HomeMy WebLinkAboutRES 121019-Y - Energy Risk Mngmt PolicyRESOLUTION NO. Z 1D 14^
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
GEORGETOWN, TEXAS, ADOPTING THE RISK MANAGEMENT POLICY
UNDER CHAPTER 13.38 OF THE CODE OF ORDINANCES; REPEALING
CONFLICTING ORDINANCES AND RESOLUTIONS; INCLUDING A
SEVERABILITY CLAUSE; AND ESTABLISHING AN EFFECTIVE DATE.
WHEREAS, the City has determined that amending the Code of Ordinances facilitates
greater transparency by reflecting current practices and business needs; and
WHEREAS, the City has identified amendments to the risk management policy to better
manage energy risk; and
WHEREAS, the City finds that amending the energy risk management policy will
enhance the City's ability to provide economic and reliable service to its customers.
NOW THEREFORE BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF
GEORGETOWN TEXAS:
SECTION 1. The facts and recitations contained in the preamble of this Resolution are
hereby found and declared to be true and correct, and are incorporated by reference herein and
expressly made a part hereof, as if copied verbatim.
SECTION 2. The Mayor is hereby authorized to sign this Resolution and the City
Secretary to attest.
SECTION 3. This Resolution shall become effective and be in full force and effect on
January 14, 2020.
PASSED AND APPROVED on the day of 2019.
ATTEST:
Robyn Densmore, City Secretary
APPROVED ❑FORM:
Charl a Mc ab , City Attorney
CITY OF GEORGETOWN TEXAS
By: L&
Dale Ross, Mayor
00011021 v LEGAL RESOLUTIONS 12 2 2019
Resolution No. Page 1 of 1
Sobject; Adopting Risk Vam ement Policy — Ch.13.38
Date Approved
GE •' •
l Risk Management Policy
Energy Risk Management Policy
Adopted:
Contents
I. PURPOSE......................................................................................................................................1
II. SCOPE.....................................................................................................:...........................I............. 1
III. KEY CONSIDERATIONS AND LIMITATIONS........................................................................................2
IV. ENERGY RISK MANAGEMENT FRAMEWORK.....................................................................................2
V. ENERGY RISK MANAGEMENT PROCESS............................................................................................ 5
VI. RISK TYPES COVERED BY THIS POLICY............................................................................................... 7
VII. RISK TOLERANCE ........................... .................. - 8
VIII. ENERGY RISK MANAGEMENT PROCEDURES.....................................................................................8
11IF"IF-TOWS
The City of Georgetown and Georgetown Electric Utility are exposed to the risks associated with
purchased power. These risks are collectively called Energy Risk.
Energy Risk can have a significant impact on the overall financial performance of Georgetown
Electric Utility and the City of Georgetown and affect the ability to provide economic and reliable
service to its customers.
Energy Risk Management Policy outlines a planned and pro -active approach to managing energy
risk.
The Energy Risk Management Policy clearly identifies the risk management process, the
organizational structures, management responsibilities, approved risk management tools,
transactions, and activities, and operating procedures necessary to ensure that the energy risk
exposures are properly identified, managed and reported on a pro -active and consistent basis.
II. SCOPE
A. The Energy Risk Policy governs all business activities that may impact the Energy Risk
profile of Georgetown Electric Utility. Activities that fall within the scope of this Policy
include, but are not limited to, the following:
1. Wholesale Transactions (PPA, Bilateral Trades)
2. Independent System Operator (ISO)/ERCOT Market Transactions (DAM/RTM/AS)
3. Energy hedging activities involving physical and financial energy products
4. Basis hedging activities involving energy products
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5. All energy commodity trading
6. Counterparty contracting and credit management
B. All transactions will be accomplished through hedging, not speculation.
1. Hedging
Hedging is the process of analyzing existing risk levels and entering into hedging contracts to
achieve desired risk levels. A hedge is an investment that reduces the risk of adverse price
movements of an asset. For example, a commodity hedge locks in a product price. As the
price rises, the hedge will have an offsetting gain or, as price declines, the hedge will have
an offsetting loss.
2. Speculation
Speculation is a bet on the future direction of price movements of assets. A key motivation
to speculate is that the risk of loss is offset by the possibility of a huge gain. Speculation does
not reduce the risk associated with normal business activities.
III. KEY CONSIDERATIONS AND LIMITATIONS
A. The standards and requirements specified in this Policy constitute only a subset of the
overall managerial and technical elements that are required to successfully manage and
control energy risk.
