, the NCPA must exercise caution and predispose itself to deal only with entities with very
high credit ratings. When a counterparty is not highly rated, caution should be used and
purchases or sales should be of minimum quantities. Actual approval of quantities, terms and
prices will be based on a decision-making matrix that allows for:
➢ Trading partner credit rating;
➢ Contract terms and conditions;
➢ Contract length; and
➢ Contract cost.
9
Where a counterparty is fully or partially supported by a performance bond, the rating of the
underwriter's financial strength shall be a minimum of A.M. Best "A" Rating or equivalent. The
existence of insurance may make entering into a transaction with a low rated counterparty more
feasible/acceptable.
Appendix III includes a list of Currently Authorized Counterparties and corresponding trading
limits. This list will be updated from time to time and approved by the ROC and the General
Manager.
4.5 Implementation Guidelines
Qualification/rating of trading partners is based on information furnished by other rating
agencies, the counterparties themselves, and other reputable sources of industry information.
NCPA does not, and will not, perform an audit in connection with any rating opinion and on
occasion may use unaudited financial information.
Ratings are a dynamic function and may be changed, suspended or withdrawn as a result of
changes in, or unavailability of such information or based on other circumstances such as
transaction performance.
When entering into any transaction, it remains the responsibility of NCPA traders to act
prudently and exercise their best judgement based on all available information.
Events of contract non-compliance are to be formally reported (in writing) in a timely manner.
Examples of such events are:
1) Material non-compliance in regard to credit or escrow requirements:
a) Exceeding credit limit by more than 5%.
b) Failure to maintain escrow or minimum balance requirements at required levels.
c) Failure to supply continuing proof of compliance with other specific credit requirements
in a timely manner, e.g.: updated letter of credit 45 days prior to expiration; audited
financial statements; notice of published credit rating changes previously provided; etc.
2) Failure to pay a properly submitted bill by the due date.
3) Failure to provide required forecasts or metering data in a timely manner.
4) Any other adverse event or action that could lead to an out of trust situation if not corrected
in a timely fashion.
4.6 NCPA Credit Watch List
NCPA will develop a Credit Watch List to record the performance, or non-performance of trading
partners, in their obligations to NCPA. The Credit Watch List will also include potential trading
partners who are suffering adverse effects from market movements
The Credit Watch List is a dynamic document that is developed from internal and external
information sources.
A counterparty placed on the NCPA Credit Watch List may be removed from the NCPA Credit
Watch List not sooner than three (3) months after being placed thereon. The NCPA Credit
Watch List will be submitted to the ROC whenever it is updated.
10
U Credit Risk and Members
Members contracts/transactions with third parties assigned to the NCPA must meet minimum
NCPA credit risk requirements.
Members' transaction/contract activities with third parties and assigned to the NCPA must be
included in the total exposure measurements.
Members must inquire/consult with the NCPA prior to committing to transactions/contracts in
order to ensure that minimum credit risk requirements have been met.
4.8 NCPA External Credit Rating
Just as NCPA rates external trading partners, external trading partners will rate the NCPA.
In an industry highly focused on issues of credit, a high and stable credit rating is desirable and
has market value. A good credit rating attracts better prices, terms and conditions. An
organization's good credit rating has a dollar value for the trading partners. As such, NCPA
must take every action to maintain its good credit rating, including the following:
➢ Payments will be made on time;
➢ Issues of improper billing or questions on billing will be addressed immediately;
➢ Material contract dispute will be brought to the attention of the ROC and the General
Manager in a timely fashion; and
➢ The NCPA will ensure good cash flow (possibly through the establishment of a line of
credit or reserve fund to ensure that timely payment can be made).
4.9 Conflict of Interest
NCPA personnel who may influence trading decisions must report any conflict of interest with
qualifying counterparties. The ROC may prohibit such personnel from participating in trade
related decisions/activities with the said counterparty.
11
Appendix I — Subscription Process
NCPA Resources
For NCPA resources under the Facilities Agreement, Members have rights and obligations to
specify participation in sale/purchase transactions, exercise Right -of -Refusal, and may
unilaterally make a purchase/sale with counterparties and/or NCPA Members.
The Right -of -Refusal process will be implemented in the following sequence for sale of Member -
owned resources:
1) NCPA will notify Member -owners of any NCPA initiated sale of capacity/energy from any
Member -owned generating plant(s).