B. The implementation of the risk management policy and its elements, by itself, will not
guarantee a particular level of financial performance or energy risk control.
C. The efficacy of the risk management policy is contingent on the quality of execution and
compliance.
D. Adverse and unprecedented conditions can produce more extreme levels of financial
performance than forecasted using commonly -applied risk analysis methodologies.
E. The implementation of the risk management policy or elements of the policy may create
new sources of risk that may not have existed prior to the implementation of the policy.
IV. ENERGY RISK MANAGEMENT FRAMEWORK
A. Energy Risk Management Organization Structure
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G€OFR6€:IOWN
I VAN �
City CDUnCll
Independent 3rd Parly Georgetown Electric Board
(Risk Management (GTE£3)
Conipliance Reporting)
Risk Oversight
Comrm`itllee
I'Ro i)
I
L Risk Management
Committee (RMC)
B. The Energy Risk Management Organization is responsible for the overall implementation
of the Risk Management Policy.
1. City Council
a. Responsible for drafting, approving, and overall Policy Oversight.
2. Georgetown Electric Board (GTEB)
a. Aid the City Council in providing the overall Policy Oversight.
b. An independent third party appointed by the Georgetown Electric Board will
provide periodic Risk Management Policy Compliance reports to the GTEB and
City Council.
c. Receives Monthly Risk Management Policy updates from Risk Oversight
Committee (ROC) and Risk Management Committee (RMC)
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Board Member # t Board Member # 2
Expertise in the Expertise in the field
field of Marketing, of in Electric Power
Finance,Law or Distribution
Engineering
Georgetown
Electric Board
(GTEB)
Board Member # 3
t
Expertise in the field of in
Electric Generation or
Power Marketing.
GE0RGET" OWN
TEXAS
City Council City Council
Member Member
3. Risk Oversight Committee (ROC)
a. Responsible for setting, approval, and compliance of transaction and risk limits.
b. In conjunction with the RMC develop the overall risk management strategy.
c. Receives weekly/monthly Risk Management updates from RMC.
GM- Eie&ic and
staff
Risk Oversight
Committee
(ROC)
City Manager Assistant City
Manager
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Finance Director
GE •' •
Risk Management PolicyTLXAS
4. Risk Management Committee (RMC)
a. In conjunction with the ROC develop the overall risk management strategy.
b. Implement the risk management strategy approved by the ROC.
c. Review existing and potential transactions, monitor proximity to limits and help
support the responsibilities of the ROC.
d. Responsible for the day-to-day execution and management of transactions.
Risk Oversight
Committee
(ROC)
Risk Management
Committee
(RMC)
Q
Energy Electric - GM Independent
Manager/QSE and Staff Consultants
V. ENERGY RISK MANAGEMENT PROCESS
A. The following are the steps in the Energy Risk Management Process:
1. Organizational Objectives - The city of Georgetown (City Council, GTEB, Staff, ROC
and RMC) will establish strategic and operational goals and objectives that help
define the risk tolerance of the entity, overall risk management strategy including,
the portfolio management, hedging, and trading activities to be undertaken, as well
as those activities and transactions that are approved and prohibited. These
organizational objectives are identified and reviewed through periodic strategic and
business planning processes conducted with the objective of establishing budgets
and enhancing power supply decisions.
The outcomes of this step are:
a. Financial and Budgetary Goals
b. Portfolio Goal
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c. Risk Tolerance
d. Approved activities and transactions.
2. Risk of Type Identification and Measurement - ROC and RMC will identify and
measure the magnitude of the types of risk that can have a significant impact on the
strategic and operational goals identified in the organizational objectives.
The outcomes of this step are:
a. Types of risks
b. The magnitude of the risks identified
3. Risk Tolerance - The risk tolerance (tolerance for uncertainty in meeting strategic and
operational goals and objectives), with emphasis on downside risk, is identified by
the organizational objectives.
The outcomes from this step (The city of Georgetown's risk tolerance is translated
into) are:
a. Transaction Limits
b. Risk Exposure Limits
c. Activities and transactions that are approved and/or prohibited.
4. Portfolio Management - RMC with oversight from ROC will engage in purchase power
activities within the approved risk tolerances. These activities shall be in compliance
with the risk exposure and transaction limits and the approved and prohibited
activities and transactions identified in this Policy.