2) Member -owners may elect to:
a) not participate;
b) subscribe to their ownership share of the sale;
c) participate at less than their ownership share of the sale; or
d) exercise their First Right -of -Refusal to purchase at the price, terms/conditions of the
sale, for all or a portion of the available shares of those Member -owners electing to
participate in the sale.
3) If an NCPA initiated transaction lacks full subscription, the size of the transaction may have
to be reduced and/or the Member -owners that choose to participate in the transaction may
have to "step up" their participation shares in the transaction.
4) If lack of participation causes adjustments in price or requires "step-ups", participating
Member -owners must be informed of the new terms/conditions and given another
opportunity to determine their level of subscription.
5) The responsibility for a non -subscribing Member will be limited to the provisions in existing
contracts/agreements, unless otherwise agreed to by the parties of the respective
contracts/agreements.
6) Written notification of subscription percentages will be available immediately after the
execution of the transaction.
NCPA Initiated Physical Transactions
For all other NCPA initiated physical transactions, Member Subscription decisions are as
follows:
1) For transactions with duration of one month to one year (Term Transactions):
a) Member staff authorized to elect participation will provide positive affirmation of
participation level or provide written delegation of authority with any trading
limitations/instructions to NCPA.
b) Each Member will designate from its staff a representative (and alternate(s) in the
absence of the primary representative) with the authority to make decisions relating to
the Member's participation in NCPA initiated transactions.
c) Authorized Member representative may delegate transaction decision-making authority
to the NCPA. Such delegation must be in writing including all transaction limitations and
special instructions.
2) Member Subscription for NCPA initiated physical transactions with duration of less than one
month will be based on the following default allocations:
a) Transactions requiring SOT and COTP transmission will be allocated hourly based on
each Pool Member's hourly surplus capacity of SOT and COTP, respectively. These
allocations will be computed after -the fact as part of the Pool's monthly billing procedure
b) In -month energy purchases to meet the combined physical and financial requirements of
the Members will be allocated in proportion to each Member's total energy deficits during
12
the periods in which the transactions are in effect. Energy sales will be allocated similarly
in proportion to each Member's energy surplus totals.
c) Allocations of portions of transactions that are not assigned by need, including all
arbitrage transactions, will be based on short-term power management percentages.
3) Written notification of subscription percentages will be available immediately after the
execution of the transaction.
13
NCPA 1999 Interim Policies, Processes and Procedures
Appendix II — Interim Trade Authorization Levels
Position/Name
Amount
Conditions
1. General Manager
a) For NCPA Pool
a) Up to one-year term
Jim Pope
transactions, individual
transactions up to $40
million and $10 million per
quarter
b) Term up to Member's limits
b) For Member specific
transactions, up to the
Member's limits
2. Assistant General
Individual transactions up to $5
Transactions of not more than
Manager and Portfolio
million in value
twelve (12) months in duration
Manager
Don Dame
Tom Lee
3. Chief Dispatcher
Individual transactions up to
Transactions of not more than
Alan Parsons
$2,500,000 in value
three 3 months in duration
4. Pool Trader (Gas &
Individual transactions up to
Transactions of one (1) month
Electric)
$2,500,000
but not more than three (3)
Don Imamura
months in duration
Kevin McMahan
5. Daily Scheduler * (Gas &
Individual transactions up to
Transactions of less than one
Electric)
$500,000 and maximum daily
(1) month
Kevin McMahan
limit of $750,000
Norm Worthington
Don Imamura
Ken Goeke
6. Supervisor, Dispatch
Individual transactions up to
Transactions of not more than
Operations *
$500,000 and maximum daily
72 hours in duration
Fred Young
limit of $750,000
7. Dispatcher *
Individual transactions up to
Transactions of not more than
Roy Haver
$125,000 and maximum daily
72 hours in duration
Patricia McCartney
limit of $250,000
Balta Ramirez
Tina Sweeney
Jana Linkiewicz
Michael Brush
8. Gas Scheduler
Individual transactions up to
Transactions of one (1) year or
Dana Griffith
$500,000
less
• For emergency operations or unusual market conditions contact Chief Dispatcher or
Assistant General Manager for additional authorization if required.
14
NCPA - Qualified Counterparties
As of December 16, 2005 the following counterparties have been rated
for trading with NCPA for the specified maximum amount:
(Dollars in millions)
Green shade: New Evaluation
Orange shade: Buy only
Privliged and Confidential
For Internal Use Only
Trade Limits for Purchase, Sale & Netting Agreements
Counterparty
CRAM CRAM
Active Score Rating
Credit
Rating
Credit
Limit
Date
Last
Eval.
Financial
Statement
Date
WSPP
Netting NCPA Trading
WSPP Partner
Comments
AEPSC as Agent for Ohio Power & Columbus Southern
Y
BBB
$ 0.50
3/30/2005
12/31/04 A
Yes
AEP as agent for OPC, SWEPCO & PSO
Anaheim, City of, Public Utilities Dept.
N
A+
$ 0.20
1/5/2005
6/30/04 A
No
Arizona Public Service
Y
BBB
$ 0.50
5/26/2005
12/31/04 A
Yes
Avista Energy, Inc.
Y
N/A
$ 0.25
5/31/2005
12/31/04 A
Yes
$1.5 million guarantee from Avista Capital
Bonneville Power Admin.
Y
W.
$ 3.00
3/23/2005
9/30/04 A
No
BP Energy Company
Y
AA+
$ 2.00
5/16/2005
12/31/04 A
Yes
500 point deduct for no parent guarantee
California Dept. Of Water Resources
Y
AA
$ 1.00
1/6/2005
6/30/04 A
Yes
Calpine Energy Management, L.P.
Y
B/CCC+
Buy Only
4/1/2005
12/31/04 A
Yes
Declined to provide Deutsche Bank LOC.
Calpine Energy Services, L.P.
Y
B/CCC+
Buy Only
4/1/2005
12/31/04 A
No
No netting with long-term deliveries.
CERS DWR Electric Power Fund
N
A
$ 0.20
1/6/2005
6/30/04 A
No
ConocoPhillips Company
Y
A-
$ 2.00
5/11/2005
12/31/04 A
Yes
Constellation Energy Commodities Group, Inc.
Y
A -/BBB+
$ 2.00
3/18/2005
12/31/04 A
Yes
Elec guarantee expires 12/15/05, gas 12/31/05
Coral Power L.L.C.
Y
A-
$ 2.50
10/28/2005
06/30/05 1
Yes
Guarantee from Coral Energy Holdings, Inc.
Duke Energy Trading & Marketing L.L.C.
Y
N/A I
Buy Only
8/5/2004
9/30/03 1
Yes
Request for parent guarantee denied
Eugene Water & Electric Board
N
AA/A+
$ 0.20
8/19/2005
12/31/04 A
Yes
Hetch-Hetchy Water & Power/Cit &CoSF
N
AA -/A+
$ 0.20
8/29/2005
6/30/04 A
No
Idaho Power Company
N
A -/BBB+
$ 0.20
8/19/2005
12/31/04 A
Yes
Klamath Falls, City of (Cogeneration Project
Y
BBB
$ 0.25
5/26/2005
6/30/04 A
No
Lassen Municipal Uitlity District
Y
N/A
$ 0.02
7/5/2005
6/30/04 A
No
Credit limit $20 K to allow limited trading.
Los Angeles Dept. Of Water & Power
N
AA-
$ 0.20
8/18/2005
6/30/04 A
Yes
Modesto Irrigation District
Y
A
$ 0.50
7/5/2005
12/31/04 A
Yes
Morgan Stanley Capital Group, Inc.
Y
AA -/A+
$ 3.00
3/17/2005
11/30/04 A
Yes
Gurarateed by Morgan Stanley
Occidental Power Services
Y
A-
$ 0.40
11/8/2005
12/31/2004
Yes
Limited trading. Waiting on guarantee.
PacifiCorp
Y
A -/BBB+
$ 1.50
11/29/2005
3/31/05 A
Yes
Credit reduced due to corporate aggregration.
Portland General Electric
Y
BBB
$ 2.00
3/18/2005
12/31/04 A
Yes
Owned by Enron
Powerex
Y
AA-
$ 3.00
11/28/2005
3/31/05 A I
Yes
BC Hydro guarantee renewed to 12/31/05
PPM Energy, Inc.