5. Risk Management Operating Procedures - The risk management policy shall be
enforced and implemented through the operating procedures that execute the
controls and management responsibilities. All departmental procedures that may
impact risk exposure of GP&L shall be in full compliance with this Policy. RMC, ROC,
staff, and vendors shall follow the operating procedures.
6. Risk Management Reporting - The following types of reporting will support the
overall implementation of the risk management policy.
a. Independent Third -Party Compliance Reporting
b. Position tracking
c. Performance measurement
d. Budgeted Vs. Actual Power Costs
e. Power Cost Adjustment Reporting
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VI. RISK TYPES COVERED BY THIS POLICY
This Policy addresses measurable risk types listed below.
A. Risk is the uncertainty in Georgetown Electric and the City of Georgetown's financial
performance due to the following types of exposures:
1. Market Risk is the uncertainty due to uncertain commodity market prices (i.e.
commodity price risk) and uncertain price relationships (basis risk).
2. Credit Risk is the uncertainty due to the chance of non-performance in payment or
delivery (either physical or financial) by counterparties.
3. Volumetric Risk is the uncertainty due to the variability in native load peak demand
and energy volumes, and in the quantity of energy deliveries under variable off -take
energy contracts and/or option contracts.
4. Transmission Risk is the uncertainty due to transmission constraints or congestion
affecting the volume and/or transmission costs impacting price risk.
5. Locational basis risk (Congestion) is the uncertainty due to the difference between the
source pricing point and the consumption pricing point that may exist in different
energy -related activities and transactions
6. Outage Risk is the uncertainty due to variability in the availability, curtailments, forced
and/or planned outage rates of the facilities that Georgetown Electric has contractual
entitlements.
7. Model Risk is the uncertainty due to the use of insufficiently accurate models for
portfolio management decision making resulting in adverse financial outcomes.
8. Execution Risk is the uncertainty due to the lack of speed or accuracy of the
transaction execution.
9. Operational Risk is the uncertainty due to inadequate or failed internal processes,
people, internal systems, or from external events. Operational risk can also be
exacerbated by inadequate or ineffective:
a. Internal controls
b. Transaction and/or strategy risk assessment
c. Segregation of duties
d. Management oversight
e. Staff resources, expertise and/or training
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f. Protections against fraudulent actions by employees or third -parties
VII. RISK TOLERANCE
A. For the purposes of this Policy, Georgetown Electric's Energy Risk tolerance is defined by
the degree of uncertainty that it can accept in its Total Budgeted Purchase Power Costs
(TBPC), Financial Ratios, Power Cost Adjustment (PCA), and credit position.
B. Evaluation and measurement of Energy Risk shall be based on Georgetown Electric's
Total Budgeted Purchase Power Costs (TBPC versus industry benchmarks and monitoring
of counterparty credit positions. These metrics may be augmented by other forms of risk
measurement and are described in more detail in Appendix D.
C. Georgetown Electric's risk tolerance is further defined by the limits contained in other
appendices to this Policy.
VIII. ENERGY RISK MANAGEMENT PROCEDURES
The Energy Risk Management Policy shall be implemented through internal Energy Risk
Management Procedures that accomplish the controls and management responsibilities
identified in this document.
A. Important elements of Energy Risk Management Procedures:
1. Purpose of RM Procedures - Re -articulate highlights of policies and establish the role of
ERM procedures in achieving organizational objectives.
2. Authority and Enforcement - Establish the chain of command and authority for writing,
reviewing and enforcing procedures.
3. Deal Process Operations - Track the full detail of the deal contracting process from
motivation, origination, settlement, and delivery. Each step may be defined in terms of
authorization, valuation, risk assessment, and limit checking. The risk management
procedures established in accordance with this Policy shall ensure that Georgetown
Electric's Energy Risk exposure remains within the defined transaction and risk exposure
limits. The risk management procedures shall align with the risk management policies and
procedures of the Energy Manager/QSE.
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4. Portfolio Management Operations -Track the full process of portfolio management cycle,
including initial portfolio analysis, objective analysis, hedging analysis, portfolio
modification due to hedging and final portfolio analysis. Includes a statement of cycle
frequency and defines reporting requirements.
5. Reporting -Identifies the reporting requirements to support the Energy Risk Management
function. The reports developed as part of the procedures contain purchase power
information (PPA and other trade information) that needs to be treated as "Competitive
Matters.
6. Appendices
a. Hedging Policy
b. Approved Transaction types
c. Transaction Limits
i. Risk Exposure Limits
ii. Transaction Limits
d. Risk Measurement Metrics
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