Y
A-
$ 1.50
1/7/2005
3/31/04 A
Yes
PacifiCorp Holdings guarantee exp 5/31/06
PUD No 1 of Snohomish Count
N
A+
$ 0.20
8/29/2005
12/31/04 A
Yes
PUD No. 1 of Chelan County
N
AA
$ 0.20
8/29/2005
12/31/04 A
Yes
PUD No. 2 of Grant County
N
AA
$ 0.20
9/29/2005
12/31/04 A
Yes
Puget Sound Energy, Inc.
Y
BBB/BBB-
$ 1.00
7/5/2005
12/31/04 A
Yes
Redding, City of
N
A-
$ 0.20
8/19/2005
6/30/04 A
Yes
Riverside, City of
N
A+
$ 0.20
1/5/2005
6/30/04 A
Yes
Sacramento Municipal Utility District
Y
A
$ 3.00
5/10/2005
12/31/04 A
Yes
Salt River Project
N
AA
$ 0.20
11/28/2005
4/30/05 A
Yes
San Diego Gas & Electric
Y
AA -/A
$ 2.00
3/24/2005
12/31/04 A
Yes
Credit reduced due to corporate aggregration.
Santa Clara, City of SVP
Y
A
$ 0.60
8/5/2005
6/30/04 A
Yes
City of Santa Clara Electric Department
Seattle City Light
Y
AA-
$ 1.60
5/16/2005
12/31/04 A
Yes
Sempra Energy Trading Corp.
Y
A/BBB+
$ 1.50
3/24/2005
12/31/04 A
Yes
Credit reduced due to corporate aggregration.
Shasta Lake, City of
N
BBB
$ 0.20
7/5/2005 1
6/30/04 A
No
Shelter Cove Resort Improvement Dist No. 1)
Y
N/A
$ 0.50
9/19/2005
6/30/04 A
No
Tacoma, City of dba Tacoma Power
Y
AA -/A+
$ 1.00
6/29/2005
12/31/04 A
Yes
Tacoma Power
Truckee Donner PUD
N
/A$
0.20
8/29/2005
12/31/04 A
No
Turlock Irrigation District
Y
A+
$ 1.00
7/5/2005
12/31/04 A
Yes
Western Area Power Administration
Y
AA"
$ 2.00
8/4/2005
9/30/04 A
Yes
WAPA-Sierra Nevada Region
" Implied rating
$ 42.92 Aggregrate Total
Sorted by Name
See Counter Party Credit Information Attachment. 1/13/2006 10:44 AM
Appendix IV: Transaction Tracking Form - NCPA Initiated Trade
NCPA
Deal Control Schedule
1. Deal Number:
2. Deal Type:
3. Contract - Product:
4. Participating Members:
5. Term:
6. Shape:
7. Delivery/Transaction Point:
8. Pricing:
9. Description:
10. Notes:
11. Counter Party Information
12. Approvals
Purchase / Sale
WSPP
On -Peak / Off -Peak
Energy / Transmission / Capacity / Call Option / Cash Out
NCPP Other
(Example: Jan 99, Q2 99, Annual 99)
7x24 / 7x16 / 6x16 / 6x8 / Other
Index ISO ExPost
Fixed Premium / Option
PX + Other
Contract Implementation Billing
Company Company
Contact Name Address
Phone
Fax
Attention
Phone
Fax
Member / Pwr Mgmt Member/ Pwr Mgmt
Prepared By: Approval:
Signature: Signature:
Date: Date:
Distribution: Original with Original Contract - Power Accounts Administrator
Copies - Scheduling and Dispatch, Power Billing Senior Analyst
Financial / Physical
Accounting & Finance
Audit Review:
Signature:
Date:
16 07/12/99
Appendix V: Transaction Tracking Forms — Member Initiated Trade
NCPA
Deal Control Schedule
1. Deal Number:
2. Deal Type:
Purchase / Sale
Energy / Transmission / Capacity / Call Option / Cash Out Financial / Physical
3. Contract - Product:
WSPP
NCPP Other
4. Participating Members:
5. Term:
(Example: Jan 99, Q2 99, Annual 99)
6. Shape:
On -Peak / Off -Peak
7x24 / 7x16 / 6x16 / 6x8 / Other
7. Delivery/Transaction Point:
8. Pricing:
Index
ISO ExPost
Fixed
Premium / Option
PX +
Other
9. Description:
10. Notes:
11. Counter Party Information:
Contract Implementation
Billing
Company
Company
Contact Name
Address
Phone
Fax
Attention
Phone
Fax
12. Approvals
Member / Pwr Mgmt
Member/ Pwr Mgmt
Prepared By: Approval:
Signature: Signature:
Date: Date:
Distribution: Original with Original Contract - Power Accounts Administrator
Copies - Scheduling and Dispatch, Power Billing Senior Analyst
17
Accounting & Finance
Audit Review:
Signature:
Date:
07/12/99
RESOLUTION NO. 2006-19
A RESOLUTION OF THE LODI CITY COUNCIL
APPROVING THE CITY OF LODI ENERGY RISK
MANAGEMENT POLICIES
NOW, THEREFORE, BE IT RESOLVED that the Lodi City Council does hereby
approve the City of Lodi Energy Risk Management Policies, as shown on Exhibit A
attached hereto and made a part of this Resolution.
Dated: January 18,2006
hereby certify that Resolution No. 2006-19 was passed and adopted by the Lodi
City Council in a regular meeting held January 18, 2006, by the following vote:
AYES: COUNCIL MEMBERS —Beckman, Hansen, Mounce, and
Mayor Hitchcock
NOES: COUNCIL MEMBERS —Johnson
ABSENT: COUNCIL MEMBERS — None
ABSTAIN: COUNCIL MEMBERS— None
SUSAN J. BLACKSTON
City Clerk
2006-19
City of Lodi
Energy Risk Management Policies
January 7,2006
Purpose:
EXHIBIT A
The purpose of the Risk Management Program is to ensure that risks associated with
Lodi's bulk power procurement program are properly identified, measured and
controlled.
Scope:
The policies are to be applied to all aspects of Lodi's wholesale procurement and sales
activities, long-term contracting associated with energy supplies, capital projects and
associated financing documents related to generation, transmission, transportation or
storage, and participation in Joint Powers Agencies (JPA's).
These policies do not address the following types of general business risk, which are
treated separately in other official policies, ordinances, and regulations of the city; fire,
accident and casualty, health, safety, workers compensation and other such typically
insurable perils.
Risk Management Program Strategies:
1. Identify, measure and control risks that would have an adverse affect on retail rate
stability
2. Assign risk management responsibilities to appropriately qualified individuals and
committees
Risk Management Program Objectives:
1. Maintain a regularly updated inventory of Lodi's Bulk Power Procurement
Program risks
2. Establish risk metrics and reporting mechanisms that provide both quantitative
and qualitative assessments of potential impacts to rate stability
3. Adopt business practices that encourage development of appropriate levels of
operating reserve funds, contribute to retail rate stability and maintain appropriate
security for established funds
Risk Inventory:
Lodi Electric must inventory and address the following categories of risk as a component
of the monitoring and reporting under the risk management program:
• Price Risk
• Credit Risk
• Operational Risk
• Contingent Liabilities
Price Risk — Price risk is the risk that wholesale prices may increase relative to open
position needs and/or long term supply contracts may move "out of the money", or
become unprofitable or costly in comparison to prevailing price levels.
2
CreditRisk — Credit risk is the risk associated with entering into any type of transaction
with another counterparty and is generally segmented into the following five categories:
1. Trading Counterparties and retail customers fail to pay for energy delivered
2. Trading counterparties and/or wholesale suppliers fail to deliver contracted for
energy
3. Trading counterparties fail to take delivery of energy sold to them, necessitating a
quick resale elsewhere, likely at a loss
4. Counterparties,may refuse to extend credit or charge a premium for credit risks
5. Counterparty transactions are too concentrated among a limited number of
suppliers
Operational Fd& — Operational risk consists of the potential to effectively plan, execute
or control business activities. Operational risk includes the potential for:
1. Inadequate organizational infrastructure, i, e-., the lack of sufficient authority to
make and execute decisions, inadequate supervision, absence of internal checks
and balances, incomplete and untimely planning, incomplete and untimely
reporting, failure to separate incompatible functions, etc.
2. Absence, shortage or loss of key personnel
3. Lack or failure of facilities, equipment, systems and tools such as computers,
software, communications links and data services;
4. Inability to finance capital projects or meet financial obligations incurred in the
course of wholesale operations;
5. Exposure to litigation or sanctions as a result of violating laws and regulations,
not meeting contractual obligations, failure to address legal issues and/or receive
competent legal advice, not drafting contracts effectively, etc.
6. Errors or omissions in the conduct of business, including failure to execute
transactions, violations of guidelines and directives, etc.
Contingent Liabilities — contingent liabilities consist of liabilities that Lodi could incur in
the event of the failure of other parties to discharge their obligations. At present, these
consist of three principle categories:
1. Guarantees and step up provisions in the enabling agreements for the Joint Powers
Agencies (JPA s) of which the city is a member
2. Project closure, decommissioning, environmentalremediation and other
obligations which result from Lodi's own activities and from JPA projects and
activities;
3. Provisions for take or pay, termination payments and/or margin calls in the city's
long-term electric power supply agreements.
Prohibited and Authorized Transaction Types:
Prohibited Transaction Types
Speculative buying and selling of energy products is prohibited. Speculation is defined as
buying energy that is not needed for meeting forecasted load, selling energy that is not
owned and/or selling energy that is not surplus without simultaneously replacing that
energy at a lower cost. In no event shall transactions be entered into to speculate on
market conditions.
Approved Transaction Types
1. Purchase energy to serve load above what is expected to be generated or
purchased from existing resources.
2. Sell existing capacity or energy that is expected to be in excess of Lodi's load
serving obligations
3. Purchase gas that is expected to be needed to fuel owned plants
4. Sell surplus gas if more economic energy is available for purchase
5. Execute financial transactions to fix the price of variable commodity purchases or
sales
6. Purchase simple call options to limit price exposure on short gas or electricity
positions
7. Sell simple call options or tolling agreements on capacity that is expected to be in
excess of Lodi's load serving obligations
8. Purchase emissions allowances deemed necessary for efficient operations of
owned generating facilities
9. Purchase or sell firm transmission rights to manage congestionprice risk
10. A purchase/sale of energy at the California Oregon Border and a sale/purehase of
energy at NP 15 to take advantage of Lodi's transmission capacity
11. A purchase ofnatural gas and a sale of energy to take advantage of excess gas
fired peaking capacity
12. A sale of natural gas and a purchase of electricity to take advantage of market
heat rates below NCPA gas fired generation.
Transactions that are not included in the Approved Transactions Type list are prohibited;
unless explicitly approved by the City Council.
Energy Risk Management Roles, Responsibilities and Organization:
City Council
The City Council is responsible for making high-level, broad policy and strategy
statements as contained in the Energy Risk Management Policy document. The City
Council adopts the Energy Risk Management Policies as developed and recommended by
the Risk Oversight Committee and delegates the City Manager to execute it. The City
Council will review the Energy Risk Management Policy every year. Additionally, the
City Council shall receive reports quarterly from the City Manager regarding risk
management activities. These reports will be provided to the Council within six weeks
after the end of each calendar quarter.
City Manager
The City Manager has overall responsibility for executing and ensuring compliance with
policy adopted by the City Council. The City Manager reports quarterly to the City
Council regarding energy risk management activities.
Risk Oversight Committee (ROC)
4
The ROC shall include as voting members, the City Manager, Assistant City Manager,
City Attorney and the Electric Utility Director; or in the case of their absence, their
designees. The City Manager shall appoint the chair of the ROC. Additional non-voting
members may be invited to participate on the ROC based on supporting expertise
required by the ROC.
The ROC shall meet not less than once per month, or as otherwise called to order by the
City Manager or City Council. The ROC shall keep minutes of all meetings and business
transacted and shall appoint one of its members to perform this task. A quorum for the
ROC to do business shall consist of all members or their designees. The ROC shall
request attendance at its meetings by, and/or reports From, other persons as appropriate.
The City Manager shall make regular reports to the City Council regarding business
transacted by the ROC at such intervals and/or upon such occasions as the Council shall
direct.
The ROC shall have the responsibility for ensuring that business is conducted in
accordance with the Energy Risk Management Policies (ERMP). The ROC shall from
time to time, adopt and bring current risk management business practices, defining in
detail the internal controls, strategies and processes for managing risks associatedwith
the adoption of those business practices. The ROC shall recommend to the City Council
the categories of transactions permitted and set risk limits for those transactions. The
ROC, with the approval of the City Manager, shall confirm the assignment of authority to
execute wholesale trading transactions, and administer retail accounts, supply contracts,
capital projects and JPA relationships.
Electric Department
The Electric Department shall participate on the ROC through the Electric Utility
Director. The Electric Utility Director shall provide load forecast information and
coordinate the receipt and dissemination of relevant market and transactional information
undertaken on Lodi's behalf throughNCPA.
Finance Department
The Finance Department shall participate on the ROC through the Assistant City
Manager and provide accounting and cash flow information to the ROC.
Legal Department
The Legal Department shall participate on the ROC through the City Attorney and
provide legal advice and representation and ensure that business is canied out in
compliance with all applicable laws, regulations and executive court orders.
Reporting
Quarterly reports shall be provided to the City Council, which provide detail on the
City's forward purchases, market exposure, credit exposure, transaction compliance and
other relevant data.
Quarterly Reports shall include:
• Load and Resource balances as forecast and adopted in the current operating years
budget
• Load and Resource balances as adjusted due to operating conditions or purchases
occurring during the quarter
• An assessment of market exposure
• An assessment of the quarterly change in power supply cost from budget
• Credit Exposure by counterparty
• A summary of any purchases made during the quarter
• An assessment of any counterparty credit problems
Transaction Limits and Controls
For transactions executed on behalf of Lodi through NCPA, trade authorization levels,
counterparty credit limits and minimum counterparty rating criteria shall be as described
in NCPA's "Trade and Risk Management 1999 Interim Policies, Processes and
Procedures (RMPP)", which are made a part of this document, and attached hereto.
Material changes to NCPA's RMPP shall he reported to the City Council as part of the
quarterly reporting under Lodi's Energy Risk Management Policy.
For transactions executed on behalf of Lodi through NCPA, the City Manager and the
Electric Utility Director shall have the authority to direct NCPA to enter into purchase
agreements under authority granted by the City Council, by Resolution. The Resolution
shall specify the limits of the authority delegated, including the maximum dollar amount
of the authority and the duration of the contracts and/or transactions that may be executed
under the delegation of authority.
Because NCPA cannot enter into agreements on behalf of pooling members for longer
than one year, power supply contracts that have terms longer than one year, or that begin
delivery more than one year into the future must be executed directly by Lodi.
For transactions executed directly by Lodi, the City Manager and the Electric Utility
Director shall have the authority to enter into purchase agreements under authority
granted by the City Council, by Resolution.
The Resolution shall specify the limits of the authority delegated, including the maximum
dollar amount of the authority and the duration of the contracts and/or transactions that
may be executed under the delegation of authority.
Any resolution delegating authority to the city manager to contract for electricity shall
specify generally at least the following terms and conditions and the description of
energy and energy services to be procured, including, but not limited to, on -peak and off-
peak energy and ancillary services; term, specifying a not -to -exceed period of time;
period of delivery denoted in years or months; and point of delivery on the locus on the
interstate transmission system on which the delivery is made.
6
Any delegation of authority to contract for gas shall specify generally at least the
following terms and conditions; quantity and the description of gas services to be
procured, including but not limited to scheduled gas and gas transportation services,
specifying a not -to exceed period of time; period of delivery denoted in years or months
or years and months; and point of delivery of the locus on the interstate transmission
system at which the transfer of title is made.
For contracts executed directly by the City, the City shall use standardized form contracts
for the procurement of gas and electricity, as practicable, including, but not limited to
form contracts created and copyrighted by the Edison Electric Institute, the Western
States Power Pool, and the North American Energy Standards Board. Unless waived by
resolution of the City Council, a counterparty shall obtain and maintain during the term
of the contract, the minimum credit rating established as of the date of award of the
contract of not less than a BBB- credit rating establishedby Standard and Poor's and a
Baa3 credit rating establishedby Moody's Investors Services.
All procurement of gas and electricity by contract shall conform to the requirements of
the Energy Risk Management Policies.
Compliance
Compliance exceptions are actions, which violate the authority limits, requirements or
directives set forth in the Energy Risk Management Policy. All exceptions shall be
reported immediately to the City Manager and quarterly to the City Council in the
quarterly exception report.
Willful violations of the Energy Risk Management Policy will be subject to review and
may be cause for discipline or dismissal.